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01 May 2002
MOODY'S LOWERS LONG-TERM RATINGS OF DILLARD'S, INC. (SENIOR IMPLIED TO Ba3); OUTLOOK IS NEGATIVE
New York, May 01, 2002 -- Moody's Investors Service lowered the long-term ratings of Dillard's,
Inc. based on the continued decline in debt protection measures,
the increased competition and promotional activities in Dillard's major
trade areas, and the challenges that the company faces in achieving
a significant and sustainable improvement in its operating performance.
The new rating level also assumes that Dillard's will put in place a new
bank facility before the expiry of its current revolving credit agreement
on May 9th. This rating action concludes the review of long-term
ratings for possible downgrade begun on January 14, 2002.
The outlook is negative, reflecting the major challenges that the
company faces in improving its same store sales, profitability and
debt protection measures in an unforgiving retail environment.
Senior Implied to Ba3 from Ba1.
Senior unsecured bonds, debentures, notes, Reset Put
Securities, expiring bank credit agreement and issuer rating to
Ba3 from Ba1.
Senior unsecured shelf to (P)Ba3 from (P) Ba1.
Subordinated debentures to B2 from Ba2.
Subordinated unsecured shelf to (P)B2 from Ba2.
Preferred stock shelf to (P)B3 from (P)Ba3.
Mercantile Stores Company, Inc.
Senior unsecured notes and debentures to Ba3 from Ba1.
Dillard's Capital Trust I:
Capital securities to B2 from Ba2.
Dillard's Capital Trust II, Dillard's Capital Trust III, Dillard's
Capital Trust IV, Dillard's Capital Trust V:
Capital securities shelf to (P)B2 from (P)Ba2.
Dillard's Inc.: Commercial paper at Not Prime.
Dillard's Investment Company, Inc.: Commercial paper
at Not Prime.
Dillard's debt protection measures have continued to steadily decline
since its debt financed acquisition of Mercantile Stores in August of
1998. Like many traditional department stores, Dillard's
has also been impacted by sated consumer demand for apparel, competition
from new entrants and discounters, and a slower economy.
Monthly same store sales have been negative for all but six of the last
25 months. Two months with positive comparable stores, however,
have occurred within the last three months.
Profit margins fell again in fiscal 2001, given negative comparable
store sales and promotions and markdowns to clear inventory. EBITDA
in fiscal 2001 fell to $617 million (7.4% of sales),
down from the prior year's 719 million (8.1%). Dillard's
is working to boost profitability through initiatives such as its "product-first"
buying philosophy, enhanced markdown strategy, an exclusive
brand program in women's shoes, upgrades in systems to better forecast
sales and replenishment levels, and increased private label penetration.
One of the benefits of the company's initiatives has been lower inventory
levels. Dillard's successfully reduced comparable store inventory
by 5% in 2001. While the company's efforts may yield returns
over the long run, Moody's believes that it is unlikely that the
margin improvement in the fourth quarter can be sustained and unlikely
that debt protection measures in the short term will improve materially
given intense competition in apparel retailing, from some stronger
players. Dillard's faces a dual challenge in significantly improving
its operating performance: it needs to convince its target customer
that its department store format provides a compelling and convenient
shopping experience, as well as to differentiate its merchandise
and stores from those of other traditional department stores.
Expense control and tighter working capital management have enhanced operating
cash flow, allowing Dillard's to repay over $1.2 billion
of debt since the Mercantile acquisition. Despite consistent debt
reduction, coverages are modest and debt to EBITDA, adjusted
for operating leases and securitized receivables, has not improved.
While Dillard's has sufficient near term liquidity, certain aspects
of its liquidity management and capital structure are not optimum.
Although the company's bank credit agreement is due to expire within the
next two weeks, Dillard's has not yet executed a new bank facility.
Dillard's access to receivables conduit facilities provides a useful source
of supplemental working capital financing, but does not, in
Moody's view, provide the same level of financial flexibility as
a multi-year bank credit agreement. The conduit facilities
are short term and, to use them, Dillard's must have eligible
retail receivables -- which is currently the case.
(Total receivables were over $1 billion at fiscal year end 2001.)
Additionally, in Moody's view, certain structural features
of Dillard's financing arrangements could, in certain circumstances,
weaken its financial flexibility. However, Dillard's ownership
of about 75% of its stores remains a credit positive, representing
another potential source of monetization. Dillard's also had cash
of $153 million at the end of the fiscal year.
Headquartered in Little Rock, Arkansas, Dillard's Inc.
operates about 340 department stores in 29 states.
Moody's Investors Service
Elaine E. Francolino
VP - Senior Credit Officer
Moody's Investors Service
No Related Data.
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