Fitch Upgrades Dillard's Inc. IDR to 'BBB-'; Outlook Stable
NEW YORK -- March 19, 2013
Fitch Ratings has upgraded the Long-term Issuer Default Rating (IDR) for
Dillard's, Inc. (Dillard's) to 'BBB-' from 'BB+'. Fitch has also upgraded the
issue ratings by one notch. The Rating Outlook is Stable. A full list of
rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades reflect Dillard's consistent improvement of comparable store
sales (comps) and EBITDA. Comps have increased for 10 consecutive quarters and
have exceeded the industry average for most of this time frame, after years of
underperforming its large industry peers. While Dillard's credit metrics -
with adjusted debt to EBITDAR between 2.7x in 2009 improving to 1.2x in 2012,
and fixed charge coverage range of 3.5x improving to 7.6x during the same time
period - have always compared favorably to higher rated investment grade
peers, Fitch views the ability to defend and grow market share as a key tenet
of achieving investment grade ratings. Dillard's has shown significant
progress in driving positive top line momentum and Fitch expects Dillard's to
sustain comps growth in the low single-digit range over the next 24 to 36
months and see modest improvement in EBITDA.
Fitch expects Dillard's leverage to remain well within 2.0x over the
intermediate term. While Dillard's credit metrics remain strong for even the
'BBB-' rating category, the ratings continue to incorporate Dillard's
below-industry average sales productivity (as measured by sales per square
foot) and operating profitability relative to its higher rated
investment-grade department store peers.
Dillard's is the sixth largest department store chain in the U.S. in terms of
sales with revenue of $6.5 billion on 284 stores and 18 clearance centers in
29 states in the southeast, central and southwestern U.S. Dillard's comps have
continued their positive trajectory, up 4% in 2012, following a 4% and 3%
comps growth in 2011 and 2010, respectively, after 10 years of negative
trends. The improvement has been driven by improved merchandise assortment,
better in-store execution, and strong inventory control.
Dillard's has attempted to move more upscale in order to differentiate itself
from moderate, traditional department stores by procuring products found in
specialty boutiques and up-market retailers such as Nordstrom. Dillard's more
recent focus on reinvigorating its brands and cutting through excess inventory
appears to be yielding positive top-line results. The company has also taken a
more aggressive stance toward closing underperforming stores, closing a net 24
units or 7% of its square footage since the end of 2007. However, Dillard's
annual sales per square foot at approximately $125 are significantly lower
than other well-operated mid-tier department store peers, which are in the
$180-$200 range (based on gross square footage). This should provide further
opportunity for improvement.
Dillard's has made strong progress on improving profitability both on gross
margin and expense control. The company's EBITDA margin of 11.9% in 2012 is
the highest level generated in more than a decade, which has significantly
narrowed the gap to strong operators that have EBITDA margins in the 13.5% to
15% range. Looking at the core retail business (excluding CDI Contractors,
Dillard's general contracting construction operations, and other income), 2012
EBITDA of approximately $640 million and EBITDA margin of 9.8% are
significantly higher than 2005/2006 levels of $460 million and EBITDA margin
of 6%, on a revenue base that is approximately 15% lower than six years ago.
From a store investment perspective, Dillard's modestly increased its capex to
$137 million in 2012 after pulling capex down significantly to $75 million in
2009 and roughly the $100 million-$120 million level in 2010 - 2011. Capex is
expected to increase to the $175 million range in 2013 to support increasing
investments in store updates (in the higher sales generating or more
productive areas of the store), online growth initiatives and some modest new
store openings expected in 2014/2015. The company's real estate portfolio is
in an adequate shape and the real upside will come from executing on its
merchandising strategy, in Fitch's view.
Liquidity remains strong, supported by a cash balance of $124 million as of
Feb. 2, 2013 and $819 million available under its $1.0 billion credit
facility. The company has generated $400 million in FCF (after regular
dividends) on average over the last four years. Fitch expects Dillard's to
generate strong FCF of approximately $325 million - $350 million annually in
the next two years assuming modest working capital uses and higher capex.
Prior to 2010, Dillard's dedicated the bulk of its FCF to debt reduction,
paying down more than $3 billion in debt since 1998 to a level where
consolidated book debt (excluding short-term borrowings on the credit facility
and capital leases) is approximately $815 million. In addition, Dillard's has
directed excess cash towards share repurchases since 2010 and a special
dividend of $243 million in 2012. With Dillard's next debt maturity only in
2018 (when $248 million in unsecured notes comes due), Fitch expects Dillard's
to direct excess cash flow toward share buybacks and increased dividends
including any one-time special dividends.
The $1 billion senior credit facility, which is due to mature on April 11,
2017, is rated one notch above the IDR at 'BBB' as the facility is secured by
100% of the inventories at Dillard's, Inc.'s unrestricted operating
subsidiaries. The $615 million of senior unsecured notes are rated at par with
the IDR, while the $200 million in capital securities due 2038 are rated two
notches below the IDR reflecting their structural subordination. Fitch notes
that Dillard's owns 88% of its retail square footage, which is currently
A positive rating action could result in the event that Dillard's generates
above industry average comparable store gains and EBITDA margins improve to
the 14% - 15% range.
A negative rating action could result in the event of a return to negative
sales trends and/or a more aggressive financial posture, leading to an
increase in leverage ratio of more than 2.5x and/or reduced financial
Fitch has upgraded the company's IDR and issue ratings as follows:
--Long-term IDR to 'BBB-' from 'BB+';
--$1 billion secured credit facility to 'BBB' from 'BBB-';
--Senior unsecured notes to 'BBB-' from 'BB+';
--Capital securities to 'BB' from 'BB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2012);
--'Evaluating Corporate Governance' (December 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (December 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Evaluating Corporate Governance
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
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Monica Aggarwal, CFA, +1-212-908-0282
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Isabel Hu, CFA, +1-212-908-0672
Phil Zahn, +1-312-606-2336
Brian Bertsch, New York, +1 212-908-0549
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