By  on August 27, 2008

Dillard’s Inc. might have brought its once high-flying ways down to earth under pressure from investors, but the retailer still isn’t on the flight path many analysts would like to see.

Despite efforts to trim costs, the Little Rock, Ark.-based firm on Wednesday posted wider second-quarter losses — even with a multimillion-dollar boost from the sale of a company airplane.

Analysts wonder if Dillard’s newfound austerity and numerous store closures — steps demanded by activist investors who appear to be gaining some traction after muscling their way onto the firm’s board — will be enough to turn the 318-door regional retailer around. The company closed four stores in the second quarter and plans to close another eight units in the near future. It finished the second quarter with 56.6 million square feet of retail space, 200,000 square feet less than a year ago.

Dillard’s assortments, however, are another issue. The company, which owns much of its own real estate and therefore has significant intrinsic value, gets criticized by analysts for its merchandising and uncertain competitive position vis-à-vis larger national players such as Macy’s Inc.

The department store’s quarterly deficit weighed in at $38.3 million, or 51 cents a share, compared with year-ago losses of $25.2 million, or 31 cents. The most recent quarter included an $11.2 million aftertax gain on the sale of an airplane, as well as $6.1 million in aftertax asset impairment and store closing charges.

Revenues for the three months ended Aug. 2 decreased 2.5 percent to $1.65 billion from $1.69 billion. Comparable-store sales slid 4 percent. Net sales in the juniors’ and children’s apparel areas were significantly below trend for the quarter.

“I just don’t see them as having that ‘wow’ factor that everyone else is trying to infuse in their operations,” said Jason Asaeda, a retail analyst with Standard & Poor’s Equity Research who kept his “sell” rating on the firm’s stock.

The tough economy, however, makes it hard for the firm to launch brands and tweak its business, he said.

“One way they’re trying to improve profitability is by cutting expense and by closing underperforming stores,” said the analyst. “You can only close so many stores and you can only cut back on expenses so much. You really need to have top-line growth.”

After months of back and forth with activist investors Barington Capital Group and Clinton Group Inc., Dillard’s cut a deal with them in April to support four nominees to its board and avoid a proxy fight. The two funds had pushed Dillard’s for information on the company and its executives, including their compensation and perks such as the use of private planes.

Analysts said the timing of the sale of the plane and the store closures show the impact of the activists.

William Dillard 2nd, chief executive officer, emphasized the firm’s conservative stance in the earnings report Wednesday. The department store’s advertising, selling, administrative and general expenses fell 3.5 percent during the second quarter to $479.3 million.

“However, our accomplishments with expense reduction were not sufficient to offset large disappointments in sales and gross margin,” the ceo said. “Clearly, we believe our continued efforts to reduce both capital and operating expenditures and to close underperforming stores are appropriate as we weather challenging economic times.”

For the first half, the firm posted losses of $35.6 million, or 47 cents a share, compared with earnings of $17.8 million, or 22 cents, a year earlier. Revenues fell 3.7 percent to $3.36 billion.

For the full year, the company plans to cut capital expenditures by 48.5 percent to $204 million.

“They’ve basically been hemorrhaging market share” over the last couple of years, said Kristina Westura, an equity analyst at Telsey Advisory Group who covers Dillard’s broadline competitors. “They spent a lot of money on their stores, but the merchandise in there, I don’t think it’s been that strong. They haven’t really been running the business as maybe they should have been.”

Despite all the nay-saying, which has persisted for some years, Bill Dreher, equity analyst at Deutsche Bank, said management seems to have undergone a considerable change in outlook.

“It appears that they’re making an increasingly bright-light audit of their organization and trying to realize the value from their own stores,” said Dreher. “Management is likely responding to a combination of a very difficult environment and increasing pressure by activist investors.”

Dreher estimated the firm has an asset value of $25 to $55 a share — a figure all the more dramatic given that the stock rose 1.1 percent Wednesday to $11.50. Over the last year, the stock’s traded as high as $25.57 and as low as $7.61.

“There is tremendous opportunity here, but it’s very difficult for them to realize it,” he said.

So far, management has not been able to get at that value, but Dreher said it is possible, comparing the Dillards to the Nordstroms, another retailing family, but one that has managed to carve a niche for itself in higher-end retailing.

“If we were speaking about Nordstrom five years ago, there were significant investor concerns about the management team, but that same management team has realized that potential,” he said.

While it has yet to develop the cache of Nordstrom, Dillard’s has made some merchandising moves, such as launching the Pink Twill women’s sportswear line in spring. The collection of knit shirts, sweaters, bottoms and outerwear, hyped by the company as “casual chic,” carried prices of $19 to $69.

Exclusive lines made up 24.2 percent of the retailer’s sales last year.

For fall, the company will be calling attention to its offerings with a “Dillard’s: The Style of Your Life” ad campaign that will be carried in fashion publications and online and be supported by in-store events.

Dillard’s, though, will have to fight to make itself heard. Macy’s this fall will be rolling out an exclusive Tommy Hilfiger collection as J.C. Penney Co. Inc. continues to push American Living, its collaboration with Polo Ralph Lauren Corp., and Wal-Mart Stores Inc. and Target Corp. hammer away at consumers with their value-orientated messages.

Russell Jones, a director at restructuring and advisory firm Alix Partners, which has surveyed consumers to gauge their attitudes toward retailers, said Dillard’s has rated middle of the pack over the last couple of years.

“No one thinks Dillard’s stands for anything in particular,” said Jones. “People don’t hate it, people don’t love it.”

That lukewarm sentiment means consumers who are cutting back on spending might not even make it to Dillard’s when they do shop, he said.

Ultimately, to thrive the firm has to find a way to be relevant to shoppers within its own scale and that might well require a major reinvention.

“In some ways, the department stores that are left are mostly national wannabes in the way they behave,” said Jones. “Just being another version of Macy’s is not going to work for Dillard’s.”

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