Department Store Deals

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

The department store industry has been gaining a lot of attention recently. With all of J.C. Penney (NYSE: JCP)’s problems, they have been trying to re-brand and create a new image for quite a while. With their earnings still in the red, they have a long way to go. 

But, what about other companies in this industry? Is the department store industry in trouble just because all of the attention they are getting is negative?

Take a look at Dillard’s (NYSE: DDS). They are a regional retailer with 304 stores primarily in the Midwest, southwest and southeast areas of the United States. They have a number of their own branded clothing lines, as well. A portion of their sales comes from their online retail platform J.C. Penney is one of their largest competitors, but because of their history of negative earnings and their 50% drop in stock price they cannot be used to really understand a proper valuation for Dillard's. 

Instead, look at the following companies that are in competition with Dillard's and used for a comparative valuation. 

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Market Cap</strong></td> <td><strong>12 Month Return</strong></td> <td><strong>EPS</strong></td> <td><strong>P/E</strong></td> </tr> <tr> <td>Kohl's Corp</td> <td>$10.81B</td> <td>-7.38%</td> <td>$4.38</td> <td>10.72</td> </tr> <tr> <td>Sak's Inc</td> <td>$1.7B</td> <td>1.01%</td> <td>$.49</td> <td>23.11</td> </tr> <tr> <td>Nordstrom Inc</td> <td>$11.06B</td> <td>9.22%</td> <td>$3.29</td> <td>16.81</td> </tr> <tr> <td>Dillard's</td> <td>$4.07B</td> <td>78.32%</td> <td>$6.37</td> <td>13.86</td> </tr> </tbody> </table>

By looking at just a few simple metrics, there is a clear inclination towards Dillard's. Kohl's (NYSE: KSS) has taken a hit in the last year, but their price to sales is only at .57 and their other metrics aren't bad either. With the lowest price to earnings of the lot, you can buy $1 worth of earnings much cheaper than the competition.  

Sak's (NYSE: SKS) has perhaps the best brand of this group. They are the high-end of department stores and have more direct competition with Macy's than with Dillard's. Their earnings are high-end as well. You have to pay $23.11 for just $1 worth of earnings from them. They have been all over the place in terms of price over the last year but have ended virtually flat. 

Nordstrom (NYSE: JWN) has had lower earnings over the last 3 quarters. But, analyst estimates put last quarter's earnings at $1.33 per share being announced on Feb. 21. This represents an 87% increase from last quarter. Additionally, expectations are that their earnings will increase by 11% next year, 13% the year after and 13% the year after that. Keep an eye on Nordstrom in the coming months.

Dillard's has the highest return over the last year, so the question remains: is there room to grow? Using a comparable valuation method looking at various fundamental metrics says there is room to grow for Dillard's.

Here are the comparable valuation methods for Dillard's:

<table> <tbody> <tr> <td><strong>Valuation Method</strong></td> <td><strong>Price Per Share</strong></td> </tr> <tr> <td>Unlevered Price to EBITDA</td> <td>$66.90</td> </tr> <tr> <td>Levered Price to EBITDA</td> <td>$82.67</td> </tr> <tr> <td>Price to Sales</td> <td>$96.64</td> </tr> <tr> <td>Price to Earnings</td> <td>$156.46</td> </tr> <tr> <td>Dividend Adjusted Price to Earnings</td> <td>$168.95</td> </tr> <tr> <td>Price to Book</td> <td>$172.48</td> </tr> </tbody> </table>

The valuation numbers vary greatly from a 24.4% discount to a 95.% premium. An average of these puts the expected price at $123.92 per share. This is a 40.5% increase from where it is at now. When you factor in the gains the company has already had in the last year, the total return would need to be a 153.6% return from February of last year. 

Comparable company valuation isn't the only technique to use in valuing a company. There have been steady gains across successful department stores over the last year, with Dillard's clearly leading the industry. With an average 15.94 Price to Earnings ratio across these companies, Dillard's would need to grow its earnings to $7.78 per share. This is only an increase of 22%, which isn't unheard of. 

Dillard's has seen an amazing year and the company still has room to grow. 

DisclaimerAt the time of this writing, I do not have any position (long or short) in any of the companies mentioned. I have not entered in to a position within the last two days nor will I in the next two days. 

Austin Higgins is the Principal Consultant for Build. Invest. Grow. and focuses on building businesses through innovation, growth and investment. Learn more at and follow him on Twitter @Austin_Higgins

higginsaustin has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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