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Author: Builder62 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 93  
Subject: Re: Dillard's Daunting Dilemma Date: 5/25/2005 2:55 PM
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I can't fault your reasoning for some of Dillard's problems. However, does that make it a bad investment at this point? I'm not inclined to believe that.

First, the company is trading at 15% discount to book value. I didn't dig into the financial statement footnotes, so I don't know how good the book is. For the sake of argument, I'll assume that it's good for now.

Second, I made a couple of adjustments to the book value just for giggles. Let's say in a breakup situation Dillard's current inventory is worth 50% or $1,036.9 million. Working that through the statements, Dillard's would be worth about $15.80 per diluted share and would currently be trading at 1.5X my adjusted book.

Of course, a standard theme among private equity players and other folks is that the often times the property, plant, and equipment of the big retailers (Sear's) is undervalued on the balance sheet. Let's say that Dillard's PPE ($3,202.7) is undervalued by a conservative 10%. So, maybe the property is really worth $3,558.6 million. Working this and the adjustment to inventory through the balance sheet provides a breakup value of $20.11 per diluted share, so the stock is currently trading at 1.2X my adjusted book.

For reference, Federated is currently trading at 1.83X book (mrq). May is at 2.52X book (mrq). Saks is at 1.26X boor (mrq). These multiples carry no adjustments from what's reported. So, at the least Dillard's trading at a discount to its peers. At the most, the inventory is worth more than 50% in liquidation and the property is worth much more than book meaning that selling at a discount to book is probably unfounded.

Third, the company just announced a $200 million share buyback. I believe that Warren Buffett would be applauding this. The current shareholders are buying back chunks of their own company at a discount to book. That's a beautiful share buyback plus the company is paying a small dividend which should probably be raised if they have the cash flow.

Fourth, earnings estimates were forecast to be decrease this year compared to last and increase by around 25% for the next year. If it comes true life is good. If not book value will provide a margin of safety.

Fifth, the company does business in the southeast, southwest, and midwest parts of the U.S. Considering, the population growth in the southeast and southwest parts of the United States particularly among department store shoppers (retirees), I can think of worse places to be in business (Ohio). Just look at the store closings and openings for last quarter. The company opened new stores in Atlanta (one of the fastest growing urban areas), Jacksonville (one of the fastest growing urban areas), and some place in southern California (nuff said) while closing stores in Cleveland and Cincinatti.

Sixth, I have faith in the founding family to get stuff sorted out on the merchandising side of things.

All in all, this seems like a strong buy. Due to a lack of investible funds, however, I don't own this stock.







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