Dillard's vs. Nordstrom: Which Department Store Stock is a Better Buy?

Dillard's, Inc. (DDS) in Little Rock, Ark., operates retail department stores in the Southeastern, Southwestern, and Midwestern areas of the United States. Its stores offer merchandise that includes fashion apparel, accessories, cosmetics, and home furnishings. In comparison, Nordstrom, Inc. (JWN) in Seattle, Wash., is a fashion retailer that provides clothing, shoes, beauty, accessories, and home goods for women, men, young adults, and children. It offers various channels and a range of brand names and private label merchandise.

The resurgence of COVID-19 cases has proved to be a massive obstacle for department stores because supply chains and operations have been disrupted. However, many retailers have strengthened their online presence to benefit from the online buying trend. While online sales are helping many retailers, increasing physical store sales with the reopening of the economy should help them thrive in the coming months. As stores integrate data analytics into management to streamline operations and enhance supply chain efficiency, there is the potential for further growth in the sector. According to a ReportLinker report, the global department stores industry is expected to grow at a 3.7% CAGR through 2027. Therefore, both DDS and JWN should benefit.

Over the past six months, DDS’ shares have gained 56.5% in price, while JWN had negative returns. Also, DDS’ 157.8% gains over the past nine months compare with JWN’s negative returns. Furthermore, DDS is the clear winner with 238.2% gains versus JWN’s negative returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Nov. 18, 2021, DDS announced that the Board of Directors declared a special dividend of $15 per share on the company's Class A and Class B common stock. The dividend follows the company’s recent record financial performance. The special dividend was to be paid on Dec. 15, 2021, to shareholders of record as of November 29, 2021.

A law firm is investigating allegations of securities violations and breach of fiduciary duty claims against JWN on concerns that the stock declined more than 23% in price in extended trading. It is alleged that the company reported earnings that fell short of analysts' expectations as labor costs ate into profits and sales and its Nordstrom Rack business struggled to return to pre-pandemic levels.

Recent Financial Results

DDS’ revenue increased 44.5% year-over-year to $1.48 billion for the fiscal third quarter, ended Oct. 30, 2021. The company’s net income grew 518.5% year-over-year to $197.30 million. Also, its EPS came in at $9.81, up 586% year-over-year.

JWN’s revenues have increased 43.8% year-over-year to $3.64 billion for its fiscal third quarter, ended Oct. 30, 2021. The company’s net earnings grew 20.8% year-over-year to $64 million. Also, its EPS came in at $0.39, up 14.7% year-over-year.

Expected Financial Performance

Analysts expect DDS’ revenue to increase 47% in the current year but decrease 3.7% next year. The company’s EPS is expected to grow 1,489.6% in the current year but decline 50.3% next year.

In comparison, JWN’s revenue is expected to increase 36.7% in the current year and 3.7% next year. Its EPS is expected to grow 128.2% in the current year and 65.3% next year.

Profitability

JWN’s trailing-12-month revenue is 2.29 times what DDS generates. However, DDS is more profitable, with gross profit and net income margins of 41.17% and 10%, respectively, versus JWN’s 35.40% and 0.08%.

Furthermore, DDS’s 41.31%, 15.01%, and 25.33% respective ROE, ROA, and ROTC are higher than JWN’s 3.60%, 2.33%, and 4.10%.

Valuation

In terms of forward non-GAAP P/E, JWN is currently trading at 16.98x, which is 132.9% higher than DDS’ 7.29x. And JWN’s 7.36x forward EV/EBITDA ratio is 78.6% higher than DDS’ 4.12x.

So, DDS is relatively affordable here.

POWR Ratings

DDS has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast , JWN has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

DDS has an A grade for Value, consistent with its 4.29x forward EV/EBIT, which is 61.3% lower than the 12.72x industry average. However, JWN has a B grade for Value.

DDS has an A grade for Quality. This is justified given DDS’ 25.33% trailing-12-month ROTC, which is 236.7% higher than the 7.52% industry average. In comparison, JWN has a Quality grade of B.

Among 65 stocks in the A-rated Fashion & Luxury industry, DDS is ranked #13. In comparison, JWN is ranked #49.

Beyond what I have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the DDS ratings. Also, get all the JWN ratings here.

The Winner

Because the economy is reopening, department stores are expected to benefit from their online sales and growing physical store-based sales. So, both DDS and JWS are expected to gain. However, we think it is better to bet on DDS because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Fashion & Luxury industry here.

DDS shares were trading at $269.26 per share on Wednesday afternoon, up $6.30 (+2.40%). Year-to-date, DDS has gained 9.89%, versus a -3.92% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...