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Dillard’s Expecting a Happy HolidayLock Icon

5 min read

Dillard’s third-quarter revenue would have been cause for celebration a year ago, but investors didn’t like the bottom line.

Dillard’s (NYSE: DDS) stock price tumbled some 15 percent in the hours after the Little Rock department store chain’s third-quarter numbers were released before the market opened on Thursday.

“While we are encouraged by our 3 percent comparable sales performance, this was a disappointing quarter as markdowns weighed heavily on gross margin, particularly in the first month,” Dillard’s CEO Bill Dillard said in a news release.

Dillard’s missed its profit estimates for the quarter and reported an income of $7.4 million for the quarter that ended Nov. 3, which was down nearly 50 percent from the same quarter a year ago.

Still, Dillard’s and other department stores are looking toward the holiday season, when department stores generate about 25 percent of their total annual sales.

Retail analysts expect Dillard’s and other retailers should have a season of good cheer. The National Retail Federation forecasts that holiday spending will be between $714.45 billion and $720.9 billion, up by 4.3 percent to 4.8 percent from the 2017 holiday season, according to an NFR Oct. 3 news release.

“Thanks to a healthy economy and strong consumer confidence, we believe this holiday season will continue to reflect the growth we’ve seen over the past year,” NRF President and CEO Matthew Shay said in a news release. “While there is concern about the impacts of an escalating trade war, we are optimistic that the pace of economic activity will continue to increase through the end of the year.”

Those numbers are welcome news for Dillard’s, which has reported four consecutive quarters of same-store sales increases since the fourth quarter of 2017. Before the past year, it had reported nine straight quarters of same-store sales declines, a period that covered mid-2015 through three quarters of 2017. 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.

Through its first three quarters of this fiscal year, which ended Nov. 3, Dillard’s reported net income of $85.1 million, up from $63.8 million during the same period in 2017. Its retail sales were $4.16 billion for the first three quarters of the fiscal year, an increase of 3.9 percent over 2017’s first three quarters.

Neil Saunders, managing director of retail for GlobalData of New York, which offers retail consulting services, credits the overall economy for improving Dillard’s numbers, not anything that the department store chain has done.

The increases in Dillard’s same-store numbers starting in late 2017 are “actually below overall growth in retail, which is running in the mid-4.5 percent,” he told Arkansas Business.

“So Dillard’s is still losing market share, even though it’s performing better,” Saunders said. “And I think that’s probably a good reflection of where they are.”

In August, Wedbush Securities of Los Angeles started analyst coverage of Dillard’s and placed an outperform rating on the department store chain with a target stock price of $95. It was nearly there in mid-August, briefly topping $93.

Since then, the chain’s stock price has tumbled, dropping below $70 at times in October and again last week. The drop in the stock price triggered Wedbush to downgrade the stock to neutral on Oct. 30.

Still, Jen Redding, the Wedbush analyst who tracks Dillard’s, told Arkansas Business that she expects Dillard’s to have a good holiday season, mainly because of the strong economy.

“I think Dillard’s is making the right moves too,” she said.

Moody’s Investors Service said in an Oct. 25 report that the strong U.S. economy is fueling the retail sales growth forecast.

“We expect a very healthy 5 percent to 6 percent growth in retail sales this holiday season, while a healthy U.S. economy, consumer confidence and increasing wage growth will aid consumer spending,” the report said. Moody’s also said it expects retail sales figures will continue to climb into 2019.

But the department store segment remains one of the worst performing in the retail sector, it said. Moody’s forecasts an operating loss for the sector of 2.1 percent this year, which was an improvement from 2017, and an operating loss of 1.7 percent in 2019.

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“Over the year, [department stores] generally continued to post top line momentum thanks to same-store sales growth, better inventory control and improved shopping efficiencies for customers,” the Moody’s report said.

Department stores also have been able to manage their online sites to “close the sale in instances where inventory is unavailable at a certain physical location, with the ability to make an online purchase from its store location.”

Nevertheless, the trade dispute between the United States and China might hurt U.S. retailers that source a large portion of their products from China.

Disagreeing Analysts
Wedbush’s Redding and GlobalData’s Saunders disagree on the condition of Dillard’s.

Redding said she thinks Dillard’s is making the right moves with its product mix. She said the exclusive brands offered by Dillard’s help the company. And its “stores look good,” she said. “I think they’re making all the right steps in the products.”

Saunders disagreed. He said Dillard’s assortments are “reasonable.” The problem, he said, is Dillard’s is a “very traditional-type department store with a massive product, especially in apparel. It isn’t the easiest of stores to shop.”

Saunders said he would like to see Dillard’s renovate its stores and close the underperforming ones or convert them to outlet stores, as it has in the past. Currently, Dillard’s has 267 locations, 25 clearance centers and an internet site. As of Feb. 1, 2014, it had 296 stores, including 18 clearance centers, and an internet store.

He said younger consumers aren’t shopping at Dillard’s, leaving the retailer with an older demographic.

Dillard’s is not “a terrible retailer,” Saunders said. “It’s not a very exciting retailer either.”

Being an average retailer is fine in a strong economy, he said, but “if the environment becomes weaker, obviously, that becomes a problem again, like it was before.”

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