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Rating Action:

Moody's upgrades Dillard's CFR to Ba2; outlook positive

04 Apr 2013

Approximately $825 Million of Debt Securities Affected.

New York, April 04, 2013 -- Moody's Investors Service today upgraded Dillard's, Inc. long term rating including its Corporate Family Rating to Ba2 from Ba3. At the same time the rating outlook was changed to positive.

The upgrade acknowledges Dillard's continued growth in both sales and operating margins, its improved credit metrics, and Moody's expectation that Dillard's will be able to maintain credit metrics appropriate for its Ba2 rating going forward. For the fiscal year ended February 2, 2013, net sales grew by about 5% to $6.6 billion from $6.3 billion. Excluding the 53rd week sales grew by about 3%. This resulted in operating margin reaching 5.8% and EBIT increasing by nearly 20% to about $470 million.

The following ratings were upgraded:

Corporate Family Rating to Ba2 from Ba3

Probability of Default Rating to Ba2-PD from Ba3-PD

Senior unsecured notes rating to Ba3 (LGD 4, 61%) from B1 (LGD 4, 63%)

Senior subordinated rating to B1 (LGD 6, 95%) from B2 (LGD 6, 95%)

For Dillard's Capital Trust I

Backed preferred stock to B1 (LGD 6, 95%) from B2 (LGD 6, 95%)

RATINGS RATIONALE

Dillard's Ba2 rating reflects its good credit metrics as a result of its low level of funded debt which results in modest leverage. It also reflects Moody's belief that Dillard's continued improvements in merchandising are driving its sales growth. The improvements in merchandising along with continued inventory management by Dillard's have also resulted in a significant improvement in operating margin. Dillard's operating margin is now more in line with other industry competitors, albeit at the low end of the range. Moody's believes the changes Dillard's has made to merchandising and inventory management should result in Dillard's operating performance being more predictable going forward. Dillard's rating is also supported by its very good liquidity and its sizable portfolio of company owned real estate.

While Dillard's improved credit metrics and good liquidity may be representative of a higher rating, the rating is constrained by its regional concentration in the southwest, southeast, and midwest. This concentration results in Dillard's needing to maintain credit metrics which are strong for its rating level going forward. In addition, the rating is also constrained by the possibility that Dillard's may at some time choose to use its REIT to raise incremental debt. However, Moody's notes that Dillard's has been reducing its debt levels over the past ten years. Lastly, Moody's remains concerned about Dillard's long history of inconsistent operating performance. Dillard's experienced a prolonged decline in comparable store sales and sporadic earnings from 2000 to 2009.

The positive outlook reflects Moody's view that Dillard's improvement in operating margin will likely be sustained resulting in modest earnings growth due to sales gains.

Ratings could be upgraded should Dillard's demonstrate a continued track record of consistent performance including flat to modestly positive comparable store sales while maintaining its current operating margins specifically operating margin (excluding Moody's standard adjustments) of 5.5%. In addition, quantitatively, ratings would be upgraded should debt to EBITDA remain below 3.25 times and EBITA to interest expense remain above 4.0 times. An upgrade would also require Dillard's financial policy, including transactions involving its REIT, being managed such that credit metrics remain at levels appropriate for a higher rating.

Given the positive outlook, a downgrade is unlikely at the present time. The outlook could return to stable should Dillard's experience a decline in either sales or operating margins. Ratings could be downgraded should operating performance decline such that debt to EBITDA rises above 4.25 times or EBITA to interest expense falls below 3.0 times. Ratings could also be downgraded should Dillard's liquidity become weak or should financial policy become increasingly aggressive including transferring additional properties to the REIT.

The principal methodology used in this rating was Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Dillard's, Inc., is a regional department store chain operating 283 retail stores and 18 clearance centers in 29 U.S. states, an internet store. Dillard's retail stores are concentrated in the southwest, southeast, and Midwest. The company is headquartered in Little Rock, Arkansas. Revenues are about $6.6 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Margaret M Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kendra Smith
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Dillard's CFR to Ba2; outlook positive
No Related Data.
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