Dillard’s Inc.: The story of capital management success

In recent years, Little Rock-based Dillard’s Inc. has been one of the biggest positive surprises on Wall Street. From 2018 to 2022, Dillard’s has generated an astounding 515% stock return, far outperforming the S&P 500 Index (44%) and its closest competitors, Macy’s (5%) and Nordstrom (61% loss).

That is an extraordinary performance, especially considering that Dillard’s operates in the department store industry, which has been severely challenged by changing customer preferences, the rising popularity of online shopping, and, more recently, COVID-19 and inflation-driven declines in luxury sales.

Over the past decade, many traditional department stores have gone bankrupt or out of business. In addition, the number of malls has steadily declined. In the 1980s, there were more than 2,000 malls in the U.S. Today, there are about 1,000, and Coresight Research expects the number to drop by as much as 25%.

There are multiple reasons for Dillard’s stock price growth, but two stand out. First, efficient inventory management. Analysts who follow the company and the business media have been particularly puzzled because Dillard’s has achieved superior performance without a significant sales or store footprint increase. However, especially since the beginning of the COVID crisis, Dillard’s has significantly increased its inventory turnover (the number of days it takes for an inventory item to be sold), all while increasing the company’s profit margin. That means Dillard’s can offer items that don’t spend much time on the shelves and sell without discounting. The company thus makes more money per item sold and can be more profitable without increasing sales or store space.

The second reason is even more critical — prudent management of the company’s capital in an era of what seems to be an inevitable and permanent contraction of the department store industry, primarily due to the rise of online retailing. Financial research has long documented that the proper response to a significant contraction in growth opportunities is to begin returning capital to owners to invest elsewhere. Unfortunately, not many companies are ready or willing to do that. Managing capital in an industry downturn is challenging because executives love growth and often miss the tipping point at which additional asset expansion cannibalizes cash flow from existing projects, fails to cover costs, and thus becomes detrimental to the company’s long-term survival. Financial studies show that the value of $1 of cash reserves for large companies with no significant growth prospects is worth only $0.70 of market value — because investors assume that the remaining $0.30 will be destroyed by spending on unprofitable and damaging future projects.

Fortunately for its investors, Dillard’s has been an undisputed leader among department store companies (and retailers in general) in returning unused and unneeded capital. Over the past decade, the company has announced several major share buyback plans. Most recently, the company committed to spending up to $500 million on share repurchases in May 2023. In addition, the company paid a $15 special dividend to all shareholders in both 2021 and 2022, returning more than $500 million to investors each time.

Can we expect another substantial abnormal stock return from Dillard’s? Probably not. The benefits of excellent inventory management and tight capital control have already been seen and thus are fully priced into the existing stock value. Dillard’s stock performance in 2023 was essentially flat. At the same time, investors may have reason to believe that the company will continue to generate a return that fairly compensates for investment risk.

Tomas Jandik is a finance professor and the holder of the Dillard’s Chair in Corporate Finance at the University of Arkansas. While he holds the research chair named in honor of Dillard’s, he is not paid by the company. The opinions expressed are those of the author.