The letter was sent following Barington's receipt of a July 2007 letter from Mr. Dillard, in which Mr. Dillard did not consent to Barington's initial request to meet with him in order to present suggestions to improve the Company's profitability and better utilize its substantial asset base. Instead, Mr. Dillard stated that the Company's investor relations director "would be happy to speak with you regarding our corporate strategy and answer your questions."
A Copy of the Letter:
Dear Mr. Dillard:
Thank you for your letter. While we appreciate your offer to make Dillard's director of investor relations available to speak with us, our interest is to meet with you and members of your management team. As a steward of a publicly- traded company, we had expected that you would be receptive to meeting with one of your larger stockholders, especially one with substantial experience helping improve shareholder value as a long-term investor in a number of retail companies.
There is clearly room for improvement at Dillard's. As reported in Monday's New York Post, Dillard's "has historically lagged behind its peers by almost every retailing measure." Among other things, Dillard's suffers from sub-par operating margins(1) and sub-par same store sales growth(2) and trades at a valuation multiple that is considerably lower than the industry- average.(3) Furthermore, as noted in the July 15, 2007 research report of UBS Securities, the Company's Return on Invested Capital (ROIC) has been approximately 2 percentage points below its weighted average cost of capital. According to UBS, this is one of the main reasons the Company has typically traded at a lower multiple than its peers and implies that Dillard's is destroying value in its business.
While we strongly believe in the potential prospects of Dillard's, whose shares we believe are significantly undervalued, we hope you recognize that the status quo is not acceptable. We would therefore like to meet with you to discuss initiatives in areas such as inventory management, merchandising and cost containment that we believe the Company should implement to bridge these differences and substantially increase shareholder value. We would also like to discuss with you a number of measures to enhance the value of Dillard's real estate portfolio, including the conversion of certain properties into higher and better uses, the closure of unprofitable stores and the sale/leaseback of owned properties. Given the highly competitive nature of the retail industry, it is our belief that Dillard's needs to take advantage of every opportunity to improve its operations and realize its vast value potential.
As part owners of the Company and in light of our track record, we hope that you will reconsider our request. We would be happy to meet at a time and location that is most convenient for you.
James A. Mitarotonda
(1) Dillard's last twelve month earnings before interest, taxes, depreciation, amortization and rent ("EBITDAR") margin is 9.0% versus the industry average of 13.2%. Industry group comprised of Bon Ton Stores Inc., Macy's, Inc., J.C. Penney Company, Inc., Nordstrom Inc., Kohl's Corp., Saks Inc., Stage Stores Inc. and Gottschalks Inc.
(2) On average, Dillard's same store sales growth has lagged its competitors by 3.9 percentage points per annum over the past 5 years. Dillard's has not posted an increase in annual same store sales since 1999.
(3) Dillard's Adjusted Enterprise Value / EBITDAR is 5.6x versus the industry average of 8.0x. Enterprise Value has been adjusted by capitalizing rent expense at 8x.