Perhaps it’s an indication of over-exuberance that the market has lately seemed to just shrug off the latest global trade news. It could also be that investors have come to accept tariff threats and trade tensions as “the new normal.” Either way, it is interesting that while the Trump administration imposed a new set of tariffs on China, the market today decided to use the fact that the tariffs were set at a lower-than-expected 10% instead of the 25% that many had feared as a catalyst to drive higher. Among the industries that have been responding favorably since the beginning of August is the retail industry, driven in large part by stocks like KR, TGT and KSS that have only dropped from 52-week highs in the last week or so. Even with the most recent pullback, the industry is up 6% since August 1, as measured by the SPDR S&P Retail ETF (XRT).
One of the stocks that has bucked that upward trend is Dillard’s, Inc. (DDS), which is actually down about 3.74% over the same period, and more than 20% off of its own 52-week highs that were reached in late June. The stock is currently resting right on the edge of its long-term trend line as measured by the 200-day simple moving average, which for a lot of technical traders and even value investors is a good sign the stock could rebound higher off of that important support level. And if you follow the normal kind of value-based analysis that I like to use, you’ll be even more tempted to buy the notion, and to consider taking a position in the stock. I’m less convinced; oftentimes, a stock moves into a downward trend for very good reasons that go beyond the constantly shifting tide of market sentiment. DDS is a case in point; in fact, I think it’s a legitimate value trap that presents a much higher risk than any opportunity it offers.
One of the first reasons for my negative view of the stock is an equally negative view of the industry in general by a lot of experts, many of whom are forecasting small declines in department stores in 2018 and 2019, driven by competition from big-box stores like Target Stores (TGT) and WalMart (WMT), and also of course from Amazon (AMZN). This opinion seems to be backed up by data from the U.S. Census Bureau demonstrating that department store sales declined about 1.6% in 2017, as spending shifted away from the industry and into other areas. Perhaps more concerning is the fact that while DDS saw sales and net income increase over the past year based on total numbers, that growth trailed the industry during a time when the economy has been showing increasing signs of health and vitality. DDS is also a company with poor profitability characteristics as demonstrated by its margin profile and poor liquidity that could threaten their ability to cover short-term cash needs, to say nothing of their long-term debt.
Fundamental and Value Profile
Dillard’s, Inc. is a retailer of fashion apparel, cosmetics and home furnishing. As of January 28, 2017, the Company operated 293 Dillard’s stores, including 25 clearance centers, and an Internet store offering a selection of merchandise, including fashion apparel for women, men and children, accessories, cosmetics, home furnishings and other consumer goods. The Company’s segments include the Retail operations segment and the Construction segment. The Retail operations segment includes the operation of the Company’s retail department stores. The Construction segment includes the operations of CDI Contractors, LLC (CDI), a general contracting construction company. CDI’s business includes constructing and remodeling stores for the Company. As of January 28, 2017, the Company operated retail department stores in 29 states, primarily in the southwest, southeast and midwest regions of the United States.. DDS’s current market cap is $1.8 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 83% while revenues posted an increase of only 2.5%. In the last quarter, earnings reversed, declining more than 103%, while revenues were only about .5% higher. The company operates with a very narrow margin profile, with Net Income running at only about 2.8% of Revenues for the last twelve months, and that actually turned negative in the last quarter.
- Free Cash Flow: DDS’s free cash flow is modest, at only about $96 million. This number has declined since the first quarter of 2017, when it was a little more than $450 million.
- Debt to Equity: DDS has a debt/equity ratio of .34, which in and of itself is a conservative number that most investors will take as a positive. Also working in the company’s favor is the fact that since the last quarter of 2016, DDS’s long-term debt declined from more than $800 million to a little over $565 million; however the steep decline in Free Cash Flow, the fact that Net Income in the last quarter turned negative along with the severe narrowing of an already thin operating margin implies the company is in a precarious state where liquidity is concerned. They have almost no flexibility to do much more than try to keep the status quo right now, and doing even that could be a challenge.
- Dividend: DDS pays an annual dividend of $.40 per share, which translates to an annual yield of about .5% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DDS is $60.67 per share and translates to a Price/Book ratio of 1.29 at the stock’s current price. This is where you might be tempted to buy into the idea that the stock is cheap right now: their historical average Price/Book ratio is 1.72, which suggests the stock is trading right now at a discount of about 33%, and that puts the stock’s long-term target above $104 per share. The stock last saw movement in that price range in mid-2015.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend from November 2017 to its high in June of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock dropped from that point until mid-August, where it recently found major support around $75 per share to start hovering in a relatively narrow stabilization range with resistance coinciding roughly with the $80 level shown by the 38.2% retracement line. A break above that line would be a minimum requirement for any kind of new upward trend, while a drop below support at $75 would mark a continuation of the intermediate-term downward trend that began in June.
- Near-term Keys: The stock’s narrow trading range right now means that a decisive trade in either a bullish or bearish direction really isn’t practical right now. If you prefer to buy the stock or work with call options for a short-term trade, you should wait to see if the stock can break its current resistance at around $80, while bearish players should wait to short the stock or buy put options until they see the stock drop decisively below $75. For a value-oriented investor, it’s hard to justify any kind of long-term forecast that would put the stock anywhere close to its 52-week high, to say nothing of the target offered by the stock’s historical Price/Book ratio.