March 12, 2015 Dillard s Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 01/05/2014 Current Price (03/11/15) $130.28 Target Price $137.00 52-Week High $131.95 52-Week Low $88.50 One-Year Return (%) 40.51 Beta 1.58 Average Daily Volume (sh) 494,603 Shares Outstanding (mil) 41 Market Capitalization ($mil) $5,364 Short Interest Ratio (days) 3.34 Institutional Ownership (%) 88 Insider Ownership (%) 19 (DDS-NYSE) SUMMARY Dillard s consistent efforts to capitalize on growth opportunities in its brick and mortar stores and e- commerce business will help it to retain existing customers while attracting new ones. We believe it is the company s strategy of offering fashion-forward and trendy products that helps it to attract more customers. We expect Dillard s focus on increasing productivity at existing stores, developing a leading omni-channel platform and enhancing its domestic operations to support its top and bottom lines. However, the company reported lower-than-expected fourth-quarter fiscal 2014 results due to higher operating costs. Moreover, the company s initial cost guidance for fiscal 2015 indicates significant cost pressures for the year, which may hurt bottom lines again. We are also apprehensive about the company s performance as soft economic recovery and intense competition may prove to be hurdles for it. Risk Level * Below Avg., Type of Stock Large-Blend Industry Retail-Rgn Dept Zacks Industry Rank * 116 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $0.24 Dividend Yield (%) 0.18 5-Yr. Historical Growth Rates Sales (%) 2.5 Earnings Per Share (%) 41.6 Dividend (%) 10.2 using TTM EPS 16.9 using 2015 Estimate 15.0 using 2016 Estimate 13.4 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page 2013 1,589 A 1,517 A 1,469 A 2,079 A 6,692 A 2014 1,589 A 1,513 A 1,460 A 2,136 A 6,621 A 2015 1,620 E 1,544 E 1,534 E 2,229 E 6,927 E 2016 7,063 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $2.40 A $0.79 A $1.13 A $2.69 A $6.99 A 2014 $2.56 A $0.80 A $1.21 A $3.17 A $7.70 A 2015 $2.81 E $0.90 E $1.40 E $3.55 E $8.66 E 2016 $9.69 E Projected EPS Growth - Next 5 Years % 12 (Note: Qtly. fig. may not add up to annual fig. due to rounding off.) 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Dillard's Inc. is a large departmental store chain featuring fashion apparel and home furnishings. As of Jan 31, 2015, the company operated 277 stores and 20 clearance centers across 29 states, all under the Dillard s brand name. The company also sells its merchandizes through internet at www.dillards.com. Stores are mainly located in the Southwest, Southeast, and Midwest regions of the US. The company s primary product categories comprise women s and children s apparel, shoes, accessories and lingerie, men s clothing and accessories, cosmetics, home, and children s clothing. Its merchandise mix consists of both branded and private-label items. The company s strategy is to offer more fashion-forward and trendy products in order to attract customers. Dillard s also owns a real estate investment trust (REIT), which helps it to enhance its liquidity position. Revenues of a REIT company mostly come from either rent or mortgage payments. The company has an obligation to distribute at least 90% of its taxable income to the investors in the form of dividends. A REIT company does not have to pay taxes at the corporate level. Moreover, Dillard s has a wholly owned captive insurance company, which enables it to manage its risks more efficiently and provide access to more reinsurance markets. A captive insurance company is an inhouse insurance company with a limited purpose, which insures the risks of its parent company. The captive insurance company may reinsure some or all risks, or may retain such risks of its parent company. The primary goal of forming a captive insurance company is to retain the profit that would have been made by an outside third-party insurance company or in a situation where the coverage is not available for business risks. REASONS TO BUY Fashionable and Trendy Merchandise Offerings Form the Company s Core: Dillard s is a leading player among fashion apparel, cosmetics and home furnishing retailers. The company offers a broad array of merchandise in its stores, featuring products from both national and exclusive brand. The company has created a niche for itself by focusing stringently on offering fashionable products to its customers and adding value through exceptional customer care service. We believe that the company s strategy of offering fashion-forward and trendy products acts as a catalyst for attracting more customers, leading to improved top and bottom lines. Growth Initiatives to Boost Customer Base: Dillard s is well positioned to benefit from growth opportunities in both its brick and mortar stores and e-commerce business, which will help retain existing customers and attract new ones. On the store front, the company will gain by enhancing brand relations, focusing on in-trend categories, store remodels and rewarding store personnel. On the other hand, some of the strategies to boost growth across its e-commerce business include, enhancing merchandise assortments and effective inventory management. We expect the company s top and bottom lines to gain from its focus on increasing productivity at existing stores, developing a leading omni-channel platform and enhancing its domestic operations in the years ahead. Healthy Balance Sheet: The company s strong balance sheet and cash flow provide financial flexibility with respect to shareholder-friendly moves as well as store and online business expansions. The company generated operating cash flow of $611.6 million in fiscal 2014, while cash and cash equivalents stood at $403.8 million as of Jan 31, 2015. Prioritizing returning cash to shareholders, during fiscal 2014 the company completed its planned share repurchases under the Mar 2013 and Nov 2013 authorizations, buying back about 2.8 million shares for about $290.4 Equity Research DDS Page 2
million. As of Jan 1, 2015, the company had $500 million worth of authorization remaining under its share repurchase program that was announced in Nov 2014. REASONS TO SELL Negative Surprise Trend: Dillard s performance in fiscal 2014 was rather dismal as it underperformed the Zacks Consensus Estimate in three of the trailing four quarters. This resulted in an average negative surprise of 2.4%. The company s underperformance was mainly owing to lower-than-expected top-line growth as well as higher costs. Moreover, the company s initial cost guidance for fiscal 2015 indicates significant cost pressures for the year, which may again hurt bottom lines. Competitive Threat: Dillard s operates its retail merchandise business amid a highly competitive environment. Although it is a large regional department store, the company has many rivals at the national level competing with its individual stores, including specialty, off-price, discount, Internet and mail-order retailers. On losing its competitive position, the company might face downward pressure on prices, lower demand for its products as well as reduced margins. Further, the company will not be able to capitalize on new business opportunities and will experience the loss of market share. Macroeconomic Challenges: The retail merchandise business is affected by changes in consumer preferences and spending patterns, demographic trends, consumer credit availability and location of competing stores. Factors such as inflation, apparel costs, labor and benefit costs, legal claims and the availability of management and hourly employees also affect store operations and administrative expenses. The company s ability to finance new store development, improvement and addition to existing stores, and the acquisition of stores from competitors is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the availability of borrowed funds. RECENT NEWS Dillard's Declares Quarterly Dividend Feb 27, 2015 Dillard's Inc. declared a quarterly dividend of $0.06 per share, payable on May 4, to shareholders with record as on Mar 31. Dillard's Q4 Earnings Miss Estimates, Revenues Surge Feb 23, 2015 Dillard's Inc. reported lower-than-anticipated fourth-quarter fiscal 2014 results, wherein adjusted earnings of $3.15 per share fell short of the Zacks Consensus Estimate of $3.20. However, adjusted earnings marked a year-over-year improvement of nearly 16.2%. Dillard's net sales (including CDI Contractors LLC or CDI) jumped nearly 5% year over year to $2,135.5 million in the quarter. Merchandise sales, excluding CDI, grew 2.7% to $2,068 million from $2,013 million reported in the year-ago quarter. The improvement in merchandise sales came on the back positive response from customers to the company s improved mix and service during the holiday season, which also helped boost retail gross margins. Equity Research DDS Page 3
The company s total revenue (including service charges and other income) of $2,179.6 million reflected an increase of 4.9% from the year-ago quarter revenue of $2,078.7 million and also surpassed the Zacks Consensus Estimate of $2,113 million. Merchandise comparable-store sales (comps) for the thirteen-week period ended Jan 31, 2015 increased 3% from the thirteen-week period ended Feb 1, 2014. During the quarter, the outperforming categories were ladies' apparel and shoes. This was followed by strong performance at the juniors' and children's apparel. However, the home and furniture category recorded the lowest sales in the quarter. The best performing region was Central, followed by the Eastern and Western regions, respectively. In the quarter, consolidated gross margin improved 30 basis points (bps) to 34.3% while gross margin from retail operations (excluding CDI) expanded 103 bps. The year-over-year improvement in retail gross margin was primarily due to lower markdowns. Dillard's selling, general and administrative (SG&A) expenses for the quarter increased nearly 4.2% to $457.5 million, while as a percentage of sales it contracted 20 bps to 21.4%. On the other hand, operating expenses from retail operations, as a percentage of sales, expanded 40 bps to 22.1%, primarily due to higher selling payroll, insurance and supplies expense, offset by lower advertising cost. Fiscal 2014 Synopsis For fiscal 2014, the company s adjusted earnings came in at $7.70 per share, which increased 10.2% from fiscal 2013 but fell short of the Zacks Consensus Estimate $7.72. Total Revenue for the year rose about 1.3% to $6,780.2 million. The company s top line also surpassed the Zacks Consensus Estimate of $6,713 million. Other Financial Details Dillard s ended the year with cash and cash equivalents of $403.8 million compared with $237.1 million at the end of fiscal 2013. As of Jan 31, 2015, the company s long-term debt and capital leases was $620.7 million compared with $621.5 million as of Feb 1, 2014. In fiscal 2014, the company generated net cash flow from operations of $611.6 million compared with $501.7 million in the prior-year period. Furthermore, during fiscal 2014, the company completed its planned share repurchases under the Mar 2013 and Nov 2013 authorizations, buying back about 2.8 million shares for about $290.4 million. As on Jan 1, 2015, the company had $500 million worth of authorization remaining under its share repurchase program that was announced in Nov 2014. Store Update During the fourth quarter, the company shut down its store at Southgate Mall in Sarasota, FL. Dillard s did not open any new store in the quarter. In fiscal 2014, the company opened two namesake stores and closed one store. The newly opened stores are located at The Shops at Summerlin in Las Vegas, NV and The Mall at University Town Center in Sarasota, FL. As of Jan 31, 2015, Dillard s had about 277 namesake outlets and 20 clearance centers operating in 29 states and an online store at www.dillards.com. Dillard s total square footage as of Jan 31, 2015 was 50.5 million. Equity Research DDS Page 4
Fiscal 2015 Outlook For fiscal 2015, the company projects rentals of approximately $25 million compared with $27 million reported in fiscal 2014. Net interest and debt expenses for the year are expected to be nearly $61 million, flat with fiscal 2014. Moreover, the company still expects capital expenditure for fiscal 2015 to be about $160 million compared with $152 million in fiscal 2014. Depreciation and amortization expenses for fiscal 2015 are expected to be $250 million compared with $251 million incurred in fiscal 2014. VALUATION The company s current trailing 12-month earnings multiple is 16.9x, compared to the 16.1x industry average and 17.9x for the S&P 500. Over the last five years, Dillard s shares have traded in the range of 10.4x to 34.2x trailing 12-month earnings. Further, the stock is trading at a premium to the industry average, based on fiscal 2015 earnings estimates. Our target price of $137.00, 15.8x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Dillard s Inc. (DDS) 15.0 13.4 12.2 9.2 16.9 34.2 10.4 Industry Average 13.9 13.4 11.0 6.8 16.1 N/A 10.6 S&P 500 16.3 15.2 10.7 14.6 17.9 18.4 12.0 Kohl s Corporation (KSS) 16.3 14.6 10.0 8.5 17.4 17.3 9.9 Bon-Ton Stores Inc. (BONT) 10.9 N/A N/A 1.1 N/A N/A 6.3 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. Dillard s Inc. (DDS) 2.7 2.8 0.7 16.4 0.4 0.2 7.0 EV/EBITDA Industry Average 2.5 2.5 2.5 1.0 4.4 1.3 7.8 S&P 500 6.2 9.8 3.2 25.4 N/A 2.0 N/A Equity Research DDS Page 5
Earnings Surprise and Estimate Revision History Equity Research DDS Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DDS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 15.5%, Neutral - 74.8%, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DDS Page 7