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Impressive fiscal third quarter 2012 (ended October 27, 2012) results that included a 28% earnings surprise coupled with advancing earnings estimates helped Dillard’s Inc. (DDS - Analyst Report) achieve a Zacks #1 Rank (Strong Buy) on November 13.

Shares of this fashion, cosmetics and home furnishings retailer attained a new 52-week high of $86.71 on November 8, after posting strong third quarter numbers. Moreover, looking at the stock’s robust growth (year-to-date return of 93.1%) and its history of beating quarterly earnings estimates (including an average beat of 19.9% over the trailing four quarters), this stock offers an attractive investment opportunity.

The Rank Driver

Sturdy fiscal third quarter 2012 earnings, healthy comparable-store sales, effective cost management and upward trending earnings estimates – are the primary rank drivers for this stock.

Dillard's, which competes with Kohl’s Corporation (KSS - Analyst Report) and Macy’s Inc. (M - Analyst Report), posted third-quarter earnings of 96 cents a share, significantly above the Zacks Consensus Estimate of 75 cents and doubling from the prior-year quarter’s earnings of 48 cents. The quarter also marked the company’s ninth straight quarter of positive earnings surprise.

Dillard's top line (including CDI Contractors LLC or CDI) increased 4.8% to $1.450 billion from $1.383 billion in the year-ago quarter. Merchandise sales, excluding CDI, came in at $1.425 billion compared with $1.366 billion in the year-ago quarter. The company’s total revenue (including other income) of $1.486 billion surpassed the Zacks Consensus Estimate of $1.442 billion. Comparable store sales (comps) for the quarter were up 5%.

The robust performance was backed by healthy comparable-store sales growth of 5% and improved margins. Further, management’s cost cutting initiatives is facilitating the company to abridge costs and boost profitability.

The company benefits from its improvements in inventory management, which is focused on conservative purchasing and efficiently matching the timing of receipts with demand, which ultimately results in reduced markdowns.

Moreover, earnings estimate revisions for the company is exhibiting a positive trend for fiscal 2012 and 2013. The Zacks Consensus Estimate for fiscal 2012 (ending January 2013) jumped 5.5% to $6.33 per share in the last 30 days, reflecting year-over-year growth of 50.4%. Moreover, for fiscal 2013, the Zacks Consensus Estimate augmented 10.8% to $7.20 per share, reflecting an estimated year-over-year growth of about 13.7%.

Valuation

Dillard's currently trades at a forward P/E of 13.41x, at par with the peer group average, while, its price-to-sales ratio of 0.62 is at a premium to the peer group average of 0.57. However, on a price-to-book basis, shares trade at 1.93x, a discount to the peer group average of 1.97x. With respect to return on equity (ROE), the stock looks attractive as well. It has a trailing 12-month ROE of 13.7%, which is above its peer group average of 9.7%. This implies that the company reinvests its earnings more efficiently than its peer group.

About the Company

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. As of October 27, the company operated 284 outlets and 18 clearance centers and one Internet store across 29 states. The company, founded in 1938, has a market cap of $4 billion.

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