Watch out for Dillard's

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, departmental stores have been in focus as they released their earnings, with most of the companies topping analyst expectations. Lets take a brief look at the 4Q performance of major departmental store stocks.

Dillard's (NYSE: DDS) :

Dillard's is a relatively smaller player in the departmental stores space with 304 stores, primarily in the Midwest, southwest, and southeast areas of the United States. It has its own branded clothing line and also derives sales from its online platform.  The company suffered dwindling same-store sales for nearly a decade before returning to growth in 2010, and has now reported same-store sales gains for 10 straight quarters.

All three major ratings firms have lifted Dillard's rating this year on the strength of its operating performance. It reported 4Q12 sales increase of 7%, with Comparable Same Store Sales (SSS) of 3% (marking the Company's 10th consecutive quarterly comparable sales increase). Positive sales performance and gross margin expansion driven by cost control helped to increase its cash flow, and as a result the company announced a special dividend of $5 per share.

Macy's (NYSE: M)

Dillard's closest competitor Macy's, which operates the famous Bloomingdale, has around 40 stores under the names of Macy's and Bloomingdales, and 7 Bloomingdales Outlet stores, as well as macys.com and bloomingdales.com. It reported strong 4Q12 results, increasing sales by 7.2% with SSS growth of 3.9%. It had a strong 2012 as a result of successful execution of its strategies and 48% surge in its online sales. It also guided for a strong FY13 with EPS of $3.90 to $3.95 and SSS of 3.5% (vs. Analyst expectations of $3.85). 

Nordstrom (NYSE: JWN)

A slightly more upscale chain, the omnipresent Nordstrom operates 240 stores in 31 states, including 117 full-line stores and 119 Nordstrom Racks. It operates under two segments: Retail, which includes its full priced stores, off-price Nordstrom Rack stores, and its online store nordstrom.com, and Credit, which operates Nordstrom fsb, a federal savings bank, which provides a private label credit card and a debit card.

It reported strong 4Q12 sales of $3.7 billion, up 13% with SSS growth of 6.1%. The company benefitted from revived demand in its designer merchandise after the recent economic recession, and also benefitted from an extra week during the period. However, it provided a weak outlook for FY13, guiding EPS of $3.65 to $3.80 and 4.5% to 6.5% increase in total sales with same-store sales growth of 3.5% to 5.5% (vs. Analysts expectations of EPS $3.97 and revenue growth of 7.1%).

Recently it announced a $800 million share repurchase program, which will be largely funded out of its $1.3 billion cash on hand.

Which stock should I buy?:

  • Out of the above three, I would put Dillard's on my watchlist, mainly due to its phenomenal financial performance leading to a $5 special dividend in FY12. It has had one of the most impressive runs since 2009, going from just $3 to almost $90, before falling to $80 as of this writing.
  • As seen above, although Macy's is the largest in sales, but it has a relatively flat EBITDA growth rate. Looking at Dillard's, the company's EBITDA margins have soared post the economic recession in 2008-2009, reaching 11.9%, marginally below its peers.
  • Furthermore, from table 3, Dillard's stands out on the dividend payout ratio and 5-yr. PEG rate. It still remains a relatively cheaper stock vs. Macy's and Nordstrom, with a forward P/E of 10.4, further strengthened by modest margins and a lower debt level.
  • However a word of caution, Dillard's could have trouble in repeating its 2012 success. Most of the companies within the departmental space benefitted from the recent turmoil in J.C. Penney (NYSE: JCP). However, the company has recently-announced that it will turnaround and bring back its sales. It plans to increase its fashion-oriented brands, thereby moving ahead of Dillard's and giving tough competition to Macy's and Nordstrom in the upscale retailer space.
  • Further, the economic condition is still volatile with the customer still being frugal. Consumer confidence was volatile in the last three months, moving from 65.1 in Dec 2012 to 58.6 in January 2013 (due to the lingering concerns regarding the fiscal cliff and 2% payroll tax hike which will have a significant impact on the disposable income) to 69.5 in February 2013 (consumers are less worried about the increasing gasoline prices and employment situation).


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