S&P Upgrades Dillard's (DDS) to 'BBB-', Outlook Stable; Notes Improvements in Operating Measures

Standard & Poor's Ratings Services today raised its ratings, including the corporate credit rating, on Little Rock, Ark.-based department store Dillard's Inc. (NYSE: DDS) to 'BBB-' from 'BB+'. The outlook is stable.

"The upgrade reflects our view that the company has consistently improved its operating measures to a level that is more comparable to other higher-rated investment-grade rated department stores (such as Macy's, Kohl's, and Nordstrom), although we don't expect the company to completely close the gap given its target markets and lower cost structure," said credit analyst Helena Song. "We also note that margins have improved over the past two years, whereas the department store sector has faced a declining trend. Accordingly, we reassesed the comparable rating analysis to "neutral" from "unfavorable"."

The stable outlook reflects our view that operating performance will remain stable with modest revenue and margin growth, as the company continues to benefit from effective merchandising, good execution, and expense controls. We also expect the company will maintain very conservative financial policies and solid credit protection measures that will remain in line with current levels.

An upgrade is unlikely in the near term, as the rating is currently limited by our assessment of the company's profitability and operating metrics relative to other department stores and their business risk profiles. However, if the company is able to successfully expand its geographic footprint and omnichannel capability meaningfully and demonstrate solid improvement in operating measures over time, this could cause us to revise our assessment of its business risk profile to "satisfactory" from "fair". Furthermore, a higher rating would also be predicated on stable cash flow generation, conservative financial policies, and credit protection measures remaining in line with current levels.

We could lower the ratings if the company's performance erodes because of weak apparel sales or increased promotional activity resulting in margins decline of 200 bps and same-store sales decline in the high-single-digit area, causing leverage in the high-1x range. Additionally, we could lower the ratings if the company becomes more aggressive with its financial policies. Under this scenario, the company would enact debt-funded share repurchases of more than $1 billion, which would result in leverage increasing to the upper-1.0x area.

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