Is Dillard’s a good stock-buying opportunity?

October 5, 2020
Is Dillard’s a good stock-buying opportunity?

Over the past couple of months, the American retail business Dillard’s Inc. has been getting a lot of attention. This was mainly because of the noticeable stock price movements on the NYSE, which went from $73.78 down to $34.40 per stock. But what caused the fashion giant’s stock-price fall? Is DDS a good stock buying opportunity? Let’s see.

DDS Company History

The American department store Dillard’s was founded in 1938, and now holds approximately 282 stores in 29 states. The state of Florida and Texas has the most stores in the country, 42 and 57 respectively, and the headquarters are based in Little Rock, Arkansas. 

Dillard’s Inc. is one of the biggest fashion retailers whose annual sales exceed $6.2 billion in industries like fashion and apparel for women, men and children, cosmetics, home furnishings, and more. Today, the majority of the company’s directors and executives are members of the Dillard family. 

COVID-19, Q1, and Q2

Dillard’s was amongst the thousands of companies that were hit hard by COVID-19. The pandemic peaked at the worst possible moment for DDS, as the company had earned the majority of its annual profits in the first fiscal quarter in recent years. 

However, because they hadn’t set a strong e-commerce business compared to its competitors, DDS was poorly positioned to offset lost in-store sales with online growth.

The net result was that Dillard’s lost $228 million before tax and $162 million after-tax in Q1 which is usually its strongest quarter of the year for earnings.

Trying to do some damage control, DDS did a remarkable job by clearing out seasonal merchandise at the very beginning when the pandemic hit the US. This created a better Q2 profit margin, and things seemed to be under control.

Although their sales remained under pressure in Q2, with retail sales of $893 million down to 35% year over year, it actually could have been a lot worse.

Luckily, most of its stores are concentrated in the Sun Belt region which had imposed less restrictive laws due to the pandemic compared to other states. 

As a result, people living there maintained more of a semblance of normality (on average) than in the Northeast and West Coast regions, and could still visit Dillard’s stores.

Between its order reductions and late-Q1 inventory clearance, Dillard’s managed to increase its Q2 retail gross margin to 31.1% from 28.7% a year earlier. 

So, basically, although Dillard’s still posted a $33 million pre-tax loss, it was better than its $52 million pre-tax loss a year earlier. After factoring in a tax benefit, Dillard’s GAAP net loss last quarter was just $8.6 million.

Opportunity or Too Big of a Risk?

Let’s get one thing straight: there is always a risk when trading anything from currencies to stocks etc., and this is a fact. Now, let’s see whether the DDS stock prices are a “good idea” at the moment. 

So, as we already covered, DDS stock has been facing some ups and downs during these two quarters. The company posted a GAAP net loss of $7.33 per share in the first half of fiscal 2020, eroding some of its book value.

Experts, however, expect the company to do a lot better in the upcoming months. This is because although there’s plenty of uncertainty around those estimates, the period of maximum danger in terms of asset value erosion is thought to have passed.

At this point, the company’s management has some very important decisions to make that will ultimately pave Dillard’s future. 

By focusing on keeping expenses low and maximizing gross margin rather than trying to grow the top line, the company will be able to keep the cash flowing for a number of years.

This, and together with its asset sales, DDS will be able to continue buying back stock aggressively, especially if the stock share price remains low. 

What does this all mean?

Since the majority of the company’s management are members of the Dillard family, this means that outside investors don’t have a real influence on the strategy the company follows.

Therefore, basically, investors are relying on the management’s decisions. 

When the stock was trading around book value at the beginning of 2020, that implicit bet seemed rather risky. 

However, with Dillard’s stock trading at a substantial discount to book value and the pandemic making management extra cautious, the risk-reward tradeoff is much more favorable now.

It is a fact the future is unpredictable, and whether or not DDS stocks take off it’s something that only time will tell for sure. Investors and analysts, however, are seen to be very optimistic about the retail giant’s future and what it holds.

Interested in investing Dillard’s stock? Check out our website and trade today!

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

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