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Dillard’s (NYSE:DDS) is a U.S. based chain of 328 department stores. Dillard's department stores are located in suburban shopping malls primarily in the Southwest, Southeast and Mid-west and cater to middle income customers. In 2006, Dillard’s sold 7.6 billion worth of apparel, home goods and other items through their department stores and website. In recent years, consumers have also increasingly chosen to shop at off-mall specialty stores and at less expensive mass/discount merchandisers like Wal-Mart Stores (WMT) . As a result, Dillard’s has seen both its total sales and same store sales fall over the last five years. [1].

Contents

[edit] Business Overview

Dillard’s Annual Report
Dillard’s Annual Report [2]

Dillard’s is a department store and derives its revenue from the sale of clothing and interest and transaction fees earned on its store credit cards:

 Dillard’s Annual Report
Dillard’s Annual Report [3]

Dillard’s generated 7.6 billion in revenue from its 328 stores, in 2006. Dillard’s owns more than 2/3 of its stores and that gives it significant real estate value [4].

The substantial increase in net income from 9M in 2003 to 117M in 2004 is due to reduction in the level of outstanding debt largely attributed to the sale of the company's private label credit card business to GE in 2004.

[edit] Divestment of Credit Card Business

Dillard's issues a private credit card, which can only be used at Dillard’s. The company sold its private credit card business to GE Consumer Finance (“GE”) for $1.1 billion in 2004 [5]. 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.

[edit] Trends and Forces

[edit] Shift to Specialty Department Stores

Specialty department stores are based outside of malls (or are "off-mall"), and consumers have shifted in recent years from shopping in traditional mall-based department stores to specialty ones. The off-mall stores cost less to run than traditional mall-based department stores and offer consumers convenience with a one stop shop. As a result of consumer's shift to off mall stores, Dillard's has experienced a steady decline in sales over the last few years.


Square Footage Growth (%) 2001 2002 2003 2004 2005 2006
Traditional Stores 1.8 (0.4) 0.2 1.6 (3.6) (0.4)
Moderate Stores (1.3) 1.9 3.5 3.1 2.7 2.0
Luxury Stores 4.1 4.9 3.9 (0.4) 2.1 0.3
Total Department Stores 0.5 0.9 1.9 2.2 (0.4) 0.7
Total Specialty Stores 7.2 4.4 3.0 4.3 4.2 4.8
Total Mass Merchants 6.5 7.3 0.3 6.3 6.0 7.2
Off-Price 11.6 10.4 12.5 9.4 8.8 6.1

[edit] Exclusive and Private Upscale Brands

Department stores are increasingly seeking to distinguish themselves by offering exclusive brands and private brands. Exclusive brands are brands marketed under the wholesaler's name that are sold only in a particular chain. Private label brands are produced by wholesalers, but sold under the brand name of the retailer. In recent years, there has been an increase in demand for private label brands, which are typically higher margin. Department stores have increasingly sought to distinguish themselves by offering exclusive brands and private label brands. About 24.8% of Dillards’s sales are from its private and exclusive brands [6]. In 2006, the company expanded its selection by offering upscale brand merchandise such as Antonio Melani, Gianni Bini, Roundtree & Yorke and Daniel Cremieux to attract a new demographic [7].

[edit] Catastrophic Weather Conditions

Dillard’s has stores that are located in regions prone to adverse weather. 95 of the company’s stores are located along the Gulf and Atlantic coasts [8]. Weather catastrophes, such as Hurricane Katrina, Hurricane Rita and Hurricane Wilma have impacted approximately 60 of the company’s stores [9]. While Dillard’s property and merchandise are covered by insurance, the company stands to lose a substantial amount of revenue from any damaged stores. Additionally, hurricanes can greatly affect local economies, reducing consumer demand, in affected areas.

[edit] Competition

Dillard's faces stiff competition from many retailers, ranging from department store operators such as Macy's Inc. (M) and Kohl's (KSS) to big box retailers like Wal-Mart Stores (WMT) and Target (TGT). Macy's Inc. (M) has gained momentum over Dillard’s as its merger with the May stores has strengthened its presence in the mid-tier department store sector. Specialty off-mall based stores such as Kohl's (KSS) and soon J.C. Penney (JCP) continue to gain market share with impressively increasing comparable same store sales. .

Dillard’s strategy in 2006 included expanding its exclusive and private brand offerings and expanding it’s targeted demographic by offering upscale merchandise. [10].

Dillard's Comparison to other Department Stores
Dillard's [11]. Bon-Ton Stores (BONT) [12] Macy's Inc. (M) [13] J.C. Penney (JCP) [14] Kohl's (KSS) [15] Nordstrom (JWN) [16] Saks (SKS) [17] Sears Holdings (SHLD) [18]
Net Sales (mm) 7,636 3,362 26,970 19,903 15,544 8,559 2,940 20,890
Operating Margin 3.25% 3.84% 6.8% 9.0% 11.7% 10.6% NA 4.76%



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      [edit] Specialty Stores

      Department stores have lost favor in the recent past due to the practice of over distributing their brands to many locations of each mall. Consumers are opting for a wider portfolio of unique merchandise sold in off-mall specialty stores and less expensive mass/discount merchandisers.

      Dillard’s Comparison to Competitors Using Same-Store Sales Growth
      Year Dillard's Nordstrom (JWN) Saks (SKS) Macy's Inc. (M) Kohl's (KSS) J.C. Penney (JCP) Target (TGT) Sears Holdings (SHLD)
      2003 (4.0)[30] 4.1 1.6 (0.9) (1.65) 0.9 4.4 (1.8)
      2004 (1.0)[31] 8.5 5.3 2.6 0.3 5.1 5.3 (1.6)
      2005 0 [32] 6.0 2.1 1.3 3.6 2.9 5.6 (8.1)
      2006 (1) [33] 7.5 [34] 4.9 [35] 4.4 [36] 5.9 [37] 3.7 [38] 4.8 [39] (6.1) [40]

      [edit] MarketShare

      Dillard's is relatively small in size compare to its competitors.


      Compared with other fashion retailers, Dillard's market share is relatively small.
      Compared with other fashion retailers, Dillard's market share is relatively small.

      [edit] Notes

      1. Dillard’s 2006 10K, Item 6, pg. 9
      2. Dillard’s 2006 10K, Item 1, pg. 1
      3. Dillard’s 2006 10K, Item 6, pg. 9
      4. Dillard’s 2006 10K, Item 2, pg. 6
      5. Dillard’s 2006 10K, Item 1, pg. 2
      6. Dillard’s 2006 10K, Item 6, pg. 18
      7. Dillard’s 2006 10K, Item 1, pg. 1
      8. Dillard’s 2006 10Q, Item 2, pg. 20
      9. Dillard’s 2006 10K, Item 6, pg. 17
      10. Dillard’s 2006 10K, Item 1, pg. 1
      11. Dillard’s 2006 10K, Item 6, pg. 9
      12. Bon-ton’s Stores 2006 10K, Item 6, pg. 18
      13. Macy’s Inc. 2006 10K, Item F6
      14. JC Penney’s 2006 10K, Item 6, pg. 10
      15. Khol’s 2006 10K, Item 1, pg. 1
      16. Nordstrom’s 2006 10K, Item 6, pg. 12
      17. Saks’ 2006 10K, Item 6, pg.19
      18. Sears' 2006 10K, Item 7, pg.24
      19. 19.0 19.1 19.2 19.3 BONT,2006,10-K,Item 6, Pg 18
      20. 20.0 20.1 20.2 DDS,2006,10-K,Item-6,Page-9
      21. DDS,2006,10-K,Item-6,Page-17
      22. JCP 2007 10-K
      23. 23.0 23.1 Sec.gov
      24. Google Finance
      25. 25.0 25.1 M 2007 10-K
      26. M,2007,10-K,Item-2,Page-10
      27. 27.0 27.1 SKS,2007,10-K,Item-6,Page-19
      28. SKS,2007,10-K,Item-7,Page-24
      29. SKS,2007,10-K,Item-1,Page-1
      30. Dillard’s 2003 10K, Item 7, pg. 13
      31. Dillard’s 2005 10K, Item 7, pg. 17
      32. Dillard’s 2005 10K, Item 7, pg. 17
      33. Dillard’s 2006 10K, Item 7, pg.17
      34. Nordstrom’s 2006 10K, Item 6, pg. 12
      35. Saks’ 2006 10K, Item 7, pg.26
      36. Macy’s Inc. 2006 10K, Item F6
      37. Khol’s 2006 10K, Item 1, pg. 1
      38. JC Penney’s 2006 10K, Item 6, pg. 10
      39. Target's 2006 10K, Item 7, pg. 11
      40. Sears’ 2006 10K, Item 7, pg.26
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