While the under-the-radar department store might seem like a relic of the past in an environment dominated by e-commerce and big-box retailers, Dillard's has some unique advantages relative to most brick-and-mortar stores. The company's late-February earnings report showed a return to profitability amid improving revenue trends as well.
In the fourth quarter, Dillard's had some positive results. Although revenue was still down from the prior-year quarter before the pandemic, declines improved quarter over quarter, with sales down 17% versus down 24% in the third quarter. Impressively, profits actually increased relative to Q4 2019, as Dillard's was able to raise gross margins and cut SG&A expenses.
Dillard's has an enormous advantage relative to many other department stores in that it owns its own construction company and also owns its stores. That saves both on lease payments and on capital expenditures when it builds new stores or improves old ones.
Moreover, although the company lost $72 million for the full year 2020, Dillard's generated positive free cash flow, as it sold off lots of inventory it had heading into the pandemic. Dillard's made more than $190 million in free cash flow last year despite the pandemic, allowing it to pay its 0.65% dividend while also buying back more than $100 million of stock at attractive prices.
Dillard's and other department stores have rebounded in March, as the vaccine rollout is ahead of schedule and investors have turned to "reopening" value plays. After its recent run, Dillard's trades around 18.2 times its 2019 earnings. That's below the overall market, although many are skeptical that Dillard's can grow given the longer-term headwinds around e-commerce and declining department stores. While Dillard's became very, very cheap during the pandemic, it remains a battleground at these levels after its recent big run.