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.

"It is time for you to cause the Company to make the changes necessary to improve the Company's financial performance and corporate governance," he wrote. "As stockholders of the Company, it is our expectation that each of you will fulfill your fiduciary duties to all of the Company's stockholders, regardless of how you were elected to the Board."

Shares of Dillard's (NYSE: DDS) ended the day down almost 4 percent to $23.03.

The letter is reprinted in full here:

888 Seventh Avenue
New York, New York 10019

August 30, 2007

Mr. Robert C. Connor
Mr. Will D. Davis
Mr. James I. Freeman
Mr. John Paul Hammerschmidt
Mr. Peter R. Johnson
Mr. Warren A. Stephens
Mr. William H. Sutton
Mr. J.C. Watts, Jr.
c/o Dillard's, Inc.
1600 Cantrell Road
Little Rock, Arkansas 72201


The financial performance of Dillard's under William T. Dillard, II, the Company's Chairman and Chief Executive Officer, has been abysmal. The Company lags behind its peers on virtually every financial and retailing metric, including operating margins, return on invested capital, inventory turnover and same store sales.

Morningstar has described Dillard's as "a chronic underperformer in the department store sector" in its July 12, 2007 analyst report. Merrill Lynch has expressed the same sentiment, noting in its August 9, 2007 research report that:

"Despite easy comparisons, [the Company's] financial metrics remain
challenging. Comps are down 3.6% over the last 12 months vs. the dept
store industry average of up 4.2%. EBIT margin is at a low level, at
2.0% over the trailing four quarters with high markdown risk.
Additionally, given the more competitive landscape, it will be more
difficult for Dillard's to increase its market share. Over the past five
yrs, Dillard's apparel market share has declined from 4.6% in '99 to 2.8%
in '06."

This has not always been the case. Dillard's was a thriving franchise under the leadership of Mr. William T. Dillard, who founded the Company in 1938. 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. This occurred despite the fact that the Company has spent over $5 billion in total capital expenditures (including acquisitions) during this time period, causing Credit Suisse to announce in its June 28, 2007 research report that "there is little doubt in our minds that Dillard's is a wasting asset." UBS Investment Research has also expressed cause for concern, stating in a July 15, 2007 research report that "we have waning confidence in [Dillard's management's] ability to make needed changes." Among other things, UBS noted that the Company's Return on Invested Capital (ROIC) is below the Company's cost of capital, implying that management is "destroying value in the business."

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. We are keenly aware of the reclusive nature of the Dillard's management team, which routinely avoids meeting with stockholders and does not hold quarterly earnings conference calls despite the fact that almost all other companies in the S&P 500 do so.(1) There are also numerous accounts of the Company refusing to speak with analysts and reporters. As Luisa Kross has stated in a past Forbes article, "The family answers to no one, running the company as if it were private."(2)

As members of the Board of Directors of the Company, with a fiduciary duty to all of the stockholders of Dillard's, how can you permit such an environment to exist in this post-Enron era? While the Company is run under the Dillard family name, Dillard's is a publicly-traded corporation, not a privately-owned family business. As such, it is the Board of Directors of Dillard's that has the responsibility for overseeing the Company. It appears, however, that the 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.

We note, for example, that the Company's four highest paid and most senior executive officers are members of the Dillard family. We question whether these executives were recruited because the Board determined, after a diligent search, that they were the best available to run the Company, or was the decision unduly influenced by their family name? Similarly, were the compensation packages approved by the Board's Stock Option and Executive Compensation Committee for these family members structured so as to clearly align pay with performance, or are these executives (who have collectively earned over $130 million in total compensation over the past ten years(3)) being unduly rewarded for the fact that their family name appears on the front of each of the Company's stores?(4)

We are also concerned with the job the Board has done in overseeing the Company's corporate governance, which in our view is nothing short of atrocious. According to Institutional Shareholder Services, Dillard's currently has the second worst governance profile of the 500 companies in the Standard & Poor's 500 Index.(5)

It is our belief that the Board's continued support of the Company's A/B class structure can no longer be justified. In our view this voting structure is highly inequitable, in that it only permits the Company's public stockholders to elect one-third of the members of the Board, despite the fact that they collectively own over 87% of the Company's total economic interest. We see no rational for the Dillard family, which owns less than 13% of the total economic interest in the Company, to continue to have the right to control the election of eight of the Board's 12 directors, particularly in light of the disappointing financial performance of the Company under their stewardship.



Please read our comments policy before commenting.