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Hey Builder62,

Excellent post.

Before I delve into some of the above let me point out what the article that ran on the site is one of our shorter form pieces. Given what I had to work with I chose to focus on the long-term viability of the business, which I consider poor instead of a detailed analysis of whether or not the company is attractive at today's prices.

Given that you've put a lot of Foolish effort into the above, I'd like to continue the discussion. You raise a number of goods points and there are a few mutual funds that I respect that happen to agree with you. Still, after taking a look at the most recent 10-K and proxy statement there are a handful of things that have me disinterested in this business unless it was trading at a large fraction to book value.

- Dual class share structure is being abused. Dillard's has two share classes. One is publicly traded (class A) and has the right to elect 1/3 of the board of directors, the other is not public traded (class B) and has the right to elect 2/3 of the board of directors. The Dillard family holds the shares that are not publicly traded and in effect control the company from top to bottom.

- The current earnings are at or near the top of the cycle as the economy has rebounded since 2001-2002. Couple this with declining sales despite the fact that the store count has been fairly stable.

- Abysmal return on equity, which is somewhat amazing given their use of leverage.

- Declining book value. This doesn't concern me as much, because we're talking about real estate and P&E being depreciated due to accounting rules, where as the value of the real estate is almost certainly more than they paid for it years ago. Share repurchases will also decrease the value of shareholder's equity and book value, but I view this as being offset by the net losses run in previous years. Still it's a negative sign to see book value in a declining trend.

- A qualifier to your analysis of book value regarding the value of the stores. They only own 80% of their stores, the other 20% are leased. I'm not sure if you factored that into your assumptions.

I believe the company trades at a low book value multiple primarily because it is a business in decline with a poor ownership structure. To me this means that holders of the class A common are not likely to get much out of the business even if they do sell off the assets, because the Class B shareholders have almost complete control over how the gains from the sales will be distributed (ie via bonuses, stock options, etc.).

As it stands today, it's not a terrible business. It's an ok business with a terrible ownership structure and a poor long-term outlook. At certain prices an investor can wring out some profits here. I don't doubt that... I'm just not sure it's worth the trouble in comparison to other retailers out there.


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