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Millions of working Americans welcomed 2013 with reduced paychecks from higher taxes and with already tight credit and now less cash to spend, consumption in 2013 could be negatively impacted. Consequently, I believe 2013 will produce ample short opportunities in areas such as consumer discretionary. This article focuses on the retail sector (NYSEARCA:XRT) and specifically, builds a short case for Dillard's (NYSE:DDS).

First of all, Dillard's trashier older cousin JC Penney (JCP) has been absolutely destroyed by the markets, down 52% over the last 52 weeks. Given the similar trends in sales, I would argue DDS's share price is so far unscathed, with shares up 97% over the same period.

JCP Sales

DDS Sales

12-Jan

17.26 Bil

12-Jan

6.40 Bil

11-Jan

17.76 Bil

11-Jan

6.25 Bil

10-Jan

17.56 Bil

10-Jan

6.23 Bil

9-Jan

18.49 Bil

9-Jan

6.99 Bil

8-Feb

19.86 Bil

8-Feb

7.37 Bil

7-Feb

19.90 Bil

7-Feb

7.81 Bil

6-Jan

18.78 Bil

6-Jan

7.69 Bil

5-Jan

18.10 Bil

5-Jan

7.80 Bil

4-Jan

17.51 Bil

4-Jan

7.86 Bil

The jury seems to be out on JCP, however with 35% short interest and an already depressed stock price, I feel shorting JCP may be too crowded. Luckily, Dillard's is a less popular short candidate, with short interest currently 5%. Both DDS and JCP have junk rated debt. Below I've included a table to highlight the junk status of DDS and JCP relative to their peer group:

Ticker

Issuer

Moody's Quality rating

52 week equity return (with dividends) %

KSS

Kohl's

Baa1

0

M

Macy's

Baa3

13

DDS

Dillard's

B1

97

JCP

JC Penny

Caa1

-52

Below is the fundamental value of Dillard's using the stable-stage FCFE Gordon Growth Model with FY (14) Street earnings estimates (for simplicity, I've assumed capital spending and depreciation will cancel each other out):

This is the output from the Gordon Growth Model

Firm Details: from inputs on prior page

Current Earnings per share =

$6.33

-(1- Desired debt fraction) *

58.00%

(Capital Spending - Depreciation)

$0.00

$0.00

-(1- Desired debt fraction) *

58.00%

∂ Working Capital

$4.22

$2.45

Free Cashflow to Equity =

$3.88

Cost of Equity =

18.70%

Expected Growth rate =

5.00%

Gordon Growth Model Value =

$29.76

Given the sensitivity of inputs in the model, I've included the price per share given various growth rates:

Growth rate

Value

9.00%

$43.63

8.00%

$39.19

7.00%

$35.51

6.00%

$32.40

5.00%

$29.76

4.00%

$27.47

3.00%

$25.47

2.00%

$23.71

1.00%

$22.15

DDS closed Friday at $85.41

Conclusion:

DDS shares are priced nowhere close to where the fundamentals warrant and I feel the risk-reward favors the downside in 2013. Given the seemingly unjustified recent outperformance of DDS relative to its peer group, I believe DDS is ripe for a pullback and softness in consumer spending just may be the catalyst.

Source: Dillard's: A Short Idea In Retail