Dillard's Outlook Still Strained

For the second quarter, Dillard's, Inc. (DDS) reported sales of $1.607 billion. We think the company’s sales benefited from the government stimulus checks and that its sales trends will weaken in the second half of the year. However, total sales declined 3%, and com-store sales declined 4%. Net loss was $38.3 million, or $0.51 per share, compared to net loss of $25.2 million, or $0.31 per share, for the 13 weeks ended August 4, 2007.

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.

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.

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%. With flat revenue growth and an operating margin of 4%, Dillard’s would have earnings power of $2.00 per share.

Using an EPS estimate of $2, the stock is trading at about 6.6x. That makes our near-term price target of $13.50 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