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Dillard’s Debt Downgraded

The weakening consumer economy and credit squeeze are working against Dillard’s as well as many other chains.

Dillard’s Inc defended its “conservative financial posture” on Friday as Fitch Ratings downgraded the retailer’s debt and activist shareholders continued to loom in the background.

This story first appeared in the November 3, 2008 issue of WWD.  Subscribe Today.


The credit watchdog reduced Dillard’s issuer default rating to “B” from “BB” and kept its outlook at negative. Investors didn’t seem too troubled by the downgrade, however, pushing the firm’s stock up 15.1 percent to close at $5.33. The weakening consumer economy and credit squeeze are working against Dillard’s as well as many other chains.

“While Dillard’s is taking steps to control expenses, reduce inventory and close underperforming stores, Fitch expects that these initiatives may not be adequate to offset the strong headwinds from declining sales,” Monica Aggarwal, Fitch debt analyst, said in the downgrade.

“However, an intermediate-term strength is Dillard’s adequate liquidity position and extensive real estate holdings.”

The value locked up in Dillard’s real estate portfolio has helped attract the attention of activist shareholders Barington Capital Group and Clinton Group, which continued to needle the company last week. Barington and Clinton appealed to independent directors Robert Connor, Peter Johnson and Warren Stephens to oust chief executive officer William Dillard 2nd, but the directors backed management.

Deutsche Bank equity analyst Bill Dreher recently estimated that the firm has an asset value of $25 to $55 a share. Such real estate value has a knack for attracting activist shareholders. Last week, investor William Ackman proposed spinning off the land under Target Corp. stores to at least theoretically make Target shareholders a lot of money and create the largest real estate investment trust in the country.

The financial security of owning its own real estate hasn’t done much to support Dillard’s stock, though.

Shares of the firm have lost 65.8 percent of their value over the last fi ve years as the Standard & Poor’s Retail Index fell a lesser 21.9 percent. The retailers’ employees are among the hardest hit by the company’s stock decline. Dillard’s matches a percentage of the money workers put into their 401(k) accounts and invests the matching funds in its own Class A shares. The company’s retirement trust held 10.7 million shares of Dillard’s, or about 15 percent of those outstanding, at the end of last year. The firm’s stock has lost 76.6 percent of its value since Oct. 31 of last year.

Answering concerns about its financial strength, the company said it has a $1.2 billion revolving credit facility with J.P. Morgan Chase & Co. as the lead agent and will have $26 million in long-term debt coming due over the next two years after it pays down $100 million in bonds this month.

So far this year, the firm has said it will close 20 stores, resulting in at least a $50 million reduction in working capital requirements for inventory alone. Capital expenditures are expected to fall to about $204 million this year and $120 million next year, from $396 million in fiscal 2007.

“Dillard’s remains committed to maintaining our conservative financial posture as we navigate the most challenging economic time in modern history,” the company said.

The Little Rock, Ark.-based retailer has been struggling against larger national rivals for some time, but the Dillard family has fought to remain independent. The Dillard family controls the company by virtue of its Class B shares, which appoint eight of its 12 board seats.

The regional department stores registered losses of $35.6 million in the first half, a steep decline from year-ago earnings of $17.8 million. Revenues for the six months ended Aug. 2 fell 3.7 percent to $3.36 billion. In September, the firm’s sales fell 12 percent on both a net and comparable-store basis.