Activist Investor Eyes Dillard's Real Estate


As Dillard’s Inc. struggles through its eighth consecutive quarter of same-store sales decreases, an activist investor hopes to use the retailer’s real estate to boost its stock price.

Jeff Pierce, managing director at Snow Park Capital Partners of New York, calculated that Dillard’s generated about $5 per SF in net income for its 44.1 million SF of retail space for the fiscal year that ended in January. For comparison, the commercial real estate company Simon Property Group of Indianapolis rented nearly 30 million SF of retail space in the past year for about $70 per SF.

“It’s not to say that Dillard’s retailer is not always the optimal user of its real estate, but in many cases on its face it’s demonstrable that it’s not.” Pierce said in email to Arkansas Business last week. Snow Park is focused real estate stocks and owns about 2 percent of Dillard’s Class A shares.

Pierce told Bloomberg News in July that he believed the Little Rock retail chain’s stock could be worth more than $200 per share if the company could unlock the value of its real estate holdings. Dillard’s stock closed at $60.19 on Wednesday, a rebound from the mid-50s earlier in the month.

Dillard’s operates 268 department stores and 25 clearance centers in 29 states.

“Our estimated rental value to more productive retail tenants exceeds the company’s entire current income as a retailer,” Pierce told Bloomberg in July.

For the first half the current fiscal year, Dillard’s reported net income of $49.2 million, down from $89.5 million for the same period a year ago. Retail sales fell by almost 3 percent, to $2.77 billion, in the first half of fiscal 2017. A week after announcing its second-quarter results, Dillard’s said it would increase its dividend to 10 cents. (See Dillard’s Dividend Increase Raises Questions.)

Pierce declined to comment to Arkansas Business on Snow Park’s next steps.

The push to get value out of a department store’s real estate is popular with activist investors as traditional department stores struggle with sales.

“Every single department store, including Dillard’s, is under fire one way or another to monetize their real estate,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York. “It’s easier said than done, and it takes longer than everybody thinks.”

The idea isn’t a slam-dunk, said Kin Lee, a commercial mortgage-backed securities senior portfolio manager at Angel Oak Capital Advisors of Atlanta.

“It really depends on what’s been going on at that mall,” Lee said. “Is the mall able to drive foot traffic?”

Malls and department stores have struggled lately. Credit Suisse recently projected that 20-25 percent of the malls across the country will close in the next five years as more customers turn to shopping online. “Store closings have accelerated,” the report said.

Department store chains Macy’s and Sears recently closed or sold hundreds of locations, adding 28 million SF of retail real estate to the market, according to a March report by CoStar Group Inc. of Washington, which provides commercial real estate information, analytics and marketing services.

“The market has an oversupply of storefronts, real median household incomes are down and the internet is siphoning off spending once meant for traditional stores,” Suzanne Mulvee, director of research and real estate strategist at CoStar, wrote in the report. “As a result, more stores will close.”

She said that retailers, on average, are generating fewer sales per SF than they did during the decade before the Great Recession. Dillard’s retail sales per SF dropped from $131 in 2014 to $126 in 2016.

Snow Park’s Pierce rejects the negativity.

“The narrative that there isn’t demand for high productivity retail real estate in the United States of America is belied by the data, but nonetheless many people believe this to be true,” Pierce said in the email. “It’s a great opportunity for a real estate rich company like Dillard’s to create a lot of value through stock repurchases and ultimately highlighting the large disconnect between perception and reality to the market.”

This isn’t the first time an activist investor has pushed Dillard’s to evaluate its real estate portfolio.

At the end of 2014, Marcato Capital Management LP of San Francisco prodded Dillard’s to put its assets in a real estate investment trust.

“We believe that Dillard’s could unlock tremendous value were it to pursue such a transaction,” Mick McGuire, managing partner of Marcato, said in a 2014 news release.

A spokesperson for Marcato didn’t return a call from Arkansas Business.

It would be difficult for an activist shareholder to force changes at Dillard’s. CEO William Dillard II and his family control the Class B shares of the company’s stock, which allow them to pick eight of the 12 board members.


Dillard’s Inc.
Same-store Sales Trend

  2014 2015 2016 2017
1Q 2% -1% -5% -4%
2Q 1% 1% -5% -1%
3Q -1% -4% -4%
4Q 3% -2% -6%

Source: Dillard’s Inc. Same-store sales are sales at stores that have been open at least a year and are considered an indicator of a retailer’s health.