Consolidation and smart merchandising
At the end of January 2010, Dillard’s, Inc. (NYSE:DDS) had 309 stores. At the end of 2008, the company had 328 stores. Today, at 302 stores, the company has shrunk by 8%. Since March 2008, the stock has risen 340%. These two things are not unrelated, and they confirm the idea of many an investor that department stores today are essentially real estate companies — valuable real estate companies. Dillard’s management wisely acknowledged the changes in the industry, and instead of spending billions upon billions trying to make the stores a cool place to hang, they brought down the scope of the business to match demand. This meant (and continues to mean) big gains from real estate sales, and lowered operating costs.
On top of that, the company wised up its merchandising. Dillard’s, Inc. (NYSE:DDS) strives to offer limited-distribution lines that are more difficult to find than widely recognized, popular national brands. The company also drifted toward more fast-fashion inventory strategies, drawing in immediate feedback from stores to dictate inventory management. That helped prop up sales while the company consolidated the overall business.
How did Dillard’s luck out with such a top-notch management team? For one thing, the company has largely been kept in the family. William Dillard II, CEO, owns nearly 1 million shares, with two other Dillard family members owning another 1.4 million. Together, that gives the Dillard family a 5% position in the nearly $4 billion company. Dillard’s has always been a family business, and it looks as if the family wants to keep it that way in the near future.
Risks and valuation
The risks to the company are those inherent to the department-store business — shifting consumer sentiment toward online retailers and niche design shops. The company is expecting 10% earnings growth for the coming year, so we shouldn’t anticipate any major retraction, barring another economic meltdown. The company will probably continue to selectively reduce store count, pay down debt, and improve the operating side of the business.
Dillard’s, Inc. (NYSE:DDS) has $2.28 billion in real estate, as of the last quarter. Coupled with the company’s cash, inventory, and short-term holdings, that gives us today’s value of $3.8 billion — with no operating business growth factored in. Return on assets is over 8%, and the company is trading at just over 10 times forward earnings. This is certainly a premium to money-bleeding J.C. Penney Company, Inc. (NYSE:JCP), and slightly more expensive than Macy’s at 9.49, but Macy’s isn’t performing as strongly, nor does it anticipate the kind of growth Dillard’s is expecting.
For those who believe department stores don’t have to fade into the night, Dillard’s remains an attractive real estate play with limited downside potential in the near future.
The article This Department Store Is Doing It Right originally appeared on Fool.com.
Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Dillard’s.
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