- S&P Global Ratings on Thursday upgraded Dillard’s to BB+ from BB-. S&P forecasts “sustained profitability” and free operating cash flow, attributable to the retailer’s strong inventory management and limited discounting.
- Dillard’s will likely be in a net cash position at the end of 2023, leading S&P to issue a stable outlook for the retailer. That outlook reflects expectations that the company’s adjusted EBITDA margins will fall to the low- to mid-teens percent range, but remain several hundred basis points above pre-pandemic levels.
- But the company remains exposed to “disruptive sector trends” like consumer reticence on discretionary purchases, declining in-store traffic and online price transparency, S&P said.
A minimal balance debt sheet, a consistently conservative financial approach, and good merchandise execution will insulate Dillard’s from potential declines in consumer demand this year, S&P said.
Dillard’s saw a “marked improvement in profitability,” leading S&P to revise the retailer’s business risk assessment to fair from weak. The company’s capital structure currently includes an $800 million secured revolving credit facility; $320 million of unsecured notes, and $200 million subordinated debt.
“We believe its rapidly improved profitability and increasing track record of operational success reflects an improved competitive standing within its regional markets,” S&P Global analysts Lauren Slade and Diya Iyer said in a statement. That light debt load and amount of cash on hand “is by far the lowest leverage of the department stores we rate,” the analysts said.
For the year ending Jan. 28, Dillard’s reported net income of $891.6 million, up from $862.5 the year prior. The company also said its total retail and comparable store sales rose 5% for the 2022 fiscal year.
“We are entering our 85th year of operation in a strong position with today’s results,” CEO William Dillard said in a statement regarding the fourth quarter and year end results. “Fiscal year earnings per share of $50.81 seemed impossible just a couple of years ago, but we have seen what we can do by controlling our inventory and focusing on our customer.”
According to S&P, Dillard’s owns about 90% of its store real estate with a book value of over $1 billion. “We view its substantial asset ownership as strategic, providing operating and financial flexibility. Under current management and family control, we expect the company to maintain its real estate ownership and a conservative approach to debt,” S&P’s analysts said. Dillard’s currently has 277 stores in 29 states.
However, S&P cautioned Dillard’s could see its rating fall if the economic environment worsens, the company makes any operational missteps resulting in weaker performance, or if the retailer shifts to a more aggressive financial policy. And while unlikely near term, Dillard’s could see its S&P rating rise if the company’s performance expands beyond base-case expectations. That would include maintaining a conservative financial policy, seeing positive comp sales growth, stable EBITDA margins, and cash flow generation despite a soft economy.