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30 Dec 2003
MOODY'S DOWNGRADES DILLARD'S NOTES TO B2, SENIOR IMPLIED RATING TO B1
New York, December 30, 2003 -- Moody's Investors Service downgraded the ratings of Dillard's,
Inc. and its subsidiaries. The downgrade reflects concerns
about the value of the company's franchise over the longer term,
and the uncertainty that Dillard's financial performance will recover
to levels that will be consistent with peers. Ratings are supported
by reductions in debt which have occurred over the past two years,
as well as good asset coverage. The rating outlook is stable.
This concludes the review that started in August 2003. The following
ratings were affected by this action:
Senior implied rating to B1 from Ba3;
Senior unsecured ratings to B2 from Ba3;
Subordinate debt ratings to B3 from B2;
Shelf ratings for Dillard's debt and preferred stock to (P)B2, (P)B3,
and (P)Caa1) from (P)Ba3, (P)B2, and (P)B3;
Dillard's Capital Trust I to B3 from B2;
Dillard's Capital Trusts II, III, IV to (P)B3 from (P)B2.
The senior unsecured debt of Mercantile Stores, previously Ba3,
has been withdrawn. The debt is not formally supported by Dillard's,
which has repurchased most of the issue. Only about $30
million of debt remains outstanding.
The downgrade reflects Moody's expectation that Dillard's
will not be able to quickly turn around its disappointing operating performance,
and that the company will continue to face strong challenges from a broad
range of competitors. Dillard's primarily serves moderate
to better customers who are being aggressively sought by competitors with
significantly stronger growth trends, such as Kohl's and Target,
and by those with more heavily promotional strategies, such as other
traditional department stores. Dillard's key competitive
strategy is to excel with compelling private label product which produces
higher margins for the retailer and drives customer loyalty. Moody's
is concerned that Dillard's will find it challenging to deliver this message
to consumers given the drop-off in store traffic and the promotional
pricing strategies used by competing department stores.
Debt ratings continue to be supported by the value of tangible assets,
which Moody's believes provides good coverage for debt holders and
which could be tapped as a source of liquidity, if needed,
in the future. Dillard's owns nearly 80% of its stores,
which are largely unencumbered. The recently closed $1 billion
bank facility is secured by liens on subsidiary inventory, leaving
the value of subsidiaries' real estate and real estate and inventory assets
located at the parent available to support other obligations. Ratings
are also supported by fixed charge coverages which are satisfactory for
the rating category; a low level of rent expense relative to sales
as a result of store ownership; and a reduced debt burden,
due to the repayment of debt from working capital efficiencies gained
The two-notch downgrade of the senior notes reflects the decline
of their position relative to other obligations in the capital structure.
The notes are structurally subordinated to outstandings under the newly-established
$1 billion credit facility (under which there are currently no
outstandings), and to any future obligations of subsidiaries.
The senior notes are not guaranteed by subsidiaries, which hold
a majority of Dillard's assets and operations. Noteholders
are pari-passu with other unsecured obligors at the parent company.
The bank facility is secured by a pledge of inventory of subsidiaries
and also has meaningful subsidiaries as co-borrowers. In
addition, Dillard's has $900 million of credit card
receivable finance facilities. Moody's believes Dillard's
tangible assets comfortably exceed the amount of secured debt today.
However, the position of noteholders will deteriorate disproportionately
relative to secured debtholders if the company increases secured borrowings
or monetizes assets to finance operations. Moody's anticipates
that the upcoming redemption of preferred securities will be achieved
through receivables financing or new secured borrowings.
The rating outlook is stable. Dillard's fixed charge coverage
is satisfactory with EBITDAR less capex to fixed costs expected to remain
above 1.5 times. Leverage is high, however,
with debt to EBITDA expected to be in the range of 4.0 to 4.5
times this year. Moody's expects the company to continue
to fund its needs out of operating cash flow, particularly as it
has not been increasing the store base. Dillard's will be
challenged to reduce debt over the longer term, however, unless
it can improve its sales productivity and return on assets. The
current rating levels allow for a moderate decline in leverage measures.
Ratings could rise if Dillard's is able to improve profit margins
and returns, increasing cash flow relative to debt levels.
Ratings could fall if sustainable leverage measures deteriorate significantly
below current levels, or if the company experiences unexpected operational
volatility or a sudden drop-off in revenues.
Dillard's recently improved its immediately available liquidity
by increasing the amount of its revolving credit facility to $1
billion, which Moody's believes is sufficient to finance working
capital and any operating losses, if necessary. Like most
retailers, Dillard's is dependent on vendors to finance seasonal
working capital build. The company could face increased debt if
vendor terms are shortened or if its private label strategy causes it
to finance a greater portion of its inventory itself. Moody's
believes that Dillard's has the option to monetize real estate if
its need for long term debt increases or to finance upcoming maturities.
Dillard's Inc., headquartered in Little Rock,
Arkansas, operates approximately 330 department stores in 29 U.S.
states. Sales were $8.2 billion for the fiscal year
ended January 2003.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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