Dillard’s

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Dillard’s is a department store chain, primarily focused on selling apparel, accessories, cosmetics, and home furnishings, operating in the southern and midwestern U.S.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Dillard’s operates 272 stores, and the company is available on the stock market under ticker symbol DDS. They are trying to stay relevant in a very competitive and declining department store market.

Business Overview

Dillard’s operates as a traditional department store chain, meaning they are primarily engaged in retail merchandising.

  • Retail Segments: The company operates through its retail segments, selling merchandise in the following categories: Apparel (clothing), accessories and shoes, cosmetics, home and furniture and construction. A significant portion of their revenues comes from their ladies’ apparel.
  • Geographic Focus: Their operations are concentrated in the United States, predominantly in the South and Midwest regions. As of January 28, 2023, they operate 250 stores and 26 clearance centers in 29 states.
  • Competitive Landscape: Dillard’s competes with other department stores, online retailers and specialty retailers. This means a very competitive environment which includes many large and established companies with solid moats.
  • Department store decline: The traditional department store sector has been facing secular decline due to the rise of online retail and changing consumer preferences.
  • Competition from online retail: The rise of online retail has given tough competition to traditional brick and mortar department stores. Consumers can compare prices easily online.
  • Changing Consumer Preferences: Consumer preferences and habits are changing very quickly, making it difficult for department stores to stay relevant. Consumers are demanding faster fashion, and department stores have a hard time adjusting to this trend.
  • Fragmented Industry: The retail sector is highly fragmented, creating an extremely competitive environment, making it difficult to establish strong moats.
  • Increased Promotion and Markdown Activity: Higher markdowns and lower-than-anticipated profit margins has become a trend in the department store sector, especially as consumers become more and more demanding, causing excess inventory that must then be sold at discounted prices.

Financials Analysis

Dillard’s financial reports show a business model that is struggling with the changes of time. Sales have declined in many areas, the gross margins are not very appealing for an investor, and they seem to be struggling with growth. Their biggest upside, is that they are deleveraging their balance sheet and have a decent cash position.

  • Revenues: In 2023 revenues were 6.8 billion, compared to 6.7 billion for 2022. There are many sources of revenues such as sales of apparel, accessories, cosmetics, home furnishings and construction.
  • Gross Margin: The company’s gross margins have been around 40% for all sectors since 2021, and are declining. In 2021 gross margins were 44%, but 41% for 2022 and 2023. For a company in the apparel industry, that’s really nothing special.
  • Operating Margins: The operating income margin is volatile, being 9.9%, 10.6% and 6.5% for the fiscal years of 2021, 2022 and 2023 respectively.
  • Return on Invested Capital (ROIC): ROIC is a very important factor when determining if the company has a moat. If they can use their invested capital to generate high returns, the value creation is much higher, thus creating a sustainable moat. They have a history of high ROIC, but as mentioned above, their performance in this area has recently been declining. As of 2023, they have an ROIC of 14.4%, compared to 20.8% of 2022 and 21.7% of 2021. This indicates that the company is struggling.
  • Cash Position: The company has a decent cash position of around 900 million dollars. The management is committed to return the cash to shareholders with share buybacks, rather than expansion, and they have a long history of these kinds of actions.
  • Leverage: Their leverage ratio is declining. The total debt was 1.72 billion dollars in 2021, but 1.21 billion in 2023. The company has been deleveraging and has been doing a good job at it. Their long term debt is only 314 million, which is a very low number considering how big the company is.

Moat Rating: 2/5

Dillard’s has a very narrow moat for the following reasons:

  1. Brand Recognition: While Dillard’s has some brand recognition, especially in the Southern and Midwestern regions of the United States, this brand recognition has limited value because it doesn’t translate into higher prices for their products and is very susceptible to the changing tides of customer preferences.
  2. Location: Their scale gives them a very narrow advantage. They can offer some local pricing advantages and be able to deliver some products more quickly due to their distribution centers.
  3. Switching Costs: Switching costs for their customers are very low, making it easy to go to a competitor, whether that is another department store, or an online competitor. They are a brick and mortar retail business with no lock in mechanisms for the customers.

The competitive advantage is weak and the company has a hard time producing high sustainable returns, meaning that they have a moat rating of 2/5. It’s not enough to be a bigger company than others, they need a structure that enables higher returns over long periods of time.

Risks to the Moat

  • Technological Disruption: The rise of online retail, poses a massive risk for Dillard’s. They have been slow to react to this, and are losing a lot of market share as a result.
  • Changes in consumer preferences: Younger demographics are becoming less and less interested in department stores and that could mean trouble for the long term. They have to constantly adjust to new trends and preferences of the customers, which they are not the best at doing.
  • Cyclicality: Department stores sales are inherently cyclical and sensitive to consumer economic conditions. Economic downturns could negatively impact Dillard’s operations and profitability.
  • Intense Competition: Competition can compress profit margins and lower their returns on capital.

Business Resilience

  • Experienced Management: Dillard’s has been around for more than 100 years and the management is experienced in running the business.
  • Financial Strength: The deleveraging of the balance sheet has strengthened the company’s financial health. Their debt is low and they are sitting on almost a billion in cash.
  • Cost-Cutting Initiatives: Management has been doing a good job at cutting costs, which makes them leaner and more agile.

Understandability Rating: 2/5

Dillard’s business model is relatively straightforward: buying and selling merchandise in retail stores. However, their business is difficult to value and understand for the average investor because of the large number of different items they sell, all with different margins. Their business is constantly being affected by competition and customer preferences, so it’s very hard to estimate the company’s future cash flows, or to understand how the market will perceive them going forward. A lot more insight into the industry is required to form a reliable long term thesis, so for these reasons it’s a 2/5 rating.

Balance Sheet Health: 3/5

Dillard’s balance sheet health is decent, but not great, rating it 3/5. They have made great strides over the past years to reduce their debt, and increase their cash holdings. Their long term debt is now very minimal. Their ROIC is still pretty high, but it has been declining. A very good position to be in, but could improve more.

Recent Concerns

The biggest concern surrounding Dillard’s is the declining sales and margins. The management does not seem focused on this and they only focus on buybacks, and they seem to be ignoring some of the bigger issues facing their core business. Their declining earnings may hurt long term valuations. The increase in inventory and the decrease in cash from operations indicate a business that is struggling to be relevant in the current landscape. Their earnings for 2023 were a major disappointment because although the sales remained more or less constant, the profits were down due to decreasing margins, indicating the increased competition in this sector.