While so much of the big-box retailing world scrambles to plug the holes in the business model, Dillard's (NYSE:DDS) has remained an appealing company all the way through. The department store chain, based largely in the southeast United States, trades at more than a five-year high -- up 950% in the same amount of time. What makes this retailer that much better than the rest? For one thing, the bar is set quite low for department stores these days. On a more serious note, though, Dillard's has succeeded where others have failed due to a simple, fundamental principle -- excellent merchandising. As consumer taste shifts rapidly, the buyers at Dillard's appear one step ahead every time. Even after its tremendous run-up, this is still one tempting stock to own.

A strategy that works
Dillard's sells name-brand clothes at discount prices -- a common strategy, though not always well-executed (hi, J.C. Penney). The company's advantage is how it presents itself in the scheme of discount retail. Dillard's is a middle-of-the-road department store. It's classy and exclusive enough to appeal to more affluent, more recession-proof shoppers, while remaining a discounter at heart. This gives the company protection from the extremes of economic shifts, even as pure-play discount retailers tend to languish in rebounding economies.

The company reported its latest round of earnings this week, and delivered a 2% same-store sales gain -- coming up on four straight years of positive same-store sales. Dillard's bottom line came in at $2.56 per share -- $0.06 ahead of the year-ago quarter and nearly $0.10 ahead of analyst estimates. Investors should keep in mind that in the year-ago quarter, the company included a $0.09-per-share net tax benefit.

Dillard's is finding success in some of the most competitive areas of apparel retailing -- men's clothing and accessories lead the sales gains, followed by children's wear. Also helping the business are exclusive brand partnerships, mainly in apparel. One thing to look forward to in the coming quarters is a recent partnership with Southern Living for home goods items. Lately, home goods and furniture have been a weak segment for Dillard's.

Headed higher
Dillard's checks off most list items of a fundamentally strong, risk-averse investment. The company's EV/EBITDA is less than six times, while its forward expected earnings ratio is less than 12 times. It's not the cheapest of the department stores by a long shot, but it is one of the best-performing.

The company has been conservatively run, and with just 300 stores, there is a long, long growth runway if and when management chooses to put the pedal down on expansion. At the moment, though, Dillard's small size seems to be no impediment to its success. The company generates hundreds of millions in free cash flow, putting much to use via share buybacks.

Though its earnings release sparked a double-digit climb in stock price on Friday, Dillard's remains one compelling pick among retailers due to its comfortable valuation and operating superiority.

Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.