Dillard's Inc. (NYSE: DDS) could use new blood, literally.  The company is run by William Dillard II as CEO (founder's son) and as Chairman, and its President is Alex Dillard.  There are enough Dillard family members running the company that it looks like a family business rather than a public company, and the dual class of stock gives the family control.  This company is still running too aggressively, is paying out too much, and has major room for improvements.  Shareholders have already spoken out, but you can expect much louder cries in 2009.

Calling for a family ouster or a CEO ouster cannot be on share prices alone.  Even though the stock is off 90% from the highs of Summer 2007 when this was a $35.00 stock, the problems run deeper than just a share price.  Dillard's get to be run very similar to a family business, but under the umbrella of a public company with a dual-class of stocks.  This was also one of our "at-risk retailers" from Black Friday, although the odds that any implosions would be seen immediately are extremely remote..

Dillard's is losing money at a rate that it is different than many large peers.  While it is expected to have a profitable holiday Q4 period, the company is expected to lose money on an annual basis for this coming year and on an annual basis for the next year to boot.

The company has been in the midst of closing under-performing stores. Its goal for closures in 2008 is 21 stores, and its total store count as of November 1, 2008 was 317 Dillard's stores and 7 clearance centers.  What is interesting is that this company is actually a land bank.  That might not be able to be unlocked today in the current climate, but it owns something to the tune of 86% of its total store square footage.  That would give the ability for a sale-leaseback opportunity, or it could give a raider something much more if tough times continue for too long.

The company has put a new store opening cap-ex cut goal for 2009 at $120 million, down from $192 million in the prior year.  But Dillard's opened 10 stores this year and is still opening stores next year.  Its 8% strategic staff reductions was mainly salaried managers and support positions.  ^0 of those layoffs were in the Little Rock, Arkansas, headquarters.

Just this morning the company declared its regular $0.04 dividend for its A and B common shares, which is the same as the last ten years and when the stock was considerably higher.  The problem with this is that it is now yielding over 5% for buyers today at a time when the company is not expected to post annual profits and at a time when Treasury yields are at record lows.  You can argue that this is good that the company is doing the same dividend, but this is bordering excessive payment when the company should be hording cash.

As far as how this compares elsewhere, we use Macy's as the top competitor.  Macy's is still expected to make at least $1.00 ($1.12 is consensus) this quarter versus a $7.00 stock price, and it is expected to be profitable for this year.  Analysts expect Macy's to have shrinking profits in 2009 (Jan-2010), but it is still expected to be profitable.  Dillard's is expected to make $0.40 (thinner following) this quarter versus a $3.48 share price, but it is expected to post annual losses for both its fiscal years of Jan-2009 and Jan-2010.  That is on wider losses, lower revenues, and lower margins.

Dillard's also has a dual-class structure which gives the founding family control of the company votes and control of the major decision making at the executive level. This keeps the founding family in control and allows it to keep any takeovers from easily coming about if it is against their will.  Investors hate these structures and this frequently penalizes the public common stock holders since they have no real say.

Dillard's also has activist funds going after it.  Barington Capital Group LP and Clinton Group Inc have already written demands to Dillard's to immediately search for a new CEO and replace other Dillard family members, noting that they are on the payroll regardless of their performance.  The funds also noted that these family members are both overpaid and under-qualified.

Dillard's has been making some cuts on the personnel side and on the growth side.  But Wall Street has deemed that this has one of the weakest management teams out there.  The climate is going to be tough for retail for quite some time.  We do not advocate the break-up of companies just for a quick profit and we particularly wouldn't at such basement prices that destroy long-term holders.  But new blood without the "Dillard" last name here and some structural changes needed if the company wants to protect its shareholders in the tough times ahead. Dillard's same store sales will be coming out this week, and few expect any great improvements after last month's dismal numbers.

William Dillard II could easily step down as CEO and keep his Chairman title to still run the show on an oversight basis.  But because of this split share structure, this will only come about if he decides to do it.  Because he cannot be forced to do it and because he is still in his early 60's, we would only give a predictive chance of him stepping down entirely as being very low.  Even for him to quit the CEO role and retain the Chairman title or to make Alex just be a board member rather than president is only going to happen if they want it to.  A shareholder suit alone won't bring about this change.

If you go through the list of 2008 CEO's to go, almost all of those called out have moved on by now.  If you go through our list of 2007 CEO's to go, you'll see that most have hit the road.

Jon C. Ogg

December 3, 2008