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DDS AT A GLANCE

P/E ► -3.43   EV/EBITDA ► 241 VERY HIGH ROA ► -2.9% AVG ROE ► -9.6% AVG Debt to Equity ► 1.06 AVG Current Ratio ► 2.04 AVG Interest Coverage Ratio ► -3.28 AVG

 

 

 

 

 

 

DDS most likely refers to Dillard's. For other possible associations, see DDS (disambiguation).

Dillard’s (NYSE:DDS) operates a chain of department stores across the U.S., with 315 stores open nationwide as of January 2009. ^[1] 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.^[2][3][4]

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.^[5] Dillard's net sales fell 5.2%^[2] and same store sales declined 6% in 2008.^[6] 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^[7] and discounters like Target (TGT), which actually saw a 2.5% increase in net sales in 2008, ^[8] 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.^[9] 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 ^[10]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.^[11]

Company Overview

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.^[2]

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.^[9] 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).^[12]

Business Segments

Dillard's operates under six different business segments:^[12]

• Cosmetics (15% of net sales)
• Ladies’ apparel and accessories (37% of net sales)
• Juniors’ and children’s apparel (9% of net sales)
• Men’s apparel and accessories (18% of net sales)
• Shoes (13% of net sales)
• Home and furniture (8% of net sales)

Dillard's business segments have represented nearly the same proportion of net sales since 2006 despite annual decreases in revenue.^[12]

Divestment of Credit Card Business

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.^[13]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.

Business Growth

FY2008 (ended January 31, 2009)^[2]

• DDS incurred a net loss of $240 million during 2008, compared to its $48 million net earnings from 2007. DDS incurred its loss due to inventory pile-up and aggressive markdowns, as the weak retail environment and general economic slowdown negatively impacted consumer demand and sales. For FY2008, total sales declined 5.2% year-on-year, while the cost of sales rose 4.3%, resulting in a net loss even though DDS cut $77 million from its advertising and SG&A expenses.

• Net sales were $6.988 billion in FY2008, down 5.2% from net sales of $7.4 billion last year. In a challenging recessionary environment, DDS sales were hurt as its target consumer market of middle-to-upper-class shoppers switched to discounted retailers to cut down discretionary spending.

• Comparable store sales decreased by 7% during FY2008, with the most notable declines in the apparel and home goods categories.

• Operating loss for FY 2008 was $241 million, a $295 million decline from the operating profit of $54 million during the previous fiscal year. Gross margins also experience a 400 bps decrease from 2007.

Q2 FY2009 (ended August 1, 2009)^[14]

• Dillard had a net loss of $26.7 million. This was better than the previous-year fiscal quarter, in which the net loss was $38.3 million. Reduced advertising and a focus on decreasing SG&A expenses saved the company $82.6 million during the quarter.

• Net sales were $1.5 billion in Q2 2009, down 12.5% from net sales of $1.7 billion in Q2 of last year. This can be attributed to a decline in mall store traffic as a result of the economic downturn. All of the company's segments had negative sales for the quarter, with the hardest hit segments being home & furniture and juniors' and children's apparel.

• The company's efforts to reduce inventory levels caused an 18% reduction in inventory levels in comparable stores.

Trends and Forces

Dillard's Struggling in Recession Due to High Prices

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.^[6] 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.^[7] 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. ^[15][16]

In December 2008 the National Bureau of Economic Research reported that the U.S. economy had been in a recession since December 2007.^[5] 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.^[17] 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. ^[14]

Growing Dillard's Exclusive and Private Brands

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 Dillard'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.^[18]

In 2008 exclusive and private label merchandise accounted for 24% of Dillard's sales,^[9], 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.^[19]

Department Store Migration to Off-Mall Locations

At the end of 2008, all of Dillard's 325 stores were located in malls,^[10] 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.^[20] J.C. Penney (JCP) operated 1,093 stores at the end of FY08, only 91 of which were off-mall,^[21] 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. ^[22]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. ^[11]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.

Competition

Dillard's is one of the smallest national department store retailers, with $6.8 billion of net sales in 2008^[2] and 325 stores at the end of November 2008.^[1] 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.

Dillard's primary competitors are moderate- and higher-priced department stores, J.C. Penney (JCP), Macy's Inc. (M) and Sears Holdings (SHLD).

Department stores:

• J.C. Penney (JCP) is significantly larger than Dillard's, with far greater 2008 sales and stores than Dillard's ($18.5 billion; 1,093).^[23] J.C. Penney's prices are comparable to Dillard's but JCP carries less prominent brand name merchandise. JCP relies more heavily on its own exclusive and private label products than Dillard's, which represented 52% of total sales in 2008.^[24] Almost all of J.C. Penney's stores are located in malls, but the company is moving to an off-mall model with over 90% of new stores being opened in off-mall locations.^[21]

• Macy's Inc. (M) is far larger than Dillard's in terms of sales ($24.9 billion in FY08) and number of stores (847 at end of FY08).^[25] Macy's carries a very comparable variety of branded merchandise as Dillard's, with extensive offerings from Polo Ralph Lauren (RL), Calvin Klein, Kenneth Cole Productions (KCP) and other fashion brands. Consequently, only 19% of Macy's sales in FY08 were from private label merchandise.^[26] Macy's is a mall-based department store chain, with no announced plans to engage in the off-mall trend.

• Sears Holdings (SHLD) is the largest department store company in North America, operating both Sears and Kmart stores. SHLD received over $46.8 billion in net sales in 2008, ending the year with 3,530 store locations in the U.S. and Canada.^[27] SHLD's stores focus more heavily on home goods and appliances than clothing, a major point of differentiation between Dillard's and SHLD. SHLD's stores are traditionally mall-based, but the company has been opening off-mall locations to investigate the off-mall trend.

Notes

1. ↑ ^{1.0 1.1} DDS 2008 10-K, pg. 8
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} DDS 2008 10-K, pg. 22
3. ↑ Google Finance: JCP Overview
4. ↑ Google Finance: M Overview
5. ↑ ^{5.0 5.1} Wall Street Journal "NBER Makes It Official: Recession Started in December 2007" 1 Dec 2008
6. ↑ ^{6.0 6.1} DDS 2008 10-K, pg. 16
7. ↑ ^{7.0 7.1} Google Finance: KSS Overview
8. ↑ Google Finance: TGT Overview
9. ↑ ^{9.0 9.1 9.2} DDS 2008 10-K, pg. 23
10. ↑ ^{10.0 10.1} DDS 2008 10-K, pg. 15
11. ↑ ^{11.0 11.1} USA Today "Shopping shifts to 'off-mall' stores" 25 April 2004
12. ↑ ^{12.0 12.1 12.2} DDS 2008 10-K, pg. 1
13. ↑ New York Times "Dillard's to Sell Credit Card Unit to G.E." 9 August 2004
14. ↑ ^{14.0 14.1 14.2} DDS Q2 2009 Report, pg. 4
15. ↑ JWN 2008 10-K, pg. 14
16. ↑ SKSK 2008 10-K, pg. 21
17. ↑ Wall Street Journal "Retail Sales" November 2008
18. ↑ Tuck Business School at Dartmouth "Faculty Opinion: Private-Label Products in the Manufacturin-Retailer Power Balance"
19. ↑ Reuters "Dillard's Announces Launch of Pink Twill" 24 August 2008
20. ↑ KSS 2008 10-K, pg. 13
21. ↑ ^{21.0 21.1} JCP 2008 10-K, pg. 8
22. ↑ JCP 2008 10-K, pg. 30
23. ↑ ^{23.0 23.1} JCP 2008 10-K, pg. F-3
24. ↑ JCP 2008 10-K, pg. 18
25. ↑ ^{25.0 25.1} M 2008 10-K, pg. 15
26. ↑ M 2008 10-K, pg. 18
27. ↑ ^{27.0 27.1} SHLD 2008 10-K, pg. 22