Dillard’s Is Ready to Take on the Competition

With final holiday sales figures trickling in, it looks like it was a good—but not great—season for U.S. retailers.

According to Reuters’ latest sampling of sales at 17 retailer chains, December same-store sales (or sales from outlets open at least a year) rose 4.5%. That topped December 2011’s 4.2% gain and was ahead of analysts’ estimates of 3.3% growth. The higher result came after a sluggish start to the holiday season due to the effects of Superstorm Sandy and worrying headlines surrounding the fiscal cliff debate. If you remove Costco (NasdaqGS: COST), the highest-weighted store on Reuters’ index, for example, the rate falls to 2.8%

Reuters’ numbers jive with the latest figures from retail tracking firm ShopperTrak, which looked at the holiday season as a whole and found that retail sales were up 2.5% from last year.

Tax Hikes Cloud the 2013 Retail Outlook

The fiscal cliff debate is over, but it has left a number of question marks for the retail sector. For one, the deal raises taxes on individuals earning more than $400,000 and couples with incomes greater than $450,000. However, even more significant may be the expiration of the payroll tax holiday, which raises Social Security taxes to 6.2% from 4.2%.

“A 2% hit off the top for the average person is meaningful,” Michael Wilson, head of research at Morgan Stanley, told Reuters. “It will change their spending behavior.”

That, along with the upcoming debt-ceiling debate, which could prove just as rancorous as the fiscal cliff negotiations, has many analysts forecasting a weak spring for retailers. And rising costs, particularly for food, could also have an impact. However, retail sales could pick up toward the end of the year as consumers get a better sense of Washington’s direction.

Dillard’s Has Outperformed Many of Its Peers 

In light of all that, it’s more important than ever to invest in retailers that are able to quickly adapt to changing consumer tastes in order to hold their own in the fiercely competitive retail business. One chain that has been doing particularly well in this regard is Dillard’s (NYSE: DDS).

The company operates 284 stores, which target middle- and upper-class shoppers, as well as 18 clearance centers. Dillard’s also sells goods through its website. The company operates in 29 states.

Dillard’s has shot up nearly 80% in the past year, yet it still trades at 12.8 times the company’s latest 12 months of earnings, in line with competitors like Macy’s (NYSE: M) and Wal-Mart (NYSE: WMT).

Compare that performance to J.C. Penney (NYSE: JCP), which has plunged 46% in the last 12 months as CEO Ron Johnson, who is credited with creating Apple’s (NasdaqGS: AAPL) retail stores, struggles to shift the company toward an everyday low prices strategy and away from holding frequent sales.

Dillard’s continues to report strong results: excluding unusual items, the company earned $46.1 million, or $0.96 a share, in the three months ended October 27, 2012. That’s up sharply from $25.7 million, or $0.48 a share, a year earlier. Dillard’s also beat the Street’s forecast of $0.69 a share.

Same-store sales rose 5%, and overall sales gained 4.8%, to $1.45 billion, again topping the consensus forecast of $1.44 billion. The company’s gross margin from retail operations was 37.1%, up from 36.7% a year ago.

Dillard’s continues to keep a tight lid on its costs: its inventories at comparable stores declined 1% from a year earlier, and its operating expenses also fell slightly, to $404.6 million (or 27.9% of sales) from $404.8 million (or 29.3% of sales) a year ago.

Healthy Balance Sheet Gives Dillard’s Options

Thanks to the strong results, Dillard’s paid a special dividend of $5.00 a share in December. That’s in addition to the company’s regular payout of $0.05 a share, for a 0.25% yield. Dillard’s was one of a number of firms to pay special dividends ahead of tax increases that were likely to kick in, one way or another, after the new year.

The company’s balance sheet is also in great shape: Dillard’s ended the latest quarter with $124.8 million in cash, up from $106.4 million a year earlier. As well, its long-term debt declined to $622.5 million from $644.5 million. That will help it weather any slowdowns in the coming year. In addition, as Zacks.com points out, the company may choose to make more moves to reward its shareholders, such as hiking its dividend, buying back shares or snapping up attractive assets.

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