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Analyst Blog

On Apr 10, we downgraded the departmental store chain retailer, Dillard’s Inc. (DDS - Analyst Report), to Neutral based on the company’s lower-than-expected fourth-quarter fiscal 2012 results.

Why Neutral?

A fall in the Zacks Consensus Estimate was witnessed after the company reported below-than-expected results for the fourth quarter on Feb 25. Dillard’s quarterly earnings of $2.87 per share and net sales of $2,106.3 million were below the Consensus Estimates of $2.90 and $2,140.0 million, respectively. Following this, the estimate for fiscal 2013 declined 2.8% to $7.00 per share. Thus the company currently holds a Zacks #4 Rank (Sell).

Apart from this, we remain apprehensive about the stock’s future performance as margins are likely to remain under pressure due to rising input costs. In addition, the company operates in a competitive environment and strives to maintain its market share, actively competing with numerous manufacturers and distributors of apparel and home furnishing products such as Kohl’s Corporation (KSS - Analyst Report).

On the flip side, despite the earnings miss this quarter, our long-term outlook on Dillard’s remains positive based on its strong performance over the last several quarters. Going forward, we expect it to continue posting earnings as well as revenue growth in the coming quarters.

Moreover, 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 dividends and share repurchases.

Moreover, we believe that Dillard’s wholly-owned Captive Insurance Company and REIT auger well for its risk management abilities as well as boost its liquidity position.

Other Stocks Worth Considering

Other stocks worth considering in the departmental store chain industry are Macy’s Inc. (M - Analyst Report) and Bon-Ton Stores Inc. (BONT). Currently, Macy’s has a Zacks Rank #1 (Strong Buy) while Bon-Ton holds a Zacks Rank #2 (Buy).

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