Dive Brief:
- S&P Global downgraded Dillard's, to BB from BB+, citing the department store chain’s "weak operating results for the holiday season and full year 2019, with continued profitability decline from previous years," according to an emailed press release.
- The retailer reported fourth quarter net sales fell more than 4% year over year to $1.9 billion as comparable sales fell 3%, according to a press release. For the full year, comps were down 1%.
- S&P analysts have a "stable" outlook for Dillard's, with analysts citing "our view that the company's manageable balance sheet debt and still-healthy expected free cash flow generation provide financial flexibility" despite troubles in the department store sector.
Dive Insight:
Southern staple Dillard's has advantages that many of its department store peers lack: a strong balance sheet, relatively small debt load, a loyal customer base, an engaged owner-executive family, and positive profits, among other things. But it still faces all of the same headwinds slamming department stores today, including traffic declines, ailing malls, price competition and the rest.
As S&P analysts noted, Dillard's has experienced "significant deterioration in profitability" as its earnings margins fell by nearly half in the last five years. "We expect margins to remain weak over the next couple of years as Dillard's contends with fragile mall traffic trends, intense competition, increasing price transparency, and an uneven economic backdrop," analysts said.
CEO William Dillard II acknowledged in a statement last month that "a weak top line weighed heavily on the bottom line in the fourth quarter." He noted, though, that the company had reduced its inventory — a hedge against discounting — and kept a flat gross margin rate. "As U.S. department store retailing continues to right size, our conservative financial approach supports our long-term view," he said.
While the company is currently strong at merchandising for its baby boomer base, some analysts say the company lags in speaking to millennials and fully editing their private label assortment.
S&P analysts expect more headwinds over the coming years, as apparel competition, off-price encroachment and mall woes continue to drag on Dillard's profits. Dillard's is also behind some of its department store peers online. "We believe omnichannel capability will become an increasingly important competitive factor amongst retailers given customers' continued rapid adoption of e-commerce," the analysts said.
