Growth Gives Dillard's a Credit Ratings Boost

The continued strong earnings performance of Dillard’s Inc. resulted in recent credit ratings increases from Standard & Poor’s Rating Service and Moody’s Investors Services.

Standard & Poor’s of New York increased the Little Rock retailer’s corporate credit rating from BB to BB+, which is just below investment grade. It also gave Dillard’s a stable outlook.

Moody’s, also of New York, increased Dillard’s corporate family rating from Ba3 to Ba2, and its rating outlook was changed to positive, up from stable, according to an April Moody’s news release.

“I couldn’t agree with that more because the company did a magnificent restructuring,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York. “They are much, much stronger in the competitive environment in that they closed bad stores. They brought costs down. They changed their merchandise mix. They did so many tremendously positive things.”

The improved credit ratings will help Dillard’s financially, he said.

“Let’s say they float a bond offering; they’ll pay less” because of the better rating, Davidowitz said.

Julie Bull, a spokeswoman for Dillard’s, couldn’t be reached for comment.

Dillard’s ratings could be higher, but Moody’s is concerned about the retailer’s past performance.

Between 2000 and 2009, “Dillard’s experienced a prolonged decline in comparable store sales and sporadic earnings,” Moody’s said in its news release last month.

Better Performance

Both Moody’s and Standard & Poor’s gave Dillard’s praise for its recent performance. For the fiscal year that ended Feb. 2, sales grew by 5 percent to $6.6 billion compared with the previous fiscal year. (However, the most recent fiscal year contained 53 weeks compared with 52 weeks for the previous fiscal year. Excluding the extra week, sales rose only 3 percent for the fiscal year that ended Feb. 2.)

Dillard’s sales per SF jumped from $116 in fiscal 2010 to $129 in 2012.

And same-stores sales were up 4 percent in 2012 over the previous year. Same-store sales reflect sales at stores open at least a year and exclude gains from simply opening new stores.

The only metric that wasn’t higher in the most recent year was net earnings. The $336 million bottom line suffered by comparison with the $464 million earned in the fiscal year that ended in early 2012, which was buoyed a tax benefit of $201.6 million in connection with Dillard’s transferring its real estate into its properties to its real estate investment trust.

“The upgrade reflects performance that was ahead of our expectations over the past year, a moderate improvement in operating metrics, and our view that the company will make further operational gains over the next 12 months while maintaining conservative financial policies,” S&P credit analyst David Kuntz said in a news release.

He also said Dillard’s “has demonstrated meaningful improvement in its productivity measures over the past year and has narrowed the gap between it and higher-rated peers such as Macy’s, Kohl’s and Nordstrom.”

Moody’s also said that Dillard’s improvements in merchandising are driving its sales growth.

“The improvements in merchandising along with continued inventory management by Dillard’s have also resulted in a significant improvement in operating margin,” Moody’s said.

Dillard’s credit rating could be upgraded “should Dillard’s demonstrate continued track record of consistent performance,” Moody’s said.

The S&P said it would move Dillard’s into investment grade if it could demonstrate continued operational gains, such as sales per SF.

“Furthermore, an investment-grade rating would also be predicated on a stable cash flow generation, conservative financial policies, and maintenance of credit protection measures in-line with current levels,” the S&P said.

Moody’s said that a downgrade was unlikely at this time.

“Dillard’s is a healthy, strong company financially,” said Davidowitz, the retail consultant.