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

(To view a graph of Dillard's sales trends, click here. For a graph depicting Dillard's stock progress, click here. To see the Dillard's Board of Directors, click here.)

How secretive is Dillard's Inc.? Here's a hint:

Spokeswoman Julie Bull says it would probably violate Securities & Exchange Commission regulations for CEO William Dillard II to grant an exclusive interview.

Scores of CEOs from publicly traded companies grant interviews or otherwise make public statements every day of the year. But a public statement out of Dillard's is so rare - and Dillard's is under such pressure from disgruntled institutional investors - that anything Dillard might say in an interview would probably constitute a "material event" that would trigger SEC reporting requirements.

It's probably unrealistic to think that Dillard would sit down and answer questions from Arkansas Business when he won't even return a call from someone who has invested some $90 million in his company. And that's the point: Dillard's Inc., which provided Dillard family members with salaries and dividends in excess of $16 million last year, has rarely been responsive - not to the press, not to stock analysts, not to investors. And because the company's bylaws give holders of Class B shares - that is, the Dillard family - the right to elect eight of 12 directors, there's not a darn thing anyone can do about it.

Except sell off Dillard's stock, of course. And that's been happening. Shares that were trading as high as $40 as recently as May have lost almost half that value.

But long-term investors, those with the kind of X-ray vision that sees beneath the quirky corporate structure and the latest disappointing quarterly earnings report, like the bones of the Little Rock-based company. The market may value the company at $1.71 billion, but its book value was $2.63 billion as of May 5.

And some investors think they can, with patience and pressure, effect change in a company whose market capitalization is half what it was a decade ago.

"From a faith-based perspective, we think anyone has a chance to change," Julie Tanner, corporate advocacy coordinator for Christian Brothers Investment Services of New York, said last week.

Then she added:

"Thank goodness I have other companies in my portfolio where I feel like I am accomplishing something. This company has been very difficult to wrap your arms around."

Critical Failure

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."

Activist Investors

How long Mitarotonda and Barington will keep up the pressure remains to be seen; Mitarotonda declined an interview request last week. As an institutional investor, however, Barington tends toward long-term investments and activist involvement.

Barington's activism joins that of a coalition of long-term investors led by Christian Brothers Investment Services, which placed a nonbinding resolution on the ballot of the May 2007 shareholders meeting urging Dillard's to prepare a sustainability report on its environmental and social policies.

The resolution, unanimously opposed by the board of directors, failed - but not by much. More than three months after the meeting - a delay Tanner found curious - the result of the vote was included in the company's quarterly report: 46.36 percent of more than 51 million shares voted favored the resolution.

The coalition represented only about half a million shares.

Even if a majority of shareholders had favored the resolution, it was only advisory in nature. But Tanner said she was encouraged by the result.

"We're going to file again next year.... We're not going away," she said. "This resolution will remain on the ballot as long as we get 10 percent [of the vote]."

Other sponsors of the resolution were Connecticut Retirement Plans & Trust Funds, the New York City Pension Funds and Amalgamated Bank's LongView Collective Investment Funds.

Of course, Dillard's is free to prepare a report on corporate citizenship with or without shareholder approval.

"Hundreds of companies put out these kinds of reports without this kind of pressure," Tanner said. "Many companies that I work with that put these out have not done so due to shareholder resolutions."

And there was a time when she hoped Dillard's would be one of them.

"I've been working on Dillard's for the past five years and, as far as I know, that's when New York City [Pension Funds] also began working on it," Tanner said.

At one point, "things were going well. We were able to talk to the company and they were interested in working with us."

Specifically, she said, she had discussions with General Counsel Paul Schroeder. "I'm sure Paul was talking to us with the agreement [of the upper management]."

But that interest waned, "and we haven't been able to talk to them for about two years. And that's what's prompted us to file this resolution."

CBIS sometimes files resolutions to get the attention of other shareholders rather than out of any real expectation that managers or directors will respond, Tanner acknowledged.

"There are situations where there is very little that a shareholder can do to try to change what is currently happening," she said. But every once in a while, there is a breakthrough.

"One company that looked like it would never change is Tyco," Tanner said, citing an example that Dillard's surely doesn't hope to follow. "Every year we'd trudge down to the annual meeting ... and the company would never change. And people said, ÔWhy don't you just sell?'"

Then, in 2005, CEO Dennis Kozlowski and CFO Mark Swartz were convicted of stealing hundreds of millions of dollars from the company.

"The Dennis Kozlowski situation brought in a whole new management," Tanner said. "Dillard's is part of our portfolio, and once we sell we lose our leverage as an investor."