Dillard's Inc.

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Dillard's Inc.

1600 Cantrell Road
Little Rock, Arkansas 72201

Telephone: (501) 376-5200
Fax: (501) 376-5917
Web site: http://www.dillards.com

Public Company
Employees: 53,598
Sales: $7.59 billion (2004)
Stock Exchanges: New York
Ticker Symbol: DDS
NAIC: 452110 Department Stores

Based in Little Rock, Arkansas, and located throughout suburbs and secondary markets in 24 states in the South, Southwest, and Midwest, Dillard's Inc., operates hundreds of stores selling brand-name goods in the middle to upper-middle price ranges. Key product lines include home furnishings and fashionable clothing. Dillard's stores rarely run discount promotions, preferring an everyday pricing strategy based on local competition, aided by a sophisticated computerized inventory and sales system.

Early 20th Century Beginnings

Dillard's was founded by William Dillard, who also headed the company until his death in 2002. Born in 1914, Dillard was raised in a merchandising family in tiny Mineral Springs, Arkansas. He worked in his father's hardware store and later studied at the University of Arkansas and the Columbia University School of Business. After earning his master's degree at Columbia and completing a Sears training program, Dillard borrowed $8,000 from his father and in February 1938 opened T.J. Dillard's in Nashville, Arkansas, near his home town.

From the first, business was good. His father's wholesalers extended him credit, and customers reacted positively to his well-known father's name, "T.J." Dillard and his wife, Alexa, stocked the store with name-brand merchandise they had bought at low prices. With heavy advertising, first-year sales reached $42,000.

With the onset of World War II, Dillard volunteered for service in the U.S. Navy. He sold his merchandise to another store but kept his store open to collect on credit accounts. While Dillard was waiting for his naval commission, his father died. Family responsibilities called him home, and when the commission came through, he declined it.

In 1944, Dillard and his wife reopened their store. Despite the war, retail sales hit $300,000 in 1945. Business was so good, in fact, that in 1946 Dillard added an 80-foot-long addition. Considering the following year's $340,000 in sales an absolute maximum, Dillard sought new opportunities elsewhere. He invested $50,000 in the proposed expansion of Wooten's Department Store in Texarkana, a town split down the middle by the Texas-Arkansas border. After commuting between Nashville and Texarkana for six months he decided to settle in Texarkana. In March 1948, Dillard sold T.J. Dillard's and upped his stake in Wooten's to 40 percent, changing its name to Wooten & Dillard Inc.

With Wooten's consent, Dillard decided that, instead of expanding the existing store, Wooten & Dillard should open a new store featuring name brands and revolving credit. Despite strong sales, Wooten & Dillard lost money during its first six months, and Wooten asked Dillard to buy him out. To assemble the needed $100,000 in capital, Dillard collected investors and obtained a loan from the Federal Reconstruction Finance Corporation. By March 1949, he controlled the company. Dillard then began a massive newspaper advertising campaign, developing a relationship with the media that was to become his trademark. Within three months the store was profitable.

Expansion in the 1950s60s

Ready to expand again in 1955, Dillard bought a 7,500-square-foot Magnolia, Arkansas, store from a family friend. Magnolia, a town of 7,000 located 55 miles from Texarkana, proved a lucrative market. The following February, Dillard added appliances and furniture to his line of products.

Dillard's next opportunity came in 1956. Mayer & Schmidt had long been Tyler, Texas's most successful store. A failed attempt at expansion, however, had left it financially vulnerable. In April 1956, Dillard and a group of investors bought it. Dillard completely remodeled the place, expanding into the basement and leasing some departments. When he reopened in September, he advertised heavily in the local papers; the store soon set records for one-day sales.

Dillard's astute financing and smooth turnarounds caught the attention of the region's bankers. In 1959, Fred Eisman, a director of the First National Bank of St. Louis, asked Dillard to buy a failing Tulsa, Oklahoma, department store, Brown-Dunkin. Dillard jumped at the idea. Tulsa was bigger than Tyler, and Brown-Dunkin was bigger than Mayer & Schmidt. With the help of friends, bankers, and other investors, Dillard raised $325,000 and in February 1960 bought the store.

Turning Brown-Dunkin around was difficult. Within 24 hours of the purchase, disgruntled union members began picketing the store, protesting a previous dismissal of maids and elevator operators. A week later, Dillard discovered a cigar box filled with $150,000 in unpaid bills. Struggling with the situation, Dillard sold his Texarkana and Magnolia stores to Alden's for $775,000. In three months, the union gave up picketing, and with a loan from the National Bank of Tulsa Dillard paid off Brown-Dunkin's debts. After launching a newspaper campaign, Dillard had the store back in the black.

In 1961, as Dillard was consolidating Brown-Dunkin, he formed Dillard Investment Company, Inc. With bank loans, Dillard Investment bought Dillard's credit accounts. As customers paid their bills, the subsidiary repaid the banks. This gave Dillard stores the benefit of credit sales while remaining free of debts.

In 1962, Dillard wanted to return with his family to Arkansas. At the time, there were two leading stores in Little Rock, the Gus Blass Department Store and the Joseph Pfeifer Department Store. Rebuffed in his bid for Blass, Dillard turned to Pfeifer. After extensive negotiations, Pfeifer president Sam Strauss accepted Dillard's bid of more than $3 million.

Dillard was again creative with capital. He collected investors, sold $325,000 worth of stock to Mayer & Schmidt shareholders, and convinced Sperry & Hutchinson, makers of S & H Green Stamps, to invest $1.5 million in exchange for issuing its stamps in his stores. In the fall of 1963, the Mayer & Schmidt store bought the Pfeifer store.

In January 1964, shareholders reincorporated Mayer & Schmidt in Delaware, where laws were more favorable. They changed the name of the company to Dillard Department Stores, Inc. but retained the names of the individual stores until 1974.

In February 1964, Gus Blass Co. allowed Dillard to buy the 192,000-square-foot Little Rock store and a 61,000-square-foot store at Pine Bluff, Arkansas. Since the main Blass store was just two blocks from Pfeifer, Dillard concentrated on remodeling the Pine Bluff store. By year's end, total corporate sales reached $41.2 million.

Two other key events occurred in 1964: the company installed its first computer system and opened its first mall store. The computers were the start of one of the industry's most advanced tracking systems. The mall store, on the west edge of Little Rock, marked the beginning of a move to the suburbs. Under various names, Dillard opened six more mall stores during the years from 1964 to 1968.

The year 1968 also marked the next turning point in corporate organization. For better administration, Dillard divided his 15 stores into three divisions: Arkansas, Oklahoma, and Texas. He also formed Construction Developers, Inc., a wholly owned subsidiary, to manage the company's real estate holdings.

In 1969, Dillard turned to the stock market. He divided the stock into two classes. Class A would raise money. Class B, the voting stock, would remain under Dillard's control. Listed on the American Stock Exchange, the first offering sold 242,430 shares worth $4 million.

Acquisitions in the 1970s80s

Dillard opened three mall stores in 1970, and in August 1971 he purchased five Fedway stores from Federated Department Stores. Though not unprofitable, Federated considered the Fedway stores less than successful. After restocking the stores with name brands, Dillard renamed the stores Dillard's in 1972. By the end of that year, Dillard had 22 stores and sales of more than $100 million. Three of that year's four new stores had a regional rather than a metropolitan focus. As such, they were placed at the convergence of major highways.

The year 1973 marked the beginning of Dillard's border operations. To attract the inhabitants of nearby Matamoros, Mexico, the recently opened Brownsville store accepted the peso and extended credit to Mexican citizens.

The following year, Dillard bought five Leonard's stores from the Tandy Corporation for stock and cash. Leonard's provided an instant saturation of the Dallas-Fort Worth market. Saturation was an important factor as it allowed the company to spread advertising costs over many stores. By year's end, company-wide sales reached $173.4 million. More mall stores opened through the mid-1970s. Two stores came on line in 1975, including the first in Kansas, and in 1976 Dillard opened a record six stores in Texas, Oklahoma, and Louisiana.

In 1977, William (Bill) Dillard II, William Dillard's son, was named president and chief operating officer. William Dillard remained chief executive officer and chairman of the board, while E. Ray Kemp was named vice-chairman and chief administrative officer. By year's end, there were 38 Dillard's with sales of $269 million.

Company Perspectives:

At Dillard's, respect for our customers is paramount. Building enduring relationships with customers has, in large measure, accounted for our steady growth and continued financial success. Experience has shown that we can best earn their trust by always emphasizing value.

While sales had doubled from 1973 to 1977, debts had also doubled. By the end of 1977, the company lacked expansion capital. Searching for money, William Dillard met A.C.R. Dreesmann, chief executive officer of Vroom en Dreesmann B.V., the Netherlands' largest retail company. Dreesmann agreed to become Dillard's largest stockholder and to stay out of management. In February 1978, the board approved the sale of $24 million worth of Class A stock to Vroom en Dreesmann's subsidiary, Vendamerica B.V. The sale took place in three annual installments and gave Vendamerica 55 percent of the Class A shares. In 1979, Dillard used Vendamerica's first installment to build four new stores and remodel several older ones.

In 1980, rising interest rates checked Dillard's profits growth. Higher rates meant bigger payments on borrowed money and also hurt Dillard's own credit sales. Nevertheless, in 1980, Dillard added six stores in Texas and Oklahoma.

By contrast, 1981 was a banner year. The booming oil industry fueled sales growth, and management shifted its emphasis toward fast moving soft goods and away from less profitable home furnishings. Sales increased 26 percent to $470.7 million, profits vaulted 91 percent to $16.3 million, and earnings per share surged 85 percent to $5.35.

In 1982, new Dillard's stores opened in Dallas and Memphis. The success of the Memphis store prompted Dillard to lease three former Lowenstein stores and saturate the Memphis market. The three Memphis stores were a part of the record 11 new Dillard's opened in 1982. In the early 1980s, Dillard's grew at twice the department store average. Although the devaluation of the peso had a negative effect on border operations, 1982 profits still rose to $21.95 million.

As profits skyrocketed, so did stock prices. High stock prices reduced the company's financial flexibility, and in 1983 it embarked on a series of stock splits. With new capital available, Dillard acquired 12 St. Louis-area Stix, Baer & Fuller stores from Associated Dry Goods. The purchase came about through a chance meeting. While waiting for a flight at New York's LaGuardia Airport, William and Bill Dillard spotted mall developer Ed DeBartolo's corporate jet. They stopped for a visit and by chance met Bill Arnold, Associated's chairman. Arnold mentioned the possibility of selling Stix, Baer & Fuller, and months later, when new mall space became difficult to find, Dillard bought the stores.

The company had yet another year of massive expansion in 1984, when August Dillard agreed to pay the Dayton Hudson Corporation $140 million for 18 John A. Brown stores and 12 Diamond stores in the southwestern United States. Though not unprofitable, the stores performed below the Dayton Hudson average. Dillard immediately changed the John A. Brown stores to Dillard's. The Diamond stores went through a longer process in order to acquire the Dillard's name. In response to the needs of these western stores, Dillard added a new division based in Phoenix.

By the end of 1984, Dillard's sales had increased 50.7 percent to $1.27 billion. Net profit had jumped $15 million to $49.5 million, and the number of stores had increased from 66 to 93. Indeed, the only stain in the company's performance that year came through some poor publicity generated when Dillard's failed to feature any minority models in a major advertising supplement. The National Association for the Advancement of Colored People (NAACP) complained and the next year protested the company's treatment of minorities, announcing a boycott of the stores. In 1986, William Dillard agreed to hire more African-Americans and include more of them in management, a move that resolved the dispute.

The middle and late 1980s were marked by a shrewd reading of other department stores' finances. In 1985, after a management-led buyout of the R.H. Macy Company, Dillard went to New York, hoping that Macy's management would sell stores for needed capital. Within three months he closed a $100 million deal for 12 Macy's stores in Kansas City, Missouri, and Topeka and Wichita, Kansas.

Also during this time, Campeau Corporation, a Canadian company that had acquired Allied Stores Corp., needed cash to defray expenses. For $225 million, Campeau sold Dillard's 27 Joske's department stores and three Cain-Sloan department stores in 1987. Joske's gave Dillard what some described as a monopoly in Texas and pushed the retailer into the Houston market, while Cain-Sloan gave Dillard's a presence in Nashville, Tennessee. In 1989, in a joint venture with The Edward J. DeBartolo Corporation, Dillard's acquired the Higbee Company, a chain of 12 Ohio department and specialty stores, in a $165 million deal.

Key Dates:

William Dillard opens a retail store in Nashville, Arkansas, and expands his business through acquisitions.
The company is incorporated.
The company now has stores in Arkansas, Oklahoma, and Texas.
Dillard's goes public on the American Stock Exchange.
The company expands into Kansas.
The company pays the Dayton Hudson Corporation $140 million for 18 John A. Brown stores and 12 Diamond stores in the southwestern United States.
Twelve stores are acquired from the R.H. Macy Company.
New Orleans-based D.H. Holmes Company, a chain of 17 stores located in Louisiana, Mississippi, Alabama, and Florida, is acquired.
The company purchases J.B. Ivey & Company's 23 stores in the Carolinas and Florida.
For a period, the company begins opening new stores rather than acquiring existing businesses.
Dillard's purchase of Mercantile Stores for $2.9 billion signals the beginning of financial difficulties for the company.
Dillard's begins selling off operations as part of a strategy to recover lost financial ground.

While continuing to open new stores in Missouri, Oklahoma, and Texas, Dillard's 1989 focus was again on acquisitions. Dillard acquired New Orleans-based D.H. Holmes Company, a chain of 17 stores located in Louisiana, Mississippi, Alabama, and Florida. Although Holmes was a consistent money-loser, Dillard was confident of a turnaround and was hungry for Holmes's New Orleans and Baton Rouge properties. In 1989, Dillard also moved its stock listing to the New York Stock Exchange and offered two million shares of Class A common stock as well as two sets of debentures.

1990s and Beyond

Dillard's continued its acquisition campaign in 1990, paying BAT Industries $110 million for J.B. Ivey & Company's 23 stores in the Carolinas and Florida. The price of $109 million, or one-third of annual sales, compared favorably with rates others were paying for BAT assets. The purchase also provided Dillard's a base from which to expand in such lucrative markets as Jacksonville and Daytona Beach, Florida, and Raleigh-Durham, North Carolina.

While for many retailers, 1990 was a disastrous year, Dillard's experienced some unique gains. Some estimated that Dillard's enjoyed an 18 percent same-store sales gain over 1989. In 1990, every expense item on the company's income statement dropped as a percentage of sales. Because the company's ratio of debt to capital is lower than that of competitors, interest was less of a problem for Dillard's than for its competition.

By 1992, Dillard's acquisitions program was winding down. In 1991, the company gained eight Maison Blanche Department Stores located in central and western Florida. The following year the company bought four more stores in Ohio from Joseph Horne Co. to add to its Higbee's chain but only after Horne sued Dillard's over its backing out of a deal to acquire Horne in the late 1980s. Horne officials claimed the failed deal ruined the company's finances by disrupting its operations and leading to the departure of key executives. Dillard's received the first significant battering of its clean reputation as a result, but seemed to emerge otherwise unscathed. Also in 1991, Vendamerica sold all of its shares in Dillard's in a public offering.

By 1992, Dillard's had failed to turn around the Higbee's stores in Ohio, but nonetheless increased its exposure by buying out its partner, DeBartolo, for about $90 million. The company also announced that year that it would enter the Mexican market through the development of Dillard's anchors for five planned regional department stores. By mid-1996, the venture had not borne fruit, the apparent victim of the Mexican economic crisis of 1994.

Starting in 1991, the company significantly increased the number of new stores it was opening each yearten added in 1991 and 11 the following year. Indeed, 1993 saw the beginning of an official shift in the company's growth strategy away from acquisitions and to the opening of new stores. From 1993 to 1995, 26 new stores were opened, while none were added through acquisition. A record 16 new stores were planned for 1996. One advantage of this growth strategy was that Dillard's could carefully choose the locations for its new stores, and it moved into such desirable areas as Louisville, Atlanta, Denver, and Colorado Springs.

By 1993, sales at Dillard's had grown to $5.13 billion, a sixfold increase over a ten-year period, while profits were also multiplying from $34.1 million to $241.1 million. Signs of a downturn, however, were evident even in the 1993 results as sales increased only nine percent, following year after year of growth in the 12 to 19 percent range. Profits, meanwhile, had increased only 2 percent over 1992. This slowdown continued through 1995 as sales increased 8 percent in 1994 and 7 percent in 1995, while profits increased only slightly to $251.8 million in 1994 before falling dramatically to $167 million in 1995, which even without a $78.5 million charge for impairment of long-lived assets would still have totaled only $245.6 million.

Analysts reasoned that Dillard's was in part a victim of weak sales of women's apparel industrywide, which could be devastating for a company that generated about 40 percent of its sales from this sector. However, the company's marketing strategies were also identified as contributing to the difficulties, in particular its longstanding everyday pricing policy; some observers noted that Dillard's lack of promotions caused it to lose customers to other department stores, which lured people through their doors by running sales on an almost constant basis.

Although it was sticking with its marketing policies as of mid-1996, Dillard's reorganized its operating divisions along geographic and climatic lines in March 1996 in order to improve operating results. The company's Cleveland and San Antonio divisions were merged into the company's other divisions, leaving the company with a more streamlined operation with five divisional buying offices.

By the end of the 1990s, however, Dillard's had begun to expand its operations to compete against new competitors in retailing, including giant Wal-Mart. Early in 1998, Dilard's announced plans to purchase rival retailer Mercantile Stores for $2.9 billion, acquiring 103 separate locations in the transaction. Later in the year, Dillard's announced plans to sell off twenty-six of the newly acquired locationsin places as diverse as Duluth, Minnesota and Spartanburg, South Carolinato avoid competing with itself. The acquisition of Mercantile caused Dillard's expenses to nearly double, cutting deeply into the year's profits. Nevertheless, the addition of the Mercantile stores also boosted sales by more than 25 percent in the third quarter of 1998.

The dip in Dillard's sales following the Mercantile acquisition caused angst for stock market analysts. Early in 1999, following a weak second-quarter report, Wall Street traders reduced their valuation of Dillard's stock. The corporation responded by announcing a plan to repurchase $250 million of its common stock, partly for use in boosting employee retirement plans. Heading into the end of the century, the question facing Dillard's was whether it could turn itself around from the difficult period of the mid-1990s and reestablish its formerly lofty position, which just a few years earlier had it placed at the forefront of the department store industry.

The outlook did not look bright as Dillard's entered the new millennium. By the middle of 2000, the company had posted losses for five consecutive quarters. Business picked up toward the end of the year, however, and by March of 2001 the company reported fourth-quarter net income of $66 million, more than twice what it had been a year before. By the following March, business had increased even further, bringing in net profits of $102 million despite a decline in sales. Dillard's spokespersons credited the early retirement of debt and cost-cutting measures as important steps in the recovery program.

Dillard's sales continued to fall into 2003, driven downward by a difficult economy that hit the business and other full-price retailers hard. Despite adopting new accounting practices, cutting operating expenses by a further 1.9 percent, and tax credits left over from its acquisition of Mercantile, the company continued to lose money and sales. Dillard's responded with a program to slough off six underperforming stores and cutting prices to reduce inventory. Losses continued to mount, however, and at the end of 2003 the Wall Street investor service firm Moody's downgraded Dillard's rating. In 2004, Dillard's also suffered a setback when Hurricane Charley ripped through the southeast, forcing the closing of at least fourteen stores for at least a day.

Despite these setbacks, Dillard's continued to improve performance by cutting operating costs, interest expense, and average gross margin. The company also divested itself of some of its non-core operations. In June 2004, the corporation sold its ticket-sales operation, Dillard's Box Office, to EMT Entertainment Network of California. In September of 2004, Dillard's sold its credit card business to GE Consumer Finance.

From a small department store in Arkansas, the late William Dillard built one of the fastest growing department store chains in the United States. Expanding first by acquisition and later by placing stores in suburban malls and buying underperforming assets from debt-burdened competitors, Dillard's has grown without burdening itself with crushing debt.

Principal Subsidiaries

Cain Sloan, Inc.; Construction Developers Inc.; Dillard Investment Co. Inc.; Dillard Travel, Inc.; D.H. Holmes Company, Limited; J.B. Ivey & Company.

Further Reading

Brown, Susan, "Dillard: Acquiring for the Future," Financial World, October 30, 1990, p. 19.

Caminiti, Susan, "A Quiet Superstar Rises in Retailing," Fortune, October 23, 1989, pp. 16769.

, "The New Champs of Retailing," Fortune, September 24, 1990, pp. 85100.

Creno, Glen. "Dillard's Negotiates to Sell Arizona-Based Box Office Operations," Knight Ridder/Tribune Business News, June 18, 1999.

"Dillard's Inc.: Quarterly Loss Narrowed, But Sales Dropped by 2.9%," Wall Street Journal, August 19, 2004, p. B8.

"Dillard's Sells Its Bank for $1.25 Billion," Chain Store Age, September, 2004, p. 151.

Fisher, Christy, and Laura Loro, "May, Dillard Hot, but All Watch Specialty Inroads," Advertising Age, January 28, 1991, p. 23.

Forest, Stephanie Anderson, "Dillard's Has a Dilly of a Headache," Business Week, October 3, 1994, pp. 8586.

Hogsett, Don. "Dillard's Pushes Profit up in 1Q," Home Textiles Today, May 26, 2003, p. 20.

. "Dillard's Doubles Profits," Home Textiles Today, May 17, 2004, p.33.

. "Dillard's Inc. Narrows Loss," Home Textiles Today, August 30, 2004, p. 16.

Krim, Jonathan. "Dillard's Swings to a Q2 Loss on Lower Same-Store Sales," The America's Intelligence Wire, August 20, 2003.

Maile, Matt. "Large Retailers Adapting to Changing Environment," Journal Record (Oklahoma City, OK), November 6, 2002.

Morgenson, Gretchen, "A Midas Touch," Forbes, February 4, 1991, p. 42.

Much, Marilyn. "Recession's Been Kind To Stores, But Retail Casualties May Climb: K-Mart Teeters on Brink; Though in Better Shape, Dillard and Gap Struggle," Investor's Business Daily, January 18, 2002, p. A01.

Rosenberg, Leon Joseph, Dillard's: The First Fifty Years, Fayetteville: The University of Arkansas Press, 1988, 141 p.

Schroeder, Michael, and Wendy Zellner, "Hell Hath No Fury Like a Big Store Scorned: Horne's Department Store Is Suing Dillard, the Suitor That Balked," Business Week, September 23, 1991, pp. 3940.

Sutor, Ruthanne, "The Friends of Bill Dillard," Financial World, September 6, 1988, p. 22.

Talley, Karen. "Dillard's, Ross Rise Amid Merger Talk," Wall Street Journal, June 11, 2004, p. C3.

. "Rising Oil Prices Depress Blue Chips; Industrials, Tech Stocks Dig Deeper Into Lows for 2004; Dillard's Rises 5.7% on Pact," Wall Street Journal, August 10, 2004, p.C4.

Jordan Wankoff
updates: David E. Salamie; Kenneth R. Shepherd