WOMEN'S BUSINESS SEEN HOLDING THE KEY TO DILLARD TURNAROUND

NEW YORK--Dillard Department Stores, which for a decade set the standard for low expenses and high earnings while beating up on the competition, has sustained some battle wounds of its own this year.
While observers describe Dillard's problems as short-term and expect a recovery by the fourth quarter, market share gains by J.C. Penney, the poor apparel climate and some questionable new pricing strategies are currently taking a toll on the $5.6 billion chain.
In addition, there have been reports recently of increasingly
strained relations with some vendors.
Earnings declined 14 percent to $33.8 million, or 30 cents a share, in the quarter ended July 30, and the stock is currently hovering around 26, down from a 52-week high of 41 3/4.
Moreover, the folks in Little Rock, Ark., haven't made a major acquisition since 1990 and may be reluctant to do so after some less-than-remarkable advances into bigger cities, such as St. Louis and Cleveland. The chain does best with good, basic fashion in middle-sized, middle-income markets, where the competition is less keen.
"The profit squeeze is coming from the deeper markdowns they've had to take in more competitive markets," said R. Fulton MacDonald, president of International Business Development, a consultant. "It's been a jolt to Dillard's."
Dillard's still does a good job of controlling expenses through state-of-the-art distribution and information systems. Its expense ratios read more like a Wal-Mart than a department store, which has allowed the chain to score high profits with sales of only about $120 a square foot.
For these reasons many analysts say Dillard's is poised for a quick comeback, provided the women's business picks up.
William W. Whyte, an analyst with Stephens Inc. in Little Rock, estimated an 8.9 percent increase in earnings for the chain in 1994.
"Same-store sales and margins will be better," Whyte said. "Customers are responding to fall fashion. The third quarter looks to be shaping up better."
A Salomon Bros. report estimated 1994 earnings will rise to $260 million from last year's $241.1 million. Sales are seen at $5.65 billion, against $5.1 billion in 1993. "With inventories relatively clean heading into the fall, we remain optimistic that markdowns will not be as severe," the report said, adding, "Dillard's is poised to return to the acquisition front, given the company's strong financial position."
"They have great management, great systems and low cost basis," said Leonard Rabinowitz, president, Carole Little, a supplier to Dillard's. "When you run your business based on low cost and high inventories and you're in a healthy environment, you'll have glorious results. When you're in a bad environment, you'll have bad results. Your exposure is higher because you're operating on [higher] inventory.
"The first six months of this year were very tough for women's apparel, which dominates Dillard's business," Rabinowitz continued. "In the next 18 months you'll see the opposite. Dillard's has good assortments."
Dillard executives could not be reached for comment.
Other retailers also have been hurt by soft women's sales, though Dillard's situation has taken on greater proportions in light of the company's stellar record through the Eighties and Nineties. Some strategies are backfiring this year, and that's apparently exacerbated the adversarial relationship between retailer and vendor.
"Dillard's has gotten away from being a partnership operation," one resource said. "It's a last-minute situation. They're getting whatever the manufacturers have left over sometimes, instead of the best merchandise. It's a complaint that a lot of manufacturers have--that the orders come in so late it's impossible for a manufacturer to buy the piece goods, manufacture the garment and ship it."
Sources said Dillard's sometimes orders less than a month before it wants delivery. As a result, the chain misses certain top styles that get sold out first.
Tensions mounted last year when Dillard's decided to stop sending its buyers to New York, choosing instead to concentrate on the Dallas Market Center, in turn forcing vendors to expand their Dallas showrooms and make trips to Little Rock.
According to vendors, the chain uses its leverage in the industry to get what it wants, when it wants it. But while Dillard's drives a hard bargain, its instincts can be right on target.
For example, William Dillard, Jr., president and chief operating officer of the chain, likes to display all denim products together and wanted to include Liz Claiborne's jeans in the area. Claiborne, however, has been adamant about keeping its denim as part of the total Claiborne sportswear collection.
"We were very resistant at first," said Jerome A. Chazen, chairman of Claiborne. "All of our people felt it would be a very big mistake to take denim away from the rest of our merchandise. But after a difficult start, we are now beginning to feel that we'll be able to do a lot more denim business as consumers recognize that this is the place to buy denim."
Dillard's is also rigid when it comes to deliveries. If merchandise isn't in the store on a given delivery date, the order is automatically canceled.
"Even if they get something that's very hot and it's one day late, they cancel it," a large vendor complained. "They're not getting the reorders of their hottest styles because they're not taking them in. It could be the hottest thing selling; if it's late, more than half the time they cancel."
Some experts have questioned whether Dillard's has lost its focus in its women's apparel merchandising. Until about two years ago, the retailer aimed for a better department store image. But since it started advertising everyday low pricing, it has cut some price points in women's apparel.
In dresses, for example, Dillard's used to stick to a bottom retail price of $100. In the last year the bottom has dropped to $60.
"They tried to stay a notch above Penney's, but they weren't sure where they wanted to be," one source noted. "They're in limbo. They want to be low, but not too low."
Dillard's stores offer few merchandising surprises. A walk through three Dallas stores showed a preponderance of popular top brands, including Chaus, JH Collectibles, Kasper for A.S.L., Jones New York and Crazy Horse, as well as Claiborne and Leslie Fay.
To improve margins, Dillard's began stepping up private label production last year. Though brands still make up 90 percent of women's apparel offerings, Dillard's devotes entire departments to private labels, including Preston and York, Napa Valley, Suburbans and Westbound--all conservative misses lines--plus its Copper Key junior label and Cabernet intimate apparel.
The chain edits toward basic meat-and-potato styles and classics with a smattering of fashion. Missing are contemporary lines from California and forward styles by young designers or smaller companies.
"They'll stick with vendors longer than they should," analyst Whyte said. "It may work against them. There is a lot of loyalty that goes into their buying decisions."
According to sources, J.C. Penney's apparel improvement and strong national advertising has Dillard's on edge. A source close to Dillard's said some buyers feel stymied because management has set tougher restrictions on which vendors are to be shopped. For example, any line that is already sold to Penney's reportedly can't be considered for introduction to Dillard's.
Leslie Fay, a key Dillard resource, has agreed to sell its dress line to Penney's. A source at Leslie Fay said the company will continue to sell Dillard's the same amount of goods it sold before, including the Leslie Fay, Joan Leslie, Nippon Studio and Theo Miles labels.
"We discussed it [with Dillard's] and they've accepted it," the source said.
But another manufacturer said, "They have a big chip on their shoulder for any vendor selling Penney's, and they will cut their nose off to spite their face just over that issue."
In spite of criticism, Dillard's clings to its everyday low pricing strategy of 25 to 33 percent off manufacturer's suggested retail pricing. The strategy has faltered where consumer resistance or pressure from competitor's price promotions forced unwanted price reductions.
"They get clonked, especially in these larger cities," said one vendor. "When May Co. in St. Louis goes 30 percent off, and Dillard's sits there at same price, they've got to get hurt. It's just not working anymore."

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