UPDATE: Bank of America Merrill Lynch Initiates Coverage on Dillard's

In a report published Friday, Bank of America Merrill Lynch analyst Heather Balsky initiated coverage on

with a Buy rating on attractive EPS and FCF growth trajectory, establishing a $110.00 price objective. According to the report, the coverage reflects the south and midwest regional department store's transformation into a more upscale mid-tier department store, driving sales and margin improvement. “We expect Dillard's to generate substantial free cash for capital returns given its solid earnings growth and stable capex requirements,” the report noted. “We model $550mn of FCF in F2014, implying a 14% FCF yield, well above our 5% coverage universe average. We are modeling $400mn of annual buybacks and see room for upside. We estimate that each $50mn of incremental buybacks in F2014 adds $0.13 (1.5%) to our F2015 forecast.” Some risks to the Buy rating include high inside ownership, low liquidity in shares, a shift in consumer spending toward big ticket purchases from apparel and DDS's non-promotional strategy amidst a period of sluggish demand and excess inventory. DDS closed Thursday at $90.16 with shares trading down at 1.85.