Moody's Upgrades Dillard's (DDS) Senior Unsecured Rating to Investment Grade

Moody's Investors Service upgraded Dillard's (NYSE: DDS) senior unsecured rating to Baa3 from Ba2. The company's Ba1 Corporate Family Rating and Ba1-PD probability of default rating were withdrawn, as well as its SGL-1 Speculative Grade Liquidity rating. The rating outlook is stable. All ratings actions are detailed below.

"The senior unsecured rating upgrade to Baa3 from Ba2 recognizes Dillard's move to an unsecured capital structure and our expectation that the company will maintain a commitment to an investment grade financial profile. It also reflects our view that Dillard's operating performance has shown increasing stability as a result of improved merchandising, cost controls, and integration of its online business which is evident in its strong credit metrics" said Moody's Vice President Scott Tuhy.

The following ratings were upgraded:

..Issuer: Dillard's, Inc.

Senior unsecured rating to Baa3 from Ba2 (LGD 4)

Subordinated notes to Ba1 from Ba3 (LGD6)

..Issuer: Dillard's Capital Trust I

$200 million preferred stock to Ba1 from Ba3 (LGD6)

The following ratings were withdrawn:

..Issuer: Dillard's Inc.

Corporate Family Rating, Ba1

Probability of Default Rating, Ba1-PD

Speculative Grade Liquidity Rating, SGL-1

RATINGS RATIONALE

Dillard's Baa3 senior unsecured rating reflects its good credit metrics as a result of its low level of funded debt which results in modest leverage with debt/EBITDA near 1.4 times and EBITA/Interest expense around 7 times. The rating also reflects the company's increasingly consistent operating performance and we expect the company to sustain high single digit EBIT margins. This reflects the company's continued improvements in merchandising along with ongoing disciplined inventory management are driving its ability to maintain the improvements it has made in operating margins and that its operating performance will be more predictable going forward than it had been in the past. Dillard's rating is also supported by its very good liquidity and its sizable portfolio of company owned real estate and our expectations the company will maintain balanced financial policies. The ratings are constrained by the company's geographic concentration in the southern and southwestern United States, the continued traffic challenges facing traditional mall-based department stores and the company's still moderate operating margins relative to investment grade peers.

The stable rating outlook reflects our view that Dillard's credit metrics will remain solid. It also factors Dillard's improved operating performance and moderate leverage which provides the company with sufficient cushion to maintain good credit metrics and also offset its position as a regionally concentrated department store chain.

Ratings could be upgraded if the company further moderates its regional concentration and if operating performance improves further, while maintaining balanced financial policies, and excellent liquidity. Quantitatively ratings could be upgraded should debt to EBITDA remain sustained below 2.0x and EBIT margins were to rise and be sustained above double digits.

Ratings could be downgraded if the company were to engage in more aggressive financial policies, such as monetizing a meaningful portion of its owned real estate. Also, if the company's margins evidenced erosion versus peers. Ratings could be downgraded if debt to EBITDA rises above 3.0 times or if the company's excellent liquidity profile were to meaningfully erode.

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