Commentary

Company Review: Dillard’s Inc (DDS)

Company Profile:  Dillard’s Incorporated (obtained via Google Finance)

Dillard’s, Inc. operates retail department stores located primarily in the southeastern, southwestern and midwestern areas of the United States. As of January 28, 2006, the Company operated 330 Dillard’s stores, selling a selection of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods. Most stores are located at suburban shopping malls. Customers may also purchase products online at Dillard’s, Inc.’s Website. The Company also offers an online bridal registry to customers. Dillard’s, Inc. operates retail department stores located primarily in the southwest, southeast and midwest. The stores are located in 29 states, with 51 stores being located in the western region, 124 stores in the eastern region and 155 stores in the central region.

Business and Management Review
1) Is the business simple and understandable?

Dillard’s is in the simple business of retail.  They purchase inventory, mark it up, and sell it.  The main issues for the industry are attracting customers and keeping inventory costs low.

2) Does the business have a consistent operating history?

The company was founded by William Dillard, in 1938 when he opened his first retail store.  Since then, the company has focused on an acquisition strategy as the industry has gone through numerous consolidation stages.  The company also focuses on advertising to attract its customers.  The operating history has been consistent, as there have been no unusual tactics used (such as being a retail business but acquiring a telephone company).

3) Does the business have favorable long term prospects?

The retail industry will continue to be around as long as we exchange goods and services; however the composition of the retail industry may change.  There have been countless mergers the last few years within the industry, and a marked move towards internet purchasing by consumers.  Store fronts are still needed as consumers need to be able to see a store’s presence and have a specific location to make returns to (if necessary).  Dillard’s seems well aware of this, as their internet site allows online shopping while they are continuing to acquire new locations.

4) Is management rational?

Management appears rational in its approach to business.  We especially like the company’s outlook on the recent major mergers of their competitors – they view it as an opportunity to attract customers who are not happy with the change in store names. 

5) Is management candid with its shareholders?

Dillard’s has an average investor relations page, and we would like to see a more informative letter to shareholders.  The letter in the latest annual report seems generic, focused on overall goals but avoids discussing tactics in detail – something investors deserve to hear from management.

6) Does management resist the institutional imperative?

We have no reason to doubt that management has resisted the institutional imperative. 

Financial and Value Review
Defensive:
1) Size of firm

At a market cap of over $2.5 billion, the company passes the requirement of $2 billion.

2) Strong financial condition

The company’s current ratio is not suitable for the defensive investor.

3) Earnings stability

The company has achieved a positive net income for 10 years.  Pass.

4) Dividend record

Dillard’s has paid a dividend for over 10 years.

5) Earnings growth

Earnings per share have not grown suitably in the last 10 years for the defensive investor.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 28.60, the requirement of under 20 is not met.  Though the trailing 12-month PE ratio is 14.18, we maintain that our version of the PE ratio focusing on long-term performance, is the better statistic and should be used in determining investment opportunities.

7) Price to assets analysis

Since the PB ratio is 1.08, it makes up for the high PE ratio, and the company passes the final test.

Overall

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Dillard’s is suitable for the defensive investor.

Enterprising:
1) Strong financial condition

The company’s current ratio is sufficient for the enterprising investor.  Pass.

2) Earnings stability

The company has achieved a positive net income for over 5 years.  It passes the test.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.

Overall

We find the company to be suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be around $43. 

Opinion:

Since the company is currently trading at $33, the company seems fairly valued (it does not quite meet our margin of safety to be considered undervalued), but may be a suitable investment for a long term enterprising investor.

Neither of us held a position in Dillard’s Incorporated at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the second part of our study of the Department Stores sector.  Please come back in the next couple weeks for reviews of more companies within the sector.

 

 

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