Dillard's Has A Dilly Of A Headache

For most of the past decade, Dillard Department Stores Inc. could do no wrong. While retailers such as Federated Department Stores Inc. and Carter Hawley Hale Stores Inc. languished in bankruptcy, Dillard's well-honed strategies for merchandising, cost-control, and expansion led to robust growth. From 1983 to 1993, the Little Rock-based Dillard's rose to the nation's fifth-largest department-store chain as its store base more than tripled, to 227. Meanwhile, sales grew sixfold, to $5.1 billion, and profits grew even faster, to $241.1 million from $34.1 million.

Lately, though, Dillard's seems to have lost its golden touch. For the first half of the year, net income slid 6.2%, to $82.1 million, even as sales climbed 8.5%, to $2.56 billion. Its stock is around 28, down from 413/4 a year ago (charts).

What happened? In part, Dillard's has simply been suffering along with the rest of the department-store industry, which has been pummeled by weak sales of women's apparel. Women's clothing and accessories account for some 40% of revenues at Dillard's, which runs 232 stores mostly in the South and Southwest. Still, rivals such as May Department Stores Co. and Dayton Hudson Corp. have weathered the downturn fairly well.

Retailing experts say Dillard's has made matters worse for itself by sticking with a marketing strategy that does not seem to be working. Since the mid-1980s, the department-store chain has been telling shoppers that it offers competitive prices all the time, not just during sales. Such "everyday-low-pricing" strategies are common among discounters such as Wal-Mart Stores Inc.

But department stores have typically shunned the formula. With their seasonal and fashion-oriented merchandise, the stores must mount frequent sales in order to make room for new goods. And their customers have learned to wait. "What draws people to a department store is the thrill of a bargain," says analyst Linda R. Morris of PNC Investment Management & Research. "They look at Dillard's and its everyday low prices and say, `I'll wait until it goes on sale."'

These days, Dillard's has just two clearance sales a year, down from a sale a week. But they're the exception that proves the rule: Tonya Goodwin, who isn't a regular Dillard's shopper, was drawn to its Northpark Center store in Dallas recently after seeing an ad for a summer clearance sale of 50% to 66% off regular prices. "I search the newspapers all the time for sales, and I usually shop at the stores offering the best deals," says Goodwin, a 35-year-old paralegal.

BIG MARKDOWNS. The risks in Dillard's everyday-low-pricing strategy didn't become apparent until the severe slump hit women's apparel--and rivals pumped up promotions to move merchandise. Shoppers began passing up Dillard's for competitors such as May and Dayton Hudson, which run constant sales. Not that Dillard's prices are necessarily any higher. Officials say its everyday prices are comparable to those offered by rivals during their sales. But perceptions matter. "In theory, it's nice to have everything sharply priced every day, but it doesn't work when competitors are out there running six-page sale ads every week," says analyst Robert F. Buchanan of NatWest Securities Corp.

Dillard's paid the price in the second quarter. Saddled with high inventories of spring and summer clothing, the chain was forced to take big markdowns. That pushed gross profit margins down to 34.58%, compared with 35.74% in 1993's second quarter. The margin pressure resulted in a 14% decrease in earnings.

In a written response to BUSINESS WEEK, 79-year-old Chief Executive William T. Dillard, who founded the chain in 1938, says the company is "working to more fully implement our everyday pricing," especially in women's apparel. The yo-yoing prices of promotional stores, he says, alienate shoppers. Dillard believes promotions make retailers less efficient, adding that they take effort and they make business uneven. Dillard still oversees the chain, with day-to-day operations handled by his three sons.

Its pricing policy isn't the only thing giving Dillard's headaches now. A strong private-label business, for example, could give it more flexibility in dealing with fashion swings. If pricey brand-name stuff isn't moving, it could push house brands, which generally offer consumers a better value and the retailer better profit margins. But Buchanan figures such lines account for only about 8% of sales at Dillard's, compared with 30% at Nordstrom Inc. and 50% at J.C. Penney Co.

ON THE PROWL? William Dillard says the chain is planning to expand its private-label line as quickly as possible, but it will take the time to do the job right. In addition, while beefed-up home-furnishing departments have been fueling growth at rivals, Dillard's has been cutting back on home items. In 1993, company sales of such merchandise accounted for 11.7% of revenues, compared with 17.2% in 1988.

Lately, Dillard's hasn't even been able to rely on acquisitions--which fueled growth during the 1980s--to help lift sales and profits. It made none last year and hasn't made a major purchase since 1990. Dillard's says it's actively pursuing deals, adding that it is interested in some of the R.H. Macy & Co. stores in the Southeast that may become available after Macy merges with Federated. But because Dillard's is usually a cautious bidder, it could well lose the stores to more aggressive competitors.

Despite Dillard's recent woes, retailing experts point out that it is still one of the best in the industry at controlling costs, thanks to state-of-the-art distribution and information systems. So it could be poised for a quick comeback when the women's apparel business picks up. Until then, it looks as if Dillard's shareholders will have to get used to everyday low prices, too.

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