Retail Stocks: Dillard’s Secret to Success
Retail stocks are traditionally highly-levered to the general economy; when the consumer is weak, real estate gets pummeled, but when the consumer comes on strong, retail stocks experience a revival.
This past week, one unlikely company reported smashing success.
Even though retail spending has been weaker, especially on the higher-end luxury and mid-to-high priced clothing category, Dilliards reported year-over-year growth in profits of 57%.
Dillard’s Secret to Success
Dillard’s actually has two secrets that retail stocks as a whole haven’t yet realized:
Dillard’s goes cheap – In a recent restructuring move, Dillard’s opted to stop chasing the high-value consumer and instead seek to play into less expensive shopping malls. In trending toward a less spend-happy consumer, Dillard’s net revenues actually increased because it was the only higher-end store in the entire shopping center. Sure, they could have chased the big money, but what sense does it make to be one of four or five retailers in a megamall when you can be one of one in a smaller, less spendy mall? Clearly, this is working out well.
Dillard’s finances inexpensively – In January, Dillard’s made a move that would allow it to form a real estate investment trust, which would allow the company to borrow inexpensively. By forming a REIT, it can better access debt and preferred stock markets to fund its recent growth trajectory, and secure complete ownership of commercial property. Owning the property in which you sell your products means that you have a competitive advantage in keeping other companies out.
While 1Q earnings were up big year-over-year, 4Q was even better. The company posted lower revenues, but managed to cut costs as well, which have helped thicken margins. The company also announced that quarter that it would choose to self-insure as a method for cutting costs. Known as a captive insurance company, Dillard’s is now large enough that it can afford to skip on the middle man and pay out of pocket—at least, out of the “captive insurance” company’s pocket—to save a few percentage points annually on its costs to insure itself. What a deal!