Dillard’s shares surge on talks of a real estate spin off

Investors of Dillard’s Inc. enjoyed a hefty $10 jump in share price on Thursday (Nov. 20) as the stock rose 9.4% to $121.14 per share in very active trading.

The rally was linked to an announcement from Marcato Capital Management, a 4.9% stakeholder in the Little Rock-based department store chain, urging the Dillard’s board to consider a spin off of its real estate assets. Mick McGuire, runs the hedge fund Marcato Capital, and is a fairly new investor in department store chain.

Marcato said that creating a real estate investment trust could "unlock tremendous value" for the retailer and its shareholders. The hedge fund said that after creating a REIT, the value of both it and Dillard's could reach a combined stock price of $193 a share, a 75% increase from current levels.

This request comes on the heels of improved earnings despite a 1% dip in comparable sales for the quarter ending Nov. 1.

Dillard’s reported net income of $55.2 million, or $1.30 per share, compared to net income of $50.9 million, or $1.13 per share, for the prior year third quarter. 
The majority of the year-over-year gain came from a net after-tax credit of $3.8 million ($0.09 per share) related to the sale of a store location.


Dillard’s CEO Bill Dillard, noted in the release that the retailer did see a slight increase in gross margins. 

“We believe we are positioned very well for the holiday season, and we look forward to providing premium Dillard’s service to our customers,” Dillard noted.

Analysts with the Street.com note that a spin off of the real estate assets is interesting because it would give shareholders the opportunity to unlock much of the cash flow and appreciation in real estate prices as opposed to waiting for assets to be sold. Another advantage of the REIT is that the exemption from U.S. income taxes  which can offer considerable rewards for investors.