New All-Time High In Dillard’s, But The Run Isn’t Over Just Yet | New All-Time High In Dillard's, But The Run Isn't Over Just Yet
New All-Time High In Dillard’s, But The Run Isn’t Over Just Yet
Dillard’s (DDS) is one of the United States’ largest fashion apparel, cosmetics, and home furnishings retailers with 297 locations (including 20 clearance outlets) covering 50.5M acres across 29 states. The $5.4B company also has an online presence through dillards.com where they sell everything from handbags and lingerie to men’s dress shirts and home décor. Dillard’s offers well-known brands including: Michael Kors, Coach, Ralph Lauren, Estee Lauder, UGG, Under Armour, and Nike.
On February 23rd, the company reported Q4 EPS of $3.17 vs the Wall Street consensus estimate of $3.18 (earned $2.71 in Q4 of FY14) on revenue of $2.14B vs the $2.10B estimate (5% year over year increase). An important metric among retailers, same-store sales, rose 3% in the quarter compared to estimates of just a 1% gain. Gross margins were up 103 basis points and 35 basis points for the entire year.
Selling, general & administrative (SG&A) expenses came in $18.3M higher to $457.5M, but as a percentage of sales fell to 21.4% from 21.6%. Total cost of sales fell 300 basis points to 67.1% (down 200 basis points to 64.5% for the year). The company spent $4.27B on selling their products in FY15.
FY14 marked another year where cash and cash equivalents grew significantly. Cash holdings stood at $403.8M on January 31st, 2015, nearly doubling from $237.1M. Dillard’s has been able to shrink their shares outstanding nearly 3M by $290.4M worth of buybacks. In November, the board of directors approved a new share repurchase program for $500M.
Total assets increased 2.9% to $4.17B and stockholders’ equity ticked up year over year to 1.4% to $2.02B. Long-term debt and capital leases actually dipped just under $1M to $620.7M.
Valuation
DDS shares trade at a P/E ratio of 15.15x (Jan16 estimates) with 10.3% EPS growth, price to sales ratio of 0.79x, and a price to book ratio of 2.65x. Analysts expect double digit earnings to extend beyond this year and into next (top line growth staying in the low single digits).
Short interest has been hovering around 1M shares, or 3.12% of the total float. Using the average daily stock volume of 490,057 it would take about 3 days to cover these bearish positions.
Technical Analysis
Looking at the two-year weekly chart above we can see that DDS shares were finally able to breakout above the 8 month resistance level at $130 on heavy volume. This comes after yet another successful test of the 40-week simple moving average (200-day SMA). MACD, A/D line, and the ADX (w/+DI and -DI) are all showing positive signs to confirm the bullish price action. Using the prior range of $100 and $125, the stock is setting up for a measured move to $150 later this year or possibly early 2016 ($125-$100=$25+$125=$150).
Dillard’s opened two new stores last year and closed one store in Sarasota, Florida. In 2015, they plan on opening three new stores including a 155,000 square foot location in Cincinnati, Ohio. This plays well into the growth coming from the “central” region and western region where they will build a larger 200,000 square foot location in Murray, Utah by August. The closing of the smaller 90,000 square foot location in Sarasota may come across as a negative, but it is likely the best given the sluggish sales that the company has experienced down south.
Since they aren’t in 21 states currently, their online presence can fill the void in the remaining part of the country. Dillards.com comes across as a clean and easy to browse website for all of the product offerings. Consumers that are looking for a bargain can search by category for recent price reductions and for those wanting a certain brand can browse from A to Z in easy enough fashion. Despite its primarily upper middle class target customer, they regularly offer free gifts, additional discounts, and free shipping to attract beyond their core market.
With any retailer, two of the biggest risks are always having the right styles/brands and managing an appropriate level of inventories. Dillard’s has kept inventories around the $1.3B-$1.4B range as they slowly expand their physical store front locations.
Compared to Macy’s the stock trades at a premium to the larger competitor. Macy’s shares trade at a P/E ratio of 13.28x (Jan16 estimates), P/S ratio of 0.77x, and a P/B ratio of 4.03x. On the other hand, TJX Companies is growing slower than DDS and trades at a premium (P/E ratio of 20.37x, P/S ratio of 1.63x, and a P/B ratio of 11.11x).
A proposed REIT conversion by Marcato Capital Management (4.9% stake holder) is unlikely anytime soon, but for anyone considering an investment in DDS (or a short position), it is a potential big tailwind for the stock price. Marcato believes by separating the real estate into a different company it would result in the combined value being worth $193 per share. They cite Sears and Loblaw as examples of REIT conversions in the retail space.
Overall Dillard’s shares are likely to persist higher on rising margins, declining expenses, and new store openings later this year. The new $500M share repurchase program will also cushion the stock in the event of sizable pullbacks. Management can look to extra deploy cash in terms of an attractive dividend yield (currently 0.18%) and expedite the expansion into faster growing markets the central and western regions.
For those considering Dillard’s, but want yield support as well, there is Dillard’s Capital Trust (DDT). DDT, a preferred stock with a $290M market capitalization, has a 7.17% dividend yield. Comparing the last 200 days for DDS and DDT, the preferred has underperformed with a 7.47% gain vs Dillard’s 32.37% rally. However, volatility is almost non-existent in the preferred, which hasn’t been more than 3% below the stock’s 52-week high at any point in this time frame.
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