Dillard’s Inc. ended the week with an improved credit profile.
Standard & Poor’s Ratings Services upgraded the Little Rock, Ark.-based department store group to a corporate credit rating of “BBB-minus” from “BB-plus,” a one-notch improvement that puts the company on the lowest rung of the investment-grade ladder from a perch on the highest rung of the noninvestment or “junk” category.
While Moody’s Investors Service didn’t change its corporate credit rating for the company — leaving it at “Ba1,” the highest speculative rating — it elevated the rating outlook to “positive” from “stable.”
“The positive rating outlook reflects our view that the company could be upgraded to investment grade given its improved operating performance and moderate leverage, which offset its position as a regionally concentrated department store chain while maintaining a debt/EBITDA below 2.25 times,” wrote Scott Tuhy, vice president and senior credit officer at Moody’s, who noted the department store’s “increasing stability as a result of improved merchandising, cost controls and integration of its online business.”
Tuhy said that Dillard’s might qualify for a ratings upgrade if it is able to maintain “balanced financial policies, stable operating performance while moving over time toward a capital structure less reliant on secured financing.”
Dillard’s isn’t without challenges in the long or short term, with many of its units in the South Central states and facing possible disruption due to falling oil prices. Also, it owns more than two-thirds of its own stores and has been pressured to group them into a real estate investment trust, or REIT, as other retailers, including Sears Holdings Corp., have considered doing. The Hudson’s Bay Co. in February formed partnerships with two REITs, Simon Property Group and the RioCan Real Estate Investment Trust, a move that could presage the creation of a REIT of its own.
Helena Song, credit analyst at S&P, also cited Dillard’s geographical limitations in her report on Dillard’s.
“The company has consistently improved its operating measures to a level that is more comparable to other higher-rated investment-grade rated department stores — such as Macy’s, Kohl’s and Nordstrom — given its target markets and lower cost structure,” she said. “We also note that margins have improved over the past two years, whereas the department store sector has faced a declining trend.”
Song also noted that the company could qualify for a upward revision of its business risk profile to “satisfactory” from “fair” if it “is able to successfully expand its geographic footprint and omnichannel capability and demonstrate solid improvement in operating measures over time.”
Dillard’s finished fiscal 2014 with a strong fourth quarter, with sales up 5 percent to $2.14 billion and net income up 9.6 percent to $130.5 million, as full-year sales grew 1.4 percent to $6.62 billion and net income expanded 2.5 percent to $331.9 million.
Operating margin, 6.2 percent of sales two years ago, has moved to over 8 percent of sales in the last 12 months.
While operating metrics have improved, so has its market capitalization. After rising 0.4 percent on Friday, shares stood at $137.11, 9.5 percent above their $125.18 mark at the end of 2014 and 56.1 percent above the 52-week low of $87.81 set on March 25.
They reached a 52-week high of $138.10 in midday trading Thursday.