Dillard's (DDS) Stock Surges 80% in 3 months: What Lies Ahead?
Dillard’s Inc. DDS has been witnessing momentum from robust quarterly results on improved margins and lower expenses. Notably, the company’s aggressive measures to lower excess inventory, owing to the pandemic-led decline in demand, have been aiding the gross margin. Also, the limited store operating hours have been resulting in reduced operating expenses. These have led to reporting better-than-expected bottom-line results for the past three quarters.
Apart from these, the Zacks Rank #2 (Buy) company’s shares have received a boost from the endeavors. The stock has soared 80.7% in the past three months compared with the industry’s growth of 65.1%. It has also comfortably surpassed the S&P 500’s growth of 6.2% and the Retail-Wholesale sector’s decline of 3% over the same period. Additionally, the company’s VGM Score of A indicates that the stock is likely to retain the positive momentum in the days ahead.
Factors Driving the Rally
Dillard’s initiatives to control inventory and expenses throughout the uncertain pandemic-led environment have been contributing to bottom-line gains in the past three quarters. The company has been keen on inventory management since the start of the pandemic through measures like cancellation, suspension and delaying of shipments as well as merchandise purchase reduction. These aggressive measures to lower excess inventory, owing to the pandemic-led decline in demand, have proved beneficial for the company’s margins. The reduced total merchandise purchases have led to a decline in overall inventory levels in the past four quarters.
As of the end of fourth-quarter fiscal 2020, inventory declined about 26% year over year to $1,087.8 million. Prior to this, inventory levels were down 22%, 20% and 14% in the third, second and first quarters of fiscal 2020, respectively. Moreover, inventory reductions resulted in lower markdowns in the fiscal fourth quarter, which boosted gross margin. Notably, consolidated gross margin improved 127 basis points (bps) to 31.1% from the year-ago quarter. Retail gross margin expanded 171 bps year over year to 31.9%.
Citing the business disruptions due to the pandemic, Dillard’s has also taken several steps to reduce costs starting from first-quarter fiscal 2020, which continued in the fourth quarter. Some of these are an extension of vendor payment terms, reduction of discretionary and capital expenditure, and payroll reduction. Backed by these efforts, the company reduced operating expenses by $123 million in the reported quarter.
Notably, retail SG&A expenses (operating expenses) declined 26.8% year over year to $334.3 million in the fiscal fourth quarter. Consolidated operating expenses of $335.8 million declined 26.8% year over year, mainly driven by reduced payroll expenses. While the company realized cost savings in all expense categories, payroll expenses fell about 30%, in part, due to the company’s reduced store operating hours. In fiscal 2020, payroll expenses declined 33%.
Driven by the aforementioned initiatives, the Zacks Consensus Estimate for first-quarter fiscal 2021 bottom line has moved up significantly to earnings of $1.64 in the past 30 days from a loss per share of $1.01 mentioned earlier. Moreover, the consensus estimate suggests a substantial increase from a loss per share of $6.94 reported in the year-ago quarter. Further, the consensus mark for revenues is pegged at $1.21 billion, indicating growth of 53.9% from the figure reported in the year-ago quarter.
For fiscal 2021, the consensus mark for earnings is pegged at $2.70 per share, suggesting year-over-year growth of 198.9%. Moreover, earnings estimates have moved north by 31.7% in the past 30 days. The consensus estimate for revenues stands at $5.49 billion, indicating year-over-year growth of 27.5%.
Also, the company’s strong balance sheet and liquidity position raise confidence in the stock. Some highlights of its financial status include smaller rent obligations compared with the industry. This is because the company owns 90% of its retail stores and 100% of its corporate headquarters, distribution and fulfillment facilities. Moreover, it has low long-term debt obligations with its next payment of $45 million due in January 2023.
As of Jan 30, the company’s long-term debt and finance lease liabilities (including subordinate debentures) of $565.8 million remained almost flat sequentially. Moreover, its debt-to-capitalization ratio of 0.28 remains unchanged on a sequential basis and compares favorably with the industry’s ratio of 0.29. Also, management has no outstanding borrowings under its existing revolving credit facility of $800 million.
Other Stocks to Watch
Abercrombie & Fitch Company ANF has an expected long-term earnings growth rate of 18%. The company sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
L Brands, Inc. LB has an expected long-term earnings growth rate of 13%. It presently flaunts a Zacks Rank #1.
Boot Barn Holdings, Inc. BOOT, a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 20%.
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