Dillard's Difficulties Priced In

The company’s recent results show that Dillard’s, Inc.’s (DDS) operations continue to struggle. We are estimating further declines in over the next few years. Its stock price reflects this view. Despite its poor operating results and weak near-term outlook, we maintain our Hold rating.

Our neutral view comes from the activist shareholders that are pushing the Dillard’s management team to unlock shareholder value, and the company is responding. Dillard’s recently announced a plan to close underperforming stores, reduce capital expenditures, reduce expenses, and execute merchandise improvements. This plan is step in the right direction to improve the company’s operations and could eventually bring Dillard’s results in-line with its department store peers.

We think the company’s sales benefited from the government stimulus checks in the second quarter, and that its sales trends will weaken in the second half of the year. With projected losses for the next two years, the stock doesn’t have a P/E multiple. If the company’s efforts to improve its operations begin to take hold, however, it could expand its operating margin from 0.5% to 4.0%.

With flat revenue growth and an operating margin of 4%, Dillard’s would have earnings power of $2 per share. Using an EPS estimate of $2, the stock is trading at about 6x. That makes our near-term price target of $12 look fair, as the overall macro environment will make it difficult for the company to achieve $2/share anytime soon.

Read the full analyst report on DDS

Read the full analyst report on DDS