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We have maintained our long-term ‘Outperform’ recommendation on Dillard’s Inc. (DDS - Analyst Report) based on the company’s better-than-expected bottom-line performance in seven back-to-back quarters.

Why Outperform?

On November 8, 2012, Dillard’s posted its third-quarter 2012 results with earnings jumping two-folds to 96 cents per share, beating the Zacks Consensus Estimate of 75 cents per share. Dillard’s has surpassed the Zacks Consensus Estimate in the trailing seven quarters in the range of 10.5%–57.9%.The average surprise over the last seven quarters remained at 29.1%.

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 grew 4.8% year over year to 1,450.0 million and surpassed the Zacks Consensus Estimate of $1,442.0 million.

We believe that the company benefits from improvements in inventory management, focusing on conservative purchasing and efforts to better match the timing of receipts with demand, ultimately resulting in reduced markdown.

Following the strong quarterly performance in the third quarter of fiscal 2012, the Zacks Consensus Estimates has moved upwards. For fiscal 2012 and 2013, the Zacks Consensus Estimate elevated 33 cents and 70 cents to $6.33 and $7.20 per share, respectively, in the last 60 days.

Apart from strong third-quarter results, Dillard’s growth story looks compelling. Management is undertaking restructuring initiatives and inventory reduction efforts to reduce costs while boosting its profitability. We believe that Dillard’s healthy balance sheet and adequate cash flows allow it to make shareholder-friendly moves, such as acquisitions, dividends and share repurchases.

Moreover, in our point of view, Dillard’s wholly-owned Captive Insurance Company and REIT facilitate efficient risk management ability as well as boost its liquidity position.

Other Stock to Consider

Besides Dillard’s, other stock in the large departmental store chain retail sector that is currently performing well is Bon-Ton Stores Inc. (BONT). Both the companies hold a Zacks #1 Rank (Strong Buy) status.

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