Deutsche Bank is upgrading Dillard's (NYSE:DDS) to Buy from Hold with a $28 price target (prev. $13.50).
Based on Dillard's merchandising and cost control initiatives, improved inventory management and recent operating trends, the firm believes the company is better positioned than nearly all investors would have anticipated to grow EPS significantly in both the near and long term. Management began implementing several initiatives in 2007 and 2008, which up until recently have been masked by the deteriorating economy. Deutsche believes that Q3:09 results area testament to inventory and cost containment initiatives that have been undertaken and are a glimpse into what is to come. Given the improved operating efficiencies they are significantly increasing their EPS estimates, their price target and upgrading DDS to a BUY rating, from HOLD.
Historically considered a laggard, now proving the skeptics wrong
While Dillard's management was working behind the scenes on new merchandising initiatives and ways to right-size the business in 2007, the company got the reputation of a laggard versus some of their competitors as they experienced deterioration across many metrics including comps, operating margins, and return on invested capital, etc. Additionally, the company's minimal communication with investors and the Dillard family's significant economic ownership and control was perceived in a negative light. In late 2007 and early 2008, as the economy was beginning its vicious Great Recession downward spiral, the company began receiving letters from activist investors demanding initiatives be undertaken to improve the operations of the business.
These activists recommended initiatives including:
1) Reduce the company's cost base – through sourcing, rationalizing SG&A expenses
and reducing capex
2) Improve inventory management – institute initiatives to moderate inventory levels as
the stores appeared over-inventoried
3) Refine merchandise assortment – aggressively re-merchandise with a new vendor
selection, exclusive brands, updated private label and in-house collections
4) Enhance brand marketing – add more image and lifestyle campaigns to
communicate a revitalized message
While Dillard's did not to respond publicly to these suggestions, it is clear to Deutsche now that many of these suggestions were being implemented at the company.
Normalized EPS
Deutsche continues to believe that the cyclical recovery has not yet been priced into many of retailers' shares. They expect the improving economy over 2010-2011 to drive strong sales, EBIT margins and EPS growth across most of their Broadline names, including Dillard's.
