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After aggressive steps, Dillard's shows of rebirth.

AFTER YEARS OF BEING ONE of the worst-performing department store chains in the United States, Dillard's Inc. of Little Rock is showing signs of rebirth.

Since trading at $2.50 on Nov. 21, 2008, the lowest the company's stock price has been in decades, shares of Dillard's were selling for just under $27 last week. They had reached as high as $31 in late April.

And thanks to a strong fourth quarter, during which it netted $79.5 million, Dillard's net income for the fiscal year that ended Jan. 30 was $68.5 million. Dillard's reported a loss of $241.1 million a year earlier.

"Dillard's was in freefall," Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York, said last week. "I think we can say they're no longer in freefall."

In August 2008, Davidowitz wondered if Dillard's would be around in five years because of its poor performance coupled with the recession. Now he has praise for Dillard's managers for cutting costs and closing underperforming stores in a successful attempt to improve the company's bottom line.

"Management has started to take the most aggressive steps I've seen them take," Davidowitz said. "And I think these are positive steps."

Still, Dillard's has to sell merchandise, he said.

Same-store sales--year-over-year comparisons of sales at stores open at least a year and a key indicator of a retailer's heath--were off 10 percent at Dillard's for the year that ended Jan. 30. In the previous year, same-store sales were off 7 percent.

"We expect Dillard's sales to remain weak [in its current fiscal year], but systems, localized merchandise, and cost-cutting initiatives will drive improved profitability," Bill Dreher Jr., an analyst who covers Dillard's for Deutsche Bank, wrote in a March 1 research report on the company.

In November, Dreher upgraded his recommendation on Dillard's from hold to buy.

"Dillard's has responded appropriately to its challenges by focusing on expense discipline, debt reduction, and store closings," analyst Michael Exstein of Credit Suisse wrote in a March 1 report titled "Showing Margin Progress, But No Sales Improvement in Sight."

Exstein wrote that, without improvement in sales, "we think the operating margin will be pressured anew in 2010."

Under Pressure

Shareholders watched as Dillard's sales fell from $8.68 billion in 1999 to $6.1 billion in 2009. Dillard's managers "let this company languish," Davidowitz said.

But shareholders couldn't do much about the performance or about the leadership of CEO William Dillard II, whose late father founded the company in 1938. Dillard's operates under a dual-class stock structure that allows the Dillard family, as Class B shareholders, to elect eight of the 12 directors on the board. That makes it difficult for investors outside the company to effect change.

But they have tried. Activist shareholders, led by Barington Capital Group's James Mitarotonda, started a campaign to improve Dillard's and remove Dillard from the company in 2008.

The activists did score a victory when they placed four members on the board in May 2008. But the campaign to remove Dillard fizzled in 2009, when the activist shareholders sold their shares in the company.

Also in 2009, one of the new directors chosen by the activists left the board and was replaced by former U.S. Rep. J.C. Watts, R-Okla., who had previously sat on Dillard's board.

Other shareholders have filed lawsuits against the company accusing Dillard's directors of mismanagement and breach of fiduciary duty for allowing Dillard's to lag behind other retailers while paying above-average salaries to company executives.

In February, Pulaski County Circuit Court Judge Chris Piazza dismissed one lawsuit because the shareholder, Billy K. Berry, a retired pharmacist from Yell County, didn't complain to the Dillard's board of directors first. Berry has appealed that decision to the Arkansas Supreme Court.

Another shareholder, Steven Harben of Georgia, filed his derivative lawsuit in U.S. District Court in Little Rock in May 2009. That case is pending.

Davidowitz said last week that the pressure from the outside investors might have led to the changes at Dillard's.

Dreher, the analyst with Deutsche Bank, said the changes were being made behind the scene.

"While Dillard's did not respond publicly to these suggestions [by the shareholders], it is clear to us now that many of these suggestions were being implemented at the company," Dreher wrote in a Nov. 19 report.

Dillard's spokeswoman Julie Bull declined to comment on Dillard's changes because the company is in a quiet period since it will release its first-quarter financial results soon.


Some of the fundamental changes are easy to spot. For instance, Dillard's has improved its inventory in recent years, Dreher wrote.

"Historically, Dillard's philosophy when it came to inventory was to 'stack it high and let it fly,'" he wrote in November. "The company began to realize that this philosophy had become outdated and the consumer was more interested in an edited assortment of merchandise."

Dillard's responded to the customer demands. At the end of the fiscal year, Dillard's had an inventory reduction of 5 percent or $73.7 million from its previous year. And that followed an inventory reduction of 23 percent in fiscal 2008.

"Better flow of inventory, matching the timing of receipts to demand, and more conservative purchasing will likely drive gross margin improvement ... going forward," Dreher wrote.

Dillard's also has slashed its operating costs. The company said it saved $288.6 million in operating expenses for fiscal 2009. In filings with the U.S. Security &C Exchange Commission, Dillard's said it saved a large portion on advertising and payroll expenses.

Dillard's doesn't reveal exactly how much it spends on advertising, but because director Warren Stephens of Little Rock owns half of Stephens Media of Las Vegas, Dillard's reveals its spending with that newspaper chain in its annual proxy statement. And spending with Stephens Media was down about 17 percent, from $3 million in fiscal 2008 to $2.5 million in 2009.

Dreher wrote that Dillard's saved money by shifting advertising in newspapers to "lower cost emails."

Store Closings

Dillard's also has been shutting the doors of underperforming stores. In 2005, Dillard's had 330 stores. At the end of January, it had 297 locations and 12 clearance centers in 29 states. Dillard's said it would continue to close underperforming stores as needed.

Dillard's said it planned to open two stores this fiscal year: a 155,000-SF store in Fairview, Texas, and a 200,000-SF store in Austin, Texas.

Davidowitz said Dillard's had some breathing room in which to continue operating.

"I think Dillard's is trying to buy time for when things get better," he said.

But it's unclear when Dillard's might see an improvement in sales, Davidowitz said.

"Dillard's looks like a very weak player [in the retail sector]. Nothing can change that," he said. "But I think management has for the first time taken more steps than they have in the past. ... They've taken steps to survive."

He said the jump in stock price, nearly 980 percent in about 18 months, reflects the positive moves Dillard's has made.

"They appear financially stable," Davidowitz said. "You couldn't say that 18 months ago."

By Mark Friedman
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Author:Friedman, Mark
Publication:Arkansas Business
Date:May 17, 2010
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