Dillard's Is A Highly Undervalued Retailer
It looks like Dillard's (NYSE: DDS) wins the mall wars. The debate about whether the mall is still relevant aside, Dillard's is the only major department-store operator to grace mini local malls and the competition is dwindling. We are not surprised. Not only is the company well run, but its stores also are comfortable, have a better focus on merchandise that sells, and it services clientele more likely to spend money on clothing in both good economic times and bad. In our view, America's malls are an underutilized resource that is being reinvigorated by post-pandemic tailwinds. In that light, Dillard's is a definite winner and that is evident in the charts.
A Perfect Storm Lifts Dillard's To New Highs
Dillard's has managed to navigate more than a decade of contracting mall retail conditions, and the COVID pandemic to emerge a much stronger company and one well-positioned for profits. The combination of reduced competition and pent-up demand drove the company's revenue to a solid double-digit gain over last year and above pre-COVID levels. The $1.57 billion in revenue is up 70.8% from last year and beat the consensus by nearly 2000 basis points proving the strength of Dillard’s traffic. The company reports strength in all segments with a notable shout-out to the ladies and shoe segments which significantly outperformed all other categories.
This year's 70% gain in revenue is versus an easy comparison with last year's quarter so take it with a grain of salt. Last year, sales fell more than 35% but the rebound in business had already begun. Sales fell 45% in the first quarter of calendar 2020 and only 26% in calendar Q3 2020 and have only gotten stronger from there. On a 2-year basis, sales are up 7.5% and on a three-year basis, sales are up 4.6%.
On a retail basis, sales grew 70% over last year with both retail and consolidated margins widening. Retail gross margin expanded to 41.7% versus the 31.1% posted last year while consolidated gross margin came in at 41% versus 30.4% last year. Margins were aided by a 13% decline in inventory that was compounded by decreased and/or non-existent markdowns during the quarter.
The strength in sales and margins helped drive significant cash flow and earnings well above the consensus estimate just like in the prior quarter. The company reports $8.81 in GAAP earnings versus $1.69 last year but the numbers aren't entirely comparable. The company has been repurchasing shares over the past year which has helped boost EPS. Regardless, this company is generating serious amounts of cash flow.
Dillard's Gives Value To Shareholders
Dillard's is a dividend payer and one with a very positive outlook for dividend growth but that's not its real appeal in regards to shareholder value and capital returns. The company is yielding a mere 0.33% but it is a very safe 0.33% if we ever saw it. The real value for shareholders is in the share repurchase program. The company repurchased $112 million worth of stock over the past quarter, has over $500 million left under the current repurchase authorization and is sitting on $670 million in cash so repurchases are safe as well. Notably, the company's cash position is rising even while it repurchases stock.
The Technical Outlook: Dillard's Is About To Rocket Higher
If the technical picture presented by the weekly charts, the company's obvious revenue, and earnings strength aren't enough to drive this stock higher it's also got a ridiculously high 26% short interest to help it. Price action set a new all-time high in the wake of the Q2 earnings report but appears to be struggling with resistance at this level. Near-term price action may be a little sideways or volatile but we expect to see the stock begin moving higher very soon. Once a new high has been firmly established short covering can easily drive this stock up above the $200 level and we see the price action moving higher long-term.
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