Dillard’s (NYSE:DDS) operates a chain of department stores across the U.S., with 315 stores open nationwide as of January 2009.  Dillard's targets middle- and upper-class consumers with premium-priced branded and private label clothing, cosmetics, accessories and home goods. Dillard's $6.8 billion of sales in 2008 place it well behind its national department store competitors J.C. Penney (JCP) and Macy's Inc. (M) which earned $18.5 billion and $24.9 billion in 2008 sales respectively.
Since the beginning of the U.S. recession, retailers have suffered from declining consumer spending on non-necessities, and Dillard's has been no exception. Dillard's net sales fell 5.2% and same store sales declined 6% in 2008. Dillard's has fared worse than lower-priced department stores like Kohl's (KSS), which only saw a 0.5% decrease in net sales in 2008 and discounters like Target (TGT), which actually saw a 2.5% increase in net sales in 2008,  in the face of falling consumer spending due to its higher prices and reliance on discretionary shopping.
Dillard's offers its own exclusive and private label brands alongside merchandise from branded manufacturers, which represented approximately 24% of total sales in 2008. These brands can drive higher profit margins, so Dillard's is introducing new lines to grow the penetration of these private label products. Growing these brands is key to Dillard's competitiveness with its larger competitors, such as Macy's Inc. (M) and J.C. Penney (JCP). However, DDS lags behind larger and smaller competitors by the fact that all of the company's 325 stores are located in malls whereas those of its competitors have several off-mall locations -- Dillard's risks losing market share as more consumers shift to shopping at off-mall locations.
Dillard’s operates mall-based department stores and an e-commerce site in the United States that sell high-priced branded and private label merchandise. The company received $6.8 billion of total revenues in 2008, a 5.2% decrease from 2007.
Dillard's stores and e-commerce site carry a variety of clothing, accessories and home goods. The company's merchandise offerings include products from premium branded manufacturers, such as Guess? (GES) and Polo Ralph Lauren (RL), in addition to exclusive and private label brands that Dillard's wholly owns or co-owns with outside partners, such as the Roundtree & Yorke and Antonio Melani brands. These brands represented 24% of Dillard's net sales in 2008. Dillard's primary customers are women, typically in the middle- and upper-class. Consequently Dillard's bestselling product segment in 2008 was Ladies' Apparel and Accesories, which accounted fro 38% of total sales (53% if including Cosmetics sales as well).
Dillard's operates under six different business segments:
Until 2004, Dillard's issued a private credit card, which could only be used at Dillard’s. The company sold its private credit card business to GE Consumer Finance (“GE”) for $1.25 billion in August 2004.In connection with the agreement, Dillard’s and General Electric Company (GE) entered into a long-term marketing and servicing partnership whereby GE owns the outstanding account and any new accounts opened by Dillard's customers. In return, Dillard’s receives ongoing payments from GE for charges made to these credit cards. The sale of this unit allows Dillard’s to continue serving its customers with the private credit card while utilizing GE's operational and marketing capabilities.
|Metric||FY2008||Chg from FY2007||FY2007||FY2006||FY2005|
|Net Sales Revenue||$6988||-5.2%||$7371||$7810||$7695|
|Operating Margin||n/a (loss)||n/a||0.8%||3.3%||1.6%|
|Metric||3Mon ended Q1 FY2009||% Change||3Mon ended Q1 FY2008|
|Net Sales Revenue (millions)||$1,505||(12.1%)||$1,714|
|Gross Profit (millions)||$494||(11.3%)||$557|
|Net Income (millions)||$7.66||185%||$2.69|
|Comparable Store Sales||(16%)||(11%)||(5%)|
The recession hurt Dillard's performance in FY08 just as it has hurt most other department stores. Stores with higher-priced goods that target upper-class customers, such as Dillard's, have been struggling as shoppers cut back on their spending by trading down to lower-priced merchandise. As a result, Dillard's experienced significant declines in sales, with net sales decreasing 5.2% and same store sales dropping 7% in FY08. Lower-priced stores, such as Kohl's (KSS) have fared better than Dillard's as shoppers trade down and look for deals. Kohl's net sales only fell 0.5% in FY08. Dillard's is performing slightly more effectively than luxury department stores, such as Nordstrom (JWN) and Saks (SKS), which have experienced drops in same store sales at 9% and 6.1% in FY08, respectively. 
In December 2008 the National Bureau of Economic Research reported that the U.S. economy had been in a recession since December 2007. The recession was spurred by the 2008 Financial Crisis and has resulted in a significant decline in consumer spending, which has hurt retail sales. In November 2008, total retail sales fell 5.5% in the U.S., a poor sign heading into the holiday shopping season. Dillard's business suffered in 2008 and has dipped further in 2009 as a result of the economic conditions, with same store sales falling 7% in the 2007 and 16% in the Q1 of FY09 alone. 
Department stores are increasingly seeking to distinguish themselves and earn higher profit margins by offering exclusive brands and private label brands. Exclusive brands are brands marketed under the wholesaler's name that are sold only in a particular chain; one exclusive brand at Dillard's is the Antonio Melani line that can only be purchased online or at Dillard's stores. Private label brands are produced by wholesalers, but sold under the brand name of the retailer. Exclusive brands such as Gianni Bini and Roundtree & Yourke, can help draw customers into Kohl's stores, as the products can only be found at Dillard's. Dillard's own private label products are typically priced lower than branded merchandise, but have a higher profit margin for Dillard's as the retailer is able to receive the good at a lower cost by avoiding branded manufacturers.
In 2008 exclusive and private label merchandise accounted for 24% of Dillard's sales,, a figure Dillard's plans on increasing in 2009 after adding new exclusive brands such as Pink Twill, a line of activewear (athletic and exercise apparel) designed for young women, a product segment previously underdeveloped in Dillard's merchandise offerings.
At the end of 2008, all of Dillard's 325 stores were located in malls, as Dillard's is lagging behind its competitors with regards to a growing emphasis on off-mall store locations. For example, Kohl's (KSS) is a leader in the off-mall trend, operating 938 of its 1004 stores in off-mall locations at the end of 2008. J.C. Penney (JCP) operated 1,093 stores at the end of FY08, only 91 of which were off-mall, but, JCP is trying to catch up to companies such as Kohl's, as 31 of their 35 new stores in 2008 were off-mall. In 2009, 16 out of the 17 new stores JCP plans to build will be off-mall. As Dillard's is far behind its competitors with regards to this trend, it is positioned to lose market share from its competitors as consumers continue to shop more often in off-mall locations, refraining from frequenting malls and subsequently avoiding Dillard's stores.
Since the 2000's began, consumers have shifted their shopping habits to strip-malls and shopping centers rather than traditional malls. Department stores are traditionally attached to malls, but have begun moving out into shopping centers and other "off-mall" locations to follow the changing customer's shopping patterns. Off-mall stores are cheaper to operate than traditional mall-based department stores, due to smaller real estate costs and less in-store employees, and offer consumers convenience by serving as a one stop shop. Dillard's is positioned to lose from this trend as none of their stores are in off-mall locations.
Dillard's is one of the smallest national department store retailers, with $6.8 billion of net sales in 2008 and 325 stores at the end of November 2008. It competes primarily against other department stores, but also is facing increasing competition from discounters and mass merchandisers like Target (TGT) and Wal-Mart (WMT) as these companies grow their clothing and home goods categories.
|Company||Net Sales (millions)||Sales Growth (decline) from FY07||Same Store Sales Growth (decline)||Gross Margin||Operating Margin||Net Income||Total Stores (end FY08)||Private Label Sales as % TTL||Q1 FY09 Same Store Sales|
|J.C. Penney (JCP)||$18,486||(6.9%)||(8.5%)||37.4%||4.9%||$572||1,093||52%||(5.9%)|
|Macy's Inc. (M)||$24,892||(5.4%)||n/a||n/a (loss)||n/a (loss)||($4,803)||847||19%||(9.0%)|
|Sears Holdings (SHLD)||$46,770||(7.8%)||(8.0%)||27.1%||0.6%||$53||3,530||n/a||(7.4%)|