Fortress Dillard's: A Thorn in the Side of Investors, Analysts

by Gwen Moritz  on Monday, Oct. 1, 2007 12:00 am  

It's hard to find anyone with anything nice to say about Dillard's Inc. Stock analysts who follow the company either declined interview requests or failed to respond at all. But their written words and actions speak loud and clear.

When Dillard's announced on Aug. 28 a stunning quarterly loss of $25.2 million, Credit Suisse analyst Michael Exstein lit into the management in a research note he called "Earth to Little Rock."

"No explanation of why things went so bad, no acknowledgment of the awful performance in the quarter, no acknowledgment of what's being done to stop things from getting worse," he wrote. "While the company's standard operating procedure is to not provide any detail on the quarter or any other communication, this time should have been different."

Lehman Brothers cut its price target on Dillard's shares to $25, and Goldman Sachs cut its target to $26.50. Credit Suisse, never high on Dillard's, slashed its target to $20, a prediction that subsequently came true, although the stock was back above $21 for most of last week.

That has to be painful for James A. Mitarotonda, chairman, CEO and chief agitator for Barington Capital Group LP of New York, which bought more than 2.5 million shares of Dillard's stock sometime after April 1, according to public records. The price during that time generally stayed around $35, suggesting an investment of close to $90 million.

On May 21, the New York Post reported that Dillard's had "put out tentative feelers to bankers"; the stock hit $40.56 that day, its highest price since 1999. Almost three weeks later, the same reporter, Suzanne Kapner, took it back. "Dillard's CEO William Dillard II had, in fact, been talking to bankers in recent weeks, but not necessarily about his own company," Kapner wrote. "As a director of Acxiom Corp., Dillard had been working on the recently announced $3 billion deal to sell the direct marketing data provider to two private equity groups."

By then its stock price had returned to the mid-30s.

Shortly thereafter, Mitarotonda went public with his frustration. He had tried to reach Dillard by phone and, getting no response, released a letter requesting a meeting to discuss "a number of measures that we believe will increase the company's profitability to levels achieved by its peers and better utilize the company's substantial asset base."

Although Dillard had responded publicly to investor criticism about Acxiom, the company only offered Mitarotonda a meeting with Julie Bull, the investor relations director.

A follow-up letter to the Dillard's board late last month was far less collaborative. In it, Mitarotonda called Dillard's corporate governance "nothing short of atrocious," and he accused the board of directors of "permitting [the Dillard family] to run the Company as if it was the family's private domain."

None of the four members elected to represent Class A shareholders - Robert C. Connor of Dallas, Will D. Davis of Austin, Texas, former U.S. Rep. John Paul Hammerschmidt of Harrison and Peter R. Johnson of San Francisco - returned calls seeking comment last week. All were nominated to their positions, which pay in excess of $120,000 a year, by the rest of the board. Thanks to an exemption in New York Stock Exchange rules, the company has no nominating or corporate governance committee, a setup that has helped it land on various rankings of the "worst boards."

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