DDS: (D)riving (D)epartment (S)stores Higher

On a day where news out of retail land is scarce, the following brief statement/filing appears to be taking the mall anchors for a ride, to the upside:

 

Dillard's, Inc. (the "Company" or "Dillard's") intends to form a wholly-owned

subsidiary that will seek to operate as a real estate investment trust (the

"REIT"). Dillard's believes the formation of a REIT may enhance its ability to

access debt or preferred stock and thereby enhance its liquidity. It is

intended that various Dillard's entities (the "Dillard's Parties") will

transfer to the REIT interests in certain real properties (the "Properties")

currently owned by the Dillard's Parties, who will lease the Properties back

from the REIT under "triple net" leases.

 

We’ve been asked a couple of times what is driving the strength in the department store space, mainly Macy’s but it’s hard to ignore the strength in Sears and JC Penney.  Yes, Macy’s was stamped with a “buy” last night from Cramer but this is likely coincidence more than anything else.  The bottom line is the group is trading up in sympathy with speculation that each of this country’s mall anchors could/should employ a similar REIT subsidiary structure.  While in theory this could be viewed as a valid reason to unleash real estate value and separate the “operations” from the “assets” we have to question whether it makes sense for each of these companies.  The key differentiating factor between DDS and the others primarily surrounds the company’s “ruling family”.  The Dilliard’s themselves are still in complete control of DDS with voting rights that comprise 99.4% of the B share super-voting stock (which in turn is entitled to electing two-thirds of the board).  It’s also no secret that the Dillard family has long held interests in real estate (i.e entire malls) that Dillard stores operate in. 

 

Interestingly the company notes in the filing that they believe this strategy with enhance the company’s access dept or preferred stock markets.  This is clearly financial maneuvering at its best.  To our best knowledge the company is as mature as it gets and really has little true capital (i.e growth) requirements.  In looking at JCP specifically, we know that debt reduction is a company-stated top priority- even surpassing the desire to buyback stock.  So, if access to debt capital markets is a key reason for engaging in such a structure, does this even apply to JCP or the other levered mall-anchors?  Anything is possible for sure, but we’d be surprised to see the others following suit given their unique ownership characteristics as well as wide range of differences between each of the company’s operational strategies.

 

Eric Levine

Director


Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more