Updated Research Report on Dillard's - Analyst Blog

On Apr 1, 2014, we issued an updated research report on Dillard's Inc. DDS.  While the large department store chain reported dismal fourth-quarter results, its comps growth trend coupled with efforts to increase traffic remains impressive.

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. The disappointing results in the quarter stemmed from the lower-than-expected top line and higher markdowns.

Moreover, the company's gross margin remained pressured due to higher inventory levels. Going forward, the company projects the continuation of this gross margin trend into fiscal 2014 as the company will emphasize on clearing excess inventory through higher markdowns, impacting bottom lines.

This equation was 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. The estimate for first-quarter fiscal 2014 fell by 13 cents to break even, while for fiscal 2014 and 2015, it fell 26.4% and 19.3% to 64 cents and 88 cents per share, respectively.

However, looking at the trailing four quarters surprise trend, the company has emerged a winner in 3 of the last 4 quarters recording an average surprise of 10.05%.

Moreover, we believe that the company's strategy of offering more fashion-forward and trendy products has attracted more customers to its stores, as evident from positive comparable store sales performance in the trailing 13 quarters. Further, improved comparable store sales performance and enhanced e-Commerce capabilities have helped Dillard's post sales growth over the last several quarters.

Other positives for the stock include its efforts to capitalize on growth opportunities in both its brick and mortar stores and e-Commerce business, targeting to retain existing customers and attract new customers. Initiatives to boost sales of physical stores include better branding, focus on in-trend categories, store remodels and rewarding store personnel, while its online strategies are focused on enhancing merchandise assortments and effective inventory management.

Positivity is also reflected in the company's strong balance sheet and cash flow positions that provide financial flexibility with respect to shareholder-friendly moves as well as store and online business expansions. Additionally, we believe Dillard's wholly owned Captive Insurance Company and REIT facilitate efficient risk management while enhancing its liquidity position.

Dillard's currently holds a Zacks Rank #4 (Sell).

Key Picks from the Sector

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). Investors interested in the retail sector may also consider better-ranked stocks like Barnes & Noble Inc. BKS which carries a Zacks Rank #1 (Strong Buy).