MOODY'S CONFIRMS RATINGS OF DILLARD'S, INC.; CHANGES OUTLOOK FROM STABLE TO NEGATIVE
Moody's Investors Service confirmed the ratings of Dillard's, Inc. and changed the rating outlook from stable to negative. The outlook change reflects the under-performance of the former Mercantile stores and the possibility that the company may not realize the long term return on its considerable investment in Mercantile as quickly as anticipated, slowing the restoration of debt protection measures. Dillard's ratings incorporate the good strategic fit of Mercantile, the company's strengthened position in its major trade areas, the achievement of synergistic cost savings and the progress the company has made in reducing acquisition related debt.
Senior unsecured bonds, debentures, notes, Reset Put Securities and issuer rating at Baa1.
Senior unsecured bank credit agreement at Baa1.
Senior unsecured shelf at (P)Baa1.
Subordinated debentures at Baa2.
Subordinated unsecured shelf at (P)Baa2.
Preferred stock shelf at (P)"baa2"
Commercial paper at Prime-2
Dillard Investment Company, Inc.
Senior unsecured notes at Baa1.
Senior unsecured bank agreement at Baa1.
Commercial paper to Prime-2.
Dillard's Capital Trust I:
Capital securities at "baa2"
Dillard's Capital Trust II, Dillard's Capital Trust III, Dillard's Capital Trust IV, Dillard's Capital Trust V:
Capital securities shelf at (P)"baa2"
Mercantile Stores Company, Inc.
Senior unsecured notes and debentures at Baa1.
"Negative. Dillard's is weakly positioned at its current rating level given the less than anticipated performance at the former Mercantile stores and the modest improvement in post-acquisition debt protection measures. Failure to raise the returns at the former Mercantile stores to those of the core Dillard's stores, lack of progress in further improving debt protection measures in the intermediate term or significant initiatives to enhance shareholder value at the expense of bond holders could put downward pressure on the ratings."
The merger with Mercantile bolstered Dillard's market position in its major trade areas. Like Dillard's, Mercantile was a historically stable, financially prudent, family-controlled business. Such common traits somewhat eased the normal challenges of an operational combination. However, systems integration problems in the fourth quarter of 1998 led to significant delays in distribution (since remedied) and, as a result, higher post-holiday markdowns. As recently as the second quarter of the current fiscal year, the former Mercantile stores were under-performing, with store level SG&A of 27.2% (versus 23.9% for core Dillard's stores) and gross margin contribution about $25 million lower than the margin which would have obtained if the acquired stores had performed at the level of core Dillard's stores.
Dillard's has, however, made progress in improving debt protection measures. While the $2.9 billion debt-financed acquisition dramatically increased leverage, the sale of 26 stores to Saks and to May helped to lower the net acquisition cost to under $2.2 billion by the end of 1998. The realization of synergistic cost savings have also helped to improve financial performance. Nonetheless, leverage remains high, though still acceptable, with debt to EBITDA for the 12 months ending in July 1999 of about 4.1 times. Leverage could deteriorate should the company undertake a share repurchase or other initiative to enhance shareholder value.
Headquartered in Little Rock, Dillard's, Inc. operates about 336 department stores in 29 states.
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