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Dillard's Remains Outperform

M DDS KSS

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Our long-term ‘Outperform’ recommendation on the department store chain, Dillard’s Inc. (DDS - Analyst Report), remains intact as the company posted stronger-than-expected second quarter 2012 results and continues to focus on cost containment initiatives to boost profitability.

Dillard’s posted sturdy second-quarter 2012 results with earnings jumping over two-folds to 63 cents per share, beating the Zacks Consensus Estimate of 49 cents per share. The company’s improved results were backed by solid comparable-store sales performance and reduced input and operating costs, resulting from restructuring initiatives and inventory reduction efforts. Further, total revenue of the company escalated 3.3% year over year to 1,525.2 million and surpassed the Zacks Consensus Estimate of $1,466.0 million.

Of late, Dillard’s continues to benefit from improvements in inventory management, focusing more on conservative purchasing and efforts to better match the timing of receipts with demand, which ultimately resulted in reduced markdowns.

Further, we believe Dillard’s healthy balance sheet and adequate cash flows allow it to make shareholder-friendly moves, such as acquisitions, dividends and share repurchases. In an effort to further enhance its financial flexibility, the company has modified its old $1.0 billion senior secured revolving credit facility, scheduled to expire on December 12, 2012. The new credit facility will now have a maturity date of April 11, 2017, facilitating the company to borrow more funds at the same level of inventory pledged.

Moreover, we anticipate Dillard’s wholly owned Captive Insurance Company and REIT, which has opened the avenues of debt and equity markets, will help it manage risks more efficiently while enhancing its liquidity position.

Headquartered in Little Rock, Arkansas, Dillard's is a large department store chain, featuring fashion apparel and home furnishings. The company’s primary product categories are: women’s and junior’s apparel; shoes; accessories and lingerie; men’s clothing and accessories; cosmetics; home; and children’s clothing. Its merchandise mix consists of both branded and private-label items. Dillard’s currently operates 304 stores including 16 clearance centers and one Internet store across 29 states, all under the Dillard’s brand name.

Although Dillard’s is a large regional departmental store, the company’s individual stores compete with numerous players at the national and local level. These competitors include specialty, off-price, discount, internet, and mail-order retailers. Dillard's, which competes with Kohl’s Corporation (KSS - Analyst Report) and Macy’s Inc. (M - Analyst Report), maintains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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