In terms of physical footprint, one of the largest retailers in the US, particularly when it comes to retailers focused on fashion apparel, cosmetics, home furnishings, and more, is Dillards (NYSE:DDS). Around since 1938, Dillards has had an interesting history. But over the past few years, the financial picture for the company has been rather volatile. Revenue for the company has shown no clear trend in recent years and, prior to the 2021 fiscal year, net profits for the business declined year over year for at least four years. Perhaps the best aspect of the company is that shares do currently look cheap on an absolute basis. But when you consider the difficulties faced by these types of retailers more generally and factor in the company’s continuously declining physical footprint, it’s likely that there are better prospects on the market to be had right now.
An Iconic Retailer
Beyond any doubt, Dillards is one of the most well-known retailers in the US. It’s likely that most Americans, particularly those over 30, have been into one of its stores at least once. After all, the company does have a wide variety of products to choose from. During its 2021 fiscal year, for instance, the business generated 21% of its revenue from selling ladies apparel. A further 15% of sales came from ladies accessories and lingerie, while 14% was attributable to cosmetics. This is not to say that the company doesn’t have a lot of exposure to men. It does. In fact, in 2021, the company generated 19% of its sales from men’s apparel and accessories. On top of this, the business gets 15% of its revenue from shoes, 10% from juniors and childrens apparel, and 4% from home and furniture products. Included in the companys retail business, however, is also an interesting relationship that the firm has with Wells Fargo (WFC). In short, the bank owns and manages Dillards private label credit cards, including those that are co-branded with American Express (AXP). This relationship results in Wells Fargo assuming all of the risks associated with the customer accounts. In exchange, however, Dillards is compensated based on the performance of the credit card portfolio.
In addition to these main retail operations, the company also has a segment that it calls Construction. Through this, the company operates a general contracting construction company called CDI, which focuses on constructing and remodeling stores for the enterprise. Of course, the Construction segment also provides services for other customers as well. In fact, a substantial portion of the revenue associated with that segment came last year from sales stemming from external customers. All things considered, however, this unit is responsible for just 2% of the company’s revenue.
Over the past few years, the financial performance achieved by Dillards has been rather mixed. Generally speaking, you should want to see revenue increase year after year. But that has not been the case. Between 2017 and 2019, for instance, sales remained in a fairly narrow range of between $6.34 billion and $6.50 billion. In 2020, revenue plummeted to $4.43 billion as a result of the COVID-19 pandemic. But then last year, something remarkable happened. Revenue at the company surged, climbing to $6.62 billion for the year. Even management does not seem to be fully convinced as to what contributed to the revenue increase the business saw during this timeframe. However, they did mention that the reopening of the economy as a result of the COVID-19 vaccines coming out likely had a role to play. In addition to this, they attributed some of the strength to the issuance of stimulus checks and warmer weather. In addition to this, comparable store sales for the enterprise were up 8% in 2021 compared to where they were in 2019. It should also be noted that, during the past five years, Dillards saw its physical store count shrink, with the number dropping from 292 in 2017 to 280 by the end of last year.
When it comes to profitability, the picture for Dillards has been rather interesting. Net income declined consistently year after year, dropping from $221.3 million in 2017 to negative $71.7 million in 2020. But then, in 2021, profits surged, climbing to $862.5 million for the year. A number of factors contributed to this bottom-line improvement. For instance, the company’s consolidated gross margin in 2021 came in at 42.3%. That compares to the 28.6% seen just one year earlier. Management attributed this to stronger consumer demand, combined with the firm’s decision to control inventory levels. This also resulted in less promotional activities and decreased markdowns compared to both 2020 and 2019. As a percent of revenue, selling, general, and administrative costs also improved, dropping from 28.2% of sales in 2020 to 23.7% in 2021. There are, of course, other profitability metrics to consider. One of these is operating cash flow. This metric remained in a range of between $252.9 million and $367.3 million in the four years ending in 2020. Then, in 2021, the metric jumped to $1.28 billion. A very similar relationship can be seen when looking at operating cash flow without the working capital adjustments factored in. Meanwhile, EBITDA shrank year after year, falling from $503.6 million in 2017 to $122 million in 2020. Then, in 2021, it came in strong at $1.31 billion.
For the 2022 fiscal year, management has not really provided any detailed guidance. However, initial data from the company looks promising. Revenue of $1.64 billion in the first quarter of the company’s 2022 fiscal year comfortably outpaced the $1.36 billion generated one year earlier. Net income rose from $158.2 million to $251.1 million. Operating cash flow jumped from $302.4 million to $365.2 million, while the adjusted equivalent rose from $185.4 million to $290.5 million. And finally, EBITDA for the company also expanded, rising from $241.7 million in the first quarter last year to $375.5 million the same time this year.
Using our 2021 results, we can see that shares of Dillards are pretty cheap. The company is trading at a price to adjusted operating cash flow multiple of 5.7. By comparison, this multiple, using the company’s 2019 fiscal year results, was 19. Using the EV to EBITDA multiple for the company’s 2021 fiscal year, we end up with a reading of 4.3. This increases to 14.6 if we rely on 2019 results instead. To put the pricing of the company into perspective, I decided to compare it to three similar firms. On a price to operating cash flow basis, these three companies are trading at multiples ranging from 2.2 to 5.3. Even if 2021 results can be replicated in perpetuity for Dillards, it remains the most expensive of the group. Meanwhile, using the EV to EBITDA approach, the range is from 2.4 to 4.8. Our prospect is more expensive than two of the three businesses.
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Right now, Dillards seems to be doing quite well for itself. It remains to be seen just how long this will continue. Ultimately, I believe that investors should be extremely cautious when it comes to retail in general, particularly those focused on the types of goods that Dillards makes a good portion of its revenue from. Yes, shares are cheap, but they are pricey relative to similar players and the historical volatility of fundamental performance is discouraging. Although recent fundamental data does suggest the picture is improving, the other factors combined make me want to rate this business a hold at this moment.