Dillard's Commercial Real Estate Is Like Casper The Ghost — Friendly But Hard To Pin Down

Dillard’s reported a second-quarter net loss of $40.7M Friday, compared to a loss of $2.9M a year ago, raising questions about whether the retailer is going the way of J.C. Penney Co. and Macy’s and landing in some type of retail purgatory.

Yet, analysts on the street say the real story is not the retailer’s earnings report, but what is going on with the department chain’s real estate.

The retailer owns lucrative commercial real estate outright, which analyst reports say gives it inherent value (and a stock price floor) that positions the company against the deeper headwinds and stock woes hitting the retail sector.

But, the real value of Dillard's real estate is not necessarily etched in stone. Dillard's had 291 stores in 29 U.S. states in February, totaling 49M SF. Of that amount, Dillard's owned about 44.3M SF outright, according to Securities and Exchange Commission filings.  

Wedbush Securities analyst Jen Redding estimates in her report the real estate portfolio has a value of $1.7B (at cost), but she admits while that estimate is based on various reports and 10-K and 10-Q information, it isn’t necessarily exact. 

“I think it’s very hard to assess the true value of the real estate, especially at a time when mall space value is sinking,” Redding said.

“A-[class] mall real estate is still valuable, but I think a lot of these B’s and C’s have lost value, so I definitely think it’s not a hard value that we can just know what it is and we can use that to get a floor on the stock price. People instinctively know that there is some value there, but they don’t know exactly what that value is.”

Redding said Dillard's benefits from owning the majority of its stores where other retailers lease them and exercise less control. 

Dillard’s earnings fell Friday on weaker store traffic and deeper discounting, Redding said. She attributes the traffic stall and price markdowns — which were greater than her firm expected — to intense weather conditions in the first part of the second quarter that interrupted retail traffic.

Even though an exact estimate of Dillard's CRE value is unknown, the street does seem to have the perception it is valuable enough to buffer against some of the bad news hitting other department stores. 

Hedge fund manager Greenlight Capital’s David Einhorn sent a letter earlier this year to investors supporting his firm’s decision to take a larger position in Dillard’s, CNBC reported.

CNBC also quoted Snow Park Capital Partners as claiming Dillard's real estate properties alone should be valued near $200 per share.  

So what do all of these doses of confidence in Dillard's real estate do for the retailer and its stock?

“I think it helps create the perception that there’s a value there, but that perception has been there for a long time,” Redding said. “I’ve looked at Dillard’s for 10 years, and I’ve heard private equity come in and out, as well as activist shareholders come in and out, over the 10 years because of their real estate value.” 

The retailer communicates very little with the street, so retail analysts are often left guessing. 

“We don’t have comments from management to give us an indication if it’s for sale or if it’s not for sale or if they would have any plans to do anything with it in the future, so it’s just kind of a big gray area,” Redding said. “We know the [real estate] value is there, but we don’t know what the value is.”

All factors considered, Redding still considers Dillard's more valuable than many of its competitors and does believe its commercial real estate has value. 

She said so far the third quarter is looking much better for the retailer, and Dillard's earnings have ebbed and flowed before. 

So does Dillard's need to compete more online to survive and recruit millennials to gain traffic? Redding doesn’t think so. 

“I think Dillard's has to do what Dillard's does; and Dillard's differentiates itself by having a loyal customer relationship with that older customer base and by really focusing on private-label brands that their peers don’t have.”