LITTLE ROCK — Shares of Dillard’s Inc. ignited in 2009, rising more than 400 percent as investors took encouragement from cost cuts that led to fatter margins and better-than-expected earnings.
Dillard’s opened the year on Jan 2 at $3.95 but on Tuesday closed at $19.86.
One of the few Wall Street analysts still following the Little Rock-based department store chain expects shares to go much higher.
Bill Dreher of Deutsche Bank has a target price of $28 on the shares and on Tuesday lauded management’s attempts to turn the company around.
“It’s an under-followed, under-appreciated company that has worked very hard to correct its cost structure, eliminate unprofitable stores and tailor their merchandise selection more to what their consumers want,” Dreher said.
He believes progress made by management has been masked by the recession’s toll. Closing a few dozen unproductive stores has been the biggest factor in Dillard’s cost-cutting efforts, he said.
The company now operates 313 locations, after closing 23 stores in the past two years and opening several new ones.
Dreher issued a “buy” recommendation on Dillard’s in November and expects shares to perform well in 2010 as earnings are boosted by better margins. He has no direct ownership of Dillard’s shares, but Deutsche Bank itself owns more than 1 percent of the stock.
Company spokesman Julie Bull on Tuesday said company policy prevented her from commenting on the stock’s performance.
Just a year ago, it wasn’t uncommon for Business Week and other financial media to mention Dillard’s prominently in articles about retailers at risk of bankruptcy.
“Analysts are skeptical about the chain’s ability to turn itself around,” Business-Week reported in November 2008, a month when the stock sank to the $3 range, which it hadn’t seen since the early 1980s.
Since then, sales have worsened along with the overall economy. They were down 14 percent to $4.53 billion for the 43 weeks ending Nov. 28, compared with $5.27 billion for the comparable 2008 period.
But sales aren’t the only thing factor that weighs on investors’ minds.
Exceeding analysts’ estimates in the third quarter also played a role in the stock’s recovery, said Bob Williams, managing director of Delta Trust investments in Little Rock.
In the third quarter, Dillard’s posted an $8 million profit, up from a $56 million loss in the year-earlier period. Dillard’s loss for its first three quarters was $11 million compared with a $92 million loss in the comparable 2008 period.
Dreher thinks Dillard’s has an “immense opportunity” to have a good fourth quarter. He expects better margins to lead the company to finish the year with earnings per share of 95 cents, with $1.10 of it in the fourth quarter. (The company has negative earnings per share for the first three quarters combined).
Analysts at Standard & Poor’s said in a Dec. 21 release said that the firm had placed Dillard’s credit rating on a “positive” watch, because the company has reduced its debt. Relative to late 2008, S&P noted that Dillard’s had paid down about $500 million in debt at the end of the third quarter.
Dillard’s this year has reminded investors of its credit line of more than $1 billion, and S&P noted that its liquidity “remains good.”
“We believe the company has enough liquidity to operate for at least the next two years, even if sales trends in the moderate department store sector remain weak,” S&P said.
Michael Exstein, a Credit Suisse analyst who follows Dillard’s, said the company has forecast that its cuts in 2009 could be $275 million compared with 2008 spending.
But Dillard’s recipe of cost cutting for success may have a downside.
Exstein wrote in a mid-November research note that the company’s investment in its stores, measured by selling, general and administrative expense and capital expenditures per store, are at their “lowest levels since at least 1992.”
“We are concerned whether Dillard’s can meaningfully improve its sales performance in the future,” he wrote.
S&P said that it doesn’t expect Dillard’s operating performance to improve until the economy as a whole gets stronger.
Macy’s and other competitors also have seen dramatic increases in their stock prices in 2009. Shares of Macy’s plunged as low as $6.27 on March 5, while on Monday its shares were trading at $17.69.
Dreher said that while Macy’s has its hands full with its own restructuring, “another thesis” that would support investment in Dillard’s is a possible buyout by Macy’s down the road.
“We believe that the Dillard’s footprint would fit very well with Macy’s,” Dreher said.
His “buy” recommendation, however, was based on Dillard’s operating performance, not a buyout.
Dreher noted Dillard’s has been keeping inventory levels much lower than in the past, which allows it to have less markdown activity and higher margins on what it does sell.
“They are managing inventory levels and maybe forcing their [in-house] buyers to make more of the decision for the consumer and sort of whittle it down and make an easier shopping experience,” he said.
Dillard’s also has been the beneficiary of consolidation in the department store industry, Dreher said.
“There’s a lot of vendors that have been displaced,” Dreher said. “Dillard’s I think has gone out and got those real high quality vendors which maybe they hadn’t had in the store previously. They’re also focusing more on getting that message out with advertising and marketing.”
Business, Pages 29 on 12/30/2009