Although the S&P 500 is down 2.4% over the past six months, Dillard’s stock price has fallen further to $359, losing shareholders 7.7% of their capital. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Dillard's, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Dillard's Not Exciting?
Even with the cheaper entry price, we're cautious about Dillard's. Here are three reasons why we avoid DDS and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Dillard’s demand has been shrinking over the last two years as its same-store sales have averaged 3.8% annual declines.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Dillard’s revenue to drop by 2.4%, a decrease from its flat sales for the past five years. This projection is underwhelming and implies its products will face some demand challenges.
3. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, Dillard’s operating margin decreased by 2.2 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see Dillard's become more profitable in the future. Its operating margin for the trailing 12 months was 11.2%.
Final Judgment
Dillard's isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 11.9× forward P/E (or $359 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Dillard's
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