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Dillard's Maintained at Outperform

Zacks Equity Research

We are maintaining our long-term Outperform recommendation on Arkansas, Little Rock based retailer Dillard’s Inc. (DDS), on the back of the company’s continued robust quarterly results.

The first quarter of 2012 marked the seventh consecutive quarter of comparable store sales and earnings per share growth for Dillard’s. Quarterly earnings of $1.88 per share outpaced the Zacks Consensus Estimate of $1.67 per share and the prior-year quarter earnings of $1.27 per share. Comps also increased 5% during the quarter.

In addition, Dillard’s witnessed an improvement in margins, mainly due to reduced operating expenses resulting from restructuring initiatives and inventory reduction efforts. Management has been taking such prudent steps with an aim boost its profitability.

The company has also been benefiting from improved inventory management by focusing more on conservative purchasing and efforts to better match the timing of receipts with demand, which ultimately resulted in reduced markdowns.

Moreover, Dillard’s wholly-owned real estate investment trust (:REIT) company and Captive Insurance Company will facilitate better risk management while enhancing its liquidity position. Further, Dillard’s healthy balance sheet and adequate cash flows allow it to make shareholder friendly moves, such as acquisitions, dividends and share repurchases.

Finally, the newly modified credit line agreement is expected to further enhance its financial flexibility by allowing the company to borrow more funds at the same level of inventory pledged.

Dillard’s, which competes with Kohl’s Corporation (KSS) and Macy’s Inc. (M), operated 287 Dillard's locations and 17 clearance centers across 29 states and an Internet store at www.dillards.com at the end of the first-quarter of fiscal 2012.

Based on the company’s strong performance over the last seven consecutive quarters, we expect it to continue to post earnings as well as revenue growth in the coming quarters.

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