By  on June 29, 2007

Shares of Dillard's Inc. rose over 8 percent Thursday after a minority shareholder group sent a letter to the department store requesting a meeting to discuss improving profitability and stock valuation.

Barington Capital Group LP, representing an investment group that owns over 3.2 percent of Dillard's outstanding stock, said it sent the letter to Dillard's chief executive officer William Dillard 2nd after being unable to reach the executive by phone.

"We would like to discuss a number of measures that we believe will increase the company's profitability to levels achieved by its peers and better utilize the company's substantial asset base," the letter read. "These include initiatives that would augment the company's existing operating strategy in areas such as merchandising, inventory management and cost containment, as well as measures to unlock the value of the company's real estate portfolio."

Dillard's, which is based in Little Rock, Ark., and operates 330 Dillard's stores across 29 states, did not return calls for comment; Barington declined to comment further.

Shares of Dillard's opened higher Thursday, up 7.9 percent to $36.60, and climbed throughout the day, closing up 8.1 percent at $36.69. Despite the stock's gain, shares of Dillard's remained below its 52-week high of $40.56, marked on May 21.

Credit Suisse analyst Michael Exstein called the chain a "wasting asset," citing its low cash flow and high capital expenditures in the past decade of $5.2 billion ­— significantly higher than the company's enterprise value of $3.8 billion.

"The question remains whether management and outside investors' interests are aligned," Exstein said in a research note. "We do not think so, and we are unwilling to judge these shares in any way except for the current operating fundamentals, which remain poor."

Exstein pointed to management's limited economic interest, with the Dillard family accounting for 13 percent economic ownership, while holding substantial voting power in the stores — making any shareholder-directed action more difficult.

Earlier this week, A.G. Edwards analyst Robert Buchanan maintained his hold rating of Dillard's shares, citing fair stock valuation on its "anemic" return on assets of 2.7 percent for fiscal 2006, below its peer average ROA of 9.6 percent."This reflects in our view such chronic and continued strategic mistakes as the taking of too many markdowns on slow-moving merchandise," Buchanan said in a research note.

Still, Buchanan pointed to potential upside as Dillard's improves merchandise and gross margins through private brands, which he called an "emerging area of distinction" that could "offer reasons to shop Dillard's versus the numbing mound of sameness that continues to plague the department store heap in the United States."

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