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Bear of the Day: Dillard's Inc (DDS)

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Through the good and bad periods for the equity markets in 2018, it’s been an especially interesting environment for retail stocks. In many cases, it has been feast or famine with some spectacular success stories and some real duds.

Lululemon (LULU - Free Report) and Restoration Hardware (RH - Free Report) are both still showing outstanding 2018 gains even in a weak overall market, and Macy’s (M - Free Report) and Kohl’s Stores (KSS - Free Report) are certainly holding their own as well, with double-digit YTD returns that look awfully good compared to an 11% loss in the S&P 500.

Dillard’s Inc (DDS - Free Report) is unfortunately one of the retailers that has not fared nearly as well and analyst estimates going forward are not optimistic about an imminent turnaround.

Dillard’s finds itself in an uncomfortable position in the retail space, not high-end enough in terms of brand cache to command premium margins, yet with its goods not inexpensive enough to attract the more budget minded customers.

Third quarter results at DDS showed an increase of 3% in same store sales – typically a good sign for retailers, yet net earnings were only $0.27/share, well below the $0.50 they posted in net earnings in the same quarter in 2017 and badly missing the Zacks Consensus Earnings Estimate of $0.56/share.

CEO William T. Dillard II explained, “While we are encouraged by our 3% comparable sales performance, this was a disappointing quarter as markdowns weighed heavily on gross margin, particularly in the first month.”

Basically, increased sales numbers don’t matter much if you have to drop prices to achieve them.

Shares of DDS are nearly 40% off of their 52-week highs reached in June.

After the big miss, analysts began revising their full year earnings forecasts downward and the consensus has fallen from $6.48/share 60 days ago, to $5.73/share currently.

The consensus estimate for 2020 has fallen by a similar percentage, from $6.03/share to $5.42/share.

There’s nothing specifically wrong with management or the business plan or practices at Dillard’s, it’s simply positioned in a very tough spot in the retail market right now.

In difficult markets like these, it’s more important than ever to stick with the “best in breed” stocks in any given industry. In Retail, that would be Restoration Hardware, a Zacks Rank #1 (Strong Buy) and Lululemon, a Zacks Rank #2 (Buy).

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