INTRO: Since the start of the pandemic, physical
retailers have gotten crushed.
Given the fear of mingling with the public, the appeal of physical locations has dwindled
over the past year, causing dozens of legacy players to file for bankruptcy including JCPenney,
J. Crew, Century 21, Guitar Center, Pier 1, and many more.
But, one retailer who has not only survived the pandemic but has gone parabolic is Dillards.
Since the pandemic lows, Dillards was up a maximum of 1409%.
That’s nearly 3 times their previous peak and nearly 100% more than Tesla’s parabolic
run.
Not only has their stock gone to the moon, but Dillards also has the fundamentals to
back up this run.
Dillards has been posting record profits and their PE ratio is still under 10.
So, here’s how one of the oldest and slowest moving companies was able to outperform even
the most innovative companies in the world since the pandemic started.
CONTROLLING THE REAL ESTATE If you’re not familiar with Dillard’s,
they’re a very popular department store in the US who specializes in clothing and
fashion.
While I’m sure they have their own fanbase that won't shop anywhere else, as far as the
general public is concerned, Dillard’s is just another department store like Macy’s
or Nordstrom.
This isn’t necessarily a bad thing as most of the competition doesn’t have anything
special going for them on the consumer side either.
But, unlike much of the competition, Dillard’s has figured out a way to address this issue
from the business side.
You see, one of the biggest shortfalls of running a retail store is the massive overhead
that comes along with each store.
You have to pay for leases, maintenance, and dozens of employees regardless of whether
you make sales or not.
And given that retail stores don’t have the highest net margins, even the smallest
downturn in demand can leave you unprofitable.
This isn’t anything new though, and Dillard’s has been strategically combating this shortfall
by owning their stores.
As of 2011, Dillards owned 241 out of their 309 stores, many of which they transferred
into a real estate investment trust or REIT.
And today, this number is simply even higher with Dillard’s owning 90% of their retail
space.
Just like us mortals, owning large amounts of real estate as a retailer is a massive
advantage.
Your monthly payments are building equity, your real estate is appreciating, you get
tax write offs for interest and depreciation, and most importantly, you have full control
over your property.
If a downturn like the pandemic does hit, and you need to close some stores, you can
cash in on your equity or you can become a landlord yourself.
On the other hand, if you were leasing, you’re gonna have to negotiate to end your lease
early and probably pay hefty fines.
All of the most successful retailers today including Walmart and The Home Depot own most
of their stores.
And they’ve all been taking the real estate side of the business extremely seriously for
quite some time now.
On the flipside, most of the dying retailers don’t own their real estate or they were
late to the game.
JCPenney, for example, didn’t form a REIT until they filed for bankruptcy last year.
Clearly, owning their stores has been a great advantage for Dillard’s, but this isn’t
their only cost saving measure either.
LEANING UP THE BUSINESS Another way Dillard’s has been able to establish
some stability in the cutthroat retail industry is leaning up the business.
Historically, Dillard’s has been known for being a higher end retailer carrying brands
like Calvin Klein, Coach, Ralph Lauren, and Michael Kors.
But, over the past few years, Dillard’s has focused on appealing to the middle class
and lower income families as well through their clearance stores.
As the name suggests, these clearance stores specialize in selling items that weren’t
able to be sold in regular Dillards, and these stores have some of the best deals out there.
Before sending merchandise to these clearance stores, Dillard’s tries to price these items
60% off at their regular stores.
And these items only make their way to clearance stores if they still don’t sell.
This means that only the most undesirable stuff makes its way to clearance centers,
but on the brightside, these items are often 70 to 80% cheaper by the time they make it
there.
Dillard’s currently operates 30 clearance centers across the US, which has really expanded
Dillard’s target audience and helped them survive a time period in which many consumers
were more frugal than ever before.
Aside from appealing to lean customers, Dillard’s has become much leaner themselves.
Dillard’s owns 100% of their corporate headquarters, distribution centers, and fulfillment facilities
which has minimized overhead.
Dillards has also been strategically closing a handful of stores that weren’t performing
as well.
Thanks to these cost cutting measures, Dillard’s didn’t have to furlough or lay off any employees
during the pandemic and their balance sheet has been remarkably healthy.
Their debt to equity ratio currently stands at 0.4 meaning that they have more equity
than debt on all their assets.
Also, their long term debt is only $599 million and their next payment isn’t due till January
of 2023.
Considering that their net income over the past 12 months itself is $608 million, Dillard’s
shouldn’t have any trouble handling this debt.
As you can see, Dillard’s has really strong fundamentals, but fundamentals alone aren’t
responsible for Dillard’s exponential rise.
MEME STOCKS Some of the most explosive runs originate
from heavily shorted stocks as shorts exit their positions, and it’s no different with
Dillards.
Once the pandemic rolled around, countless hedge funds went all in on shorting recovery
stocks.
You know, the restaurants, the cruise lines, the airlines, the hotels, and of course the
retailers.
Most of these bets played out very well as many of these businesses straight up filed
for bankruptcy.
But, among these short sided plays, the hedge funds overlooked some gems such as Dillard’s,
and this would come back to haunt them.
As y’all probably already know, we saw a massive rise in heavily shorted stocks near
the beginning of 2021.
Most of the momentum and hype went into GameStop and AMC, but naturally, many investors who
had missed out on those plays flocked to other heavily shorted stocks.
We saw dozens of posts about DDS pop up on Wall Street Bets, and DDS was able to recover
to pre pandemic levels through the GameStop rise.
But it wasn’t until the second round of short squeezes led by AMC that Dillards truly
went parabolic.
Now, the SEC claims that the rise in AMC and GameStop was mostly fueled by momentum as
opposed to an actual short squeeze.
But regardless of the specific reason, the AMC and Gamestop runs were extremely beneficial
to Dillards.
Unlike most meme stocks that stalled out after the momentum died though, Dillards has continued
their exponential run thanks to the supply shortage.
BALLOONING MARGINS Most of us associate the supply shortage with
technology and lumber, but the supply shortage has also carried into the fashion industry
as well.
Now, Dillard’s hasn’t exactly pumped up prices to the moon like Nvidia, but they have
been able to heavily cut back on discounts which carries directly into their bottom line.
For most of the 2010s, Dillard’s net margin has hovered at just under 5%.
Right before the pandemic, Dillard’s net margins were actually declining towards 2%,
and it of course went negative during the pandemic.
But since the start of 2021, Dillard’s margins have been able to sharply recover and reach
record levels of 10%.
Most analysts didn’t expect such numbers whatsoever.
The analyst consensus for 3rd quarter earnings was $1.93 per share, but Dillard’s came
in with an astounding $9.81 which is 5 times the expected amount.
As you would guess, this is the primary factor behind Dillard’s recent 100% run in November.
Dillard’s has given back most of those gains over the past few weeks, but many argue that
this is simply a great buying opportunity.
Dillard’s has proven strong resilience from the pandemic, they control a lot of real estate,
and they have pretty strong financials.
Also, even though their revenue has recovered significantly, it’s not even back to pre
pandemic levels yet.
Currently, they’re about 5-10% away from pre pandemic levels, and given that a lot
of the competition has dropped out since the pandemic, it’s very possible that Dillard’s
is able to outgrow their former self.
It should also be noted that even after a 14x run, Dillard’s is only worth $5.5 billion.
Meanwhile, Lululemon pulls in roughly the same profit, but they're worth 10 times more
coming in at $53 billion.
Dillard’s doesn’t have nearly as much hype as Lululemon, but considering Lululemon’s
valuation, it’s not crazy to think that Dillards could grow to a 15 to $20 billion
valuation.
At the same time though, many aren’t nearly as convinced by Dillard’s.
UNCERTAIN FUTURE Here’s the thing, Dillard’s may have strong
fundamentals, but at the end of the day, they’re still just a strong company in a dying industry.
Year after year, malls are seeing less and less foot traffic, and people are becoming
more and more willing to buy everything online.
Dillard’s is also decently competitive on the online side of things, but if ecommerce
is the future, it makes little sense to operate such massive stores when most customers are
just coming in to pick up an order or return an item.
Something else to consider is that, even though Dillard’s will face less competition as
competitors drop out, their real estate may also drop in real value.
Virtually all of Dillard’s stores are located in malls which garner their appeal from offering
customers a wide array of shopping options.
But as competitors go out of business, there will be less tenants looking to lease or buy
property in these malls.
The properties will continue to go up in nominal value due to inflation, but it’s very possible
that they start to lose real value in the upcoming years.
Also, real estate itself has gone parabolic over the past 2 years, so as real estate cools
down, Dillard’s balance sheet may start to look less bulletproof.
But by far the biggest concern is the supply shortage resolving.
Right now, the markets are extremely inefficient, but this should just be temporary.
Many analysts argue that it’s just a matter of time until Dillard’s is forced to be
more lenient with their discounts and their profits start to fall again to pre pandemic
levels.
At the end of the day, Dillard’s was in a relatively strong position when the pandemic
hit.
They owned their stores and they were leaning up their business.
Combine this with the meme stock craze and the supply shortage, and Dillard’s was able
to skyrocket 14x.
But, though Dillard’s has strong financials right now, it’s still heavily debated if
Dillard’s will be able to carry on this positive momentum or if this is simply their
last hurrah before their eventual demise.
Which camp are you in?
Comment that down below.
Also, drop a like if you think there’s something special about shopping for clothes in person.
And of course, consider joining our discord community to suggest future video ideas and
consider subscribing to see more questions logically answered.