Dillard's (NYSE: DDS) Stock Still a Buy Thanks to Cost Containment

Just over a week ago, we pointed out that Dillard's (NYSE:DDS) was a bargain buy thanks in part to diminished expectations for a retailer in the second quarter of 2020. This might easily have been the worst quarter for retail ever, including even the Great Depression because at least then stores weren't required to close by government mandate. Dillard's proved itself a bargain worth buying thanks to some exciting earnings results, and despite the fact that retail still isn't looking great, it's still worth a buy.

Dillard's Delivers Unexpected Numbers

The good news—though admittedly, it's not good news in an objective sense—is that the company lost just $0.37 per share. That's well down from not only its losses at this same time last year, where the company lost $1.59 per share, but also down even more significantly from analysts' expectations, which looked for the company to lose money in epic quantities to turn in losses of $4.54 per share.

That's an excellent result in its own right, but the company offered up further numbers to call attention to its operations. Dillard's pointed out that all of its locations were open once more by June 2, 2020, and though there are reduced hours, all stores are open and operating with one location as an exception. Sales performance is a bit sluggish, coming in at about 72% of prior year sales as matched to previous days.

Revenue, oddly enough, represented the biggest point the company put up. came in a little short of expectations; the company brought in $893 million, which was short of expected sales of $1.01 billion. Dillard's revenue for the quarter was actually down 35% from the same time last year.

How Did Dillard's Pull It Off, Anyway?

Dillard's essentially slashed its losses over the same time the preceding year, but did it on significantly less revenue. What happened between there and here to drive such an outcome? The reports suggest that the company put particular focus on cost-containment measures. As noted by William Dillard II, the company's CEO, the company “worked hard to control inventory and expenses.” In so doing, the company could narrow its losses still further and improve its overall margins.

Work hard it did; the company lowered inventory by 20% as compared to the second quarter of 2019, and the company also took $142 million out of its “selling, general and administrative expenses.” Purchases for the second quarter were down 62%, which was enough to drive up retail gross margin by 239 basis points. 

It even managed to stage a share buyback operation for $14.3 million in the quarter, at a time when most every other company had suspended share buyback initiatives in a bid to save money.

Dillard's Secret Sauce Will Likely Continue Driving Performance

For those considering placing an investment with Dillard's, there's every reason to do so. The company is aggressively protecting its investors and its overall business health by taking extreme measures. As noted previously, it's slashed its inventory buying and kept its share buyback plans in place, but it's gone well beyond that. The CEO is working for free. Pay cuts of 20% for salaried employees were put in place almost universally, and payroll expenses were cut 35%.

Better yet, the company doesn't have the rent troubles that many other firms do, in both directions, like Simon Property Group (NYSE:SPG) or JCPenney (NYSE:JCP). Dillard's actually owns 90% of its retail storage square footage, reports note, as well as the entirety of its distribution and fulfillment, not to mention its corporate headquarters. It has ready access to credit, and with its major cost-cutting operations, it's likely to continue generating value for some time to come.

The retail market isn't exactly healthy right now, so it would be easy to see where encouraging a buy in a retail stock might seem like a bad move. Dillard's, however, is proving its value in several steps. It's accommodating the realities of the day and working with them, not through massive layoffs but through evened-out bearing of the costs.

The cost-containment strategies it has already engaged in will give it a real edge when demand starts getting back to full strength. Dillard's might well be looking at a really impressive fourth quarter, when holiday shopping demand starts kicking in, thanks to its aggressive cost-containment, and that makes Dillard's continue to be a worthwhile bargain buy.