Dillard's: A Fashionable Investment That Is Still In Style
Summary
- Dillard’s positioned itself well to survive the pandemic, and to thrive in the "new-normal" age.
- Picking market areas for new stores is very selective. Dillard’s appears to avoid too much direct competition.
- Dillard’s stock is at or near fair value, with potential for over a 13% increase to $203.88 in 6 months.
Dillard's Inc. (NYSE:NYSE:DDS), like many other companies, was hit hard by the pandemic. Dillard's revenues and earnings dropped substantially during 2020. But Dillard's is in the business of style, and looking at the recent sales data from Dillard's, the saying "Style is always in fashion" may come to mind. Revenues and earnings were up strong in Q1 of 2021 and Dillard's stock has more than recovered from the lows during the pandemic. In fact, the stock has done much more than recover, it actually has had an impressive run. I believe that Dillard's is a great company and stands as a worthy competitor in fashion retailing. I believe the stock is fairly valued at or near the current price, and I see Dillard's as a good stock to own long-term. I rate it as a "Buy" with potential to reach $203.88 in 6 months.
Photo, Information, and Data Source: Dillard's Inc.
The Company
Dillard's, founded in 1938, has grown to be among the largest fashion apparel, cosmetics, and home furnishing retailers in the nation. The company was incorporated in 1964 and operates 282 stores, including 32 clearance centers, an internet store offering merchandise much like what is found in their stores, and other consumer goods. They also operate a general contracting construction company that builds and remodels Dillard's stores as a portion of its business.
Dillard's employs approximately 29,000 associates and the company has retail stores operating in 29 states located primarily in the Southwest, Southeast, and Midwest regions of the country. Most stores are inside suburban shopping malls and in open-air centers.
Apparel, shoes, and accessories are Dillard's majority product offerings at 77% of the total revenue. Another 15% of the product mix is cosmetics, and thus represents another substantial contribution to Dillard's revenue. The remaining 8% of revenue is received from the home and furniture products and from the construction contracting business.
Dillard's private label credit cards are owned and managed by Wells Fargo Bank, N.A. (NYSE:WFC). The agreement places benefits, risks, and operations with Wells Fargo, and Dillard's receives ongoing cash compensation in return. Dillard's does participate in marketing the private label cards, and uses the option to provide incentives to sales associates as a way to expand the program.
Dillard's is active in e-commerce through its Internet store. Besides their considerable offerings of merchandise, the website also features an online gift registry and various other services. Like many retailers, Dillard's recognized the need years ago to reach beyond brick and mortar to stay current with the trend in web-based consumer shopping.
What they may not have realized is what a critical role that online shopping would become as the pandemic shut doors in one area and another. E-commerce allowed Dillard's to fulfill orders by utilizing inventories located at temporarily closed locations to meet customer needs. That generated sales and moved inventory that otherwise could have not occurred. This helped Dillard's ability to come through the pandemic effects in a much better position than they might have otherwise.
Source: Shop-Eat-Surf
Retail Dillard's Style
Dillard's focus is on style and fashion, and the target customer demographic is directed toward the more affluent. Dillard's offers many major top brands in fashion such as Coach, Michael Kors, Preston and York, Calvin Klein, Tommy Bahama, and Polo Ralph Lauren, to name a few.
Dillard's Exclusive is a private label program featuring their exclusive brands such as Antonio Melani, Gianni Bini, GB, Roundtree & Yorke, Daniel Cremieux, Copper Key, and Southern Living - in association with Southern Living magazine. The exclusive products allow the company to better control quality and minimize costs. Dillard's believes that its private labels often provide savings for the customer, while still delivering the high standard of quality and fashion that the customer desires. Exclusive brand merchandise sales over the last three fiscal years represented 20.4% of the total.
Source: Dillard's
Dillard's Registry has long been a hallmark part of the Dillard's experience. The registry allows a person to register their event at the store - a wedding, or baby shower for example, and list off all their preferences in merchandise sold at the store. Then, their family and friends can drop by and see what is on the list. It is convenient for all parties, and creates a pool of sales for the store. Other stores do this also and the registrant may post at several stores, but I suspect Dillard's may have an edge. Occasions like these are often a time when people are willing to spend a little more to impress, and Dillard's upscale appeal is ideal to attract those people.
The emergence of the online store has only made the registry option more convenient for all participants. The whole process can now be done online without anyone ever having to actually enter the store.
As mentioned, cosmetics are a substantial part of Dillard's business recently representing 15% of revenue. Dillard's provides sales associates to work directly with customers and help them find the right products. I can speak somewhat to experience here, as my wife makes appointments to meet with the associate and they may spend an hour or more at a time trying out different shades of make-up, or other products. I suspect the hands-on relationship with the associate helps ensure a sale, and cosmetics are pretty much consumables. Once my wife is sold on a product she becomes a repeat customer. The amount of time to find the right product, such as finding just the right shade, and the quality of the product, lends to loyalty to that product. Regular replenishment of cosmetics also brings customers back into the store, and that may lead to additional unplanned purchases.
Source: Dillard's
Valuation
Per the quarter reports from Dillard's Investor Relations Quarterly Earnings page, Dillard's has a trailing twelve-month EPS of $11.36. As of this writing, the current share price for Dillard's is $179.81. This comes out to a P/E of 15.8 based on using the TTM. According to CSI Market the average retail P/E today is 16.99, so on these measures, Dillard's can be said to be about fairly valued today. Dillard's price to sales ratio at approximately .89 is currently under the retail industry average of 2.36, and also indicates a current fair value, to undervalue.
The FY21 Q1 EPS was higher than average, but included a large asset sale, and included above-average gross margins. Gross margin was 42.7% as compared to 37.8% in 2019. The company credits better inventory management and customer demand that lead to decreased markdowns. If you assume a more conservative margin of 40% and you remove the asset sale from the income statement you might see about $3.35 in EPS for the quarter instead of the actual $7.25 EPS. I consider $3.35 the more likely typical EPS, and it appears more typical with quarterly EPS you see in FY19.
Source: Dillard's
But keep in mind that the recent EPS result is based on FY21 Q1 sales. Dillard's sales are seasonal and typically sales are stronger in the second half of the year. Dillard's sales grew about 2% from FY18 to FY19. The pandemic confuses the question, but if you "normalize" sales in this way and you add 2 years of growth then you would project approximately $6.6 billion in sales for FY21 from FY19 sales of $6.35 billion. Roughly on an annualized basis that is 20% higher than FY21 Q1, so that if I add that to the $3.35 EPS projection that would come closer to $4.2 EPS per quarter. Just for margin of error, I am rounding that down to a projected $4 EPS per quarter. Obviously, just guesswork, and a number of factors can and will change including fixed costs.
Based on these "best-guess" assumptions, however, I look to see Dillard's likely able to produce $12 EPS on an annualized basis. I believe that using CSI Market's retail industry average P/E of 16.99 is appropriate for Dillard's. This is a little higher than its 5-year average P/E ratio of 11.55, but well under the maximum high of 19.50 per YCharts.
Source: YCharts
I believe the higher P/E is justified for several reasons, such as Dillard's active share repurchasing. For example, from May 2, 2020 to May 1, 2021, the outstanding share count was reduced by 1.8 million shares. Also, Dillard's has increased dividends 5 times in the last decade with percent increases growing. And, the increase in gross margins and decrease in costs are materially adding to EPS. I would like to see confirmation of sales growth, but the company was very encouraged by the FY21 Q1 results.
Created by author, data source: Dillard's
If Dillard's is on track to consistently produce $12 EPS annually, and a P/E of 16.99 is applied that would support a share price of $203.88. The belt-tightening moves that Dillard's put in place due to the pandemic helped them weather through the worst months. Then as consumer demand increased the cost savings that were put in place really added to the bottom line, as was evidenced in FY21 Q1. By normalizing the effect we can get an idea of how to value the future state of the company. Based on the assumptions herein I rate Dillard's stock as a "Buy" with a 6-month price target is $203.88.
Competition and Growth Potential
Dillard's has numerous competitors such as Macy's (NYSE:M), Nordstrom (NYSE:JWN), Kohl's (NYSE:KSS), JCPenney, Amazon (NAS:AMZN), Costco (NAS:COST), Sam's Club & Walmart (NYSE:WMT), eBay (NAS:EBAY), Target (NYSE:TGT), Burlington (NYSE:BURL), and Belk to name a few of the largest.
Dillard's and Macy's are often studied together due to their focus on high fashion, although several other competitors are also comparable. It is interesting to look at Dillard's and Macy's however, especially when considering store locations. Macy's 514 stores outnumber Dillard's 282 stores significantly. What is interesting though is the two companies appear to be, and perhaps are, trying their best to avoid locating too close to one another, at least in the majority of the country. You can see on the maps below that, for the most part, areas where one company is heavily concentrated the other is not, and vice versa.
Source: Scrapehero
I also found that there are very few states where each company is close in number of stores, and where each has 10 or more stores. I found Florida, Georgia, and Ohio to be the "battleground" states where the competition may be more direct. That is just 3 states in the whole nation.
Created by Author, Data Sources: Dillard's and Macy's
Apparently, as is obvious, the segment of retail in which Dillard's and Macy's competes works better in areas where less head-to-head competition is required, or these companies have just chosen the easier path as long as they still can.
I recently covered Dollar General (NYSE:DG), where growth is fueled by aggressive store openings. Dillard's does not enjoy rapid store growth, and instead, they state that they believe in aggressive store closures, where stores are underperforming. The 32 "clearance centers" that Dillard's operates are probably a good way to move older merchandise from all the stores where it did not sell, but once a store is designated a clearance center it may be an indication that the store itself is underperforming, and thus may be on the list to be considered for a future closure.
However, Dillard's does open new stores. In 2015 Dillard's opened 3 new locations, and more recently they opened another new store in 2020. The company plans to open a new store in Colorado in 2021 and a new store in Utah in 2022. Interestingly, Dillard's attributed both new opportunities as arising from peer closures in these areas. That seems to support the idea that the company seeks to avoid direct competition.
Source: Walton College
You might ask if a peer closed in a location then why Dillard's would wish to locate there. But maybe they have some better information, or maybe those locations are better aligned for Dillard's existing distribution network.
Historically store growth was the lifeblood of retail growth, but online sales are rapidly changing the landscape. Dillard's and their competitors can grow very well by online sales, so we may not need to focus too much attention on how many new stores are being built. Dillard's aggressive store closing policy should help overall margins, and online selling may minimize the loss of sales from closures. But I think there is some merit in continuing to open new brick and mortar locations where appropriate. Introducing the atmosphere and experience that a new high-end store brings into an area where Dillard's is not familiar should provide a great segue to bring customers to their online sales option.
If Dillard's were to decide to ramp up physical store growth, or saw they had a competitive advantage to compete more directly, then they are only in 29 states today, and many of the states they are currently in might support many more stores. Major markets for Macy's like California and the entire Northeast including New York, are nearly untouched by a Dillard's store at this time, not to mention there are currently no international stores. Clearly, there is room to expand if the company wished to do so.
But, Dillard's current strategy appears to be convincing to shareholders as the stock price has appreciated well recently. The graph below compares Dillard's share price to Macy's share price performance over the last 6 months. Macy's is shown in the blue line on the graph.
Source: Bar Chart
Risks
I see a few risks that should be considered. The pandemic is not over and could affect shopper's habits. Mask mandates might re-occur and customers could delay store visits if coronavirus cases continue to increase.
Competition exists in any number of factors such as price, quality, advertising, assortments, and customer preferences among others. Also, online retailing offers competition for those that may not have the overhead that comes from physical store locations.
Dillard's purchases merchandise from many sources and are not dependent on any one supplier. But the ability to purchase merchandise at favorable pricing represents a risk factor.
The greatest majority of Dillard's stores are company-owned. This is an incredible asset and may present an opportunity for considerable appreciation in value of the real estate. Risk would occur for locations that may become less desirable for business and the possibility of a lowering of the value of the real estate at those locations.
Also, Dillard's business strategy depends on their ability to recognize and adjust to changes in fashion trends. They must be able to provide merchandise that is currently in style and meets customer preferences. Failure to predict the latest trends could adversely affect sales and ultimately the company's financial position.
Final Thoughts
The market cycle that occurred from 2007-2009 has been referred to as "The Great Recession". While we are not out of the woods yet, I think that when history looks back to now that it will be said that "The Great Recovery" began in 2021.
Dillard's identified measures it needed to take to survive the pandemic effects, and came out leaner and more prepared to benefit well once consumers came back. When consumers did come back, they come back in mass, and Dillard's has fared very well as result. Gross margins are improved and selling and administrative expenses are leaner, enabling greater EPS achievements. This is further helped by the share repurchases.
Source: Tallahassee Democrat
The company carefully chooses new locations and puts extra focus on closing out non-performing locations. With this and its online store option, Dillard's is maximizing its sales opportunities and its returns on sales. The stock has done very well and I believe that an investment at current levels leaves room for appreciation over the coming 6 months. I believe Dillard's is a stock that you could pay a fair price for, or even a bit over and it should grow to meet and surpass that level over time. The dividend yield is low, but it actually has experienced a good growth rate, and if that continues then it is another positive for consideration in an investment. Dillard's slogan is "The Style of Your Life". The management has set the company up well for success and if it continues to perform much as it did in Q1 2021, then maybe investors will be able to live life in style.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Please note that I am not a financial advisor. The article should not be considered as a suggestion to buy or sell this or any other stocks. Consider this one source of a full range of due diligence you should undertake, but is entirely my personal opinions. It is strongly recommended that you consult an experienced, qualified, and registered investment advisor before trading.
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Comments (17)
a 4B market cap with 15M shares o/s, you're looking at $266 a share!This is $AAPl share buybacks on steroids. I also think they could split the stock at 3:1 or 4:1, the dividend is not that high and they could support it.
