Background
Dillard’s, Inc is one of the largest home furnishing and apparel retailers in the country; the firm was instituted by William T. Dillard in 1938, and incorporated in 1964 in Delaware (Investor.shareholder.com, 2008). This year, 2011, the company has been operating 308 and 14 stores and clearance centers respectively as well as an internet store providing a broad selection of the merchandise with fashion clothing for men, women and children, cosmetics, accessories and home furnishings among other goods (Sec.gov, 2011).
The firm, this year formed its own subsidiary, which will carry out Real Estate Investment Trust (REIT) it also formed an insurance subsidiary (Captive). The firm deems that the establishment of REIT might improve firm’s capacity to access preferred stock and debt and hence improve the firm’s liquidity (Sec.gov, 2011).
The firm’s ladies’ accessories and apparel segment returns the highest sales followed by men’s segment. Cosmetics and shoes department have the same sales level followed by children and juniors’ apparel and finally home furnishing and construction segments earn the least sales for the firm, with the former having the highest sale and latter the least. Therefore, this report is intended to collect the firm’s information relating to the financial performance through measures like ratios and the stock price movement in the market (Sec.gov, 2011).
Stock
The firm is listed in the NYSE with a Ticker symbol DDS and market capitalization of $2,381.4 million and 51.5 million shares outstanding. On December 1, 2011 the firm’s stock closed the day at $46.24 and the firm’s 52-week range, the lowest and the highest price, is $34.45 – $61.08 according to Table 1(Finance.yahoo.com, 2011). The stock beta is 2.50 (Advfn.com, 2011), which implies that Dillard’s stock is more risky than the market (S&P 500). It means that if returns of S&P 500 move by 1% relative to the mean then the return of the Dillard’s stock will vary by 2.50% relative to the mean.
Financial ratios
The P/E ratio for the last three years that is from 2009 to 2011 indicates that investors in 2009 would take negative years to recoup back their initial investment in the shares of the firm from the firm’s earnings this means that in 2009 the firm made losses. In 2010 and 2011, one would take 17.65 and 15.01 years to recoup his/her initial investment in shares from the firm’s earnings. This indicates that the earnings of the firm improved in 2011 and that is why there was a reduction in time period.
The firm’s profitability as measured by ROA indicates that the profitability position of the firm has increased from -5.08% in 2009 to 4.11% in 2011. This implies that the firm was efficient in utilizing the assets to generate returns to the owners of the company as shown by the increase in the ratio. Similarly, as measured by ROE the profitability position improved from -10.71% in 2009 to 8.61% in 2011. This means that the firm was efficient in utilization of the owners’ supplied funds to generate returns to common shareholders as shown by Table 2.
The Dillard’s liquidity ratio as measured by current ratio indicates that in 2010 the firm’s liquidity position had improved from 1.85 in 2009 to 2.28 but in 2011 the liquidity position reduced to 2.05. This implies that in 2011 the firm was using more of the current liabilities compared with 2010. But the firm was able to meet its short-term obligations. Current ratio of more than one represent a margin of safety for the creditors where the higher the ratio the more liquid the firm and the more confident creditors are with the firm (Drake, 2009). Thus, the firm is not facing liquidity risk.
Growth
For the last 12 to 36 months the revenue grew by 0.43% and -5.33% respectively while the EPS’s growth rate for the last 12 and 36 months was 187.10% and 57.76% respectively. The 12 months growth is measured by year-over-year while the 36 months growth rate is the 3-year average (Morningstar.com, 2011).
Probability
Given mean return of 14%, standard deviation of 10%, we have to look for cumulative probability, in that the stock return is not more than or equal to 14%. Therefore, from Normal Distribution Calculator, P(X <14%) = 0.0000
Therefore, there is a 0% chance that the stock returns will be less than 14%. This is because for every risk taken the investor must be compensated for taking such risks a concept known as risk-return tradeoff. Therefore, there is no way an investor will earn lower than 14% for taking 10% risk. This means that for returns to be lower than 14% the risk must less than 10%. Thus, potential return increases with a rise in risk.
Given mean return of 10%, standard deviation of 0%, we have to look for cumulative probability, in that the stock return is not more than or equal to 10%. Therefore, from Normal Distribution Calculator P(X <10%) = 0.0000.
Thus, there is a 0% chance that the stock returns will be less than 10%. Similarly, the above situation also apply in this case in that an investor cannot expect to earn a higher return of 10% without taking any risk, we know that risk is made up of unsystematic and systematic risks. In this case, it is only one stock that is exposed to unsystematic risk (no diversification) the investment is also exposed to market risks (systematic) thus the risk must be higher than 0%.
References
Advfn.com. (2011). Dillard’s. Web.
Drake, P. (2009). Financial ratio analysis. Web.
Finance.yahoo.com. (2011). Dillard’s, Inc. (DDS). Web.
Investor.shareholder.com. (2008). United States Security and Exchange Commission. Web.
Morningstar.com. (2011). Growth. Web.
Sec.gov. (2011). United States Security and Exchange Commission. Web.
Appendices
Table 1: Dillard’s, Inc. (DDS) Highs and Lows (share price)
Table 2: Dillard’s, Inc’s financial ratios