By and  on November 12, 2010

Dillard’s Inc. is getting its fiscal mojo back, and it might have some of its harshest critics to thank for much of the transformation.

Tighter inventories, cost controls, sharper merchandise and a new attitude — the retailer is even shying away from the term “department store” at the Little Rock, Ark., headquarters — helped boost third-quarter profits 80 percent and sent the stock up 9.7 percent Friday to $30.82 after hitting a new 52-week high of $32.52 in intraday trading.

“We do not think there’s any reason to look like anybody else in the retail sector,” said Julie Bull, director of investor relations, who describes the firm as having a “boutique chic format” and rejects the term “department store.”

By cutting inventories 23.8 percent over the past two years, the company, like others that found austerity during the financial crisis, has become more profitable. Dillard’s third-quarter earnings advanced to $14.4 million, or 22 cents a share, from $8 million, or 11 cents, a year earlier. Revenues for the three months ended Oct. 30 fell 1.3 percent to $1.37 billion from $1.39 billion as comparable-store sales rose 1 percent.

Observers attribute at least some of the change to the activist efforts of Barington Capital Group and The Clinton Group, which lobbied the firm in 2008 to refine its operations and ultimately cut a deal with management to put four outside directors on the board.

Founded in 1938 by William T. Dillard, the company is run by his sons, chief executive officer William Dillard 2nd, president Alex Dillard and executive vice president Mike Dillard. The brothers butt heads from time to time, but outwardly the family sticks together and controls the company via the voting power of its Class B shares.

“The two brothers run the company, Bill and Alex,” said Robert F. Buchanan, an assistant finance professor who studies retail at St. Louis University. “They’re smart guys. The problem is they don’t talk to anybody else. They’re down there in Little Rock day after day just talking to themselves and, in my opinion, they would do better to widen their circle of confidants. But they’re not dumb.”

Buchanan said the stores look much better than they did a few years ago and that the lean inventories mean “if you like what you see, you have to pay full price.”

Underlined by the stresses of the financial crisis, the activist campaign included efforts to buy out the Dillard family and to remove William Dillard 2nd as ceo.

“They would never admit that they gave in to those investors, but it did quicken their game,” said one source close to the Dillard family. “They acted like they never responded, but they did respond.”

And the results are being seen now.

James Mitarotonda, chairman and ceo of Barington Capital Group, told WWD, “There’s a tremendous amount of value at the company and, while improvements have been made, I don’t believe that the value will be realized under the current management infrastructure.” Although he has moved on to other investments, Mitarotonda acknowledged that the company had reduced inventories, cut costs, closed some stores and improved merchandising.

Also on Thursday, J.C. Penney Co. Inc. managed to elevate its third-quarter earnings despite modest sales gains, unseasonable weather, lower prices and costs associated with discontinuing catalogues.

Net income rose 63 percent to $44 million, or 19 cents a diluted share, topping Wall Street estimates by 2 cents. Last year, the company posted $27 million or 11 cents in profits.

Sales for the quarter inched up 0.2 percent to $4.19 billion from $4.18 billion; comparable-store sales rose 1.9 percent. Gross margin declined to 39 percent of sales from 40.6 percent a year ago. Inventories were up 6.2 percent at quarter’s end.

Fourth-quarter comp sales are seen growing 3 to 4 percent, while earnings are seen ranging from 90 cents to $1 a share. Margins are expected to decline “modestly” in the fourth quarter from historically high levels last year.

Addressing concerns raised by analysts about higher inventory levels, lower margins and rising sourcing costs, Penney’s chairman and ceo, Myron E. “Mike” Ullman 3rd, responded, “Earlier this year we told you that our performance would be second-half-loaded, and that’s exactly the way it has played out.…Growth initiatives are beginning to take hold, and we feel good about the way we are positioned for the all-important Christmas season. November is off to a great start since the weather has turned more seasonable.”

Still, Penney’s shares declined $1.09, or 3.4 percent, to $31.13 in New York Stock Exchange trading Friday.

The average price of an item was down last quarter, but Ullman said that was planned “as customers continue to be very price-conscious.” It has helped mitigate rising product costs, maintain “strong” profitability and its promotional department store positioning, he added.

Strong business at the start of November has brought inventories into line. “We lost sales during the holiday season last year because we thought inventories were too low,” he said, adding that outerwear, the weakest category in women’s, has rebounded in the second half, as has the women’s business overall.

Ullman noted average unit retail is “modestly declining” as consumers opt for opening prices to a greater degree, but units per transaction and the number of units sold are up.

Regarding 2011, Ullman said Penney’s had “worked hard” to “shield the price increase as much as possible from the consumer. But the fact is, if cotton goes up 50 or 70 percent, or wherever it lands, there will be an impact on pricing everybody in our industry is going to feel.”

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