Is Dillard's Still a Winning Department Store?

There are two storylines in the department-store world: stores that are dying and stores that are thriving -- with no middle ground to be seen. While some cannot seem to find a handful of customers to browse the outdated layouts, others like Macy's, Kohl's, and Dillard's (NYSE: DDS  ) have thus far been able to adapt to the abrupt shifts in consumer preference and technological innovation. The last mentioned of the three is a regional player that doesn't receive near the market attention the others do, but it has quietly and consistently outperformed its industry -- until this past week, when Dillard's reported a major earnings miss. Is Dillard's switching to a declining department-store story?

What went wrong?
Like many retailers during the holiday season, Dillard's employed aggressive sales tactics to juice the retail industry's traditionally strongest period. But with the heavy discounting and promotions came much lower profits, as the company earned just $2.69 per share (adjusted). Analysts had wanted $2.99 per share. While missing analyst estimates isn't always relevant, the figure also comes in at a discount of more than 25% to 2012's fourth-quarter earnings. Revenue followed the same trend, dropping by roughly $70 million.

The sole bright spot from the earnings report came from store-level sales, which showed a 2% gain year over year.

The market predictably oversold the stock on the day of the earnings release, but macro-level consumer-spending habits do not indicate long-term faults in a retail business. Is Dillard's simply a victim of the current economic environment?

Heads or tails?
Most signs point to a general economic tepidity and perhaps an overzealous promotional strategy on behalf of Dillard's management team. With the recent sell-off and a forward-earnings multiple of 10.2 times, this would indicate a potential opportunity for investors who believe in the long-term viability of the business.

But there is one factor to consider: It wasn't solely a profit dip, but a sales one, too. Management was drawn to the markdown strategy by sluggish sales figures, but it appears that even the margin-crunching discounts weren't enough to get people spending.

Investors could look to the full year for a little more color on the matter. Dillard's saw much higher earnings throughout 2013 than it did in 2012 ($6.99 per share versus $6.33 in 2012). That adjusted figure is a record for the company. Top-line sales increased as well, along with cash flow and a 1% gain in same-store sales. Gross margins came down slightly.

Despite the lackluster fourth quarter, Dillard's had a very strong year, especially when compared to the industry's laggards. Though the market and analysts are quick to cast doubt on the future of department stores today, there isn't any substantial evidence that indicates a long-term decay in Dillard's business. Looking ahead, it's of course wise to exercise caution in today's tumultuous retail-investing environment, but Dillard's stock is priced well and offers a stable, cash-generating business.

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  • Report this Comment On February 27, 2014, at 6:13 PM, HubbaBuba wrote:

    Come on - "no long term decline here?" Bull. You did read closely. They had 7% MORE inventory and DID NOT start GUTTING MARGINS UNTIL AFTER CHRISTMAS. NOT, I REPEAT NOT "PROMOTIONAL FOR CHRISTMAS".

    THEN, IN JANUARY they gutted margins and they STILL HAVE OVER 1/2 (4%) OF THAT EXCESS INVENTORY TO GUT AND CLEAR.

  • Report this Comment On February 27, 2014, at 6:15 PM, HubbaBuba wrote:

    Let's see, DDS:

    1.) CAN'T SELL WELL AT FULL PRICE

    2.) CAN'T MOVE MUCH EVEN AT GUTTED MARGINS.

    3.) Moreover, at best comps have been no better than average throughout the year.

    Now, what part of that is an quality "enduring long term investment?"

    A: NONE OF IT.

  • Report this Comment On February 27, 2014, at 6:25 PM, HubbaBuba wrote:

    Meant to ay in first comment "You did NOT read closely".

    They gutted margins late in Q AFTER excess left from Cmas. (Therefore couldn't move it at Christmas - Strike 1.)

    Are left with over 1/2 of increase in inventories STILL. - Strike 2

    Are going to kill Q1 (maybe more) margins with excess AND with END OF SEASON CLEARANCE. - Strike 3

    Can't move goods at full price, and can't gut enough to reset margins ANY TIME SOON. (Likely Q3 at best - and watch, comps then will still be boring - like the stores.)

    I find no part of this equation "a long term winner". It's clearly the opposite.

  • Report this Comment On February 27, 2014, at 9:47 PM, HubbaBuba wrote:

    While we're at it, let's review WS (which I've known in job myself for >20 yrs): Citi initiated with a "neutral" DAYS before BAD news (no if's and or buts bout it).

    Do you think for a nano-second they'd lead Citi into a bomb? NO! The company that has no conference calls "wink-wink, nod-nod"ed for Citi's (and other's; b/e apparently no one else can read CLEAR bad news! Amongst the worst of retailers) clients to buy the dip, ' that DDS would do part of thier big buyback's and yank shs back day after and on.

    Guarantee that was the game - like they would hurt Citi - EVEN THOUGH THERE IS NO IB BUS. TO BE HAD SO "DAH" - HELP THEM ON AGENCY TRADING FOR NEW COVERAGE.

    Believe NY AG needs to check into this hidden game. UNDER COVER BUNK FOR SURE. TELL ME WHAT'S ABOVE BOARD TO ACCOUT FOR IT? WANT IT CHEAP? BUY IT BEFORE! (It sucked more wind!)

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