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Here's Why Dillard's (DDS) Looks Well-Poised for Growth in 2021

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Dillard’s Inc. (DDS - Free Report) is one stock that has been resilient in recent months despite the headwinds posed by the coronavirus pandemic. Shares of this fashion apparel and home furnishings retailer have been reaping the benefits of stringent inventory management and expense-control measures undertaken to wedge the ill-effects of the pandemic-led store closures. Though sales trends have been weak, the company’s initiatives to control inventory and expenses throughout the uncertain pandemic-led environment have been contributing to bottom-line gains in the past two quarters.

Notably, the company’s earnings per share surpassed the Zacks Consensus Estimate and improved on a year-over-year basis in third-quarter fiscal 2020. This marked better-than-expected bottom-line performance for the second consecutive quarter.

Backed by the above-mentioned factors, shares of this Zacks Rank #2 (Buy) company have surged 140.2% in the past six months compared with the industry’s growth of 78.4%. Further, Dillard’s has comfortably outpaced the Retail-Wholesale sector’s growth of 19.1% and the S&P 500 index’s gain of 20.9% during the same period.

 

 

Factors to Drive Growth in 2021

Dillard’s has been keen on inventory management since the start of the pandemic through measures like cancellation, suspension and delaying of shipments as well as merchandise purchase reduction. The aggressive measures to lower excess inventory, owing to the pandemic-led decline in demand, have proved beneficial for the company’s margins. The reduced total merchandise purchases have led to a decline in overall inventory levels in the past two quarters. As of the end of third-quarter fiscal 2020, inventory declined about 22% year over year to $1,545.3 million. Moreover, inventory levels as of the end of the second quarter were down 20%. The reasonable ending inventory bodes well for the fiscal fourth quarter.

Moreover, inventory reductions resulted in lower markdowns during the fiscal third quarter, which boosted gross margin. Notably, consolidated gross margin improved 249 basis points (bps) to 35.7% compared with the year-ago quarter. Retail gross margin expanded 210 bps year over year to 36.6%.

Citing the business disruptions due to the pandemic, Dillard’s has taken several steps to reduce costs starting first-quarter fiscal 2020, which continued in the third quarter. Some of these are extension of vendor payment terms, reduction of discretionary and capital expenditure, and payroll reduction. Backed by these efforts, the company reduced operating expenses by $100 million. Notably, retail SG&A expenses (operating expense) declined 24% year over year to $316.7 million in the fiscal third quarter.

Consolidated operating expenses of $318.2 million declined 23.9% year over year, mainly driven by reduced payroll expenses. While the company realized cost-savings in all expense categories, payroll expenses fell about 28%, in part, due to the company’s reduced store operating hours. In the first nine months of fiscal 2020, payroll expenses declined 34%.

Additionally, Dillard’s has a strong balance sheet and liquidity, which position it well to weather the uncertainties arising out of the pandemic. Some highlights of its financial status include smaller rent obligations compared with the industry. This is because the company owns 90% of its retail stores and 100% of its corporate headquarters, distribution and fulfillment facilities. Moreover, it has low long-term debt obligations with its next payment of $45 million due in January 2023. As of Oct 31, the company’s long-term debt and finance lease liabilities (including subordinate debentures) of $366 million declined 35.3% sequentially.

Conclusion

Despite the effects of the coronavirus pandemic on the company’s top line, we believe cost- and inventory-management initiatives as well as strong liquidity status position it well for continued growth in 2021. This is further supported by a VGM Score of B.

Other Stocks to Consider

L Brands, Inc. (LB - Free Report) has an expected long-term earnings growth rate of 13%. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tapestry, Inc. (TPR - Free Report) presently flaunts a Zacks Rank #1. It has an expected long-term earnings growth rate of 11.7%.

Capri Holdings Limited (CPRI - Free Report) , also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 5.6%.

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