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Some thoughts on Dillards

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January 14, 2014 – Comments (4) | RELATED TICKERS: DDS

I've really been racking my brain the past several months on just how much I like share buybacks.  And to start off, I think I should say that I really, really like them.

A stock that caught my attention recently is Dillards (DDS).  Dillards is nothing sexy, at all.  Its a boring, decades-old department store, mostly run by the same family that founded it.  Like other retailers, they struggled from 2008-2010, but have rebounded VERY nicely since.  Operating income the year ended Jan 2010 landed at $157MM, but last year's operating income came in at $537MM.  That's no joke.

What's even more impressive, to me, is that they reduced the number of diluted outstanding shares from 74MM to 49MM over that same time frame.  And in the last 3 months, the share count has fallen to 45MM.  Even though share prices are now comfortably in the 90s, the company still seems dedicated to share buybacks.  And why not?  With annual free cash flows of roughly $400M per year, the company is still reducing it's outstanding share count by 10% per year!

This afternoon, I just came across an article that seemed to actually criticize Dillard's for it's share buyback strategy over the past 4 years, and even more strongly toward it's latest buybacks - "Dillard's is playing a dangerous game."  http://www.fool.com/investing/general/2013/11/18/dillards-is-playing-a-dangerous-game.aspx?source=ihpsitcag0000002&lidx=2#916420

The article seems to elude to the fact that the buyback strategy was simply a short-term boost to stock price, and that "luck is running out" and "shareholders are in for pain next year."

I realize that eventually, Dillards must begin to up its annual CapEx investments.  But even if CapEx increases back to levels of depreciation, we're still talking about very healthy FCF numbers (assuming business operations and sales don't begin to deteriorate).

But why should business deteriorate?  Despite closing a handful of under-performing stores over the past few years, Dillard's has actually increased it's top line (thank you Sears and JCP).  I certainly don't think Dillard's is going to become the next Nordsrom or Macy's, but the numbers don't indicate this is anywhere near the next JCP, either.

As long as buybacks do a successful job at reducing share counts (unfortunately many buyback plans don't), and as long as the cash spent toward buybacks aren't  fueled by debt (many buyback plans are), I think buybacks are an excellent way for companies to generate value to shareholders.  

I the case of DDS, I can't fathom any possible scenario where the money spent on buybacks, if spent on CapEx instead, could have come close to boosting EPS the way the back back plan did.  Odds are that the money spent on CapEx would have been a huge destruction to Dillards [relatively healthy] return on assets.

That being said, I realize that I may be wrong on the sustainability of Dillard's future as a successful retailer, but I don't believe I'm missing anything on the value of a good buyback plan.  I think the managment of Dillard's performed one of the most spectacular acts of increasing shareholder value over the past 4 years.

4 Comments – Post Your Own

#1) On January 15, 2014 at 5:18 PM, Schmacko (63.44) wrote:

"...and as long as the cash spent toward buybacks aren't  fueled by debt (many buyback plans are)..."

The article says "The company borrowed $170 million on its credit line", which would imply the buyback is funded by debt.  The stock has had a fantastic 5 year run, even 2 year run.  Last year... it kind of underperformed. 

At this point with the shareprice as high as it is they might serve their shareholders better by boosting their somewat anemic dividend, which is only costing them like $10.8 mil a year at the 45MM sharecount you described. 

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#2) On January 15, 2014 at 5:26 PM, ElCid16 (95.66) wrote:

Schmacko,

It is very common for retail companies to dip into their working capital in order to boost inventory going into the holiday season.  This can lead to inconsistent cash flows from quarter to quarter, and can commonly leave a need for retail companies to temporarily dip into a credit line until the holiday season has ended.  I'm guessing the author of the article knew this, but needed another "talking point" to bolster his case.  I don't believe the talking point was very good, though.

Dillard's Q4 operating cash flow will likely be in the range of $250-$350M.  This will not only easily cover the $170M intra-year borrowing, it will also provide another $100 or so for - guess what?  More buybacks!

I can assure you, Dillard's has not "run out of cash" and is not "borrowing to fuel buybacks." 

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#3) On January 15, 2014 at 5:53 PM, ElCid16 (95.66) wrote:

At this point with the shareprice as high

I know if "feels" like their share price is high, but the company is still trading at a P/B of 2.2.  Compare that to Macy's at 3.6 or Nordstrom at 6.2. 

Dillard's is still cheap.  That's the bottom line.  And when stocks are this cheap, that's the time for buybacks.  I praise the delay of dividend increases over the past 4 years, in favor of buybacks.  Until this thing starts trading at "real" higher prices, I don't think the buyback plan should slow down.

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#4) On May 22, 2014 at 3:27 PM, elcid24 (55.50) wrote:

From #1:

The article says "The company borrowed $170 million on its credit line", which would imply the buyback is funded by debt.

From #2:

I can assure you, Dillard's has not "run out of cash" and is not "borrowing to fuel buybacks." 

I never got around to updating this after their FY closed, but better late than never...

Dillards closed out the year spending $300MM on buybacks.  Their debt level, from 2013 to 2014, fell by $2M.  Their cash level rose by more than $100M.  The company is as strong as it has ever been.  And buybacks are still working.

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