Why I Don’t Believe the Dillard’s, Inc. (DDS) Story

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Competition may heat up
The big risk for Dillard’s, Inc. (NYSE:DDS) going forward is that the tailwind it received from J.C. Penney’s struggles could reverse later this year. J.C. Penney experienced a big management shakeup last month, with CEO Ron Johnson being replaced by his predecessor, Mike Ullman. Ullman has made it clear that he aims to lure back previous J.C. Penney Company, Inc. (NYSE:JCP) shoppers by bringing back coupons and frequent sales, while reintroducing popular private brands that were removed during the chain’s recent makeover.

While I am far from optimistic about J.C. Penney’s long-term prospects, I do think that Ullman’s strategy will win back some of the market share that J.C. Penney lost last year. Other mid-range mall-based department stores like Macy’s, Inc. (NYSE:M) and Dillard’s — which were the primary beneficiaries last year — will face stiff competition during the back-to-school and holiday seasons. Since Dillard’s is already losing some share to Macy’s, Inc. (NYSE:M), it could be hit hard by a J.C. Penney sales revival.

Foolish bottom line
While Dillard’s has generated strong earnings growth over the past several years, it has become increasingly reliant on margin improvement and share buybacks recently, rather than organic sales growth. Comparable-store sales growth dropped to just 1% last quarter, and Dillard’s could face a worsening competitive environment as J.C. Penney moves aggressively to regain share. With the stock trading for nearly 13 times earnings, I think investors should steer clear of Dillard’s, Inc. (NYSE:DDS) for now.

The article Why I Don’t Believe the Dillard’s Story originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of Dillard’s.

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