Wells Fargo to Back Dillard's Credit Cards - Analyst Blog

Leading fashion apparel, cosmetics and home furnishings retailer, Dillard's Inc. DDS and reputed financial services company Wells Fargo & Company WFC have formed a pact, wherein the latter has agreed to back the former's credit card program. Per the deal, Wells Fargo will sponsor, issue and service Dillard's branded private label and co-brand credit cards as well as manage the company's cardholder loyalty program.

Spanning over a 10-year period, the program is expected to boost Dillard's earnings in the future with initial earnings, excluding startup costs, from the program coming at similar levels as its previous credit card program. The program under the new agreement is expected to commence from the fourth quarter of fiscal 2014 after the expiry of the company's ongoing program deal.

Through this partnership, the companies have come together to provide significant benefits and rewards to consumers, thus delivering excellent value.

Wells Fargo will conduct operations under the agreement through its Retail Services division in Consumer Credit Solutions, which engages with retailers providing consumer private label and credit cards across the country. The company has a formidable experience of over 50 years in the consumer finance industry and offers credit programs at about 30,000 merchant outlets in the U.S.

In February, Dillard's reported dismal fourth-quarter results that were largely impacted by lower-than-anticipated top-line performance and higher markdowns, which resulted in substantial gross margin contraction. The company's earnings for the quarter declined 6.3% year over year, while revenue was down 3.5%. Both earnings and revenue fell short of the Zacks Consensus Estimate. Moreover, the company's gross margin declined 180 bps with elevated inventory levels at the end of the fourth quarter.

As a result, we expect gross margin to remain under pressure in fiscal 2014 due to higher markdowns to clear excess inventory, which will in turn impact the bottom line. This equation is well reflected in the Zacks Consensus Estimates for the upcoming quarter and fiscal 2014 and 2015 that witnessed downward revisions over the last 30 days.

However, the company's comps growth trend with positive comps in the trailing 13 quarters coupled with efforts to increase traffic continue to impress us. Moreover, we believe Dillard's wholly owned Captive Insurance Company and REIT facilitates efficient risk management as well as enhances its liquidity position.

Dillard's currently holds a Zacks Rank #4 (Sell). Better-ranked stocks among department store retailers include Bon-Ton Stores Inc. BONT and Macy's Inc. M. While Bon-Ton Stores has a Zacks Rank #1 (Strong Buy), Macy's holds a Zacks Rank #2 (Buy).