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Dillard’s in Crossroads: Can Strategies Keep Hurdles at Bay?

Zacks

Dillard’s Inc. DDS is among the few stocks that are displaying mixed sentiments. We remain optimistic about the stock, given its solid surprise trend, strong margins and long-term strategies. However, lesser share buybacks, due to soft cash flows, have been a concern, which is denting investors’ sentiment.

Evidently, the company’s shares have declined 22.7% in the last three months as the investor community remains concerned about its cash flows. This reflects a significant underperformance from the industry’s 7% decline. Nonetheless, the company’s merchandising strategies, along with solid e-commerce growth and inventory management, hold promises.



Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) stock.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factor’s Hurting the Stock and Investor Outlook

As previously noted, the company’s price graph is suffering due to lower buybacks, resulting from soft cash flows. This, in turn, has been weighing on the company’s earnings. Notably, Dillard's reported loss per share of 10 cents in second-quarter fiscal 2018, narrower than loss of 58 cents in the prior-year quarter.

In the fiscal second quarter, the company used net cash of $15.4 million in operations and reported soft free cash flows. Consequently, it bought back only 39,400 shares for $3.1 million in the fiscal second quarter under its $500-million repurchased program announced in March 2018. Year to date, the company has bought back 518,000 shares for $37.9 million under its February 2016 and March 2018 programs. As of Aug 4, 2018, it had $496.9 million worth of share buyback authorization remaining under its March 2018 program.

Another reason behind the stock’s decline can be the general weakness seen in department store space due to the shift of customers from offline to online. Looking closely, we note that the company’s peers are also suffering due to these challenges. Clearly, Macy’s M and J.C. Penney JCP have witnessed declines of 10.7% and 40.3%, respectively, in the last three months. On the other hand, Kohl’s Corp. KSS seems to be doing well, having gained 48% year to date.

Strategies to Aid Growth

Dillard’s constant efforts to capitalize on growth opportunities in its brick-and-mortar stores and e-commerce business remain encouraging. Its focus on increasing productivity, enhancing domestic operations and developing an omni-channel platform is also likely to strengthen the customer base.

On the store front, the company will gain by enhancing brand relations, focusing on in-trend categories, store remodels and rewarding store personnel. Additionally, some of the strategies to boost growth across its e-commerce business include enhancing merchandise assortments and effective inventory management. We expect the company’s top and bottom lines to gain from its focus on increasing productivity at existing stores, developing a leading omni-channel platform and enhancing its domestic operations in the years ahead.

Additionally, Dillard’s remains focused on strengthening its balance sheet, as evident from its efforts to lower debt burden. In the fiscal second quarter, it paid down debt of $161 million, pertaining to the principal remaining on 7.13% unsecured notes that matured on Aug 1, 2018. Consequently, it ended the quarter with cash and cash equivalents of $116.5 million, long-term debt and capital leases of $367.7 million, and total shareholders’ equity of $1,674.5 million. Merchandise inventories improved 5% year over year to $1,603.3 million.

Backed by the aforementioned growth efforts, Dillard’s boasts a robust surprise history, with a bottom-line beat in the last four quarters and positive sales surprise in the trailing five quarters, including the fiscal second quarter. While the company’s loss per share can be attributed to the reduced share repurchase activity, sales gained from comps growth as well as strength across its men's apparel and accessories along with juniors' and children's apparel categories. Additionally, its retail gross margin improved due to lower markdowns.

Bottom Line

Despite the concerns, Dillard’s initiatives provide visibility for the continuation of its positive surprise trend. This is further supported by its long-term earnings growth rate of 9.7% and a VGM Score of B.

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