Is Dillard?s About Done, Or Will Santa Still Come?

Wal-Mart Stores Inc. of Bentonville has braced investors for the likelihood that U.S. same-store sales during December, while clearly setting a new record, will be a modest 3 percent or so above the last month of 2002.

Meanwhile, Dillard’s Inc. of Little Rock has told investors nothing.

Arkansas’ two most notable contributions to the world of retailing present contrasts on almost every level, and external communication is no exception.

Wal-Mart issued six sales advisories during December; Dillard’s issued only one, revealing that sales in November were down 6 percent from the same period last year. Dillard’s, as is typical, has given investors no indication at all of its December results, which will be announced Jan. 8.

If those results show an improvement over 2002, it will be an exception to Dillard’s recent trend. The company has reported declining same-store sales in 10 of the past 12 months.

“Department stores did not exactly cover themselves with glory, and I do not expect Dillard’s to be the exception,” said Kurt Barnard of Upper Montclair, N.J., a retail consultant for more than 40 years.

Despite its position as the third-largest department store chain in the country, behind only Federated Department Stores and May Co., Dillard’s stock has the benefit of full analytical coverage by only a handful of investment firms. None of them could be reached for comment during the holiday week, but their recommendations speak for themselves:

• Of nine analysts making recommendations, none recommends buying Dillard’s stock. Four suggest holding, four recommend selling and one rates it a “strong sell.” A.G. Edwards downgraded its recommendation to “sell” in August based on the retailer’s “deteriorating fundamentals” and has not reconsidered; just a year earlier, its analyst, Robert Buchanan, rated Dillard’s a “strong buy.”

• According to Thompson/First Call, the consensus “target price” for Dillard’s stock from the two brokers hazarding a guess was $10.50 a share. It was actually trading in the $16.50 range, giving the stock a healthy — and inexplicable — price/earnings ratio above 47. Compare that with Wal-Mart’s p/e of just under 28. Part of the stock price’s continued buoyancy can be attributed to a stock buyback program that the family-controlled company has pursued since mid-2000.

• On Dec. 30, Moody’s Investor Service wished Dillard’s a happy new year by downgrading its bond issues to B1. The reduction in its assessment of Dillard’s various debt issues, based on a four-month review of the company’s condition, was accompanied by discouraging language:

“The downgrade reflects concerns about the value of the company’s franchise over the longer term, and the uncertainty that Dillard’s financial performance will recover to levels that will be consistent with peers.”

Moody’s said the downgrades were warranted, even though Dillard’s — now headed by William Dillard II, son of the founder — had reduced its debt over the past two years.

“The downgrade reflects Moody’s expectation that Dillard’s will not be able to quickly turn around its disappointing operating performance and that the company will continue to face strong challenges from a broad range of competitors,” the announcement said.

New Challengers

In addition to other traditional department stores, which use “more heavily promotional strategies” than Dillard’s, Moody’s identified Target and Kohl’s as aggressive competitors “with significantly stronger growth trends.”

Target, generally considered a discounter more closely competitive with Wal-Mart and Kohl’s — which made a strong move into Arkansas in 2003, has taken some tips from the discount sector.

“There are some department stores that are beginning to fight back,” said Kurt Barnard, the retail consultant. “Kohl’s is a store that has single-handedly turned retailing on its ear.”

Among Kohl’s most obvious innovations — at least in the department store arena — are shopping carts, which make shopping more convenient, and central check-out areas similar to those in discount and grocery stores. Central check-outs — as opposed to the scattered, department-specific cash registers in Dillard’s and other traditional department stores — can create cost savings by reducing the number of employees necessary to handle customers, Barnard said.

“Federated is starting to do the same, as are Sears stores,” Barnard said. But he said he hadn’t seen any of those sorts of changes from Dillard’s.

“It used to be that in a department store, you got (merchandise) handed to you on a silver platter. But you paid for the platter,” Barnard said. “Now the platter is just silver-plated, but you still pay for it.”

Standing Alone

An increasingly price-conscious American consumer is turning away from the high-touch, high-concept department store experience — which Barnard said the late William Dillard, founder of Dillard’s, delivered “extremely well.”

“The concept of department stores — I’m going to choose my words very carefully — has past its peak and is a long-term decline,” Barnard said.

And so, he said, has the shopping mall concept, whose post-World War II rise went hand-in-hand with the growth of Dillard’s.

Instead, consumers seem to favor stand-alone stores, which is another part of the Kohl’s phenomenon.

Dillard’s has reportedly optioned a 38-acre site off Chenal Parkway in Little Rock that was once planned as the location of Arkansas’ first Parisian department store. Whether Dillard’s plans to use the site for a stand-alone store, as has been widely speculated, or whether the option is more of a defensive strategy remains to be seen.

Dillard’s has made some notable but less obvious changes in its historic business plan — including toughening in its traditional partner-like relationship with vendors and an increased emphasis on private-label products that produce higher profit margins.

But the higher overall margins have not materialized. In its third-quarter earnings statement, filed with the U.S. Securities and Exchange Commission on Dec. 16, the company reported that its merchandise cost had increased to 67.9 percent of net sales in the first nine months of the fiscal year, compared with 65.4 percent in the same quarter of 2002.

Overhead costs, meanwhile, were improving in the third quarter mainly due to savings on sales commissions (due to lower sales) and a dramatic reduction — $19.3 million — in advertising expenses in 2003.

“The decline in advertising expense resulted primarily from a reduction in newspaper advertising as the company considers which media more appropriately matches its customers’ lifestyles,” Dillard’s told the SEC.

For the three quarters that ended Nov. 1, Dillard’s had a net loss for fiscal 2003 of $41.8 million.

TAB CHART

Dillard’s Monthly Sales Trends

Same-store sales as compared with previous year:

November	-6%
October	-5%
September	+3%
August	-4%
July	-1%
June	-6%
May	-7%
April	-2%
March	-12%*
February	+2%
January	-5%
December 2002	-5%

*Declined blamed on shift of Easter from March in 2002 to April in 2003, although similar increase in April sales were not forthcoming.

Source: Sales statements issued by Dillard’s Inc.