Department store chain and online retailer Dillard’s (NYSE:DDS) has just wrapped up a spectacular 2021. After COVID-19 crashed into our economy, the company’s management rolled up their sleeves and controlled costs, and managed inventory so efficiently that the company beat all earnings estimates in 2021. Plus, pent-up demand soared as vaccinations gathered pace, lockdowns were lifted and people took to online shopping with a vengeance.
Image Source: NASDAQ
Analysts estimate that DDS will report an EPS of about $32 in 2022, which will fall to about $19 in 2023 as the situation returns to normal. If these estimates play out, it implies that DDS will enter into a time correction or consolidation stage. That seems to be the consensus in the market these days because DDS has reacted rather sharply from the $417 high that it notched up in November 2021 to $234 as of January 6, 2021, shaving off 44%.
Now, here is my take on DDS’s investable quotient.
Price Momentum
Image Source: TradingView
Between March 2020 (the month that witnessed the COVID-19 meltdown) and January 6, 2022, DDS’s price gained a massive 532%. At one point, in November 2021, DDS’s price had gained over 1,000%. In the last 12 months, DDS has gained a hefty 360%. These are very irrational price moves, but at the same time, its retracement from its highs has been swift and brutal. That makes it a massively volatile stock.
DDS’s monthly price chart suggests that:
- Though the stock is falling, volumes have shrunk. This implies that a bounce can occur if the valuations look attractive again to the big players.
- Support exists at $217 (and then at $171). If it doesn’t crack below the first support level, a bounce can occur.
- Resistance levels, based on Fibonacci retracement levels, are seen at $264 and $322.
- Related data suggest that DDS’s short interest is a whopping 44%. That makes the possibility of a short squeeze brighter. Traders can watch the levels suggested above.
Year-over-Year Comparison of Income and Expenses
Image Source: YCharts
Though DDS’s revenue in 2021 has fallen by a massive 30.11% on a year-over-year (y-o-y) basis, the company has very efficiently controlled its costs. Its cost of goods sold in 2021 has fallen by a solid 27.55% on a y-o-y basis and its SGA expenses and Rent/Landing expenses dropped sharply by 28.17% and 15.93%, respectively, in the same period, also on a y-o-y basis.
So, the secret sauce behind DDS beating all earnings estimates is its efficient cost control and inventory management strategies. It is not annual revenue growth.
Note that in the pre-COVID-19 era (check the image above), DDS’s revenues recorded flat growth in single digits on a y-o-y basis. Therefore, I believe that going forward DDS’s net profits are likely to be driven by the cost-cutting schemes it has set in motion rather than by natural demand picking up for its merchandise.
Valuation
Image Source: YCharts
DDS’s forward PE ratio is estimated at 15.03 as compared to a forward PE ratio range of 6.5–11.38 estimated for its peers (JWN, KSS, M, BBBY, BBY). These data imply that the market perceives DDS as an expensive stock without significant growth potential – a view that seems to be justified based on the historical revenue numbers discussed above.
The takeaway from the valuation numbers is that the market does not fancy DDS much currently based on its financial estimates, and the stock will continue to consolidate in a range based on technical factors (charts).
Summing Up
I am not bullish on DDS as an investment, either for the short or the long term. That is because its revenue growth in the pre-COVID-19 was flat and it has managed to beat earnings estimates only because of aggressive cost-cutting and not because of any increase in demand.
On the fundamentals level, I’ll go with a neutral rating.
That said, I believe that DDS is a trading play. Its short interest is high at 44% and the Fibonacci Retracement indicator suggests that the stock can consolidate between $217 and $264, with the next support and resistance levels placed at $171 and $322, respectively. Traders can track the volumes and apply their favorite indicators to short or long the stock.
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