Earnings Preview: Dillard's

| About: Dillard's Inc. (DDS)

Company Profile

Dillard's, Inc. (NYSE:DDS) ranks among the nation's largest fashion apparel, cosmetics and home furnishings retailers with annual revenues exceeding $6.2 billion. The company focuses on delivering maximum fashion and value to its shoppers by offering compelling selections complemented by exceptional customer care. Dillard's stores offer a broad selection of merchandise and features products from both national and exclusive brand sources. The company operates 294 Dillard's locations and 14 clearance centers spanning 29 states, all with one nameplate - Dillard's.

Current Analyst Estimates

There are only two analysts covering Dillard's, only one of which offers estimates for revenues. The analysts offer expectations of $1.67/share in earnings, which would represent a 27.5% growth over last years earnings for the same quarter. The analysts believe these earnings will come on revenues of $1.53 billion, up from $1.47 billion, or 4.1%, from the prior year.

Consensus Earnings Estimates Trend

The consensus earnings estimate for Dillard's has gradually increased over the last three months from an initial estimate of $1.52/share to its current position. These revisions are likely to have been submitted following same store sales numbers that are reported monthly.

Current Analyst Price Targets

The last price target that was placed on the stock was by Deutsche Bank back in February of 2011 and no further revisions have been made.

Ratio Analysis

To get a sense of the current valuation with respect to its competitors, below is the ratio analysis for Dillard's vs. Nordstrom (NYSE:JWN), Macy's (NYSE:M) and Sak's Incorporated (NYSE:SKS) along with the industry and S&P 500 averages.

DDS JWN M SKS Industry S&P 500
Price / Earnings 7.53 17.53 13.8 24.88 153.8 15.3
PEG 1.37 1.51 1.32 1.6 --- ---
Price / Sales 0.51 1.06 0.64 0.56 0.5 1.3
Price / Book 1.58 5.86 2.81 1.42 2.2 2.2
Dividend Yield 0.3% 1.96% 1.99% --- 1.5% 2.1%

Other competitors of Dillard's include TJX Companies (NYSE:TJX), Kohl's (NYSE:KSS) and J.C. Penney (NYSE:JCP).

Fair Value Analysis

The valuation of discounted cash flows is an effective tool in identifying the intrinsic value for well established companies. The input for the analysis is as follows:

Revenue Growth Rate (Current Year / Ongoing) 3% / 2%
Cost of Goods Sold (COGS)(% of Revenue) 63%
Operating Expenses (% of Revenue) 31.4%
Tax Rate 21.5%
Weighted Average Cost of Capital 11%

Dillard's has done well managing its business since the financial debacle in 2009 when the company saw significant decreases in revenues. While they have managed to bring down costs effectively over the past four years, the rate at which they bring those costs down has slowed considerably. To preserve the conservative nature of this price target the estimated COGS for 2012 will be used as the ongoing cost of goods sold.

With regard to operating expenses the company has drastically reduced expenses but similar to COGS, the rate of of decrease has begun to stagnate and so for operating expenses the three-year average will be used. Finally the tax rate for Dillard's has been highly variable and so for the ongoing tax rate I've considered the four-year average between 2008 and 2011. The Weighted Average Cost of Capital (WACC) was derived from the industry average. The result points to an estimated fair valuation of $58.83/share which amounts to the stock being over valued by approximately 10.4%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.