Dillard's Department Store Sets a Trend - and It's Not For Fashion
Dillard's (DDS) may not be setting fashionistas on fire with its apparel and accessories assortments but its taking a forward-thinking approach to its real estate holdings. According to an SEC filing, the Arkansas-based department store chain is forming a real estate investment trust (REIT), a smart move that should give the company improved liquidity.
With the exception of Nordstrom (JWN), department stores are still battling recession-weary consumers with an arsenal of so-so styles and ho-hum merchandising. Chains such as Lord & Taylor and Belk have each gambled that focusing on fresh fixtures and made-over logos would dump their frumpy image for good.
Though it's publicly-traded, Dillard's is still controlled by the Dillard family and helmed by William Dillard, II. That's probably the primary reason the retailer's been able to sell the REIT idea to shareholders. The filing was short on details, however, it does say Dillard's plans to transfer its real estate assets (241 of 309 stores) into the new REIT and then lease the properties back to the operators on "triple net" leases. In other words, the lessee's not only paying rent, they're responsible for all taxes, insurance, and maintenance expenses. Dillard's also formed a captive insurance company, a wholly-owned unit to help efficiently manage its risks.
Now that the economy is beginning to show signs of life, REITs have rebounded and started producing significantly better returns. CBL & Associates (CBL) for example, posted better than 50 percent gains over the past year. So it's clearly good timing for Dillard's, especially as store sales continue to underwhelm. Total sales for the 48 weeks which ended January 1, 2011 increased just 2 percent, while comps eked out a 3 percent gain.
Add to that the fact that Dillard's owned real estate is worth about $2.3 billion to $3.3 billion according to Deutsche Bank's estimates -- a figure that exceeds the company's $3.1 billion enterprise value, and it's practically a no-brainer.
Several major retail chains have tried -- and failed -- to pull off forming REIT's recently. Activist investor William Ackman attempted to increase the value of Target (TGT) just that way in late 2008. That plan never made it off the deal table, despite its ability to minimize taxes. Sears (SHLD) was cooking up a similar strategy, and it too, never came to fruition.
If Dillard's REIT proves to be a success, it may find itself setting a trend among competing department stores. After all, Sears owns 808 of its 3,921 stores, Macy's (M) owns 469 of 850, JCPenney (JCP) owns 416 of 1,108, and Nordstrom (JWN) 92 of 184. Who needs to reinvent the wheel -- or another denim collection -- when you're sitting on acres of potentially lucrative land?
Image via Wikimedia Commons CC 2.0
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