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 pricesalone.  Even though the stock is off 90% from the highs of Summer 2007when this was a $35.00 stock, the problems run deeper than just a shareprice.  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 manylarge peers.  While it is expected to have a profitable holiday Q4period, the company is projected to lose money on an annual basis forthis coming year and 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 countas of November 1, 2008 was 317 Dillard’s stores and 7 clearancecenters.  What is interesting is that this company is actually a landbank.  That might not be able to be unlocked today in the currentclimate, but it owns something to the tune of 86% of its total storesquare footage.  That would give the ability for a sale-leasebackopportunity, or it could give a raider something much more if toughtimes 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’sopened 10 stores this year and is still planning to open stores next year.  As far as its layoffs per the last release on NOV. 26:          Dillard’s recently announced a strategic staff reduction of        approximately 8% of its salaried associates as part of its ongoing        efforts to reduce operating expenses. The positions were comprised        mainly of salaried managers and support professionals including 60 in        the Company’s Little Rock, Arkansas, headquarters.

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

As far as how this compares elsewhere, we use Macy’s as the topcompetitor.  Macy’s is still expected to make at least $1.00 ($1.12 isconsensus) this quarter versus a $7.00 stock price, and it is projectedto be profitable for this year.  Analysts expect Macy’s to haveshrinking profits in 2009 (Jan-2010), but it is still expected to beprofitable.  Dillard’s is expected to make $0.40 (thinner following)this quarter versus a $3.48 share price, but it is expected to postannual losses for both its fiscal years of Jan-2009 and Jan-2010.  Thatis on wider losses, lower revenues, and lower margins.

Dillard’s also has a dual-class structure which gives the foundingfamily control of the company votes and control of the major decisionmaking at the executive level. This keeps the founding family incontrol and allows it to keep any takeovers from easily coming about ifit is against their will.  Investors hate these structures and thisfrequently penalizes the public common stock holders since they have noreal say.

Dillard’s also has activist funds going after it.  Barington CapitalGroup LP and Clinton Group Inc have already written demands toDillard’s to immediately search for a new CEO and replace other Dillardfamily members, noting that they are on the payroll regardless of theirperformance.  The funds also noted that these family members are bothoverpaid and under-qualified.

Dillard’s has been making some cuts on the personnel side and on thegrowth side.  But Wall Street has deemed that this has one of theweakest management teams out there.  The climate is going to be toughfor retail for quite some time.  We do not advocate the break-up ofcompanies just for a quick profit and we particularly wouldn’t at suchbasement prices that destroy long-term holders.  But new blood withoutthe "Dillard" last name here and some structural changes needed if thecompany wants to protect its shareholders in the tough times ahead.Dillard’s same store sales will be coming out this week, and few expectany great improvements after last month’s dismal numbers.

William Dillard II could easily step down as CEO and keep his Chairmantitle to still run the show on an oversight basis.  But because of thissplit share structure, this will only come about if he decides to doit.  Because he cannot be forced to do it and because he is still inhis early 60’s, we would only give a predictive chance of him steppingdown entirely as being very low.  Even for him to quit the CEO role andretain the Chairman title or to make Alex just be a board member ratherthan president is only going to happen if they want it to.  Ashareholder 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

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