UPDATED: Investor Group Questions Dillard's Commitment to Shareholders

by Lance Turner  on Thursday, Aug. 30, 2007 3:39 pm  

James Mitarotonda, a co-founder and principal of Barington Capital Group, as seen in an article from the Wall Street Reporter here.

In a new letter sent to the Dillard's Inc. board of directions on Thursday, Barington Capital Group, which represents more than 3 percent of Dillard's shares, questioned the retailer's commitment to stockholders and called on the board to change the company's management structure.

Barington, which has at least twice requested a meeting with Dillard's executives to discuss ways to maximize shareholder value, called Dillard's performance "abysmal" and laid much of the blame on William Dillard II, the son of the retailer's late founder, who is now CEO.

Dillard's spokeswoman Julie Bull declined to comment on Barington Capital.

Barington is led by James Mitarotonda, whose capital group has engineered turnarounds of varying levels of success at companies including Pep Boys.

"Dillard's was a thriving franchise under the leadership of Mr. William T. Dillard, who founded the Company in 1938," Mitarotonda wrote. "However, since his son took over in 1998, the Company has lost approximately $2 billion in market capitalization - falling from approximately $3.8 billion as of July 31, 1998 to approximately $1.9 billion as of August 29, 2007. ... It appears to us that William T. Dillard, II has established an insular culture at Dillard's which includes a mind-set that the Company need only be responsive to the input, interests and concerns of the Dillard family."

Mitarotonda also took aim at the board of directions, which includes Little Rock financier Warren A. Stephens and former U.S. Rep. John Paul Hammerschmidt. Mitarotonda said the company's board has "relegated its responsibilities to the Dillard family, permitting them to run the Company as if it was the family's private domain - insulated from the influence, and often with a lack of concern for the interests, of the Company's public stockholders."

Dillard's management is notoriously tight-lipped about its plans, rarely talking to the media or investors. And the firm does not provide quarterly guidance to shareholders.

It's that tight-lipped nature that has earned it even more criticism from analysts this week. On Wednesday, a Credit Suisse research note blasted Dillard's for providing an inadequate explanation of the company's poor second quarter. In a report on Tuesday, Dillard's claimed a $25.2 million, or 31 cents per share, earnings loss. Wall Street had been expecting a loss of only about 1 cent per share.

"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 ..." the report said. "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."

Critics have also been unhappy with Dillard's corporate structure, which they say limits outside shareholders from having any say in the company's direction.

Dillard's remains tightly held by members of the Dillard family, who control its board of directors through ownership of class B shares. The family gets to elect eight directors, while owners of class A shares get to elect four, making the company's board of directors impenetrable to much outside influence.

In his letter on Thursday, Mitarotonda criticized that arrangement, and called Dillard's corporate governance "nothing short of atrocious." He called on the board to make changes to how the company is run.



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