Dillard’s Inc. (DDS), one of the leading fashion apparel, cosmetics and home furnishings retailer in the U.S., has recently modified its old $1.0 billion senior secured revolving credit facility, which expired on December 12, 2012.
The amended revolving credit facility, financed by a consortium of investment bankers JP Morgan Securities LLC, a division of JPMorgan Chase & Company (JPM) and Wells Fargo Capital Finance LLC, a division of Wells Fargo & Company (WFC), now have a maturity date of April 11, 2017. The new credit line facility will facilitate the company to borrow more funds at the same level of inventory pledged.
The old credit line facility, which expires on December 12, 2012, has a maximum access of 85% of inventory amount. Interest rate applicable on the borrowing amount was either JP Morgan Base Rate minus 0.5% or LIBOR plus 1%. Moreover, Dillard’s usually pays a commitment fee of 0.25% on committed amount less outstanding borrowings.
Under a revolving credit facility, a company is eligible to borrow again once it repays all dues under the old credit facility. The company may utilize this fund for general corporate purposes, including repayment of outstanding commercial papers, working capital and capital investment or acquisitions.
Prior to this on February 29, 2012, Dillard’s board of directors approved a new $250 million share repurchase program, which reflects the company’s sound financial position and well-defined future prospects.
Dillard’s has always been committed to create value for its shareholders by returning capital in the form of dividends and share repurchase program. To improve shareholders’ wealth, the company will repurchase shares from time to time depending on market conditions. These strategies will enhance shareholders’ return while boosting the market value of the stock.
Our Recommendation
Based in Little Rock, Arkansas, Dillard’s is a large departmental store chain, featuring fashion apparel and home furnishings in the United States.
The company is now contemplating on inventory management by focusing on purchasing activities and ensuring that the timing of receipts remains in sync with demand, resulting in reduced markdowns.
Moreover, Dillard’s has recently taken a revolutionary step to enhance its liquidity position by forming a real estate investment trust company, which will open the avenues of debt and equity markets. Moreover, the company has also formed a wholly-owned captive insurance company, which will enable it to manage its risks more efficiently and provide access to more reinsurance markets. Further,Dillard’s healthy cash flow and balance sheet will allow it to make shareholder friendly moves, including acquisitions, dividends, and share repurchases.
However, Dillard’s operates its retail merchandise business under highly competitive conditions. Although, it is a large regional department store, the company has many competitors at the national level that compete with its individual stores, including specialty, off-price, discount, Internet and mail-order retailers such as Kohl’s Corporation (KSS) and Macy’s Inc. (M). If the company is unable to maintain its competitive position, it could experience downward pressure on prices, lower demand for products, reduced margins, and inability to take advantage of new business opportunities as well as loss of market share.
We retain a long-term ‘Outperform’ recommendation on Dillard’s.
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