While some old-school department stores are doing rain dances and praying to the Lord of Light in attempts to save themselves from pending irrelevance, one Southern-based chain is achieving record results. Flirting with its 52-week high, Dillard's (DDS 2.23%) seems to be making the right moves in a disrupted industry. But what does the latest earnings release show about the future? Can the company continue its attractive earnings growth, or has this story passed? Let's take a closer look at the results and forward valuations to find out.
The results
For Dillard's, the headline number for the recently ended first quarter was a 27% increase on the bottom line to $2.40 per share, after accounting for a one-time $0.09 benefit. The number comes in at a sharp premium to both the prior year's number and analyst expectations of $2.12. But EPS was not the only line to celebrate.
Same-store sales crept up just 1%, while cash flow from operations blew up 39%, from $98.5 million to $136.9 million. Revenue hit $1.55 billion for the quarter -- almost perfectly flat with 2012's first quarter and a discount to analyst expectations of $1.62 billion. The top-line miss dipped the stock briefly, but investors and analysts eventually found much more to be excited about than to lament.
Margins improved slightly across the board, with gross margins up 110 basis points and operating margins up 170 basis points. Throughout the first quarter, the company bought back $114.7 million worth of Class A stock.
Where from here?
The stock pushed to new highs last week, and has seemed to stabilize above the $90 mark, giving it a forward P/E of 11.61 times. Now, the company is in much better shape and deserves higher valuation multiples than, say, J.C. Penney (NYSE: JCP), which has negative earnings but trades at just 0.32 times sales. But when comparing Dillard's to other, healthy department chains, such as Kohl's (NYSE: KSS), we see a more interesting picture. Kohl's trades at 10.7 times forward earnings, and while it saw lower same-store sales due to bad weather, the company still beat estimates and is set to grow via new stores.
Another strong performer, Target (TGT 1.14%), trades at 12.73 times forward earnings. Target has conducted a successful facelift in recent years -- becoming the premium-products-with-value-pricing department store. While there have been some missteps, such as its recent partnership with Neiman Marcus, the store has largely kept its shopper base while reaching out to new, younger consumers.
So Dillard's current valuation sandwiches it among the leading stores. The company has a sizable $622 million debt load, but overall has a strong balance sheet with $156 million in cash.
One of the early attractive features of Dillard's before its run-up in stock price was its real estate portfolio -- a common thesis for large retail store investing. The company is shutting down poor-performing stores and investing in the remaining square footage. This smart capital management will likely keep the company on solid footing going forward. Also to note is the recent quarter's segment performance, which shows home and furniture as the worst department. As the housing recovery continues in the U.S., there may be some growth in these areas, especially as the stores are renovated and inventory is updated.
Overall, Dillard's appears to be valued fairly at neither a considerable discount nor premium to its intrinsic value. Investors encouraged by management's ability to control costs and use capital may want to take a closer look, but this is no longer a value-oriented story. Still, in an industry subjected to plenty of turmoil in recent years, Dillard's appears to be an outperformer.
