DDS - Dillard's Stock On Sale Buy This Retailer For Dividend Growth And Cash Flow

2023-10-20 06:47:53 ET

Summary

• Dillard's gets Buy Rating today, agreeing with consensus from SA analysts.
• Tailwinds are dividend growth, positive cashflow and equity, YoY revenue strength among similar peers.
• Headwinds include underperformance vs S&P500, rising costs and YoY profitability declines.
• Risk of debt loads has been discussed as well as recent positive economic news favoring the retail industry.

Research Note Summary

This week I am returning to the retail sector again by covering Dillard's (DDS).

Its tailwinds include revenue strength among its similar peers, 3 year dividend growth, and positive cash flow.

Headwinds include challenges to profitability, rising costs, underperformance vs the S&P500, and a sluggish retail consumer earlier in the year.

The downside risk of debt load was discussed, as was the upside risk of a recent report downplaying the risks of a recession.

Methodology Used

I will utilize my WholeScore Rating methodology which looks at this stock holistically across 6 categories including potential downside risks, and then assigning a rating score.

Some of the data will come from the Aug. 10th earnings release (fiscal 2023, Q2 ending July 30th), while forward earnings estimates may relate to the upcoming Nov. 10th earnings release (fiscal Q3).

Industry Outlook

Dillard's is part of the broadline retail sector . Having been to their stores in the US many times, it is evident this chain is geared towards a shopper of higher-end clothing, and the brand is a common sight at many American malls.

What I can say about this sector is it was hit hard in the pandemic era (2020/2021) with mall shopping coming to a standstill in many places, and since then attempting a recovery, while the online / eCommerce potential has shown resilience.

In comparing against peers in the sector, I chose a peer group of 4 retailers to compare YoY revenue growth.

In this peer group of mid-to-high end retailers in the US, all of whom are very well known names in the US, Dillard's came out on top with positive YoY revenue growth.

Although Dillard's did not quite make my target in beating its peer average by 5% or better, it came utterly close at 4.83%, so in this context I am willing to give it a score of 1 since it did beat the peer group I selected and beat the peer average by almost 5%, just short by less than 0.20%.

A headwind to revenue I identified was consumer caution in the first part of the year.

According to CEO William Dillard in his quarterly results commentary ,

The cautious consumer we noted in the first quarter continued in the first few weeks of the second, leading to a sales decline of 3%.

However, my forward outlook is positive.

Just a few days ago, an article by Reuters highlighted recent strength in retail sales returning.

According to the article:

U.S. retail sales increased more than expected in September as households stepped up purchases of motor vehicles and spent more at restaurants and bars, cementing expectations that economic growth accelerated sharply in the third quarter.

The economy's enduring strength has defied the hand-wringing since late 2022 about a possible recession this year.

Financial Statements

In terms of the financials to keep an eye on, I am interested in the income statement , cash flow , and balance sheet for this company.

If you look at the table I created below from that data, this stock underperformed my goals of a 5% YoY growth in revenue and net income, coming short. In fact, most recent quarterly net income actually saw a 19% YoY decline.

The situation was better with cash flow and equity, both beating my target of 5% YoY improvement.

My sentiment is positive looking forward on revenue, again because of that Reuters article highlighting retail sales growth in the US, and I think this will help cashflow too.

In terms of equity, my sentiment is positive. Consider that long-term debt has not increased at this company on a YoY basis:

In terms of net income / profitability, my forward sentiment is neutral or expecting similar cost challenges, in this inflationary environment for all businesses.

Consider the following from their Q2 press release , showing that net income was impacted by significant increase to cost of sales on a YoY basis, as well as other expenses (not including interest expense, which actually fell).

Dividends

When it comes to dividends , it turned out to be mixed results.

For instance, my goal of finding a company that pays at least $0.25 per share in quarterly dividends was met, and my goal of at least $100 in annual dividend income on holding 100 shares. I am thinking about a cashflow stream rather than just holding shares!

Further, when comparing the dividend amount last month with the same month 3 years prior, the 3 year dividend growth was just over 66%, beating my goal of 5% impressively.

Where this stock came short was dividend yield, coming in 88% below its sector average.

Looking ahead, I think the yield will be similar for a little while as I don't expect the stock price to jump drastically or fall drastically soon, so either way will not be affecting yield by a lot. It will take a quarter or two I think before retail sales growth shows some incredible numbers and brings the bulls back, while costs remain a challenge.

A major "what-if" scenario to think about is what happens if another pandemic strain surfaces, causing pressure on an already beaten-down industry?

I welcome your feedback in the comments section! Personally, I avoid buying clothing online as it misses the entire experience of going to the mall and trying out different outfits for size. You cannot get that online, as if you are buying plane tickets. But, that is just my opinion.

Some of my favorite times growing up were heading to American malls during holiday season.. the sounds, decorations, colors, brands, cinnamon rolls. It is quite an adventure. Some of us even had seasonal jobs in retail in younger days, which one does not forget easily. At the same time, in older years I did start to realize.. wow they really do hold a lot of inventory that just sits there and barely moves!

When researching this stock, I did not see the dividend amount planned for an increase soon, so I expect the same amount going into fiscal Q3.

Share Price

Now, the question is whether the current share price presents a value-buying opportunity right now, in the context of all the other fundamentals discussed.

If you look at yesterday's close price of $319.34, it is almost 3% below the 200-day moving average which I use to track longer-term price trends.

If you look at my table below, this price meets my goal of finding a price that is no more than 5% above the moving average. So, I gave it a score of 1.

This portfolio strategy aims to track the long-term moving average and find a buying price that is below average or slightly above it but not too far above average. The strategy hopes to limit downside risk and increase upside potential, rather than attempting to predict a specific buy or sell price.

If you look at the yCharts, both times the price took a crossover below the moving average it eventually rebounded nicely and the price spread was amazing.

Performance vs S&P500

The market momentum for this stock in relation to the larger S&P500 index has been lackluster to say the least, as you can see from my table below, showing the stock's 1 year return underperforming the index by a lot.

Understandably, a large portion of the S&P index is made up of big tech, and we saw this spring a bullish momentum in tech stocks. At the same time, as mentioned earlier, retailers have faced headwinds.

My forward estimate on this category is neutral, because although the latest retail sales and economic data I mentioned should provide tailwind, and the upcoming holiday season is right around the corner, which is known as the most important time of year for a business like Dillard's I would say, it will be a quarter or two I think before the larger market momentum catches up so for now I think the stock may still trail the S&P500 for a while.

Valuation

In terms of its valuation, I will briefly talk about forward price-to-earnings and price-to-book value.

From my table below, I determined the P/E ratio is undervalued for this stock, while the P/B is overvalued. My target is a valuation that is max 5% above the sector average.

In this case, I believe the stock is undervalued on price to earnings because the market is concerned about this stock's profitability growth. I mentioned earlier the challenge of rising costs, and YoY net income declines.

I think the overvaluation on price to book value is in line with the stock's return on equity ("ROE"). Major investor content sites like Investopedia have said the following on this topic:

P/B is often looked at in conjunction with return on equity ((ROE)), a reliable growth indicator. ROE represents a company's profit or net income as compared to shareholders' equity.

With that said, we can see that the trailing twelve-month return on equity for Dillard's has been over 51%, earning an A+ grade from Seeking Alpha and beating the sector median by a lot. So, in this case, an overvalued price to book ratio would be in line with a high ROE like this.

Forward-Looking Risks

In some recent articles, I highlighted the risk of heavy debt loads and increasing interest costs for some debt-ridden and capital intensive companies.

Retail is very capital intensive due to high overhead cost of operating so many physical stores, despite also having a major online / digital presence as well.

However, Dillard's actually has a decreasing long-term debt over the last year as well as decreasing cost of interest, as the following shows:

So, the potential downside risk of debt and interest costs was determined to be within risk tolerance levels, having both a risk impact and probability score of 3 (on scale of 1 to 5) that I gave it.

An upside risk I identified is the recent optimism in the US economy, which could bring out the bulls on retail stocks like this one.

A recent article this week in the Wall Street Journal, for example, spoke about a lower recession forecast than previously thought:

Economists are turning optimistic on the U.S. economy. They now think it will skirt a recession, the Federal Reserve is done raising interest rates and inflation will continue to ease.

While this is positive news for the retail industry, I think it is not quite out of the woods just yet, so on that I gave it a moderate risk score that is still tolerable but does not present a major upside risk just yet. I think we need to see a few quarters of amazing sales growth before we can say much more on that.

WholeScore Rating

In today's rating, my first on Dillard's, I gave it a WholeScore of 9, which translates to a Buy Rating today.

With this rating, I am agreeing with the consensus from SA analysts:

For further details see: