Unless you live in the South or Midwest, you may not be familiar with Dillard's, Inc. (DDS). DDS is a large departmental store chain featuring fashion apparel and home furnishings. Its stores offer a large variety of merchandise and feature products from both national and exclusive brand sources.
The company also operates a general contracting construction company, CDI Contractors. The CDI Contractors' business includes constructing and remodeling stores for DDS. However, its retail segment generates most of the revenue for the company.
DDS has become quite popular of late as its stock is up over a whopping 440% in the past year. This is meme stock territory. So, what drove these massive returns? Especially when the SPDR S&P Retail ETF (XRT) is up almost a quarter (125%) of that in the past year?
Partly driving performance are the economic recovery, vaccinations, and government stimulus packages. But what sets DDS apart has been the company's inventory management and cost reductions that led to an explosive first quarter as total retail sales soared 73% year over year to $1.3 billion.
Even with an impressive quarter and massive gains, I still believe DDS is a great buy for investors. Here are three reasons why.
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Margin Growth and Cost Reductions
Due to less demand during the pandemic, the company made an aggressive push to lower inventory through canceling and delaying shipments. This helped lower excess inventory and improved the company's margins. At the end of the first quarter, inventory declined 17% year over year.
The company also took steps to lower costs, such as the extension of vendor payment terms, reducing discretionary and capital expenditures, and payroll reduction. These efforts lowered DDS's operating expenses by 17% year over year.
There's no question these measures contributed to the solid first quarter, but I believe the company has set itself up to run more efficiently through the rest of the year, which could lead to more gains in the months ahead.
Strong Fundamentals
DDS also has a very strong balance sheet. The company has a current ratio of 2.2, which indicates it has more than enough liquidity to handle short-term obligations. Plus, its debt-to-equity ratio of 0.4 means that the company's debt situation is under control.
Compared to its competitors, DDS has fewer rent obligations as it owns almost all of its retail stores and 100% of its distribution and fulfillment facilities. The firm's long-term debt is only $599 million, and its next payment isn't due until January 2023.
These solid fundamentals have resulted in the company rewarding shareholders with buybacks and dividend payments. In the first quarter, it bought back shares worth $58.8 million. The company has also announced it will distribute a dividend of 15 cents per share on Class A and B common stock, payable on Aug 2 for shareholders of record as of Jun 30.
Growth at a Reasonable Price
DSS is also a GARP stock, or growth at a reasonable price stock, meaning it has excellent growth potential and is trading at an attractive price. In terms of growth, analysts forecast 256.8% year-over-year earnings growth in the current quarter and an insane 443.50% growth for the year.
Even with all this expected growth, the stock's forward P/E is a paltry 15.10. Plus, its price-to-tangible book ratio of 2.4 is well below the industry average. That makes DDS a great GARP stock.
POWR Ratings
I gave you my qualitative point of view. Now it's time to look at the stock from a quantitative perspective. Our proprietary POWR Ratings system evaluates stocks based on 118 different factors. DDS, in particular, has an overall grade of A, translating into a Strong Buy rating in the POWR Ratings system. That means it's one of the best stocks in our database.
As expected, the company has a Growth Grade of A, a Value Grade of A, and a Quality Grade of A based on the aforementioned strength in its fundamentals, growth potential, and current valuation. For the rest of DDS's grades (Momentum, Stability, and Sentiment), click here.
DDS is ranked #7 in the A-rated Fashion & Luxury industry. For more top stocks in this A-rated industry, make sure to visit this link.
DDS shares were unchanged in premarket trading Monday. Year-to-date, DDS has gained 168.46%, versus a 13.93% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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