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Tickers in this Article: DDS, M, JWN, SKS, JCP
Shares of well-known and well-worn department store Dillard's (NYSE:DDS) have certainly seen better days. Like many retailers, the company is currently flirting with its 52-week low, and I think the worst is yet to come.

In the period ended May 3, Dillard's earned $2.7 million (4 cents per share). That's a grotesque drop from the $42.9 million (53 cents per share) it earned in the comparable period last year, and its well shy of the 21 cents per share that the analyst community had forecast. If this news sounds grim just wait until we check out the revenue, sales and margin numbers.

Revenue Slips
In the quarter Dillard's booked $1.71 billion in total revenue, which was in line with analyst expectations. It was, however, noticeably shy of the $1.8 billion that it generated last year, about a 4.8% drop. The revenue drop is a big concern in this environment because it means Dillard's has a lack of leverage over fixed expenses. It's also particularly worrisome given Dillard's gross margin performance.

When compared to some of the other major department stores, Dillard's fails to impress. Keep in mind that Dillard's is a smaller retailer, so I would have expected a little more from it in terms of top line performance.

Comparison Shopping - Revenue

  • Macy's (NYSE:M) posted a decline of 2.9% in Q1, to $5.7 billion from $5.9 billion last year.
  • Nordstrom (NYSE:JWN) posted a decline of 3.8% in Q1, to $1.88 billion from $1.95 billion.
  • J.C. Penney (NYSE:JCP) posted a decline of 5.1% in Q1, to $4.1 billion from $4.4 billion.
  • Saks (NYSE:SKS) saw sales increase 8.8% in Q1, to $862.4 million from $792.7 million.
The retail sales environment is clearly soft right now, especially for mid-range department stores. The only company to post a gain in the group was high-end rival Saks. Apparently the consumer spending slowdown is not hurting the high-end shopper.

Comps down too
Same store sales (comps) are watched closely by the analyst community. This stat is probably the best way to gauge a company's performance on an apples-to-apples basis each year. It strips out new store openings and gives us a measure of true growth. Unfortunately for Dillard's, comps were down a hefty 6% for the period.

This is particularly bad because Dillard's saw a decline of 5% during the same period last year. It shouldn't have been a challenge to beat this already deflated number. At the very least, you'd hope for a smaller decline. Again, Dillard's failed stand out when compared its rivals:

Comparison Shopping - Comps

  • Macy's saw comps decline 2.6% in Q1. Last year it reported a 0.6% comps increase.
  • Nordstrom saw comps decline 6.5% in Q1. Last year it reported a 9.5% increase.
  • J.C. Penney saw comps decline 7.4% in Q1.Last year it reported a 2.2% increase.
  • Saks saw comps increase 8.4% in the period. That's on top of a 14.4% increase the prior year.
Saks is the clear leader here. The other three retailers posted declines similar to Dillard's for the quarter, but they had seen increases the previous year, meaning they were going up against much harder numbers to beat.

Gross Margins Shrinking
In the quarter, Dillard's saw its gross margin decline to 34.7% from 37.4% of sales in the comparable period last year. That's a 270-basis point (BPS) drop. That's an issue because it leaves the company with less money to pay for important expenses like advertising and SG&A. SG&A costs increased to to 28.7% from 28.3% of sales last year. (For further reading, check out our related article The Bottom Line On Margins.)

How do its margins compare with the other department stores?

Comparison Shopping - Margins

  • Macy's gross margin in Q1 was 38.6%, down 120 BPS from 39.8% last year.
  • Nordstrom's gross margin was 37.3%, down 50 BPS from 37.8% last year.
  • J.C. Penney's gross margin was 40%, down 150 BPS from 41.5% last year.
  • Saks' gross margin was 38.2%, down 320 BPS from 41.4% last year.
Only Saks saw a drop in margins that was worse that Dillard's for the period. It's arguable that this is excusable, given Saks' performance in the other measures.

Bottom Line:
Dillard's is having a tough time right now. All retailers are struggling, but as we've seen, the other department stores are not struggling as badly. The terrible trifecta of decreased sales, comps and gross margins certainly does not bode well. And that leads me to believe the stock should probably be avoided, at least for now.

To learn more on researching stocks in this sector, read Analyzing Retail Stocks.

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