NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) for Dillard's, Inc. (Dillard's) at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The ratings reflect Dillard's positive comparable store sales (comps) trends over the past five years, which have exceeded the industry average for most of this time frame, and an EBITDA margin that has stabilized in the 12% range over the last two years. Dillard's has significantly narrowed the gap to the strong operators that have EBITDA margins in the 13%-14% range. Fitch expects Dillard's to generate comps growth in the 1%-2% range over the next 24 months and EBITDA margin to remain flat-to-modestly higher.
While Dillard's credit metrics are strong for the 'BBB-' rating category with adjusted debt/EBITDAR currently at 1.1x, the ratings continue to incorporate Dillard's below industry-average sales productivity (as measured by sales per square foot) and operating profitability and geographical concentration relative to its higher rated investment-grade department store peers. Fitch expects Dillard's will continue to maintain or grow its market share modestly of the overall apparel and accessories category in the near to intermediate term, although long-term secular trends in the department store space remain negative and the decline in mall traffic has accelerated. Fitch expects Dillard's leverage to remain in the low-1x range over the next three years.
Dillard's is the sixth largest department store chain in the U.S. in terms of sales with retail revenue of $6.5 billion on 277 stores and 20 clearance centers in 29 states concentrated in the southeast, central and southwestern U.S. Dillard's comps have continued their positive trajectory since 2010, although growth moderated since 2013 to 1% versus the 3%-4% range between 2010 and 2012. Dillard's has experienced positive comp growth by improving its merchandise assortment towards more upscale brands, better in-store execution, and strong inventory control.
The company continues to focus on closing underperforming stores, closing a net 29 units or approximately 10% of its square footage since the end of 2007. However, Dillard's annual sales per square foot at approximately $130 is significantly lower than other well-operated mid-tier department store peers, which are in the $180-$200 range (based on gross square footage) and could constrain further improvement in EBITDA margin.
From a store investment perspective, capex is expected to moderately increase to the $160 million range in 2015, from $152 million in 2014, versus an average of roughly $110 million in 2010 - 2013, to support increasing investments in store updates (in the higher sales generating or more productive areas of the store), online growth initiatives and some modest new store openings expected in 2015/2016.
Liquidity remains strong, supported by a cash balance of $404 million as of Jan. 31, 2015, and $904 million available under its $1 billion credit facility, net of letters of credit outstanding. The company generated approximately $450 million in free cash flow (FCF; before special dividends) in 2014, the highest level since 2009, reflecting EBITDA growth and some working capital benefit. FCF generation has been approximately $400 million on average over the last five years, and Fitch expects Dillard's to maintain this level going forward, assuming modest working capital uses and a modest increase in capex. Given no debt maturities until early 2018, Fitch expects Dillard's will direct excess cash flow toward share buybacks and/or increased dividends including any one-time special dividends.
The $1 billion senior credit facility, which is due to mature on July 1, 2018, is rated one notch above the IDR at 'BBB' as the facility is secured by 100% of the inventories at Dillard's, Inc.'s unrestricted operating subsidiaries. The $615 million of senior unsecured notes are rated at par with the IDR, while the $200 million in capital securities due 2038 are rated two notches below the IDR reflecting their structural subordination. Fitch notes that Dillard's owns 88% of its retail square footage, which is currently unencumbered.
--Comps growth in the 1%-2% range over the next 24 months and EBITDA margin to remain flat-to-modestly higher, driven by continued improvement in its merchandise assortment towards more upscale brands, better in-store execution, and strong inventory control;
--Maintain or grow its market share modestly of the overall apparel and accessories category in the near- to intermediate-term, although long-term secular trends in the department store space remain negative and the decline in mall traffic has accelerated;
--Leverage to remain in the low-1x range;
--FCF of approximately $400 million annually, which Fitch expects will be directed toward share buybacks and/or increased dividends including any one-time special dividends.
A positive rating action could result in the event that Dillard's continues to generate above-industry-average comparable store gains and EBITDA margin improves to the 13% - 14% range.
A negative rating action could result in the event of a return to negative sales trends and/or a more aggressive financial posture, leading to an increase in leverage ratio of more than 2.5x and/or reduced financial flexibility.
Fitch has affirmed Dillard's ratings as follows:
--Long-term IDR at 'BBB-';
--$1 billion secured credit facility at 'BBB';
--Senior unsecured notes at 'BBB-';
--Capital securities at 'BB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage