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 While some cannot seem to find a handful of customers to browse the outdated layouts, others like Macy's, Kohl's, and Dillard's (DDS 1.56%) have thus far been able to adapt to the abrupt shifts in consumer preference and technological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.
