Right smack in the middle of our economy, a retail dead zone languishes -- the domain of department stores. Recent real estate hype has created a flurry of false hope in this fallow field, but don't be small-f fooled. Smart investors should beat a hasty retreat from Dillard's (NYSE: DDS).
Three cheers for … bricks and mortar?
Dillard's shares have surged over recent months, particularly after the company disclosed that it's forming a real estate investment trust, or REIT. Market pundits speculate that Dillard's will unlock some value through the real estate it owns at malls. But when investors start tuning out a company's actual ability to do business in its core field, and focus instead on extraneous factors, you should start hearing alarm bells.
Dillard's has reported decreasing sales for several years running; last year, its same-store sales dropped 10%. The company currently trades at 16 times forward earnings, with a staggering 3.26 PEG ratio. In light of those facts, the 139% surge its stock price in the last 12 months looks downright outlandish.
Financial engineering
Dillard's isn't the only department-store stock benefiting from a little REIT-related euphoria. Activist investor Bill Ackman, founder of Pershing Square, recently bought a stake in J.C. Penney (NYSE: JCP), and word has it that he will try for a similar real estate-oriented tactic.
Looking back further, the perceived value of its real estate has kept Sears Holdings (Nasdaq: SHLD) in many investors' good graces, even though it's been ages since the company demonstrated any actual ability to succeed as a retailer. Alas, a glance at Sears' five-year chart reveals that a rich real estate portfolio hasn't helped its stock performance.
It's hard to argue that the retail landscape looks rosy. A&P owner Great Atlantic & Pacific recently declared bankruptcy, and Borders Group (NYSE: BGP) teeters on the brink of failure, having recently disclosed plans to withhold January payments to preserve its dwindling liquidity. Ackman owns a slug of Borders, too.
But compared to REITs' prospects, retail looks downright sunny. The U.S. real estate market remains troubled, and continued high unemployment makes consumer spending a difficult element to bank on right now. Both of factors leave commercial real estate in a precarious position, and many folks still believe the sector's set to deflate, like the residential real estate market did. Thus, current investor excitement over REITs seems highly speculative, even when you take Dillard's out of the equation.
Run to greener pastures
Dillard's competes in an arguably overcrowded middle ground of department stores, at a time when many consumers will probably dwell in the low end or splurge on the high end. What's so enticing about the middle ground? Dayana Yochim and I recently recommended off-priced retailers Ross Stores (Nasdaq: ROST) and TJX (NYSE: TJX) as good ways for investors to protect their portfolios by avoiding the mall's unhappy mediums.
Dillard's is surging on a speculative thesis that diverges greatly from the reason its business actually exists. If a company isn't so good at doing what it actually does, why bother investing? Run from this stock, Fools. Run away fast.
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