Dillard’s Stock Looks Attractive At $52
Dillard’s stock (NYSE: DDS), the apparel and home furnishings retailer, became vulnerable due to its non-essential product assortment and mall-based locations during the pandemic. Consequently, the company’s stock has lost 29% of its value so far this year, and currently stands at around $52. However, we believe it to be a good time to enter this stock as it could see a strong upside once the Covid-19 fear abates. This is taking into account the company’s better-than-expected Q2 and Q3 performance, Covid vaccine news, the low debt of only $581 million, and massive real estate holdings. Our conclusion is based on our detailed comparison of Dillard’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
Dillard’s profitability jumped from $0.22 per share in Q3 2019 to $1.43 in Q3 2020, despite revenues falling 26% during the same period – due to a gross margin increase of 250 basis points along with expense reductions, thanks to its strong inventory management.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 63% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
Dillard’s Performance During 2020 Coronavirus
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DDS stock declined from levels of around $64 in mid-February (the pre-crisis peak) to roughly around $36 as of March 23 (as the markets bottomed out) – implying that the stock lost as much as 45% of its value from its approximate pre-crisis peak. It then rallied to levels of over $52, rising by 47% since March 23. However, it is still down 29% from levels of around $73 seen in early January.
S&P 500 Index Performance During 2020 Coronavirus/Oil Price War Crisis
The S&P 500 index declined from levels of around 3,386 in mid-Feb (pre-crisis peak) to levels of around 2,237 as of Mar 23 (as the markets bottomed out), implying the index lost 34% of its value from its approximate pre-crisis peak. It then rallied to levels of about 3,702 currently, rising by 66% since Mar 23. It is also up 15% from levels of 3,231 seen in early January.
2007-08 Financial Crisis
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
Dillard’s Stock Performance Over 2007-08 Financial Crisis
DDS stock witnessed something similar during the 2008 downturn. DDS stock declined from levels of around $22 in October 2007 (the pre-crisis peak) to roughly $4 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 84% of its value from its approximate pre-crisis peak. However, DDS stock recovered post the 2008 crisis, to levels of about $19 in early 2010, rising by 420% between March 2009 and January 2010.
S&P 500 Performance Over The 2007-08 Financial Crisis
S&P 500 Index fell 51% from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124 – rising by about 48% between March 2009 and January 2010.
How Do Dillard’s Fundamentals Look In Recent Years?
Dillard’s revenues declined 2% from $6.4 Bil in 2016 to $6.3 Bil in 2019. In addition, earnings growth, on a per-share basis, was lower by 11% between 2016 and 2019.
Does Dillard’s Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Dillard’s total debt declined from $613 million in 2016 to $366 million in 2019, while its total cash was $277 million in 2019. The company also generates close to $365 million in cash from its operations. It appears to be in a good position to weather the crisis.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Dillard’s stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest.
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