Dillard's: Stuck in the Middle

Dillard's (NYSE: DDS) is still struggling to find a clear direction. While other department store chains have become fully aware of their identities, Dillard's remains stuck in the middle, and I'm not just referring to its central Arkansas heritage.

Dillard's reported fourth-quarter and full-year earnings last week that were among the weakest in its peer group. Nordstrom (NYSE: JWN) was also accused of underperforming during the quarter, but it still saw a near 30% jump in quarterly and full year earnings. Dillard's, on the other hand, saw earnings fall for Q4 when excluding a sizeable income tax benefit, which also inflated reported full-year bottom-line numbers.

Sales were uninspiring as well, as Dillard's saw a 1% fall in total and same-store sales for the year. The trends are in stark contrast to J.C. Penney (NYSE: JCP), which has found a way to open new stores in off-mall locations while also pursuing private-label merchandise that carries higher profit margins. Dillard's remains hostage to mall-based store expansion, and its private-label apparel accounts for a much lower percentage of total sales as compared to rivals.

Retail behemoth Wal-Mart (NYSE: WMT) wrote the book on developing locations away from malls and, in similar fashion to Target (NYSE: TGT), has been astoundingly successful at stealing share from higher-priced and inconveniently-located mall retailers. Higher-end concepts such as Nordstrom and Neiman Marcus have been able to fend off competition based primarily off price by focusing on upscale fashion and increased customer service.

As far as I can tell, Dillard's has missed the boat regarding location and merchandise mix. It's stuck in the mall and stuck in the middle between low-cost and upscale product offerings. Until it chooses a direction, investors will likely remain stuck with a flagging stock price. I see private label as a quicker fix, but other matters could take years to figure out, as Penney's can attest to, as it went down the restructuring path in 2000.

For related Foolishness:

• Riches to Rags at Nordstrom
• J.C. Penney Takes a Breather
• Wal-Mart Defies Logic

To read more on why Wal-Mart is an Inside Value recommendation, or to find other companies at great prices, try a free 30-day trial of the newsletter.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.