Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

Why Dillard's, Inc. Stock Spiked Last Week

Three months ago, department store operator Dillard's (NYSE: DDS) released a dreadful second-quarter earnings report, as an inventory glut undermined gross margin. Dillard's ended the quarter with inventory still up 2% year over year, so investors had to worry that the company's profitability woes would continue in the third quarter.

On Thursday, Dillard's stock rose by double digits after larger rivals Macy's (NYSE: M) and Kohl's posted better-than-expected third quarter results. Dillard's justified that spike on Thursday afternoon by reporting solid sales results for the third quarter, along with a profit that was more than twice what analysts were expecting. Still, the stock looks overly expensive in light of Dillard's ongoing margin problems.

Dillard's follows up a weak quarter with a better one

In the second quarter, Dillard's comparable store sales declined just 1% year over year. That was significantly better than the trend at department store giant Macy's. However, Dillard's gross margin plummeted by more than 2 percentage points during the quarter. This led to a loss of $0.58 per share, whereas analysts had been expecting EPS of $0.19.

Dillard's posted an ugly loss in the second quarter of fiscal 2017. Image source: Author.

Last quarter, comp sales declined by 1% again. This was a surprisingly good result, given that a number of Dillard's stores were impacted by Hurricane Harvey and Hurricane Irma. Had the hurricanes not occurred, comp sales probably would have been flat, according to CEO William T. Dillard, II.

Gross margin contracted again in Q3, this time by more than 1.3 percentage points. As a result, EPS fell to $0.50 -- or $0.41, excluding an asset sale gain and a debt extinguishment charge -- compared to $0.67 a year earlier. Still, this was much better than what analysts had expected.

Mixed signals

Like other department stores that reported earnings last week, Dillard's noted that sales trends improved near the end of the third quarter. That could bode well for sales during the critical holiday season.

However, Dillard's is living on the edge once again with respect to inventory. It ended the third quarter with inventory up 3% year over year. (For comparison, Macy's ended the quarter with inventory down 7%, and down more than 4% on a per-store basis.) As a result, if sales trends weaken between now and Christmas, Dillard's would be at risk of another steep gross margin decline for the fourth quarter.

Too much inconsistency

For the past two quarters, Dillard's has posted significantly better sales results than Macy's and most of its other close competitors. Unfortunately, this isn't translating to strong profitability. Year-to-date, Dillard's pre-tax margin has collapsed to 2.3% (or 2.2%, excluding its asset sale gain), compared to 4% a year earlier.

It's hard to be confident that results are about to improve. Dillard's is incredibly secretive: The company doesn't hold earnings calls, present at investor conferences, or publish much in the way of guidance. This wasn't a big deal when it was consistently growing earnings, but profitability has been on the wane for more than two years, and Dillard's has missed analysts' earnings estimates by a country mile in two of the past four quarters.

Despite its maddening inconsistency, Dillard's stock trades for more than 14 times trailing earnings. By contrast, Macy's stock trades for less than 10 times trailing earnings, even if you strip out all of its asset sale gains of the past year.

Finally, Macy's is investing heavily in technology and other capital spending projects in order to return to growth. Meanwhile, Dillard's has cut capex to the bone in order to maximize its share buybacks. If investors want to bet on a department store turnaround, Macy's looks like a much better choice than Dillard's.

10 stocks we like better than Dillard's
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Dillard's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 6, 2017

Adam Levine-Weinberg owns shares of Kohl's and Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.