By  on June 23, 2012

Moody’s Investors Service Friday raised Dillard’s Inc.’s corporate credit rating a single notch, to “Ba3” from “B1,” lifting the Little Rock, Ark.-based department store into the family just below investment grade.

Margaret Taylor, vice president and senior credit officer of Moody’s corporate finance group, upgraded Dillard’s in light of “continued strong operating performance and Moody’s opinion that its credit metrics will remain good.”

Moody’s believes that recent improvements in merchandising and inventory and expense management “are sustainable,” Taylor wrote in a note, “which should result in Dillard’s operating performance being more predictable going forward.” She also cited the department store’s “good liquidity and its sizable portfolio of owned real estate.”

Dillard’s ratings prospects continue to be restrained by its regional concentration in the Southeast, Southwest and Midwest; sporadic earnings and declining same-store sales in the decade leading up to 2009, and the possibility that it could use its real estate investment trust to raise incremental debt.

The upgrade moves Dillard’s to the lowest level of “Ba3,” the highest non-investment grade, from the highest level of “B1.” “Ba” ratings are assigned to obligations that entail speculative elements and are subject to substantial credit risk, while those in the “B” family are viewed as speculative and subject to high credit risk.

Last month, Dillard’s reported a 23.9 percent increase in first-quarter profits, to $95 million, as sales rose 5.5 percent, to $1.55 billion, and accelerated 5 percent on a same-store basis.

The upgrade was disclosed following the close of the equity markets Friday. Earlier in the day, the company’s shares shed 78 cents, or 1.2 percent, to close the week at $65.27.

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