The shares of fashion apparel and home furnishing retailer Dillard’s, Inc. (DDS) have been surging lately, due to an increasing focus by investors on turnaround outdoor stocks as the economy recovers from the pandemic-driven recession. The stock has gained 147.7% year-to-date, and 44% over the past month. Furthermore, shares of DDS have increased 17.3% over the past five days to close yesterday’s trading session at $156.20.

DDS’ earnings report for its  fiscal first quarter ended May 1 impressed investors. Its net sales improved 68.9% year-over-year to $1.33 billion over this period. Its net income and EPS stood at $158.20 million and $7.25, respectively, representing a substantial rise from the negative year-ago values. These impressive gains have driven the stock 52.1% higher since the release of the report on May 14.

The stock is currently trading above its 50-day and 200-day moving averages of $11.69 and $83.54, respectively, indicating an uptrend.

Click here to checkout our Retail Industry Report for 2021

Here’s what we think could shape DDS’ performance in the upcoming months:

Business Expansion

DDS has launched several new products over the past couple of months, the majority of which have been a hit with its targeted customer base. In February, DDS’ largest ladies’ exclusive brand, Antonio Melani, launched Born for its ‘Fifth for Antonio Melani’ capsule collection. This product collection marks the first of the three collaborations to be introduced by DDS this year. Also in February,  DDS collaborated with American Fashion brand LDT. Under that agreement, LDT’s products are available for sale across the DDS retail chain and online store.

Given rapidly evolving fashion trends and rising demand for outdoor wear owing to the easing of social distancing protocols, DDS should be able to generate  substantial profits from  these collaborations.

Capital and Debt Restructuring

On April 29, DDS expanded its $800 million senior secured credit facility with a $200 million expansion option. The company plans  to use the proceeds to fund its liquidity requirements, which include  working capital and general corporate expenses. DDS also has the provision to utilize the revolving credit facility to fund its capital expenditures, such as share repurchases and debt repayment, subject to certain guidelines.

On May 15, DDS sanctioned class A share repurchases worth $500 million. This is in addition to repurchasing  $114.3 million remaining under the company’s March 2018 share repurchase plan. This should allow the existing shareholders to benefit from higher EPS.

Favorable Analyst Sentiment

A $0.58 consensus EPS estimate  for the current quarter, ending July 2021 indicates a 256.8% rise year-over-year. The company’s EPS is expected to rise 443.5% from its  year-ago value in the current year. In this regard, DDS has an impressive earnings surprise history; it beat Street EPS estimates in each of the trailing four quarters. Analysts expect the company’s revenues to rise 33.5% year-over-year to $5.92 billion.

Trading at a Discounted Valuation

In terms of non-GAAP forward P/E, DDS is currently trading at 12.97x, which is 23.7% lower than the 17.01x industry average. Its 0.62 forward Price/Sales multiple  is 54.4% lower than the 1.36 industry average. Also, the DDS’ forward Price/Sales multiple is 13.9% lower than its 0.72  trailing-12-month multiple. The company’s forward Price/Cash Flow and EV/EBITDA ratios of 10.54 and 6.28, respectively, compare with industry averages of 15.39 and 11.70.

POWR Ratings Show Promise

DDS has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an A grade for Growth, Value and Quality. DDS’ EBITDA and levered free cash flow have increased 761.8% and 339%, respectively,  year-over-year, justifying the Growth grade. While the stock’s lower-than-industry valuation metrics are in sync with the value grade, its relatively high profitability compared to its peers justify the Quality grade. DDS’ 16.94% trailing-12-month ROE  is 53.8% higher than the 11.01% industry average.

Of the 65 stocks in the A-rated Fashion & Luxury industry, DDS is ranked #8. In addition to the grades I’ve highlighted, one  can view DDS Ratings for Sentiment, Momentum and Stability here.

Bottom Line

Despite being one of the oldest and most established companies in the apparel and home furnishing retail space, DDS has been taking active steps to keep up with the latest trends by collaborating with famous brands and strengthening its online presence. This, combined with the current macroeconomic tailwinds, should allow the stock to continue advancing in the coming months.

Click here to checkout our Retail Industry Report for 2021

DDS shares were trading at $159.77 per share on Friday afternoon, up $3.57 (+2.29%). Year-to-date, DDS has gained 153.83%, versus a 13.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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