Hats Off To Dillard's

| About: Dillard's Inc. (DDS)

Dillard's (NYSE:DDS) has reported exceptional earnings for Q2 based on a very small increase in volume. The earnings per share are up 97% over last year. And the department store chain has continued to implement a very well structured share buyback program. Due to a strong cash flow, Dillard's was able to repurchase 134.6 million class A shares in the second quarter. According to a press release late Wednesday afternoon:

Dillard's reported net income for the 13 weeks ended July 28, 2012 of $31.0 million, or $0.63 per diluted share compared to net income of $17.6 million or $0.32 per share for the 13 weeks ended July 30, 2011. Highlights of the 13 weeks ended July 28, 2012 included a 3% increase in comparable store sales ....

This is one of the companies that I thought would be hurt by the rise in new car sales this year. Many of those sales are due to cars completely wearing out, as the average car on the road continues to get older. A lot of these middle income consumers have gone for years without having to pay a car payment. So even though a monthly payment should not affect most customers that shop at the higher end stores like Neiman Marcus and Saks (NYSE:SKS), it could slow retail spending for people that shop at stores like Dillards, Macy's (NYSE:M), and JC Penney (NYSE:JCP). However, this chart tells a different story. The price of all of these companies' shares have either declined or "flattened" since March when the new car sales really took off. So this seems to be affecting a large segment of people at different income levels.

Chart forDillard

If you are a retail investor, watch sales volume closely each month. But remember sales aren't everything. Although Dillard's squeaked out a small increase in sales, these great earnings per share are due to cuts in operating expenses, and the share buyback, which made the EPS higher due to fewer shares:

Net sales for the 13 weeks ended July 28, 2012 were $1.488 billion compared to net sales for the 13 weeks ended July 30, 2011 of $1.442 billion. Net sales include the operations of the Company's construction business, CDI Contractors, LLC ("CDI").

Total merchandise sales (which exclude CDI) for the 13-week period ended July 28, 2012 were $1.456 billion compared to $1.426 billion for the 13-week period ended July 30, 2011. Total merchandise sales increased 2% during the second quarter. Sales in comparable stores increased 3%.

Sales trends were strongest in ladies' accessories and lingerie, followed by shoes and cosmetics. Weakest performing categories were home and furniture and juniors' and children's apparel. Sales trends were strongest in the Central region, followed by the Eastern and Western regions.

Dillard's closed Wednesday at over $70 a share, and was up to $75 in after market trading. The $72.05 high of the day almost topped the 52 week high for the year of $72.46. I think if the company can continue to control expenses, and keep the margins high, it will remain the best investment choice for a middle department store. The tipping factor in my opinion is the continuation of the share buyback. The management really knows how to structure a successful buyback, and as a result, the share price has risen from around 2-3 dollars to over $70 in just over three years:

Chart forDillard

That is an increase of around 3000%. And if you have owned the stock that long, it would probably be very tempting to take some profits right now. There are going to be a lot of people that do that in the near future. This could cause a little pull back for investors to either start a new position, or add more shares to their current portfolio. I would still proceed with caution until we know more what the economy is going to do. Gas prices are rising again which will also play a part in the consumer's budget. But if you want to own a retail stock, this one still looks the most appealing.

Disclosure: I am long DDS.