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Dillard’s Survives in Tough Retail SectorLock Icon

7 min read

If short-sellers were responsible for Dillard’s Inc.’s stock rising 24% one day last month, analysts say it’s because they don’t understand the Little Rock retailer’s stability.

“Dillard’s isn’t going out of business,” said Richard Pearson, who runs Moxreports.com, a financial website based in Los Angeles. “They’re going to do great.”

The retail chain saw its stock price leap from $64 when the market closed on July 18 to $79.35 on July 19. And that was weird, according to Jen Redding, an analyst for Wedbush Securities Inc., a financial services and investment firm in Los Angeles.

“Department stores don’t run 25% in a lot of years, let alone” in a day, Redding said. The stock price retained some of that bounce as investors paid more attention.

“It was all because of that Friday move,” she said.

Pearson, a private investor and a former director at Deutsche Bank, said he believes the jump in the stock price stemmed from investors who shorted the stock, mistaking Dillard’s for yet another traditional retailer facing the same troubles that have beset J.C. Penney, Sears or Kmart. But it isn’t.

The short-sellers “are totally wrong,” Pearson said. “I think we’ll see Dillard’s above $100 in the next year or so.” On Wednesday, Dillard’s stock closed at $72.78. (NYSE DDS)

Some analysts agreed that they’ve seen some improvement, and say that Dillard’s, which is celebrating its 50th year as a publicly traded company, is in better financial shape than many other brick-and-mortar retailers. Nevertheless, Dillard’s has room to grow its online sales, a situation the company has indicated it plans to address.

In a June letter to the U.S. Securities & Exchange Commission, Dillard’s said it was expanding its ship-from-store capability for online sales this year. A Dillard’s spokeswoman wouldn’t comment on the company’s letter to the SEC.

Last month, Wedbush upgraded Dillard’s to neutral from underperform. Redding said Dillard’s was offering about the same number of promotions as it had last year, an indication that the company doesn’t have a particular need to liquidate inventory that isn’t selling.

Still, other analysts have concerns.

On May 15, Deutsche Bank reiterated a sell rating on the stock after Dillard’s first-quarter results were released. Dillard’s reported its first-quarter net income fell 2% to $78.6 million from the same quarter a year ago, and same-store sales were unchanged.

Pearson said Dillard’s plan to buy back its shares is working, resulting in the company’s remaining shares rising in value. During the first quarter, Dillard’s bought 200,000 shares for $17 million, which left $389 million in the share repurchase program announced in March 2018, Deutsche Bank said in a research report.

On May 17, Dillard’s bought almost $5 million worth of shares after its share price fell 10.5% in the two previous days.

But Dillard’s faces lots of competitors in the malls, a situation that likely will make it difficult for Dillard’s to improve its margins in the future, the report said.

The retailer operates 261 Dillard’s locations and 28 clearance centers across 29 states.

A Matter of Degree

Dillard’s, however, isn’t suffering as much as other brick-and-mortar retailers are, said Neil Saunders, managing director of retail for GlobalData of New York, which offers retail consulting services.

“One of the things that is true about Dillard’s is that they’re not in as bad a position as many other companies because they’ve always invested in the stores and … in customer service,” he said. “Dillard’s is in a weak segment, but they’re not the weakest player in that weak segment.”

Even Dillard’s CEO William Dillard II acknowledged during the company’s annual meeting in May that malls are struggling.

“I don’t know all the reasons,” he said. “Amazon gets thrown out as part of the reason. Whatever the reason is, all malls in general, and retailers that operate mainly in malls, all of us are having difficult times.”

Wedbush’s Redding disagreed that struggling malls are Dillard’s problem. Consumers will go to a mall when retailers give them a reason to shop, she said. She noted that the children’s apparel company Carter’s Inc. recently announced it plans to open about 100 stores in malls in the next five years.

“It shows when there’s opportunity and market share to be up for grabs, retailers are going to go to the mall, and they’re going to open stores,” Redding said.

“Dillard’s problem is that they don’t have the merchandise right,” Redding said. “Consumers are finding women’s apparel is not compelling enough to make people buy it there.”

Deutsche Bank said in its May research report that Dillard’s strongest performance came in the categories of juniors’ and children’s apparel, followed by home and furniture and men’s apparel and accessories.

Shoes and cosmetics underperformed, Deutsche Bank said.

Even though Dillard’s same-store sales were unchanged in the first quarter, Saunders said that’s not a cause for alarm. Same-store sales, which measure performance at locations that have been open at least a year, are considered an indicator of a retailer’s health.

Saunders said Dillard’s has a loyal customer base, “especially some of the older consumers who have shopped at Dillard’s for a long time.”

Online Growth

Dillard’s does have room to grow with its online sales, Saunders said.

“I think Dillard’s has done an OK job of online,” he said. “I wouldn’t say it’s particularly advanced.”

Dillard’s doesn’t pop into the heads of consumers when they are shopping online, Saunders said, but its online sales could improve with effective marketing.

Dillard’s online sales numbers have attracted the attention of the SEC. In a May 29 letter to Dillard’s, the SEC wanted to know more about Dillard’s online sales, which weren’t broken out as a percentage of its sales in the report.

The letter was made public last month.

Dillard’s said in its response that it believes investors should view its sales on a companywide basis.

“Whether a sale is attributable to a retail store or online has become less relevant as the line between the two has become progressively blurred,” the company said.

Dillard’s told the SEC in a June letter that, unbeknownst to customers, online orders could be filled from any of the retailer’s distribution/fulfillment centers or any Dillard’s store.

Shorting Stock

Pearson, of Moxreports, said he thought short-sellers caused the price of Dillard’s stock to jump on July 19.

When investors short a stock they are borrowing the share, but they have to buy it in the future, he said. “The goal is you think you’re going to buy it back 10% lower, 20% lower, 30% lower” than the price it was borrowed at, he said. “But the fact is that the stock can go up, … and you still have to buy it back.”

Hundreds of hedge funds are spreading out their short bets against dozens of brick-and-mortar retailers.

Meanwhile, Dillard’s also has been buying back its stock steadily for a long time, a standard technique for improving the value of shares that are still outstanding. At the end of the first quarter on May 4, Dillard’s had 26.1 million total shares of outstanding stock.

A price trigger might have caused the short sellers on July 19 to be forced to buy back the Dillard’s shares, Pearson said. But, he suggested, there weren’t enough shares readily available to buy.

“And it’s really just … a stampede for the exit,” he said. “When … too many people are trying to get out at the same time, even the very small amount of volume can make these [prices] go ballistic.”

Eventually, “these things tend to resolve themselves at some price,” which for Dillard’s was nearly $80 per share, he said.

Pearson said he thinks it’s a bad bet to short Dillard’s.

In the last three fiscal years, Dillard’s net sales has been around $6.3 billion. And it has been paying down its debt. Since January 2018, Dillard’s has paid $248 million of long-term debt.

“So they’re not going anywhere,” Pearson said.

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