Valuation & Analysis
Clay Mauldin
clayton.mauldin@ttu.edu
Alex Orr
alex.orr@ttu.edu
Kevin Beck
kevin.beck@ttu.edu
Chance Turner
jordan.c.turner@ttu.edu
Dane Chambless
dane.chambless@msn.com
1
TABLE OF CONTENTS
Executive Summary
3
Overview of Dillard’s, Inc.
6
Industry Overview & Analysis
10
Value Chain Analysis
14
Competitive Advantage Analysis
15
Accounting Analysis
17
Ratio Analysis
25
Cross-Sectional Analysis
26
Financial Statement Forecasting
45
Cost of Capital Estimates
46
Method of Comparables
48
Intrinsic Valuation Models
51
Credit Risk Analysis and Z-Score
55
Appendix 1
57
Appendix 2
63
Appendix 3
73
References
77
2
Executive Summary________________________________________
Investment Recommendation: Overvalued, Sell (4/1/07)
Dillards
DDS - NYSE
52-Week Range
Revenue (2006)
Market Cap.
Shares Outstanding
$35.50
25.36-36.47
7,810,067
2.78 Billion
81,533
Dividend Yield
Average Trading
Vol.
Altman Z-Score:
0.49%
1,175,270
DDS
EPS Forecast
FYE
2007
EPS
235,527
2008
238,389
2009
241,313
Ratio Comparison
Trailing P/E
Forward P/E
Dillard’s
$23.98
$32.15
Industry
$18.91
$23.38
$23.55
$1.07
$19.11
$1.13
Forward PEG
M/B
3.32
Book Value Per
Share
ROE
ROA
Est. 5-year EPS Growth Rate
Valuation
Estimates
Actual Current Price
$32.28
5.23%
2.13%
5.05%
Cost of Capital
Est.
R2
Beta
Ke
Ke Estimated
3-Month
1-Year
5-Year
7-Year
10-Year
Published
0.0855
0.0855
0.0855
0.0855
0.0855
0.9029
0.9029
0.903
0.903
0.9031
0.95
10.76%
10.77%
10.87%
10.40%
11.02%
Kd
WACC
6.80%
8.58%
3
34.40**
Ratio Based Valuations
P/E Trailing
$16.23
P/E Forward
Enterprise Value
$15.45
$55.58
Intrinsic Valuations
Discounted Dividends
Free Cash Flows
Residual Income
Abnormal Earnings Growth
$1.48
$14.90
$12.71
$8.91
2010
244,301
Dillard’s is one of the largest department store retailers in the nation. The firm
specializes in offering a broad selection of men’s and women’s clothing and
accessories, as well as cosmetics, furniture, and cookware. Dillard’s has several
direct and indirect competitors in the industry including; Federated Department
Stores, Saks, Inc., JC Penney, Nordstrom’s, and Neiman Marcus. Dillard’s
competes in the industry by maintaining its competitive advantage of offering
brand name products at competitive prices with greater customer satisfaction.
The accounting strategies of Dillard’s are important when valuing the firm.
Through accounting disclosures in the 10-K, Dillard’s exhibits a moderately
conservative approach towards accounting. Dillard’s accounting policies are
displayed accurately, as well as honestly throughout the firm’s 10-K. Changes in
policies are effectively communicated to outside parties. Dillard’s uses accounting
policies that are common of the industry, as well as policies that adhere to
Dillard’s key success factors. Inventories are stated at cost and managers have
the accounting flexibility to enforce mark ups and mark downs in accordance
with the firm’s current sales. This allows the firm to maximize revenues from
inventories and liquidate overstocked merchandise. Dillard’s recently raised their
pension rate in an effort to prevent understating pension expense. This is a
conservative move by management not common within the industry. JC Penny’s,
Dillard’s main competitors uses similar accounting strategies that reflect a
consistency within the industry. Dillard’s uses conservative strategies to reflect
accurate information to shareholders. This honest approach is consistent
throughout Dillard’s financial statements. Dillard’s continues its honesty with
more than satisfactory disclosures in the footnotes of their SEC statements that
show investors and auditors accurate details of the accounting policies used.
By calculating the core financial ratios, we are able to directly compare Dillard’s
performance with other competitors within their industry. We computed ratios to
determine the liquidity, profitability, and the capital structure of the firm.
4
Dillard’s debt service margin is favorably higher than their competitors which
exhibits their ability to control their debt. The steady increase in the debt service
margin for the firm indicates that Dillard’s has less pressure to use its cash flows
from operations to finance its liabilities. Dillard’s has also worked towards a
lower debt to equity ratio as well. A declining debt to equity ratio year to year
would be a favorable impact for the company. The debt to equity ratio states
that a firm has a certain amount of liabilities for every dollar of owners’ equity.
The main reason why this is possible is due to Dillard’s ability to lower their total
liabilities. Dillard’s also showed high rates of return on equity between 2004 and
2005 because total assets and total liabilities declined at a constant rate to keep
equity equal to the previous year. This illustrates a higher profitability by
maintaining a constant level of equity invested into the firm.
Our forecast valuations for Dillard’s were calculated 10 years into the future, to
ultimately evaluate Dillard’s future performance. Through our forecasting, we
were able to determine that Dillard’s is maintaining constant stable growth. The
values we forecasted helped us with the intrinsic value calculations. Then,
through our valuations, we were able to conclude if Dillard’s was under, over, or
fairly valued compared to its current market price.
After each of the intrinsic values was computed, we came to the conclusion that
Dillard’s is highly overvalued. The discounted dividends model was the poorest
valuation to predict the estimated value per share. This model was inaccurate
because dividends do not do a fair job of evaluating the market price of a firm.
The residual income, abnormal earnings growth, and the free cash flows models
were the primary valuation models that we relied on in determining Dillard’s
overall value. All three models consistently showed that Dillard’s current stock
price is inflated by around $20.
5
OVERVIEW OF DILLARD’S, INC._______________________________
Dillard’s, Inc. is among the nation’s largest fashion apparel and home furnishings
retailers in the department store industry. The 330 Dillard’s store locations offer
a broad selection of name brand men’s and women’s clothing, accessories,
cosmetics, cookware, and home furniture. Dillard’s was incorporated in
Delaware in 1964 after the first store opening in 1938. Over the next forty-two
years, the firm has expanded over twenty-nine states with fifty-one stores being
located in the western U.S., 124 in the eastern region, and the remaining 155
located in the central region of the U.S.
Competitors
Dillard’s operates in the high end retail department store industry. Its direct
competitors include Federated Department Stores, Saks Inc, Nordstrom’s,
Neiman Marcus, and JC Penney. However, the broad array and diversity of
department store products allows for many indirect competitors, such as large
and local retail, outlet, and furniture stores to challenge as substantial threats to
firms within the industry. Under these conditions, the industry is a highly volatile
and competitive sector characterized by reputation, advertising, price, and
quality. Dillard’s focuses primarily on extensive customer service and maintaining
brand loyalty through exclusive upscale contemporary choices.
Market Capitalization
Currently, Dillard’s holds a market capitalization of 2.8 billion compared to an
overall industry capitalization of 18.28 billion. Dillard’s ranks second among the
direct top competitors in market capitalization. Federated benefits from a much
larger capitalization at 21.69 billion due to the coalition between Macy’s and
Bloomingdale’s Department Stores under the same umbrella corporation. Sears,
Kohl’s, and TJX Companies actually acquire a larger share of the market
capitalization but are not considered to be direct competitors of Dillard’s.
6
5 year Sales Volume & Growth
Dillard’s sales depend greatly on the success of the last quarter of the fiscal year
due to the holiday season. Sales for the fourth quarter on average are
approximately one-third of annual sales. Overall, total salves volume has
decreased from 2001-2004 with a slight increase in 2005 by approximately
$36,000. Along with sales, assets have decreased significantly over the past five
years by a total of about $1.5 million in total asset deduction.
Table 1: Dillard’s
Year
Net Sales
($)
Total Assets
($)
%Change
in Net Sales
2001
8,154,911,000 7,199,309,000
-
%Change
in Total
Assets
-
2002
7,910,996,000 7,074,599,000
(3.00)
1.73
2003
7,598,934,000 6,675,932,000
(3.94)
5.63
2004
7,528,572,000 5,691,581,000
(0.93)
14.74
2005
7,560,191,000 5,516,919,000
.42
3.07
In recent years, Saks, Inc. has shown a steady decrease in net sales and total
assets with the exception of 2004. Nordstrom’s total assets and net sales have
grown considerably in recent years. Neiman Marcus also shows growth in these
two categories.
7
Table 2: Saks, Inc.
Year
Net Sales
($)
Total Assets
($)
5,050,611,000
%Change
in Net
Sales
-
%Change
in Total
Assets
-
2001
6,581,236,000
2002
6,070,568,000
4,595,521,000
(7.76)
(9.01)
2003
6,055,055,000
4,579,356,000
(0.26)
(0.35)
2004
6,437,277,000
4,709,014,000
6.31
(2.83)
2005
5,953,352,000
3,850,725,000
(7.52)
(18.23)
Table 3: JC Penny’s
Year
8
Net Sales
($)
Total Assets
($)
2001
17,384,000,000 17,787,000,000
%Change
in Net
Sales
-
%Change
in Total
Assets
-
2002
17,513,000,000 18,300,000,000
.3
2.88
2003
18,096,000,000 14,127,000,000
3.7
(2.28)
2004
18,781,000,000 12,461,000,000
3.8
(11.7)
2005
19,903,000,000 12,673,000,000
6.3
1.7
Table 4: Nordstrom, Inc.
Year
Net Sales
($)
Total Assets
($)
2001
5,607,687,000
%Change %Change
in Net
in Total
Sales
Assets
4,084,356,000
-
2002
5944,656,000
4,185,269,000
6.01
2.47
2003
6,448,678,000
4,569,233,000
8.48
9.17
2004
7,131,388,000
4,605,390,000
10.59
0.79
2005
7,772,860,000
4,921,349,000
9.0
6.86
Table 5: Neiman Marcus
Year
9
Net Sales
($)
Total Assets
($)
%Change %Change
in Net
in Total
Sales
Assets
-
2001
3,015,534,000
1,785,870,000
2002
2,948,332,000
1,907,546,000
(2.22)
6.81
2003
3,080,353,000
2,034,430,000
4.48
6.65
2004
3,524,771,000
2,617,648,000
14.43
28.67
2005
3,821,924,000
2,660,660,000
8.43
1.64
Stock Price Performance
The stock price for the firm since the beginning of January 2003 seems to be on
a steady climb after an apparent volatility in the year of 2002. After studying the
industry, the three main competitors seem to be following the same price trend.
5 FORCES MODEL__________________________________________
The five forces model is the basis of assessing the profit potential of the industry
in which a firm is competing. The factors that affect profitability in the industry
include the degree of actual and potential competition. This is classified by rivalry
among existing firms, threat of new entrants, threat of substitute products, and
bargaining power in input and output markets described by bargaining power of
buyers and suppliers.
Rivalry Among Existing Firms
The high-end retail industry is a very competitive industry. Firms must find a way
to differentiate themselves from their high-end competitors. The industry has
been growing over time and existing firms have become larger and larger. Due
to the size of the large firms, they dominate the market. Nordstrom Inc. holds a
market share in this industry at 12.95 Billion. Federated Department Stores holds
a 22.13 Billion market share. This market is dominated by the main firms of the
industry, Nordstrom’s Inc, Federated, Saks, Dillard’s and Neiman Marcus. The
10
only way to gain market share is to take it away from other players. With an
increasing demand for designer products firms must rely on their credibility and
authenticity of their products. The major firms also face competition from smaller
stores. These stores compete on reputation, fashion, advertising, price, quality,
service, and credit availability. However, it is anticipated that the most intense
competition will continue to be on price. Switching costs in the industry are
relatively low. Most firms sell the same brands and models. This allows consumer
switching cost to be very low. This causes firms to rely heavily on personal
customer service as well as price to hold their market share. All of the main firms
in the industry have expanded their sales to the internet. This is way of offering
more personal customer service. Internet sales have helped these firms increase
net sales and have given larger firms an edge against smaller retail competitors.
With all of the competitive advantages held by larger firms in the industry they
mainly compete with one another. For this reason, we conclude that the rivalry
among existing firms in the high-end retail-department store industry is very
high. Firms in this industry must be large to maintain and must find a way to
differentiate themselves from competitors.
Threat of New Entrants
Economies of scale are important in determining business strategy when entering
a new industry. When there are large economies of scale, new entrants face a
difficult decision to enter such a competitive industry. They either have to invest
in a large capacity which may not be immediately utilized or enter with less than
optimum capacity. It is very difficult for a new firm to compete with Dillard’s,
Saks, Nordstrom’s, or Neiman Marcus. In the high end retail-department store
industry supply surpassed demand. This excess capacity favors larger firms that
can sustain operations with reduced margins. Larger firms usually have
substantially larger marketing budgets; which provides them with a competitive
advantage. The large direct competitors in the industry produce large economies
of scale. This puts smaller firms at a disadvantage because they are not able to
11
obtain prices offered to larger firms by suppliers. An advantage to new entrants
is the possibility of utilizing the internet. Online companies avoid rental and
facility cost which can allow for competitive pricing. However, the inability to
offer consumers a tangible product before purchase can decrease the
attractiveness of online shopping. Internet sales still struggle to come anywhere
close to store sales in the industry.
Since the industry is driven by high price competition it is extremely hard to
generate a first mover advantage. Many larger firms have exclusive rights to
manufactures. For example, Dillard’s holds exclusive agreements with Antonio
Melani, Gianni Bini, and Daniel Cremieux. These exclusive rights are the result of
an initial action to establish market share. The relationships between large high
end firms and manufacturer’s make it very hard for new entrants to access
channels of distribution and break into the market. It is because of this that we
conclude the threat of new entrants to be very low.
Threat of Substitute Products
The high-end retail Industry is definitely one that competes on price. There is a
high degree of a customer’s willingness to substitute products. Most all of
Dillard’s competitors carry the same lines of clothing. This causes little variation
in the products that consumers are looking for. It proves that Dillard’s, and other
firms, have to compete on price, or they will experience a loss in customer base
and market share. For example, designer label clothing commands a price
premium even if it is not superior in terms of basic functionality because
customers place a value on the image offered by designer labels. So, in order for
firms to keep their customers, they must keep prices at a competitive level along
with a high degree of customer service. In this industry, there will not be much
of a difference in the price between competing stores. Therefore, as stated
before, Dillard’s will have to provide their customers with all of the extras that
come with shopping at their store. In recent quote, William T. Dillard said, “Our
12
companies main goal in this business is not to provide the lowest price products.
That is not our goal at all. Our goal is to beat our competitors with superior
customer relations and an outstanding product.” The threat of substitute product
in this industry is very high. Without offering the customer service, customers
will easily be willing to switch products.
Bargaining Power of Buyers
There are two factors that determine the power of buyers including price
sensitivity and relative bargaining power. Price sensitivity refers to the extent to
which buyers care to bargain on price. Relative bargaining is the extent to which
they will succeed in forcing the price down. As stated before, this high-end
industry competes heavily on price. However, since some firms introduce their
products as being differentiated, customers are not that sensitive to price
increases. Most all of Dillard’s products are clothing lines that are offered by all
of their competitors. This causes a high degree of price sensitivity which drives
prices down. Considering these factors, it is easy to see that buyers have quite a
bit of bargaining power. One factor that might lessen the amount of bargaining
power is the wide variety of products Dillard’s carries. With all of these factors
considered, we consider the bargaining power of buyers to be relatively high.
Bargaining Power of Suppliers
The bargaining power of suppliers can prove to be a very powerful tool when
there are only a few companies and few substitutes available to their customers.
This is not the situation with the high end retail industry. The numerous amounts
of competing firms and various product lines restrict supplier’s ultimate power.
The supplier’s need the big name firms to maintain, more than the big firms
need the single supplier. Firms develop relationships with suppliers to receive low
prices. High prices from suppliers result in high prices to the consumer, and
lower margins to firms like Saks, Neiman Marcus, and Nordstrom, Inc. Since
firms compete on price, developing relationships with these large firms is
13
essential to suppliers. Many large firms operate under the belief that they should
never be dependent on one supplier. For example, last year Dillard’s ordered no
more than 5% of its inventory from a single supplier. With all of these factors
considered, we believe the bargaining power of suppliers to be relatively low.
Competitive Force
Conclusion
Rivalry Among Existing Firms
Very High
Threat of New Entrants
Low
Threat of Substitute Products
High
Bargaining Power of Buyers
High
Bargaining Power of Suppliers
Low
VALUE CHAIN ANALYSIS_____________________________________
High end retail department stores compete in a highly competitive market based
on price. Although their retail department stores are in shopping malls, they have
to compete on national and local levels. Competitors compete on many different
strategies including differentiation and outstanding customer service. Firms in
this industry must find a way to differentiate themselves in order to gain profits.
Dillard’s sells its products slightly cheaper than other high end stores like
Nordstrom’s or Saks. Nordstrom’s and Saks attempt to make the shopping
experience more elegant and enjoyable. They appeal to the consumer who is
willing to spend a little more in order to have a lavish shopping experience. All
high end retailers in this industry make sure that their products are of the
highest quality. Firms really focus on enhancing in the in-store experience to add
value to their products.
14
High end retailers also focus on offering a wide selection of merchandise. The
more merchandise they have, the more people they can appeal to. Many of the
firms in the industry offer the same types of products. A firm can stand out when
its merchandise selection exceeds that of a competing firm. Again switching cost
is low, so presentation and a large merchandise selection can add value to a
firm.
COMPETITIVE ADVANTAGE ANALYSIS__________________________
Dillard’s believes that they are in a strong competitive position with regard to a
various number of factors. These factors include location, reputation,
assortment, advertising, price, quality, service, and credit availability. Dillard’s is
constantly seeking new ways to separate itself from the rest of their competition.
They try to position their stores in such a way that attract new customers, who
are excited about the manner in which Dillard’s operates its stores. Dillard’s can
also compete by obtaining new clients, while working to maintain its existing
clientele. They constantly work to expand and improve their product lines for
their customers.
Due to the expansive pricing budget of its competitors, Dillard’s has had to
reduce prices and reduce margins. The retail merchandise business has
fluctuated due to some of the changes in the local and national economic
conditions and has changed consumer preferences and spending patterns.
Dillard’s differentiation allows them to provide more distinct products and
services that are valued by their customers. They invest heavily in brand image,
offer superior product quality, and have superior customer service. In all 330
stores, Dillard’s provides its customers brand names such as Polo, Coach, and
Daniel Cremieux. Throughout every department in each Dillard’s store,
employees try to foster a brand image of strength, status, and reliability.
According to a poll on www.epinions.com, Dillard’s customer service has been
ranked in the top five in its industry since 1983. Dillard’s upholds their superior
15
customer service name by offering twenty-four hour online support as well as
customer service departments in each store. Dillard’ also allows other
independent firms to run certain departments where specialization, focus, and
expertise is critical. Throughout our history Dillard’s has been able to acquire
knowledge in each of their trade areas and customer bases, which gives
consumers full knowledge of the product they are buying. Dillard’s has expanded
and integrated vertically by establishing a vast source of suppliers. In doing so, it
has afforded itself not only the opportunity to provide a higher quality of
products, but also greater control over the merchandise it sells.
Another competitive advantage of Dillard’s is the issuance of all proprietary credit
cards to their customers and the making of all credit card loans. As a customer,
ownership of a card provides them the ability to receive monthly discounts on a
variety of discount products. This also bodes well for Dillard’s having a steady
inflow of frequent customers. In November of 2004, Dillard National Bank was
bought out by GE Consumer Finance whose already established company
acquired all of the existing credit card accounts. In conjunction with the sale,
Dillard’s experienced an income of $83.9 million. According to Dillard’s 10k, they
became a more focused retailer and used the proceeds generated from the sale
and ongoing compensation to strengthen their balance sheet and return value to
their shareholders.
Dillard’s dedication to their customer service, competitive pricing, and variety of
products will continue to keep them competitive in the industry. Dillard’s is
always looking to expand by opening new stores, keeping its product lines up to
date, and keeping its name associated with superior quality.
16
Accounting Analysis________________________________________
It is important for any company’s accounting practices to reflect the goals of the
company. Investors should be able to easily decipher and interpret the
information disclosed by the company. Companies in each industry compete with
different strategies and different policies. How they account for these policies
financially is of great interest to the investor.
A goal of accounting analysis is to see if the firm’s accounting practices capture
current and prospective financial actions of the company. We will also look at
how these financial actions relate and support Dillard’s key success factors.
Dillard’s, in the department store industry, competes on product quality,
competitive pricing, and extensive customer service. We have identified the
following key success factors whose fluctuations have a significant impact on its
operating results.
As stated in our five forces model, Dillard’s is a company that competes on price
and differentiation. Dillard’s offers quality merchandise at a slightly lower cost
than its other high end competitors. Using mark downs Dillard’s is able to
manage its inventory and avoid being overstocked. Managers must also watch
spending on SG&A. Dillard’s, having a lower marketing budget than most of it’s
competitors, must find a way to sell it’s merchandise while incurring minimal
SG&A expenses. Maintaining revenues, cash flows, and store growth are also
key factors necessary for the continued success of Dillard’s.
Key Accounting Policies
The fashion industry has escalated over the last five years. An increase in
demand for designer brand products has sent department stores sales very high.
Since Dillard’s relies on their high-quality products, their revenues are steadily
increasing. Consumers are willing to pay a good price for a quality product.
Dillard’s recognizes revenue at the “point of sale.” The company also recognizes
17
an allowance for sales returns that are recorded as a component of net sales in
the period in which the related sales are recorded. Dillard’s is also very profitable
in their sale of gift cards. This is an effective strategy to help Dillard’s predict
future revenues and anticipated inventory sales. Preparing for fashion and
industry trends plays a huge role in Dillard’s attempts to manage its inventory.
According to our key success factors Dillard’s must control its inventory. Dillard’s
mainly uses upscale merchandise at a low cost which helps maintain lower
inventories. Since Dillard’s is part of the department store industry, inventory
management is essential. This requires Dillard’s to have low input cost in
inventory. In addition, Dillard’s incurs low distribution cost to transport their
products from manufactures to consumers. Keeping just enough inventory to
display in stores helps avoid expenses incurred with stock piling inventory.
Roughly 98% of Dillard’s inventory is accounted by using the Retail Inventory
LIFO method. The remaining 2% of the inventory is valued by the retail
inventory method (RIM). RIM is a method used by retailers to value inventory
with a physical count by converting retail prices to cost. This method requires
Dillard’s to keep the total cost and retail value of goods purchased and available
for sale, and also sales for the period. Additionally, RIM will result in valuing
inventories at LCM if markdowns are currently taken as a reduction of the retail
value. Dillard’s merchandise inventory has steadied between 1.6 and 1.8 million
over the last five years. In comparison with two industry competitors, this figure
fits right in the middle. JC penny reported inventory at 3.4 million in 2006, and
Saks, Inc. reported inventory around 800,000.
Revenue is accounted for at the point of sale. Allowance for sales returns are
recorded under nets sales in the period in which the sales are recorded. The
firm’s provision for sales returns varies upon prior evidence of its return rate. The
allowance for sales returns during 2006, 2005, and 2004 was 7.7 million, 7.6
million, and 6.3 million respectively. Gift cards and other credit accounts are also
18
recognized during the time of sale, and the liability is decreased upon
redemption. Any remaining balance of the liability is amortized over a 36 month
period and recorded as a reduction of cost of sales.
Property and Equipment is stated at cost and is depreciated using the straight
line method of its estimated useful life. The buildings owned by the firm have an
estimated useful life of 20-40 years. Furniture, fixtures, and other equipment
only utilize a useful life of 3-10 years. Depreciation for 2006 was estimated at
$300 million which only differed slightly from 2005’s actual depreciation of $302
million. This minor differentiation between the estimated and actual cost of 2005
and 2006 shows that Dillard’s tends to keep its depreciation in accordance with
the previous year’s actual depreciation cost. The related rental expense of 62
operating lease stores is recognized over the lease term under a straight-line
basis. The difference between the amounts charged to expense and the rent
paid are recognized as deferred rent liability. Currently, a balance of $200 million
remains in operating leases and $31 million remains is capital leases as of 2006.
Cash flow from operations is a primary source of liquidity that is adversely
affected when the industry faces market driven challenges and new existing
competitors seek areas of growth to expand their business. If the firm does not
sell sufficient quantities of merchandise, they respond by taking markdowns. If
they have to reduce prices, the cost of goods sold on the income statement will
equally rise, thus reducing income. Dillard’s success is also dependent upon
brand image and predicting customer’s fashion preferences. Dillard’s will need to
identify suitable markets and locations to ensure success when opening new
stores.
Dillard’s did raise the discount rate the company uses for determining future
pension obligations. The rate increased to 5.6% in 2006 from 5.5% in 2005. The
increase in amounts set back for pension funds is a conservative move by
19
Dillard’s. Many firms in the industry have had problems when under estimating
pension obligations. Dillard’s is attempting to prevent any unexpected loss in
revenues as a result of under estimating future pension expenses.
Accounting Flexibility
The FASB imposes certain accounting standards and policies in accordance with
Generally Accepted Accounting Principles (GAAP). However, GAAP allows a broad
view of flexibility for managers of a firm to report an accurate fair market value
of estimations on several accounting policies. Dillard’s has a great deal of
flexibility when reporting its inventory. This is ideal for the industry because of
the ever changing demand for department store merchandise.
Dillard’s success depends greatly on selling of retail merchandise. Retail sales are
the key operating cash component providing 98.1% and 96.3% of total revenues
over the past two years (Dillard’s 10-k). If sufficient quantities of inventory are
not sold Dillard’s uses markdowns. Retail markdowns increase Dillard’s cost of
goods sold, but it is necessary in-order to liquidate inventory. Since Dillard’s
competes on the basis of high quality, investing in high amounts of inventory
reduces the rate of product failure. To account for this Dillard’s uses a flexible
accounting system for inventories.
Using the LIFO inventory method for 98% of inventories allows Dillard’s to value
most of their inventory at the lower of cost or market. LCM allows managers the
flexibility to adjust the inventory account to show loss on inventory. The
remaining 2% of the inventory is valued by the RIM method. The RIM includes
significant management judgments such as merchandise markups and
markdowns, which significantly impact the ending inventory and the resulting
gross margins. Decisions based on LIFO and RIM provides an inventory valuation
that will not surprise the company if losses are incurred. This is a conservative
20
approach that allows managers to be prepared for changing revenues and is
flexible enough to handle markups and markdowns.
Actual Accounting Strategy
Firms can manipulate their financial appearance using the flexibility of GAAP.
They can influence performance data as well as change the firm’s financial
standing. Accounting strategies range from aggressive to conservative and are
utilized by firms as they desire. Dillard’s uses conservative approaches in their
financial reporting.
Dillard’s management believes RIM values inventory at the lower of cost of
market. However, the RIM approach does require management to make quite a
few assumptions. Managers must correctly anticipate future markups and
markdowns, which can greatly impact the ending inventory valuation as well as
the resulting gross margins. Dillard’s past accounting estimates can fluctuate but
are usually caused by factors beyond the firm’s control. Sales and operating
results vary from quarter to quarter affected mainly by variations in timing and
volume of sales. Changes in cost of availability of material and labor, as well as
changes in shipping cost of supplies also contribute to Dillard’s inconsistent
estimates.
In 2004 Dillard’s sold its private label credit card business to GE finance for 1.1
billion. GE assumed $400 million of long-term securitization liabilities. The sale of
Dillard’s credit card debts reduced its account receivable by nearly 1.2 billion.
However the transaction could have taken place to achieve certain accounting
objectives. We believe that the selling of the credit card company was a major
effort to reduce expenses, to increase net income for the year 20004. In 2002
Dillard’s experienced a loss when it adopted Statement of Financial Accounting
Standards No. 142, “Goodwill and other Intangible Assts” (Dillards 10-K). Net
21
income hit a record low for the past five years. Below are some expense
reductions that occurred as a result of selling the credit card company:
SG&A Expense
(53,700,000)
Payroll
(15,000,000)
Advertising
(17,600,000)
Communications
(10,000,000)
Insurance
(8,300,000)
Net income was reported as 117.6 million as opposed to 9.3 million in 2004. This
increase could show that the selling of the credit card company was a decision
by management to increase net income to take investor attention away from the
past and excite them about the future. This is a more aggressive move that
shows management is hoping for future growth. Their actions are an effort to
demonstrate prosperity on the financial reports of the firm. Dillard’s also
capitalizes its operating leases to consider them as assets during the accounting
period. By doing this Dillard’s can represent a more promising outlook by failing
to disclose some of the debt associated with operations. This technique is
commonly used in the industry.
Dillard’s chooses to use the Last in First Out method as well as the RIM method
to account for excessive inventories. Dillard’s accounting strategy is necessary
when competing on the basis of high quality. Dillard’s has also been working
toward increasing net income since 2002. The selling of Dillard’s credit card
company in 2004 could be a significant effort to decrease expenses to report
increased net income. Dillard’s uses a conservative strategy coupled with
aggressive movements to help show the future prosperity that the company
hopes for.
22
Quality of Disclosure
Quality of Disclosure is an effort by the company to release information to
investors that allows them to see for themselves the details of the company.
Companies must be careful not to release information that could hurt the
company if accessible to the public. The quality of disclosure is a measure of the
accuracy of the financial statements to that of the actions of the company.
The firm provides adequate disclosure in its letter to shareholders. The letter
clearly lays out the firm’s industry conditions, its competitive position, and plans
for the future. The letter to the shareholders is intended to give shareholders
insight as to the goals and upcoming actions of the company. The letter also
explains financial documents with footnotes. The letter offers an easy
understanding of the progress of the companies operations and finances.
Dillard’s is very forthcoming with their information on a qualitative and
quantitative level concerning the particular Market risk that they are currently
facing. The company is very clear that they are particularly responsive to the fact
that their obligations have given them concerning current interest rate changes.
Dillard’s is also very open with the public stock holders concerning personal
evaluations that the company’s key staff member made dealing with the
effectiveness of the company’s disclosure controls and procedures consistent to
the Securities Exchange Act. Dillard’s state’s that after all the evaluations have
taken place, their disclosure controls and procedures are at an assuring level. We
believe this to be true. As for overall quality, Dillard’s policies and procedures are
correct and productive.
23
Sales and Core Expense Manipulation Diagnostics
YEAR
SALES/AR SALES/INV
SALES/TA
CFFO/OI
2002
7.76
5.37
1.19
2.02
2003
6.15
5.16
1.23
.80
2004
6.60
4.82
1.23
1.79
2005
805.80
4.51
1.37
1.62
2006
615.57
4.27
1.40
1.50
The only standout change in the sales diagnostics appears in net sales over
accounts receivables. Net Sales over accounts receivables experienced quite a
jump in 2005. This is due to Dillard’s selling their credit card company. The ratio
shows a huge decrease into accounts receivable. This boosted the firm’s financial
position by collecting on accounts receivable immediately. The company’s net
income has been consistently higher since the sale of the credit card company.
Potential Red Flags
When working on financial valuation of a company, a certain amount of time
and energy must be spent looking for any suspicious accounting principles.
When searching for potential red flags, we researched Dillard’s 10-K statements
over the last four years. During the research, we paid particular attention to
their income statements, balance sheets, and cash flow statements. Dillard’s
shows sound financial statements with no unusual increases or decreases in any
of their inventory, cash equivalents, or tax income.
A look into the quarterly reports from past Dillard’s 10-Q’ show that fourth
quarter earnings are continually larger than the other three quarters in the year.
This increase in sales and earnings can be attributed to the holiday season. One
area we did decide to look into a little further was the company’s Accounts
Receivables. Looking back to the Accounts Receivable in 2003 shows you that
24
Dillard’s had a balance of 1.3 billion dollars. This seemed strange when looking
at the current 10-K because it shows Accounts Receivables with a balance of
12.5 million. This was all a result of Dillard’s selling their credit cards to GE
Consumer Finance. “GE acquired our proprietary credit card business, which
previously owned and securitized the accounts receivable generated by the
proprietary credit card accounts. The sale of the Company’s credit card business
significantly strengthened its liquidity and financial position. The Company had
cash on hand of $300 million as of January 28, 2006 and reduced outstanding
debt and capital leases by $163.9 million during fiscal 2005. After identifying this
information, there were no more potential ‘red flags’ discovered.
Undo Accounting Distortions
After evaluating Dillard’s accounting practices, no major adjustments took place.
As far as we can tell, Dillard’s is not trying to hide or manipulate any numbers to
deceive their shareholders and potential lenders. They do an adequate job
describing what they are doing and why. The “red flag” mentioned previously is
slightly suspicious, but Dillard’s contributes the discrepancy to the sale of their
credit card program. Not only did the numbers match, but they explained why
there were a few minor increases and decreases. Dillard’s discloses all of their
information in many of their reports, proving they have laid everything out for
investors to see. They provide the investors with footnotes, and memos that
clearly explain why events occurred the way they did. We see no need for
Dillard’s to adjust any of their accounting information.
Financial Ratios Introduction_________________________________
For the next part of our evaluation of Dillard’s Inc, we are going to assess the
company’s performance by calculating several financial ratios. In order to make
a proper assessment, we will perform a ratio analysis for the past 5 years. By
calculating the ratios with information we get from the financial statements, we
can evaluate our company’s performance individually. We also can determine
25
where Dillard’s ranks in the department store industry by evaluating their
competitors and the industry as a whole. By looking at these ratios, we can get
an in-depth look at Dillard’s past and present performance, and then take that
information and utilize it to make the logical forecasts for the next ten years. In
order to give investors an insight into the company, we must paint a clear picture
of the company through the successive analysis.
Ratio Analysis_____________________________________________
In order to properly evaluate the financial condition of a company, financial
statements must be analyzed and interpreted. Financial statement analysis
provides information that is necessary to evaluate the financial dimensions of
management performance, detect emerging trends, and to help explain
relationships contained in the basic financial statements (Dr. Moore’s Notes.) Our
analysis of Dillard’s and its competitors will focus on the three major areas:
liquidity, profitability, and capital structure. We will be conducting our analysis by
using 16 ratios that fall under the three major areas of liquidity, profitability, and
capital structure. By using these ratios we will be able to create an industry
comparison for Dillard’s and its competitors. We will compute our ratios for up to
five years in order to provide for a fair level of comparison.
Trend (Time Series) Analysis/Cross Sectional Analysis______________
Liquidity
The first category of ratios we will be using deal with liquidity. Liquidity refers to
a firm’s ability to generate cash flow and to pay back their short term financial
obligations in a timely fashion. The first ratio we will be discussing is the current
ratio. The current ratio is found by dividing current assets by current liabilities.
Both of these are found on the company’s balance sheet.
26
Current Ratio=Current Assets/Current Liabilities
4.00
3.00
2.00
1.00
0.00
2002
2003
2004
2005
2006
Dillards
3.03
3.53
2.26
2.19
1.87
Federated
1.75
1.97
1.91
1.75
1.34
Saks
2.25
2.41
2.11
2.21
1.95
Industry Average
2.00
2.19
2.01
1.98
1.65
Above are the current ratio calculations of Dillard’s, Federated, and Saks. We
also calculated the industry average, excluding Dillard’s. The current ratio is a
valuable calculation because it states that for each dollar of liabilities a company
has, they must have current assets to match it. Current assets consist of cash,
cash equivalents, accounts receivable, inventory, marketable securities, and prepaid expenses. The higher the current ratio, the more liquid a firm is.
This cross sectional graph above shows the industry average and it compares it
to Dillard’s, Federated, and Saks. The industry average from 02’-06’ stays right
around two. Dillard’s in the first two years of our calculations had a current ratio
above three. This is well above the industry average and could mean that
Dillard’s is not efficiently utilizing their current assets. We can contribute the drop
in the ratio in the last three years because of the sale of their credit card
corporation in 2004, which significantly declined their accounts receivables. From
2003 to 2006 Dillard’s current assets declined each year, while their current
liabilities remained about the same. This is another reason why Dillard’s current
ratio started to decline in the last three years of our calculation. In the last three
years Dillard’s is much closer to the industry average, each year it is about two
tenths of a percentage point higher. For example, in 2005 Dillard’s had a current
27
ratio of 2.19, while the industry average was 1.98. In all five years Dillard’s
current ratio is above the industry average. In the first two years, we would say
that Dillard’s had an excess of assets that could have been utilized more
efficiently elsewhere. But, from 04-06 they are above the industry average and
have better liquidity than Federated, and are about equal to Saks.
The next ratio we will discuss is the quick asset ratio. This is calculated by
dividing the firm’s quick assets by current liabilities. Quick assets consist of cash,
securities, and accounts receivable.
Quick Asset Ratio=Quick Assets/Current Liabilities
2.00
1.50
1.00
0.50
0.00
2002
2003
2004
2005
2006
Dillards
1.32
1.67
1.01
0.49
0.27
Federated
0.63
1.02
1.06
0.49
0.36
Saks
0.43
0.60
0.44
0.46
0.23
Industry Average
0.53
0.81
0.75
0.475
0.295
Up until the most recent year, Dillard’s quick asset ratio stayed above the
industry average. Once again the ratio in the first couple of years in our
calculation is well above the industry average. Then in the last couple of years it
declined heavily and is right around the average. As we discussed earlier, this
happened because of their heavy drop in their accounts receivable resulting from
the sale of their credit card corporation in 2004. Saks quick asset ratio stays
consistent from 2002-2005. Based on our calculation, Federated’s ratio is very
inconsistent. From 2002-2004 it increased heavily, then after 2004 it started to
28
decline heavily. All three companies experienced unfavorable changes in the last
two years.
The Inventory Turnover ratio is found by dividing cost of goods sold by
inventory. The ratio determines how many times the firms inventory is sold and
replaced over a period of time. The Days Supply of Inventory is found by dividing
365 by the inventory turnover. This ratio tells you the number of days inventory
stays with the company before it is sold.
Inventory Turnover=Cogs/Inventory
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
29
2002
2003
2004
2005
2006
Dillards
3.53
3.30
3.17
2.90
2.78
Federated
2.82
2.75
2.74
2.88
2.35
Saks
3.06
2.84
2.59
2.64
2.92
Industry Average
2.94
2.80
2.67
2.76
2.64
Days Supply of Inventory=365/Inventory Turnover
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2002
2003
2004
2005
2006
Dillards
103.51
110.76
115.24
126.06
131.23
Federated
129.43
132.73
133.21
126.74
155.32
Saks
119.28
128.52
140.93
138.26
125.00
Industry Average
124.36
130.62
137.07
132.50
140.16
Dillard’s inventory turnover exceeds the industry average each year. It also
exceeds both of its competitors each year until 2006, when Saks has a higher
turnover. A strong inventory turnover creates a good day’s supply of inventory.
Dillard’s inventory average for five years is 3.14. The turnover decreased each
year, which translates into a negative impact for the company. Each year
Dillard’s inventory stayed with the company longer than the previous year. As
you can see in the Days Supply of Inventory graph, it increased from around 103
days in 2002 to 131 days in 2006. This is consistent with its competitors and the
industry average. Dillard’s maintains a competitive advantage over the industry
each year by about an average of 15 to 16 days. Although Dillard’s inventory
turnover is experiencing a negative impact from 2002 to 2006, so are its
competitors. We conclude from these calculations that Dillard’s, along with the
industry’s, cost of goods sold is remaining constant, but the inventory is
increasing each year. Although sales have remained constant, this could be a
result of more merchandise being produced each year, but fewer sales
associated with the increased inventory.
30
The accounts receivable turnover is calculated by dividing sales by accounts
receivable. The accounts receivable turnover tells you how long it takes a
company to turn its receivables into cash. We encountered some problems in
computing the receivables turnover. First, when Dillard’s sold their credit card
company in 2004, it left the company with a small amount of receivables in 2005
and 2006. This is the reason our receivables turnover in the last two years of our
calculations is so high.
Saks did not disclose any financial information on its accounts receivables;
therefore we cannot make any calculations involving accounts receivable with
that company. Therefore we cannot have an industry average for these two
calculations. The industry average is simply the ratios of Federated.
Accounts Receivable Turnover=sales/accounts receivable
2002
2003
2004
2005
2006
Dillard’s
7.59
5.91
6.38
780.08
603.70
6.58
5.24
4.75
4.57
8.88
Federated
n/a
Saks
Days Sales Outstanding=365/A/R Turnover
2003
2004
2005
2002
Dillard’s
48.11
61.74
57.23
0.47
Federated
55.47
69.66
76.84
79.87
Saks
n/a
2006
0.60
41.10
From 2002 to 2004 Dillard’s experienced an unfavorable change in its accounts
receivable turnover. It went from 7.59 to 6.38, thus increasing their day’s sales
outstanding by about 9 days. Federated also experienced an unfavorable change
in that same time period. Their turnover went from 6.58 to 4.75, which increased
their day’s sales outstanding by about 11 days. Both of these companies
experienced negative impacts because of a decrease in sales in this time period.
The day’s sales outstanding for Dillard’s in the last two years are misrepresented
because of the unusually high account receivables turnovers. This significantly
31
low number in day’s sales outstanding is attributed to the huge decline in
accounts receivable from 2004 to 2005.
Working Capital Turnover=Sales/Working Capital
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2002
2003
2004
2005
2006
Dillards
4.32
3.53
4.50
6.03
7.54
Federated
4.38
4.34
4.27
4.87
8.76
Saks
6.18
5.26
5.62
5.65
7.45
Industry Average
5.28
4.80
4.95
5.26
8.11
The working capital turnover is a useful measure in determining how a company
is using its working capital to generate sales. For example, in 2002 Dillard’s has a
working capital turnover of 4.32. This states that for each dollar in working
capital there are a $4.32 sales as a result. Working capital is found by
subtracting current liabilities from current assets. Dillard’s has experienced a
favorable impact since 2002 in its working capital turnover. In order, for this to
take place, one of three things must happen. Current assets have to decrease,
current liabilities have to increase, or more sales must be generated. Dillard’s
sales and current liabilities have remained fairly constant from 2002 to 2006.
Dillard’s current liabilities have decreased throughout the five year time span and
this is the reason its working capital turnover is increasing. Once again this is a
result of the sale of its credit card corporation which heavily decreased the
company’s accounts receivable. In computing current assets, accounts receivable
is one of its inputs.
32
In the early years of our valuation, Dillard’s was losing to its competitors and
were well below the industry average for working capital turnover. A high
working capital turnover is sought after because it states a firm has high sales
revenue as a result of working capital. At the end of 2004, with the sale of their
credit card corporation reducing their accounts receivable, thus reducing their
current assets, they gained ground on the industry and its competitors. In 2005,
Dillard’s had a working capital of 6.03 which put them ahead of both Federated
and Saks. In 2006, their working capital increased heavily once again, but the
industry did as well. It put Dillard’s ahead of Saks, but below the industry
average. Based on our calculations, Dillard’s had a favorable change in their
working capital, but they are still below the industry average. In order for
Dillard’s to regain their competitive advantage on the industry, they need to
generate more sales, reduce current assets, or increase its current liabilities.
Profitability
The profitability analysis of a firm is used to evaluate the efficiency of a company
associated with its operating activities by examining the operating efficiency,
asset productivity, return on assets, and return on equity. The construction of a
common size income statement is helpful in the comparison of the firm’s sales
from each year. Sales are represented as 100% in the income statement, and
each line item is shown as a percentage of sales for each specific year. These
percentages show a clear comparison of the expenses and where improvement is
needed.
Operating Efficiency
Dillard’s gross profit margin is the lowest between its two competitors and the
industry average each year from 2002-2006. The firm is demonstrating a steady
profit margin due to the consistency between sales and its cost of goods sold.
The ratios neither increased nor decreased significantly for any firm, which
illustrates essentially no change between each year.
33
Gross Profit Margin=Gross Profit/Sales
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Dillards
2002
2003
2004
2005
2006
32.46%
33.58%
31.96%
33.35%
33.68%
39%
40%
40%
40%
41%
Saks
35.10%
37.10%
37.90%
37.90%
37.10%
Industry Average
37.05%
38.55%
38.95%
38.95%
39.05%
Federated
In evaluating the operating profit margin, the most significant change in
percentages occurred in 2004 when it dropped almost 2% from 2003. This
negative impact is contributed to the substantial decrease in operating income.
The operating income in 2004 dropped almost $190 million from the previous
year while maintaining constant sales. Overall, each competitor is experiencing a
steady increase in its operating profit margin, which can be examined by the
industry average. Although Dillard’s experienced an unusual effect in 2004, its
graph demonstrates that it is following the same pattern of its competitors and is
closely related to the industry average for each of the other four years.
34
Operating Profit Margin=Operating Income/Sales
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2002
2003
2004
2005
2006
Dillards
5.59%
6.23%
4.35%
5.47%
6.68%
Federated
6.99%
8.63%
8.70%
8.87%
10.83%
Saks
1.70%
3.90%
3.80%
3.00%
3.40%
Industry Average
4.35%
6.26%
6.25%
5.94%
7.11%
The net profit margin evaluation has somewhat skewed information because
some of the contributing factors are not applicable due to the net loss for
Federated and Saks, Inc. in 2002, and for Dillard’s in 2003. The net loss for
Dillard’s can be contributed to the change in accounting policies for that year and
therefore net income increased considerably the following year. The industry
average evaluation for 2002 was not applicable and therefore, we were unable to
factor this into our evaluation to compare to the next year. Since 2004, Dillard’s
has experienced an increasing level in net profit margin due to the considerable
change in net income. In 2004, net income was only $9,344,000 and increased
significantly to $117,666,000 the next year. This information explains the
positive 1.44% increase between these two periods. Currently, the ratios are
beginning to become stable for the firm, but are still below the industry average
because of Federated’s improving net income. This may skew the average
somewhat because Federated clearly has a competitive advantage over the
market in this profit margin. Saks is becoming the laggard in this evaluation due
35
to its decreasing net income from 2004. Currently, Dillard’s retains nearly two
cents of every sales dollar as profit.
Net Profit Margin=NI/Sales
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Dillards
2002
2003
0.88%
2004
2005
2006
0.12%
1.56%
1.61%
Federated
5.30%
4.50%
4.40%
6%
Saks
0.40%
1.40%
0.90%
0.40%
Industry Average
2.85%
2.95%
2.65%
3.20%
Overall, operating efficiency for Dillard’s over the past five years inherits a
positive evaluation. The key factors for this evaluation were the positive factors
in both the operating income margin and net profit margin. The gross profit
margin for Dillard’s showed no significant change to receive a negative result
although it was the industry laggard in that ratio evaluation. The biggest
improvement the firm demonstrated was increasing its net profit margin to try
and compete with Federated. Although Dillard’s may not ever catch up to
Federated in this aspect, this shows that Dillard’s is continuing to grow and
improve its operations.
Asset Productivity
The asset productivity of a company is used to measure the revenue output of its
resources. This estimation is calculated with the asset turnover ratio which is
computed by dividing net income by total assets. The concept of this ratio
36
implies how well the firm’s assets are used to generate the amount of sales
volume.
Asset Turnover=Sales/Total Assets
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2002
2003
2004
2005
2006
Dillards
1.15
1.19
1.19
1.32
1.37
Federated
0.97
1.07
1.05
1.03
0.68
Saks
1.32
1.29
1.3
1.37
1.55
Industry Average
1.15
1.18
1.18
1.20
1.12
Dillard’s has maintained a constant growth in this financial ratio and is continuing
to rise above the industry average for the past two years. This is contributed to
a constant sales rate with a slight decline in total assets as of late. Federated is
showing a significant decline since 2005 which could be contributed to its
excessive increase in assets. Saks, Inc. is performing similar to Dillard’s in this
productivity measure and is setting the industry benchmark. Overall, Dillard’s
recent rise in this particular percentage warrants a positive result because its
steady sales are supporting the firm’s total resources.
Return on Assets
The return on assets ratio is a comprehensive measure of profitability than
incorporates both the firm’s profits and resources utilized. This ratio is calculated
by taking the net income of a firm for a particular year and dividing it by total
assets. The evaluation of the graph on this ratio shows a somewhat similar
37
pattern to the net profit margin. The return on assets ratio also has misaligned
information because of the net loss for Federated and Saks in 2002 and Dillard’s
in 2003. Again, Dillard’s recent rise in this evaluation is due to the improvement
in net income after the irregular downfall in 2004. Federated has been the
industry leader in this measure since 2003, but is now showing a decline in this
ratio because of its increase in total assets since the end of 2005.
Return On Assets=NI/Total Assets
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Dillards
2002
2003
1.00%
2004
2005
2006
0.14%
1.84%
2.13%
6%
5%
5%
4%
Saks
0.01%
1.80%
1.30%
0.50%
Industry Average
3.00%
3.40%
3.15%
2.25%
Federated
In general, Dillard’s is experiencing a significant improvement in this calculation
since 2004. Over the past five years, the rate of return on assets has increased
by over 1%, which is a sizeable change for the firm and the industry as a whole.
The overall profitability for the firm is expanding due to the considerable
increases in most of the ratios.
Return on Equity
The rate of return on equity is a significant measure to the financial management
of a company. This ratio represents the profitability from the owners’ interest in
the firm.
38
Return On Equity=NI/Total Equity
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2002
2003
2005
2006
0.41%
5.26%
5.23%
14%
12%
11%
10%
Saks
1.10%
3.70%
2.60%
1.10%
Industry Average
7.55%
7.85%
6.80%
5.55%
Dillards
Federated
2.73%
2004
Dillard’s showed high rates of return on equity between 2004 and 2005 because
the total assets and liabilities declined at a constant rate to keep the equity
almost equal to the previous year. This illustrates a higher profitability by
maintaining a constant level of equity invested into the firm. In this instance, as
profits increase, the return on owner’s equity will also increase due to lower debt
financing and investments in total assets.
Capital Structure Ratio
The third category of ratios we calculated deal with capital structure. The capital
structure of a company uses sources of financing activities to acquire assets, and
is represented by the liabilities and owners’ equity section of the balance sheet.
The amount of debt relative to the owners’ equity, the ability to service the
principal and the interest requirements on debt are the main concerns in
analyzing capital structure. There are three main ratios we used in our valuation
of Dillard’s capital structure. The debt to equity ratio is the first one we
calculated. It is important because it measures a firm’s credit risk. A firm has a
39
high credit risk if there is a chance that a firm’s interest and debt repayments
cannot be satisfied with available cash flows. The debt to equity ratio is found
by dividing total liabilities by total owners’ equity.
Debt to Equity Ratio=Total Liabilities/Total Equity
2.50
2.00
1.50
1.00
0.50
0.00
2002
2003
2004
2005
2006
Dillards
1.65
1.95
1.87
1.45
1.36
Federated
1.70
1.51
1.45
1.41
1.45
Saks
1.02
1.02
1.00
1.26
0.93
Industry Average
1.36
1.27
1.23
1.34
1.19
A declining debt to equity ratio year to year would be a favorable impact for a
company. The debt to equity ratio states that a firm has a certain amount of
liabilities for every dollar of owners’ equity. For example, Dillard’s in 2002 had a
debt to equity ratio of 1.65. This states that Dillard’s has $1.65 worth of debt for
every $1.00 of owners’ equity. Every year in our calculations, Dillard’s is well
above the industry average. Although towards the end, Dillard’s started making
progress on the industry average. Saks has the most consistent ratio throughout
the five year average. For the debt to equity ratio Saks sets the standard for the
industry. A ratio around 1 is very favorable for a company. A ratio of 1 would
essentially mean no credit risk for a company. A firm would have the available
cash flows necessary to pay of its interest and debt repayments. Federated is
like Dillard’s in the first couple of years of our calculations, the company has a
very high debt to equity ratio. Then towards the end, they too start to lower
40
there number. Dillard’s acquires lower ratios by lowering their total liabilities
substantially from 2003 to 2006. This is the reason their ratio drops from 1.95 to
1.36 in that same time period. Overall Dillard’s is experiencing a favorable impact
by lowering its ratio each year, but Dillard’s is unable to obtain a competitive
advantage in the debt to equity ratio. We can make this conclusion based on the
fact that Dillard’s ratios each year are well above the industry average.
The next ratio under capital structure is the times interest earned. Before there
can be profits to stock-holders of a corporation, income from operations must be
able to cover the required interest expense. The times interest earned ratio
determines the company’s ability to pay back its interest on borrowed money.
The ratio is found by dividing operating income by interest expense.
Times Interest Earned=NIBIT/Interest Expense
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2002
2003
2004
2005
2006
1.09
2.33
2.29
Dillards
1.55
Federated
3.34
4.32
5.04
4.68
5.74
Saks
0.80
1.88
2.10
1.70
2.36
Industry Average
2.07
3.1
3.57
3.19
4.05
In 2003, we do not have a calculation for Dillard’s because in that year the
company’s NIBIT was a negative number. This was due to an accounting change
that took place within that year; it had nothing to do with the company’s
earnings for the year. Dillard’s times interest earned ratio from 2002 to 2006
showed a slightly favorable impact. However, Dillard’s was below the industry
average in every single year of our calculations. Federated from 2002 to 2006
41
had the greatest ability to repay its interest expense. Although Dillard’s ratio is
improving; the rest of the industry is improving at the same rate.
The last ratio used to value the capital structure of the firm is the debt service
margin. This ratio measures the ability to cover the annual payments of the
previous year’s liabilities with the cash flows generated from operations. This
ratio is computed by dividing the operating cash flows from the current year and
dividing it by the notes payable from the previous year. The cash flows from
operations are a major contributor to the retirement of debt.
Debt Service Margin=Operating Cash Flow/Prev. Yr Current
Notes Payable
5.00
4.00
3.00
2.00
1.00
0.00
2002
2003
2004
2005
2006
Dillards
2.95
3.63
3.11
3.34
4.03
Federated
0.77
1.11
0.76
0.56
1.04
Saks
0.20
0.20
0.35
0.32
0.14
Industry Average
0.49
0.66
0.56
0.44
0.59
Over the past five years, Dillard’s has exhibited a competitive advantage in this
particular ratio. The steady increase in the debt service margin for the firm
indicates that Dillard’s has less pressure to use its cash flows from operations to
finance its notes payable. A ratio less than 1 indicates that the firm is forced to
use most, if not all, of its cash flows to pay off its liabilities. This may compel the
firm to finance its obligations with investing activities. According to the graph,
this may be true for each of the other competitors in the industry. The current
42
ratio for Dillard’s of 4.03 denotes a favorable result, and prevails over its
competitors.
IGR & SGR________________________________________________
Internal Growth Rate
The internal growth rate is the maximum level of growth a company can achieve
without obtaining outside financing. This model is derived by multiplying the
firm’s return on assets (Net Income/ Total Assets from previous year) by the
dividend payout ratio (Total Dividends/ Net Income) subtracted from 1.
IGR = ROA (1 – Total Dividends/ Net Income)
Dillard’s has shown a relatively steady internal growth over the past 5 years
compared to its top competitors. The growth rate in 2003 was unable to be
determined because the return on assets was not applicable due to the net loss
for that year. The firm’s rates have stayed steady due to the firm paying a
constant dividend rate per share and not increasing the number of shares
outstanding. The net income has varied significantly between each year, but is
beginning to show a steady increase between 2005 and 2006.
IGR
8.00%
6.00%
4.00%
2.00%
0.00%
Dillard's
-2.00%
Federated
-4.00%
Saks
-6.00%
-8.00%
-10.00%
-12.00%
Dillard's
0.80%
Federated
-1.70%
Saks
43
2002
2003
2004
2005
2006
-0.06%
1.60%
1.90%
6%
4.50%
4.30%
3.60%
1.10%
3.70%
-9.40%
1.10%
Sustainable Growth Rate
The sustainable growth rate is calculated by multiplying the internal growth rate
by (1 + Total Debt/ Stockholder’s Equity) for each year.
SGR = IGR (1 + Debt/ Equity)
By examining the model, there is a clear relationship between the sustainable
and internal growth rates for the entire industry. Since the debt to equity ratio is
multiplied by the IGR, the SGR is going to increase (or decrease if the IGR is a
negative number) by almost the same percentage amount of the IGR. The
number is not exactly equal because of the addition of 1 to the debt to equity
ratio, but illustrates a constant relationship between the two. Again, the SGR for
2003 was unable to be determined because of the unknown IGR for the year.
Total debt and shareholder’s equity has changed relatively little from year to
year, but seem to display a decline in total debt over the recent two years.
SGR
20.00%
15.00%
10.00%
5.00%
Dillard's
0.00%
Federated
-5.00%
Saks
-10.00%
-15.00%
-20.00%
-25.00%
Dillard's
2.10%
Federated
-4.90%
Saks
44
2002
2003
2004
2005
2006
-0.17%
3.90%
4.50%
15%
11%
10.40%
8.80%
2.20%
7.40%
-21.50%
2.10%
Financial Statement Forecasting Methodology Section______________
Income Statement
We first analyzed all trends and benchmarks for Dillard’s in order to make our
assumptions on what we would be using to forecast 10 years ahead.
Dillard’s had an internal growth rate of 1.90, as of the end of 2005. With the
steady increase in this rate we projected that Dillard’s would grow by about 2
percent in the early stages of our forecasting. We believe this figure is an
accurate growth rate for Dillard’s. After the first three years of forecasting, we
came to the conclusion that sales would start to level off and come closer to a
1.5 percent growth rate.
For the rest of our income statement forecasts we used five year averages,
excluding outliers. An outlier is basically a calculation that is statistically different
from the rest of the data. For example, in forecasting Dillard’s total cost and
expenses, we excluded the 2003 growth in expenses of .16%. The rest of the
data showed that Dillard’s expenses were declining by more than 2%. We use
the rates from these averages to forecast throughout the next 10 years. One
weakness in forecasting our income statements might come with our averages
on income before and after taxes. We were forced to take a two year average,
because there were too many inconsistencies in the first years of our analysis.
This could cause net income to either be over or understated.
Balance Sheet
The inventory values were forecasted by taking the cost of sales from the income
statement and dividing it by the inventory turnover rate. We were unable to
forecast Dillard’s accounts receivables. The sale of Dillard’s credit card
corporation wiped out most of its accounts receivables. We felt that we could not
come up with a correct average to be able to forecast the information accurately.
The total assets were forecasted by taking the net sales from the income
statement each year and dividing it by an average sales/total assets rate. The
45
non-current assets were found similarly but were divided by an average
sales/non-current assets ratio. The calculations based on the income statement
information ties our financials together and give a correlation between the two.
Total stockholder’s equity was determined by taking the previous year’s value
and adding in the forecasted retained earnings. The retained earnings were
calculated by taking the net income and subtracting dividends. Total liabilities
were found by subtracting the stockholder’s equity from the total assets. Then
we added the total liabilities and the stockholder’s equity together to equalize the
balance sheet and confirm the values balances.
Statement of Cash Flows
We calculated the cash flow statement to determine the cash flows from
operations for the next 10 years for Dillard’s. The cash flow statement was a lot
easier for us to forecast compared to the balance sheet and income statements.
We already computed net income in Dillard’s income statement, so we
transferred it over to the cash flow statement. To forecast the cash flow from
operations we used a growth rate associated with Dillard’s net income.
Cost of Capital (Spreadsheets in Appendix ****)__________________
Cost of Equity
We used the Capital Asset Pricing Model, or CAPM, to find Dillard’s cost of equity.
The formula for CAPM is as follows:
Ke = Rf + β * (Rm + Rf)
The CAPM is the most common method used to find the cost of equity. In order
for us to used CAPM, we had to gather all of the relevant variables. We
gathered historical stock prices for the last five years for Dillard’s and for the S&P
46
500 as well. We also found historical data for five risk free rates, ranging from
three months to ten years. We used the Treasury-bill rates for three months, 1year, 3-year, 7-year, and 10-year. The market risk premium used in our
regression is the monthly return from the S&P 500 and the monthly risk free
rate. This gives us five risk free rates to compare with the monthly prices of
Dillard’s stock. We computed five regressions for the market risk premium for 24
months, 36 months, 48 months, 60 months, and 72 months. We chose the
value with the highest R-squared, which gave us a Beta of 0.903 and a risk free
rate of 5%. For our CAPM calculations, we estimated the market risk premium
to be 6.67% because, historically, the S&P has had a 6.67% greater return over
the risk free rate. After computation, we find our cost of equity to be 11.02%.
Cost of Debt
The cost of debt is a valuable factor used in our valuation of Dillard’s. We looked
at every value of the liabilities side of the balance sheet and searched for
footnotes regarding the debt. To assess the total cost of debt, interest rates
have to be assigned to the value of the liability and then multiplied by the weight
each value holds in relation to total liabilities. The interest rate we associated
with current liabilities is a value from the St. Louis Federal Reserve. The 5.23%
was an average of the 30, 60, and 90-day commercial paper rates. The rate
associated with long term debt is an average of various interest rates held on
promissory notes at JPMorgan Chase Bank. These rates were stated in Dillard’s
2006 10-K. The rates associated with other liabilities and subordinated
debentures were also stated in the 10-K. The rate for deferred income taxes
was a projection stated by the executives and was also included in the 10-K. We
used an estimation to value the company’s interest rate on their capital lease
obligations. After multiplying these rates to their respected weights, we found a
cost of debt of 6.8%.
47
Weighted Average Cost of Capital
The weighted average cost of capital is found by using the cost of debt, the cost
of equity, and the percentage of total capital that each represents. The formula
is as follows:
Vd
WACC =
Vd + Ve
Ve
+ * Kd
Ve + Vd * Ke
The value of debt for Dillard’s is $3,176,378 and the value of equity is
$2,340,541. The cost of debt and cost of equity is 6.8% and 11.02%,
respectively. When computed, the formula gives us a weighted average cost of
capital of 8.58%.
Method of Comparables_____________________________________
PPS
EPS
BPS
DPS
34.40
1.49
32.28
0.16
41.37
1.83
37.16
0.512
83.50
5.49
72.09
0.72
DDS
FD
JCP
Trailing Price/Earnings
DDS
FD
JCP
23.08
22.61
15.21
Industry
DDS EPS
Est. Share Price
18.91
1.49
28.18
The trailing price to earnings ratio as of April 2007 is $28.18. This ratio is
calculated by dividing the current price of the competitors and dividing it by the
earnings of the previous year. Next, you multiply the industry average by
Dillard’s earnings per share to find the estimated share price. This valuation
illustrates that Dillard’s is overvalued compared to the current stock price.
48
Forward Price/Earnings
DDS
FD
JCP
32.15
32.32
14.44
Industry
DDS EPS
Est. Share Price
23.38
1.52
36.30
Dillard’s estimated share price according to the forward price to earnings ratio is
$36.30. This is calculated like the trailing price/earnings except we use the
expected earnings per share for the next period. Based on this calculation,
Dillard’s is slightly undervalued by about $2. This calculation is the closest
determinate out of each of the eight ratios to the actual share price.
Market/Book
DDS
FD
JCP
1.07
1.11
1.16
Industry
DDS BPS
Est. Share Price
1.13
32.28
36.61
The market to book ratio is calculated by dividing the price per share by the book
value of equity per share for the industry and multiplying the industry average by
Dillard’s book value of equity. This ratio reveals that Dillard’s is slightly
undervalued at a current price of $34.40.
Dividends/Price
DDS
FD
JCP
0.005
0.012
0.008
Industry
DDS DPS
Est. Share Price
0.0103
0.16
15.53
The dividends to price ratio illustrates that Dillard’s estimated share price is
$15.53. This shows Dillard’s to be overvalued compared to the current stock
price. This ratio is calculated by dividing dividends per share by the stock price
of each competitor and then taking Dillard’s dividends per share and dividing it
by the industry average.
49
P.E.G. Ratio
DDS
FD
JCP
23.55
23.39
14.84
Industry
DDS EPS
Growth Rate
Est. Share Price
19.11
1.49
2%
27.90
The P.E.G. ratio shows that Dillard’s estimated share price is $27.90. The
industry average is found by taking the P/E ratio and dividing it by 1 minus the
growth rate. To find the estimated share price, we take the industry average
and multiply by 1 minus the growth rate. According to this calculation, Dillard’s
is currently overvalued.
Price/EBITDA
DDS
FD
JCP
4.22
1.08
2.78
Industry
DDS PPS
Est. Share Price
1.93
34.40
66.41
The Price/EBITDA calculation is found by taking the current stock price and
dividing it by earnings before interest, taxes, depreciation, and amortization.
Next, this industry average is multiplied by Dillard’s price per share. This
calculation shows that Dillard’s is undervalued as of April 2007.
Price/Free Cash Flow
DDS
FD
JCP
22.0513
8.80213
40.1442
Industry
DDS FCF PS
Est. Share Price
24.47
1.56
38.18
To get the estimated share price for Dillard’s using the Price/Free Cash Flow ratio
we take the price per share over free cash flows for the industry and take this
average and multiply by Dillard’s free cash flow per share. Dillard’s estimated
share price using this ratio shows that it is slightly undervalued.
50
Enterprise Value/EBITDA
Enterprise Value
DDS
FD
2,851,209 22,493,530
1,184,939
7,847,000
0
0
193,994
1,211,000
MVE
LT Debt
Pref. Stock
$ & Equivalents
Enterprise Value
/ EBITDA
DDS
FD
JCP
5.78
9.36
7.26
JCP
17,536,503
3,010,000
0
2,747,000
3,842,154
29,129,530
17,799,503
664,554
5.782
3,113,000
9.357
2,451,000
7.262
Industry
DDS Est. Share Price
8.31
55.58
The enterprise value is calculated by taking the sum of the market value of
equity, long-term debt, preferred stock, and subtracting the cash and
equivalents. Once the enterprise value for the industry was determined, we
were able to find the estimated price per share using the following formula.
EV = (PPS + LTD - $ & Equivalents)/ EBITDA
8.31 = (PPS + 12.15)/ 8.15
PPS = $55.58
The estimated share price for Dillard’s of $55.58 concludes that it is undervalued
compared to its actual share price on April 1, 2007.
Intrinsic Valuation Models___________________________________
Discounted Dividends
In theory, the discounted dividends model values a company based on current
and future dividend payments to shareholders. Although this model can value a
company it is the poorest model we will be calculating. The reason the
discounted dividends model is an inadequate valuation because dividends do not
measure a company’s stock price performance very well. This can be found in
51
instances when a company that does not pay dividends, but reinvests its
earnings back into the firm.
Ke
0.10
0.11
0.12
0.13
0.14
Sensitivity Analysis
g
0
0.02
0.04
$1.63 $1.78 $2.04
$1.48 $1.60 $1.78
$1.36 $1.45 $1.58
$1.26 $1.32 $1.42
$1.17 $1.22 $1.29
0.06
$2.57
$2.11
$1.80
$1.57
$1.40
Dillard’s pays a constant annual dividend payment of $.16 per share. Using
Dillard’s cost of equity of 11.02% and assuming no growth, the estimated share
price is $1.48. The estimated value per share as of January 31, 2007 was
calculated by taking the sum of all present value of future dividends and adding
the present value of the terminal value. The current implied value at April 1,
2007 was calculated by taking the estimated value and multiplying it by 1 plus
the cost of equity raised to 2/12 to get a current value for two months after the
end of January. The discounted dividends model, illustrated in the sensitivity
analysis above, has the least explanatory power out of the models we calculated.
The sensitivity analysis shows the various prices that would be created assuming
different growth rates and cost of equity. At an estimated price of $1.48, this
model determines Dillard’s to be significantly overvalued.
Free Cash Flows
The discounted free cash flows is calculated using the forecasted free cash flows
for the next ten years and the weighted average cost of capital for the discount
rate. The free cash flows to the firm is determined by subtracting the cash flow
from investing from the cash flow from operations. These values are then
multiplied by 1/(1+WACC)t. The value of t is how many years you need to
discount back the forecasted free cash flows. Once the present values of the
free cash flows are determined, the sum is taken of these values and added to
52
the present value of the terminal value to find the market value of the firm at the
end of the fiscal year. Next, you subtract the book value of debt to find the
market value of equity. This price is then divided by the current outstanding
shares to find the market price per share. Like the discounted dividends model,
we then calculate the current value of equity by bringing the value at January 31
to current dollar terms.
Sensitivity Analysis
g
0
0.01
0.03
0.04
WACC 0.086
$14.90
$18.35
$28.92
37.65
0.090
$12.31
$15.32
$24.36
31.59
0.095
$9.37
$11.94
$19.45
25.25
0.100
$6.73
$8.93
$15.23
$19.95
0.105
$4.34
$6.24
$11.57
$15.46
The sensitivity analysis shows more price variation compared to the discounted
dividends model. By changing the growth rate to 4%, the estimated share price
increases by almost $22. Assuming different variations in the weighted average
cost of capital, a higher discount rate will decrease the estimated price per share.
With no growth, the free cash flow model estimates the firm to be overvalued by
almost $20.
Residual Income
The residual income model values a firm based on earnings and dividends per
share. To begin the valuation we calculated by finding the ending book value of
equity in the current year. This value will be the beginning book value for the
next year. This number is calculated by taking the book value of equity from the
balance sheet, adding the earnings per share, and subtracting the dividends per
share for each of the ten forecasted years. The normal income in year 1 is found
by multiplying the cost of equity by the book value of equity in the same year.
53
These values are then subtracted from the earnings to find the residual income.
Next, the present value of the residual income is discounted back by multiplying
the residual income values by the discount factor (1/(1+WACC)t). The sum of
these values is taken to get the total present value of residual income. The
present value of the terminal value is then calculated by multiplying the terminal
value by perpetuity rate in year 11. The estimated value is determined by taking
the book value of equity found in the balance sheet and adding the total present
value of residual income and the present value of the terminal value. Once this
number is found, we divided it by the number of outstanding shares to get the
estimated share price, and brought it forward to current dollar terms like the
previous models. With a cost of equity at 11.02% and assuming no growth,
Dillard’s is again substantially overvalued compared to its April 1 stock price of
$34.40. Negative growth rates were utilized for our sensitivity analysis because
of the negative AEG in the perpetuity year. A negative 10% implies slow, steady
growth, and negative 50% implies rapid volatile growth.
0
Sensitivity Analysis
g
-0.1
-0.2
-0.3
-0.4
-0.5
Ke 0.10 $15.05 $19.93 $21.56 $22.37 $22.86
0.11 $12.71 $17.51 $19.20 $20.06 $20.59
0.12 $10.90 $15.43 $17.13 $18.02 $18.57
0.13
$9.40 $13.64 $15.32 $16.21 $16.77
0.14
$8.16 $12.10 $13.72 $14.61 $15.16
$23.18
$20.94
$18.94
$17.15
$15.54
Abnormal Earnings Growth
To find Dillard’s abnormal earnings growth we used our forecasted earnings per
share and dividends per share from 2007 to 2017. Next, we multiplied our DPS
by the cost of equity (which we found from Dillard’s capital asset pricing model)
to find the reinvested dividends per share. We then added our EPS with our
reinvested dividends per share to find Dillard’s cumulative dividend earnings. You
then take that number and multiply it by one plus the cost of equity to find
54
Dillard’s normal earnings growth. We then subtracted normal earnings growth
from Dillard’s cumulative dividend earnings to find our abnormal earnings growth
for the next nine years. The abnormal earnings growth calculations are verified
by the residual income model. The year-by-year change in residual income
should equal the annual forecasted AEG values. To calculate the present value
of abnormal earnings growth, we discounted each value back to 2007. To find
our total average EPS perpetuity we subtracted the total present value of each
year’s abnormal earnings growth and the present value of the terminal value
from Dillard’s core EPS. To get the value per share for Dillard’s from this model,
we divided the total average EPS perpetuity by our capitalization rate. Like the
residual income model we used a negative growth rate from -10% to -50%
because of the negative value in the perpetuity year.
0
Ke 0.10
0.11
0.12
0.13
0.14
Sensitivity Analysis
g
-0.1
-0.2
-0.3
-0.4
-0.5
$9.25 $11.45 $12.19 $12.56 $12.78
$8.91 $10.73 $11.37 $11.70 $11.90
$8.59 $10.08 $10.64 $10.93 $11.11
$8.26
$9.49
$9.97 $10.23 $10.39
$7.93
$8.95
$9.37
$9.60
$9.74
$12.92
$12.04
$11.24
$10.50
$9.84
Credit Risk Analysis– Altman Z-Score___________________________
We used the Altman Z-Score to determine the credit risk for the firm. The
formula is as follows:
Z= 1.2*(Working Capital/Total Assets) + 1.4*(Retained Earnings/Total
Assets) + 3.3*(EBIT/Total Assets) + 0.6(Market Value of Equity/Book
Value of Liabilities) + 1.0*(Sales/Total Assets)
55
Altman Z Score
Working Capital
Retained Earnings
EBIT
Sales
Market Value - Equity
Book Value - Equity
Total Assets
Z Score
2002
$
2,243,790
$
2,205,674
$
394,100
$
7,910,996
$
1,339,662
$
2,264,196
$
6,675,932
2003
$
1,687,604
$
2,201,623
$
197,100
$
7,598,000
6491906.3
$
2,214,651
$
6,411,097
2004
$
1,248,604
$
2,201,623
$
323,607
$
7,528,600
$
2,282,472
$
2,237,097
$
5,691,581
2005
$
1,003,087
$
2,412,491
$
241,355
$
7,560,200
$
2,071,254
$
2,324,697
$
5,516,919
2006
$
1,070,731
$
2,647,388
$
361,298
$
7,810,067
$
2,851,209
$
2,340,541
$
5,408,015
2.60
0.32
2.93
2.88
3.32
The Z-score formula for predicting bankruptcy is a multi faceted formula for the
measurement of the financial health of a company and a powerful diagnostic tool
that forecasts the probability of a company entering bankruptcy within a two
year period. The Z-Score bankruptcy provides five common business ratios using
a weighted system calculated by Altman to determine the likelihood of a
company going bankrupt. As you can see, the Z-score is relatively increasing
over the last five years. In 2003, many factors contributed to the low Z-score.
This was the year when there was a call on one of their notes, resulting in the
payment of 15.6 million dollars in interest, associated with a 125.9 call on the
debt itself. Also, this was the year that Dillard’s began to sell their credit card
business. Scores above 3 prove to be a very healthy company, and therefore,
unlikely to enter bankruptcy. Dillard’s is slowly making their way to becoming a
very credit-worthy firm.
56
Appendix_____________________________________________________________________________
Appendix 1: Forecasted Financial Statements
A. Income Statement
Income Statement
Forecast
Financial
Statements
Actual Financial Statements
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Net Sales
8,154,911
7,910,996
7,598,934
7,528,572
7,560,191
7,711,395
7,865,623
8,022,935
8,151,302
8,277,647
8,401,812
8,527,839
8,655,757
8,785,593
8,917,377
9,051,138
Cost of Sales
5,507,702
5,254,134
5,170,173
5,017,765
5,014,021
5,093,844
5,177,536
5,262,603
5,346,270
5,429,137
5,510,574
5,593,233
5,677,131
5,762,288
5,848,723
5,936,453
Gross Profit
2,647,209
2,656,862
2,428,761
2,510,807
2,546,170
2,617,551
2,688,087
2,760,332
2,805,032
2,848,510
2,891,238
2,934,606
2,978,625
3,023,305
3,068,654
3,114,684
Advertise,SG&A expenses
2,191,389
2,164,033
2,097,947
2,098,791
2,041,481
Depreciation and Amortization
310,754
301,407
290,661
301,917
301,864
Rentals
72,783
68,101
64,101
54,774
47,538
Interest and Debt Expense
Asset Imparment & store closing
charges
192,344
189,779
181,065
139,056
105,570
3,752
52,224
43,727
19,417
61,734
2,771,022
2,775,544
2,677,501
2,613,955
2,558,187
2,351,522
2,186,344
2,074,022
1,976,207
1,918,263
1,876,254
1,833,615
1,790,336
1,746,408
1,701,821
1,656,566
Service Charges, Interest, & Other
Income
244,776
322,943
264,734
287,699
147,802
Income before Taxes
120,963
204,261
15,994
184,551
135,785
138,664
141,603
147,671
150,802
153,999
157,263
160,597
164,002
167,479
171,029
Income Taxes
49,165
72,335
6,650
66,885
14,300
14,377
14,455
14,611
14,690
14,770
14,849
14,930
15,010
15,091
15,173
Net Income
71,798
(398,405)
9,344
117,666
121,485
124,286
127,148
133,060
136,111
139,229
142,414
145,668
148,992
152,388
155,857
$
0.85
$
0.85
$
1.56
$
1.55
$
0.11
$
0.11
Costs & Expenses:
Total Costs and Expenses
Earnings Per Common share:
Basic
Diluted
57
1.41
1.49
1.41
1.49
144,605
14,533
130,072
B. Common Size Income Statement
Forecast Financial
Statements
Common Size Income Statement
2002
Net Sales
100%
2003
2004
0.36%
-8.59%
100%
100%
2005
3.38%
100%
4 Year Avg.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1.41%
2.00%
2.00%
2.00%
1.60%
1.55%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
-0.44%
-1.66%
2.44%
-2.04%
-0.49%
-0.40%
-0.35%
-0.35%
-0.01%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Cost of Sales
67.54%
66.42%
68.04%
66.65%
66.32%
66.06%
65.82%
65.59%
65.59%
65.59%
65.59%
65.59%
65.59%
65.59%
65.59%
65.59%
Gross Profit
32.46%
33.58%
31.96%
33.35%
33.68%
33.94%
34.18%
34.41%
34.41%
34.41%
34.41%
34.41%
34.41%
34.41%
34.41%
34.41%
Cost and Expenses:
Advertise,selling,admin,and
general expenses
26.87%
27.35%
27.61%
27.88%
27.00%
2.08%
2.08%
2.08%
2.08%
2.08%
2.08%
2.08%
2.08%
2.08%
2.08%
2.08%
-2.68%
-2.10%
-1.40%
-1.20%
-0.70%
-0.50%
-0.50%
-0.50%
-0.50%
-0.50%
-0.50%
Depreciation and Amortization
3.81%
3.81%
3.83%
4.01%
3.99%
Rentals
0.89%
0.86%
0.84%
0.73%
0.63%
Interest and Debt Expense
Asset Imparment and store
closing charges
2.36%
2.40%
2.38%
1.85%
1.40%
Total Costs and expenses
0.05%
0.66%
0.58%
0.26%
0.82%
33.98%
35.08%
35.24%
34.72%
33.84%
0.16%
-3.53%
-2.37%
-2.13%
3 yr. Avg.
Service Charges, Interest, &
Other Income
3.00%
4.08%
3.48%
Income before Taxes
1.48%
2.58%
0.21%
Income Taxes
0.60%
0.91%
0.09%
3.82%
2 yr. Avg.
58
0.88%
-5.04%
0.12%
1.96%
2.12%
2.45%
1.80%
2.12%
2.12%
2.12%
2.12%
2.12%
2.12%
2.12%
2.12%
2.12%
2.12%
2.12%
0.89%
0.19%
0.54%
0.54%
0.54%
0.54%
0.54%
0.54%
0.54%
0.54%
0.54%
0.54%
0.54%
1.61%
1.62%
1.62%
1.63%
1.64%
1.66%
1.67%
1.68%
1.70%
1.71%
1.72%
2 yr. Avg.
Net Income
-2.68%
1.56%
0.54%
1.61%
C. Balance Sheet
Balance Sheet
2004
Forecasting
2002
2003
2005
2006
Cash
152,960
142,356
160,873
498,248
299,840
Accounts Receivable
1,074,940
1,338,080
1,191,489
9,651
12,523
Inventory
1,561,863
1,594,308
1,632,377
1,733,033
1,802,695
Other Current Assets
24,747
55,507
38,952
52,559
35,241
Total Current Assets
2,814,510
3,130,251
3,023,691
2,293,491
2,150,479
2007
2008
2009
2010
2011
2012
2013
1,622,243
1,648,897
1,675,988
1,702,634
1,729,025
1,754,960
1,781,284
2,206,965
2,251,104
2,296,126
2,332,864
2,369,024
2,404,559
2,440,627
2014
2015
2016
2017
1,808,004
1,835,124
1,862,651
1,890,590
2,477,237
2,514,395
2,552,111
2,590,393
Assets
Current Assets
Property & Equipment
Land
106,911
104,848
100,726
102,098
90,879
Buildings
2,661,120
2,748,225
2,685,628
2,755,565
2,792,417
Furniture, Fixtures, & Equip
2,258,909
2,202,811
2,192,029
2,143,464
2,155,194
Buildings under Construction
43,340
28,602
40,636
96,767
92,336
Buildings under Capital Lease
50,123
50,123
51,493
60,724
81,496
Less Acc. Depreciation
(1,664,688)
(1,764,107)
Goodwill
569,545
39,214
36,731
35,495
34,511
Other Assets
234,789
135,965
153,206
181,839
173,026
Non-current Assets
4,260,049
3,545,681
3,387,406
3,398,090
3,366,440
Total Assets
7,074,559
6,675,932
6,411,097
5,691,581
5,516,919
Sales/total assets
1.153
1.185
1.185
1.323
1.370
sales/noncurrent assets
1.914
2.231
2.243
2.216
2.246
(1,873,043)
(1,977,862)
(2,053,419)
3,505,179
5,712,144
change NCA
3,575,283
5,826,387
3,646,789
5,942,915
3,705,137
6,038,002
3,762,567
6,131,591
3,819,005
6,223,564
3,876,291
6,316,918
3,934,435
6,411,672
3,993,451
6,507,847
4,053,353
6,605,464
4,114,153
6,704,546
70,104
71,506
58,349
57,430
56,439
57,285
58,144
59,017
59,902
60,800
1,045,955
1,066,874
1,088,211
1,105,623
1,122,760
1,139,601
1,156,695
1,174,046
1,191,657
1,209,531
1,227,674
Liabilities & S/E
Current Liabilities
Accounts Payable
808,231
675,962
679,854
820,242
858,082
Current Portion LTD
98,317
138,814
166,041
91,629
198,479
Current Portion Operating Lease
2,169
1,856
2,126
4,926
5,929
Income Taxes
19,354
69,829
106,487
128,436
84,902
Total Current Liabilities
928,071
886,461
1,336,087
1,045,233
1,147,392
Long Term Debt
2,124,577
2,193,006
1,855,065
1,322,824
1,058,946
Capital Lease Obligations
20,459
18,600
17,711
20,182
31,806
Other Liabilities
157,511
137,070
147,901
269,056
259,111
Deferred Income Taxes
643,965
645,020
617,236
509,589
479,123
Subordinated Debentures
531,579
531,579
200,000
200,000
200,000
Total Liabilities
4,406,162
4,411,736
4,174,000
3,366,884
3,176,378
3,260,362
3,260,502
3,260,003
3,235,075
3,205,658
3,171,447
3,135,432
3,097,563
3,057,791
3,015,974
2,972,244
2,668,397
2,264,196
2,237,097
2,324,697
2,340,541
2,451,782
2,565,885
2,682,912
2,802,927
2,925,933
3,052,117
3,181,486
3,314,109
3,450,056
3,589,490
3,732,302
Total Stockholders Equity
NI-Div
Total Liabilities & SE
59
7,074,559
6,675,932
6,411,097
5,691,581
5,516,919
111,241
114,103
117,027
120,015
123,006
126,184
129,369
132,623
135,947
139,434
142,812
5,712,144
5,826,387
5,942,915
6,038,002
6,131,591
6,223,564
6,316,918
6,411,672
6,507,847
6,605,464
6,704,546
D. Common Size Balance Sheet
2002
Common Size Balance Sheet
2003
2004
2005
2006
2007
2008
2009
2010
2011
2.16%
15.19%
22.08%
0.35%
39.78%
2.13%
20.04%
23.88%
0.83%
46.89%
2.51%
18.58%
25.46%
0.61%
47.16%
8.75%
0.17%
30.45%
0.92%
40.30%
5.43%
0.23%
32.68%
0.64%
38.98%
28.40%
28.30%
28.20%
28.20%
28.20%
38.64%
38.64%
38.64%
38.64%
Property & Equipment
Land
Buildings
Furniture, Fixtures, & Equip
Buildings under Construction
Buildings under Capital Lease
Less Acc. Depreciation
Goodwill
Other Assets
Non-current Assets
1.51%
37.62%
31.93%
0.61%
0.71%
-23.53%
8.05%
3.32%
60.22%
1.57%
41.17%
33.00%
0.43%
0.75%
-26.42%
0.59%
2.04%
53.11%
1.57%
41.89%
34.19%
0.63%
0.80%
-29.22%
0.57%
2.39%
52.84%
1.79%
48.41%
37.66%
1.70%
1.07%
-34.75%
0.62%
3.19%
59.70%
1.65%
50.62%
39.07%
1.67%
1.48%
-37.22%
0.63%
3.14%
61.02%
61.36%
61.36%
61.36%
Total Assets
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
60
Forecasting
2012
2013
2014
2015
2016
2017
28.20%
28.20%
28.20%
28.20%
28.20%
28.20%
38.64%
38.64%
38.64%
38.64%
38.64%
38.64%
38.64%
61.36%
61.36%
61.36%
61.36%
61.36%
61.36%
61.36%
61.36%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Liabilities & S/E
Current Liabilities
Accounts Payable
Current Portion LTD
Current Portion Operating
Lease
Income Taxes
Total Current Liabilities
11.42%
1.39%
10.13%
2.08%
10.60%
2.59%
14.41%
1.61%
15.55%
3.60%
0.03%
0.27%
13.12%
0.03%
1.05%
13.28%
0.03%
1.66%
20.84%
0.09%
2.26%
18.36%
0.11%
1.54%
20.80%
18.31%
18.31%
18.31%
18.31%
18.31%
18.31%
18.31%
18.31%
18.31%
18.31%
18.31%
Long Term Debt
Capital Lease Obligations
Other Liabilities
Deferred Income Taxes
Subordinated Debentures
Total Liabilities
30.03%
0.29%
2.23%
9.10%
7.51%
62.28%
32.85%
0.28%
2.05%
9.66%
7.96%
66.08%
28.94%
0.28%
2.31%
9.63%
3.12%
65.11%
23.24%
0.35%
4.73%
8.95%
3.51%
59.16%
19.19%
0.58%
4.70%
8.68%
3.63%
57.58%
57.08%
55.96%
54.86%
53.58%
52.28%
50.96%
49.64%
48.31%
46.99%
45.66%
44.33%
Total Stockholders Equity
Total Liabilities & SE
37.72%
100.00%
33.92%
100.00%
34.89%
100.00%
40.84%
100.00%
42.42%
100.00%
42.92%
100.00%
44.04%
100.00%
45.14%
100.00%
46.42%
100.00%
47.72%
100.00%
49.04%
100.00%
50.36%
100.00%
51.69%
100.00%
53.01%
100.00%
54.34%
100.00%
55.67%
100.00%
E. Cash Flow Statement
2002
Statement of Cash Flows
2003
2004
2005
2006
2007
2008
2009
2010
2011
Forecasting
2012
2013
2014
2015
2016
2017
Operating Activities:
Net Income (Loss)
71,798
(398,405)
9,344
117,666
121,485
124,286
127,148
130,072
133,060
136,111
139,229
142,414
145,668
148,992
152,388
155,857
Depreciation & Amoritization
313,711
305,545
297,201
305,536
304,376
303,219
302,067
300,919
299,776
298,637
297,502
296,371
295,245
294,123
293,006
291,892
Deferred income taxes
2,045
24,882
13,623
(122,036)
(32,862)
Asset impairment & Store closing charges
3,752
52,224
43,727
19,417
61,374
377,657
2.31%
386,353
2.30%
395,238
2.30%
404,315
2.30%
423,061
2.29%
432,739
2.29%
442,626
2.28%
452,726
2.28%
463,045
2.28%
473,586
2.28%
Adjustments to reconcile net income:
Gain from hurricane insurance
(29,715)
Proceeds from hurricane insurance
83,398
Gain on sale of credit card business
(83,867)
Gain on sale of joint venture
(64,295)
(15,624)
Gain on sale of PP & E
(2,060)
(1,103)
(8,699)
(2,933)
Provision for loan losses
21,286
36,574
35,244
12,835
(116,985)
286
110,936
166,899
(2,872)
54,323
(32,445)
(38,069)
(100,656)
(123,345)
28,794
(30,760)
16,121
(13,607)
17,138
(3,354)
Changes in operating assets & liabilities
(Increase) decrease in A/R
Increase in mercandise inventories
Decrease (increase) in other current
assets
Increase in other assets
(31,559)
(53,504)
(37,048)
(39,816)
(6,201)
(Decrease) increase in accounts payable
(101,825)
192,825
5,350
294,623
(20,640)
616,987
356,942
432,106
554,061
369,142
(233,268)
(270,595)
Net cash from Operations
Investing Activities:
Purchase of property & equipment
Proceeds from sale of PP & E
(227,421)
(285,331)
(456,078)
31,766
11,330
103,637
Proceeds from sale of subsidiary
Proceeds from joint venture
14,000
68,295
14,125
Proceeds from hurricane insurance
26,708
Net cash from sale of credit card business
688,213
Proceeds from sale of joint venture
Net cash (used in) from Investing
34,579
(164,973)
(270,595)
(340,081)
(402,941)
(161,076)
414,212
(297,608)
(272,702)
(212,163)
(163,919)
51,369
(50,000)
Financing Activities:
Principal payments on long-term debt
(Decrease) increase in s-term borrowings
Cash dividends paid
(13,529)
(13,123)
(13,395)
(13,296)
(12,987)
Proceeds from issuance of common stock
11,037
983
1,130
16,521
9,455
(22,325)
(18,915)
(40,381)
(100,868)
Purchase of treasure stock
61
413,588
2.29%
Net cash from Financing
(202,573)
(387,406)
(252,513)
(630,898)
(269,942)
F. Common Size Cash Flow Statement
Statement of Cash Flows
2002
2003
11.64%
Forecasting
2004
2005
2006
2007
2008
-111.62%
2.16%
21.24%
32.91%
32.91%
32.91%
80.29%
100%
2009
2010
2011
2012
2013
2014
2015
2016
32.91%
32.91%
32.91%
32.91%
32.91%
32.91%
32.91%
32.91%
78.18%
76.14%
74.14%
72.21%
70.32%
68.49%
66.70%
64.97%
63.28%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Operating Activities:
Net Income (Loss)
Adjustments to reconcile net income:
Depreciation & Amoritization
50.85%
85.60%
68.78%
55.14%
82.45%
Deferred income taxes
0.33%
6.97%
3.15%
-22.03%
-8.90%
Asset impairment & Store closing charges
0.61%
14.63%
10.12%
3.50%
16.63%
Gain from hurricane insurance
0.00%
0.00%
0.00%
0.00%
-8.05%
Proceeds from hurricane insurance
0.00%
0.00%
0.00%
0.00%
22.59%
Gain on sale of credit card business
0.00%
0.00%
0.00%
-15.14%
0.00%
Gain on sale of joint venture
0.00%
-18.01%
-3.62%
0.00%
0.00%
-0.33%
-0.31%
-2.01%
-0.53%
-0.91%
3.45%
10.25%
8.16%
2.32%
0.00%
18.96%
0.08%
25.67%
30.12%
-0.78%
8.80%
-9.09%
-8.81%
-18.17%
-33.41%
Gain on sale of PP & E
Provision for loan losses
Changes in operating assets & liabilities
(Increase) decrease in A/R
Increase in mercandise inventories
Decrease (increase) in other current assets
Increase in other assets
(Decrease) increase in accounts payable
Net cash from Operations
Investing Activities:
Purchase of property & equipment
Proceeds from sale of PP & E
Proceeds from sale of subsidiary
Proceeds from joint venture
Proceeds from hurricane insurance
Net cash from sale of credit card business
Proceeds from sale of joint venture
Net cash (used in) from Investing
Financing Activities:
Principal payments on long-term debt
Payment of line of credit fees & expenses
(Decrease) increase in short-term
borrowings
Cash dividends paid
Proceeds from issuance of common stock
Purchase of treasure stock
Retirement of Guaranteed Beneficial
Interest
Net cash used in financing activities
62
4.67%
-8.62%
3.73%
-2.46%
4.64%
-5.12%
16.50%
-14.99%
-8.57%
-7.19%
-1.68%
54.02%
1.24%
53.18%
-5.59%
100%
100%
100%
100%
100%
Appendix 2: Cost of Capital
Date
63
7-Mar
7-Feb
7-Jan
6-Dec
6-Nov
6-Oct
6-Sep
6-Aug
6-Jul
6-Jun
6-May
6-Apr
6-Mar
6-Feb
6-Jan
5-Dec
5-Nov
5-Oct
5-Sep
5-Aug
5-Jul
5-Jun
5-May
5-Apr
5-Mar
5-Feb
5-Jan
4-Dec
4-Nov
4-Oct
4-Sep
4-Aug
4-Jul
4-Jun
4-May
4-Apr
4-Mar
4-Feb
4-Jan
3-Dec
3-Nov
3-Oct
3-Sep
3-Aug
3-Jul
3-Jun
3-May
3-Apr
3-Mar
3-Feb
3-Jan
2-Dec
2-Nov
2-Oct
2-Sep
2-Aug
2-Jul
2-Jun
2-May
2-Apr
2-Mar
2-Feb
2-Jan
1-Dec
1-Nov
1-Oct
1-Sep
1-Aug
1-Jul
1-Jun
1-May
1-Apr
1-Mar
Dividends
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.04
Closing Price
33.10
33.37
34.30
34.93
35.49
30.10
32.65
31.07
29.92
31.74
27.09
25.95
25.91
24.51
25.74
24.66
20.80
20.55
20.71
22.29
22.64
23.19
23.64
23.00
26.59
23.00
25.90
26.52
24.81
20.19
19.45
18.69
22.41
21.93
19.64
16.52
18.81
17.24
16.61
16.12
16.46
15.80
13.66
14.74
14.69
13.13
12.98
13.58
12.55
13.51
14.53
15.36
18.66
15.93
19.49
23.68
22.66
25.35
28.91
23.58
22.97
12.94
13.45
14.41
12.65
12.75
12.06
14.55
14.10
14.84
16.25
15.30
16.61
Return
0.0081
0.0271
0.0180
-0.0147
0.1791
-0.0781
0.0521
0.0384
-0.0573
0.1731
0.0439
0.0015
0.0588
-0.0478
0.0438
0.1875
0.0122
-0.0077
-0.0691
-0.0155
-0.0237
-0.0173
0.0278
-0.1350
0.1578
-0.1120
-0.0234
0.0705
0.2288
0.0380
0.0428
-0.1660
0.0219
0.1186
0.1889
-0.1217
0.0934
0.0379
0.0304
-0.0182
0.0418
0.1567
-0.0706
0.0034
0.1188
0.0146
-0.0442
0.0821
-0.0681
-0.0702
-0.0540
-0.1747
0.1714
-0.1827
-0.1753
0.0450
-0.1061
-0.1218
0.2260
0.0266
0.7782
-0.0379
-0.0666
0.1423
-0.0078
0.0572
-0.1684
0.0319
-0.0499
-0.0843
0.0621
-0.0789
S & P 500
Closing Price
1387.17
1448.39
1409.71
1396.71
1364.30
1349.58
1311.01
1303.82
1276.66
1270.20
1270.09
1310.61
1294.87
1280.66
1280.08
1248.29
1249.48
1207.01
1228.81
1220.33
1234.18
1191.33
1191.50
1156.85
1180.59
1203.60
1181.27
1211.92
1173.82
1130.20
1114.58
1104.24
1101.72
1140.84
1120.68
1107.30
1126.21
1144.94
1131.13
1111.92
1058.20
1050.71
995.97
1008.01
990.31
974.50
963.59
916.92
848.18
841.15
855.70
879.82
936.31
885.76
815.28
916.07
911.62
989.82
1067.14
1076.92
1147.39
1106.73
1147.39
1076.92
1067.14
989.82
911.62
916.07
815.28
885.76
936.31
879.82
885.41
Return
-0.0423
0.0274
0.0093
0.0238
0.0109
0.0294
0.0055
0.0213
0.0051
0.0001
-0.0309
0.0122
0.0111
0.0005
0.0255
-0.0010
0.0352
-0.0177
0.0069
-0.0112
0.0360
-0.0001
0.0300
-0.0201
-0.0191
0.0189
-0.0253
0.0325
0.0386
0.0140
0.0094
0.0023
-0.0343
0.0180
0.0121
-0.0168
-0.0164
0.0122
0.0173
0.0508
0.0071
0.0550
-0.0119
0.0179
0.0162
0.0113
0.0509
0.0810
0.0084
-0.0170
-0.0274
-0.0603
0.0571
0.0864
-0.1100
0.0049
-0.0790
-0.0725
-0.0091
-0.0614
0.0367
-0.0354
0.0654
0.0092
0.0781
0.0858
-0.0049
0.1236
-0.0796
-0.0540
0.0642
-0.0063
Dillard's
7-Mar
7-Feb
7-Jan
6-Dec
6-Nov
6-Oct
6-Sep
6-Aug
6-Jul
6-Jun
6-May
6-Apr
6-Mar
6-Feb
6-Jan
5-Dec
5-Nov
5-Oct
5-Sep
5-Aug
5-Jul
5-Jun
5-May
5-Apr
5-Mar
5-Feb
5-Jan
4-Dec
4-Nov
4-Oct
4-Sep
4-Aug
4-Jul
4-Jun
4-May
4-Apr
4-Mar
4-Feb
4-Jan
3-Dec
3-Nov
3-Oct
3-Sep
3-Aug
3-Jul
3-Jun
3-May
3-Apr
3-Mar
3-Feb
3-Jan
2-Dec
2-Nov
2-Oct
2-Sep
2-Aug
2-Jul
2-Jun
2-May
2-Apr
2-Mar
2-Feb
2-Jan
1-Dec
1-Nov
1-Oct
1-Sep
1-Aug
1-Jul
1-Jun
1-May
1-Apr
1-Mar
64
5-year
RFR
4.5
4.84
4.68
4.39
4.52
4.56
4.68
4.9
5.11
5.03
4.99
4.85
4.63
4.51
4.3
4.45
4.47
4.25
3.93
4.16
3.84
3.63
3.88
4.13
4.02
3.71
3.64
3.72
3.36
3.44
3.32
3.68
3.74
3.86
3.63
2.87
2.98
3.18
3.36
3.46
3.34
2.84
3.63
3.37
2.48
2.37
2.82
2.78
2.66
3.05
3.05
3.31
2.92
2.75
3.04
3.46
4.08
4.36
4.49
4.93
4.43
4.30
4.34
4.39
3.97
3.91
4.12
4.57
4.76
4.81
4.93
4.76
4.64
RFR/100
0.045
0.0484
0.0468
0.0439
0.0452
0.0456
0.0468
0.049
0.0511
0.0503
0.0499
0.0485
0.0463
0.0451
0.043
0.0445
0.0447
0.0425
0.0393
0.0416
0.0384
0.0363
0.0388
0.0413
0.0402
0.0371
0.0364
0.0372
0.0336
0.0344
0.0332
0.0368
0.0374
0.0386
0.0363
0.0287
0.0298
0.0318
0.0336
0.0346
0.0334
0.0284
0.0363
0.0337
0.0248
0.0237
0.0282
0.0278
0.0266
0.0305
0.0305
0.0331
0.0292
0.0275
0.0304
0.0346
0.0408
0.0436
0.0449
0.0493
0.0443
0.043
0.0434
0.0439
0.0397
0.0391
0.0412
0.0457
0.0476
0.0481
0.0493
0.0476
0.0464
Monthly
0.0038
0.0040
0.0039
0.0037
0.0038
0.0038
0.0039
0.0041
0.0043
0.0042
0.0042
0.0040
0.0039
0.0038
0.0036
0.0037
0.0037
0.0035
0.0033
0.0035
0.0032
0.0030
0.0032
0.0034
0.0034
0.0031
0.0030
0.0031
0.0028
0.0029
0.0028
0.0031
0.0031
0.0032
0.0030
0.0024
0.0025
0.0027
0.0028
0.0029
0.0028
0.0024
0.0030
0.0028
0.0021
0.0020
0.0024
0.0023
0.0022
0.0025
0.0025
0.0028
0.0024
0.0023
0.0025
0.0029
0.0034
0.0036
0.0037
0.0041
0.0037
0.0036
0.0036
0.0037
0.0033
0.0033
0.0034
0.0038
0.0040
0.0040
0.0041
0.0040
0.0039
MRP
-0.0460
0.0234
0.0054
0.0201
0.0071
0.0256
0.0016
0.0172
0.0008
-0.0041
-0.0351
0.0081
0.0072
-0.0033
0.0219
-0.0047
0.0315
-0.0213
0.0037
-0.0147
0.0328
-0.0032
0.0267
-0.0236
-0.0225
0.0158
-0.0283
0.0294
0.0358
0.0111
0.0066
-0.0008
-0.0374
0.0148
0.0091
-0.0192
-0.0188
0.0096
0.0145
0.0479
0.0043
0.0526
-0.0150
0.0151
0.0142
0.0093
0.0485
0.0787
0.0061
-0.0195
-0.0300
-0.0631
0.0546
0.0842
-0.1126
0.0020
-0.0824
-0.0761
-0.0128
-0.0655
0.0330
-0.0390
0.0618
0.0055
0.0748
0.0825
-0.0083
0.1198
-0.0835
-0.0580
0.0601
-0.0103
-0.0039
10 year
RFR
4.56
4.84
4.68
4.43
4.57
4.62
4.73
4.99
5.15
5.11
5.14
4.88
4.59
4.57
4.37
4.52
4.58
4.39
4.02
4.32
4.06
3.91
4.21
4.46
4.38
4.15
4.23
4.16
4.11
4.21
4.13
4.48
4.57
4.71
4.53
3.91
4
4.18
4.38
4.4
4.4
3.96
4.61
4.44
3.56
3.43
3.94
3.84
3.68
4.01
4.07
4.22
4.01
3.72
3.98
4.47
4.85
5.06
5.08
5.44
4.98
4.91
5.04
5.09
4.65
4.57
4.73
4.97
5.24
5.28
5.39
5.14
4.89
RFR/100
0.0456
0.0484
0.0468
0.0443
0.0457
0.0462
0.0473
0.0499
0.0515
0.0511
0.0514
0.0488
0.0459
0.0457
0.0437
0.0452
0.0458
0.0439
0.0402
0.0432
0.0406
0.0391
0.0421
0.0446
0.0438
0.0415
0.0423
0.0416
0.0411
0.0421
0.0413
0.0448
0.0457
0.0471
0.0453
0.0391
0.0400
0.0418
0.0438
0.0440
0.0440
0.0396
0.0461
0.0444
0.0356
0.0343
0.0394
0.0384
0.0368
0.0401
0.0407
0.0422
0.0401
0.0372
0.0398
0.0447
0.0485
0.0506
0.0508
0.0544
0.0498
0.0491
0.0504
0.0509
0.0465
0.0457
0.0473
0.0497
0.0524
0.0528
0.0539
0.0514
0.0489
Monthly
0.0038
0.0040
0.0039
0.0037
0.0038
0.0039
0.0039
0.0042
0.0043
0.0043
0.0043
0.0041
0.0038
0.0038
0.0036
0.0038
0.0038
0.0037
0.0034
0.0036
0.0034
0.0033
0.0035
0.0037
0.0037
0.0035
0.0035
0.0035
0.0034
0.0035
0.0034
0.0037
0.0038
0.0039
0.0038
0.0033
0.0033
0.0035
0.0037
0.0037
0.0037
0.0033
0.0038
0.0037
0.0030
0.0029
0.0033
0.0032
0.0031
0.0033
0.0034
0.0035
0.0033
0.0031
0.0033
0.0037
0.0040
0.0042
0.0042
0.0045
0.0042
0.0041
0.0042
0.0042
0.0039
0.0038
0.0039
0.0041
0.0044
0.0044
0.0045
0.0043
0.0041
MRP
-0.0461
0.0234
0.0054
0.0201
0.0071
0.0256
0.0016
0.0171
0.0008
-0.0042
-0.0352
0.0081
0.0073
-0.0034
0.0218
-0.0047
0.0314
-0.0214
0.0036
-0.0148
0.0326
-0.0034
0.0264
-0.0238
-0.0228
0.0154
-0.0288
0.0290
0.0352
0.0105
0.0059
-0.0014
-0.0381
0.0141
0.0083
-0.0200
-0.0197
0.0087
0.0136
0.0471
0.0035
0.0517
-0.0158
0.0142
0.0133
0.0085
0.0476
0.0778
0.0053
-0.0203
-0.0308
-0.0638
0.0537
0.0833
-0.1133
0.0012
-0.0830
-0.0767
-0.0133
-0.0660
0.0326
-0.0395
0.0612
0.0049
0.0742
0.0820
-0.0088
0.1195
-0.0839
-0.0584
0.0597
-0.0106
7-year
RFR
4.50
4.71
4.75
4.54
4.58
4.69
4.68
4.83
5.05
5.08
5.03
4.94
4.71
4.56
4.37
4.41
4.48
4.38
4.08
4.18
4.06
3.86
3.94
4.16
4.33
3.97
3.97
3.93
3.88
3.75
3.75
3.90
4.11
4.35
4.31
3.89
3.31
3.59
3.65
3.79
3.81
3.75
3.74
3.96
3.45
2.84
3.07
3.47
3.34
3.45
3.60
3.63
3.64
3.54
3.50
3.88
4.30
4.60
4.90
5.02
5.14
4.71
4.79
4.86
4.42
4.31
4.51
4.84
5.06
5.14
5.24
5.03
4.88
65
RFR/100
0.045
0.0471
0.0475
0.0454
0.0458
0.0469
0.0468
0.0483
0.0505
0.0508
0.0503
0.0494
0.0471
0.0456
0.0437
0.0441
0.0448
0.0438
0.0408
0.0418
0.0406
0.0386
0.0394
0.0416
0.0433
0.0397
0.0397
0.0393
0.0388
0.0375
0.0375
0.039
0.0411
0.0435
0.0431
0.0389
0.0331
0.0359
0.0365
0.0379
0.0381
0.0375
0.0374
0.0396
0.0345
0.0284
0.0307
0.0347
0.0334
0.0345
0.036
0.0363
0.0364
0.0354
0.035
0.0388
0.043
0.046
0.049
0.0502
0.0514
0.0471
0.0479
0.0486
0.0442
0.0431
0.0451
0.0484
0.0506
0.0514
0.0524
0.0503
0.0488
Monthly
0.0038
0.0039
0.0040
0.0038
0.0038
0.0039
0.0039
0.0040
0.0042
0.0042
0.0042
0.0041
0.0039
0.0038
0.0036
0.0037
0.0037
0.0037
0.0034
0.0035
0.0034
0.0032
0.0033
0.0035
0.0036
0.0033
0.0033
0.0033
0.0032
0.0031
0.0031
0.0033
0.0034
0.0036
0.0036
0.0032
0.0028
0.0030
0.0030
0.0032
0.0032
0.0031
0.0031
0.0033
0.0029
0.0024
0.0026
0.0029
0.0028
0.0029
0.0030
0.0030
0.0030
0.0030
0.0029
0.0032
0.0036
0.0038
0.0041
0.0042
0.0043
0.0039
0.0040
0.0041
0.0037
0.0036
0.0038
0.0040
0.0042
0.0043
0.0044
0.0042
0.0041
MRP
-0.0460
0.0235
0.0053
0.0200
0.0071
0.0255
0.0016
0.0172
0.0009
-0.0041
-0.0351
0.0080
0.0072
-0.0033
0.0218
-0.0046
0.0315
-0.0214
0.0035
-0.0147
0.0326
-0.0034
0.0267
-0.0236
-0.0227
0.0156
-0.0286
0.0292
0.0354
0.0109
0.0062
-0.0010
-0.0377
0.0144
0.0085
-0.0200
-0.0191
0.0092
0.0142
0.0476
0.0040
0.0518
-0.0151
0.0146
0.0133
0.0090
0.0483
0.0782
0.0056
-0.0199
-0.0304
-0.0634
0.0540
0.0835
-0.1129
0.0016
-0.0826
-0.0763
-0.0132
-0.0656
0.0325
-0.0394
0.0614
0.0051
0.0744
0.0822
-0.0086
0.1196
-0.0838
-0.0583
0.0598
-0.0105
-0.0041
Dillard's
7-Mar
7-Feb
7-Jan
6-Dec
6-Nov
6-Oct
6-Sep
6-Aug
6-Jul
6-Jun
6-May
6-Apr
6-Mar
6-Feb
6-Jan
5-Dec
5-Nov
5-Oct
5-Sep
5-Aug
5-Jul
5-Jun
5-May
5-Apr
5-Mar
5-Feb
5-Jan
4-Dec
4-Nov
4-Oct
4-Sep
4-Aug
4-Jul
4-Jun
4-May
4-Apr
4-Mar
4-Feb
4-Jan
3-Dec
3-Nov
3-Oct
3-Sep
3-Aug
3-Jul
3-Jun
3-May
3-Apr
3-Mar
3-Feb
3-Jan
2-Dec
2-Nov
2-Oct
2-Sep
2-Aug
2-Jul
2-Jun
2-May
2-Apr
2-Mar
2-Feb
2-Jan
1-Dec
1-Nov
1-Oct
1-Sep
1-Aug
1-Jul
1-Jun
1-May
1-Apr
1-Mar
66
3Month
RFR
5.00
4.94
4.90
4.94
4.76
4.89
4.99
4.30
4.71
4.70
4.55
4.49
4.37
4.07
4.00
3.88
3.87
3.54
3.40
3.41
3.10
2.91
2.88
2.74
2.70
2.47
2.29
2.18
1.96
1.67
1.55
1.48
1.20
1.15
0.99
0.92
0.95
0.93
0.91
0.93
0.94
0.93
0.96
0.93
0.85
1.12
1.08
1.10
1.18
1.16
1.20
1.22
1.41
1.56
1.61
1.65
1.69
1.74
1.74
1.76
1.73
1.72
1.91
2.20
2.69
3.44
3.59
3.57
3.70
3.97
4.54
5.01
5.29
RFR/100
0.05
0.0494
0.049
0.0494
0.0476
0.0489
0.0499
0.043
0.0471
0.047
0.0455
0.0449
0.0437
0.0407
0.04
0.0388
0.0387
0.0354
0.034
0.0341
0.031
0.0291
0.0288
0.0274
0.027
0.0247
0.0229
0.0218
0.0196
0.0167
0.0155
0.0148
0.012
0.0115
0.0099
0.0092
0.0095
0.0093
0.0091
0.0093
0.0094
0.0093
0.0096
0.0093
0.0085
0.0112
0.0108
0.011
0.0118
0.0116
0.012
0.0122
0.0141
0.0156
0.0161
0.0165
0.0169
0.0174
0.0174
0.0176
0.0173
0.0172
0.0191
0.022
0.0269
0.0344
0.0359
0.0357
0.037
0.0397
0.0454
0.0501
0.0529
Monthly
0.0042
0.0041
0.0041
0.0041
0.0040
0.0041
0.0042
0.0036
0.0039
0.0039
0.0038
0.0037
0.0036
0.0034
0.0033
0.0032
0.0032
0.0030
0.0028
0.0028
0.0026
0.0024
0.0024
0.0023
0.0023
0.0021
0.0019
0.0018
0.0016
0.0014
0.0013
0.0012
0.0010
0.0010
0.0008
0.0008
0.0008
0.0008
0.0008
0.0008
0.0008
0.0008
0.0008
0.0008
0.0007
0.0009
0.0009
0.0009
0.0010
0.0010
0.0010
0.0010
0.0012
0.0013
0.0013
0.0014
0.0014
0.0015
0.0015
0.0015
0.0014
0.0014
0.0016
0.0018
0.0022
0.0029
0.0030
0.0030
0.0031
0.0033
0.0038
0.0042
0.0044
MRP
-0.0464
0.0233
0.0052
0.0196
0.0069
0.0253
0.0014
0.0177
0.0012
-0.0038
-0.0347
0.0084
0.0075
-0.0029
0.0221
-0.0042
0.0320
-0.0207
0.0041
-0.0141
0.0334
-0.0026
0.0276
-0.0224
-0.0214
0.0168
-0.0272
0.0306
0.0370
0.0126
0.0081
0.0011
-0.0353
0.0170
0.0113
-0.0176
-0.0172
0.0114
0.0165
0.0500
0.0063
0.0542
-0.0127
0.0171
0.0155
0.0104
0.0500
0.0801
0.0074
-0.0180
-0.0284
-0.0613
0.0559
0.0851
-0.1114
0.0035
-0.0804
-0.0739
-0.0105
-0.0629
0.0353
0.0353
-0.0370
0.0636
0.0069
0.0752
0.0828
-0.0078
0.1205
-0.0829
-0.0578
0.0600
-0.0107
1 year
RFR
5.00
5.09
4.95
4.87
4.95
4.90
4.99
5.11
5.26
5.05
4.97
4.86
4.74
4.60
4.38
4.36
4.31
4.09
3.66
3.83
3.51
3.25
3.34
3.34
3.20
2.95
2.79
2.60
2.34
2.21
1.99
2.12
2.07
1.89
1.60
1.23
1.23
1.29
1.31
1.41
1.33
1.13
1.39
1.31
1.07
1.15
1.21
1.16
1.26
1.34
1.42
1.56
1.46
1.56
1.77
1.75
2.09
2.35
2.33
2.76
2.33
1.82
1.64
2.04
1.99
2.27
2.68
3.53
3.67
3.87
4.45
4.97
5.16
RFR/100
0.05
0.0509
0.0495
0.0487
0.0495
0.049
0.0499
0.0511
0.0526
0.0505
0.0497
0.0486
0.0474
0.046
0.0438
0.0436
0.0431
0.0409
0.0366
0.0383
0.0351
0.0325
0.0334
0.0334
0.032
0.0295
0.0279
0.026
0.0234
0.0221
0.0199
0.0212
0.0207
0.0189
0.016
0.0123
0.0123
0.0129
0.0131
0.0141
0.0133
0.0113
0.0139
0.0131
0.0107
0.0115
0.0121
0.0116
0.0126
0.0134
0.0142
0.0156
0.0146
0.0156
0.0177
0.0175
0.0209
0.0235
0.0233
0.0276
0.0233
0.0182
0.0164
0.0204
0.0199
0.0227
0.0268
0.0353
0.0367
0.0387
0.0445
0.0497
0.0516
Monthly
0.0042
0.0042
0.0041
0.0041
0.0041
0.0041
0.0042
0.0043
0.0044
0.0042
0.0041
0.0041
0.0040
0.0038
0.0037
0.0036
0.0036
0.0034
0.0031
0.0032
0.0029
0.0027
0.0028
0.0028
0.0027
0.0025
0.0023
0.0022
0.0020
0.0018
0.0017
0.0018
0.0017
0.0016
0.0013
0.0010
0.0010
0.0011
0.0011
0.0012
0.0011
0.0009
0.0012
0.0011
0.0009
0.0010
0.0010
0.0010
0.0011
0.0011
0.0012
0.0013
0.0012
0.0013
0.0015
0.0015
0.0017
0.0020
0.0019
0.0023
0.0019
0.0015
0.0014
0.0017
0.0017
0.0019
0.0022
0.0029
0.0031
0.0032
0.0037
0.0041
0.0043
MRP
-0.0464
0.0232
0.0052
0.0197
0.0068
0.0253
0.0014
0.0170
0.0007
-0.0041
-0.0351
0.0081
0.0071
-0.0034
0.0218
-0.0046
0.0316
-0.0211
0.0039
-0.0144
0.0330
-0.0029
0.0272
-0.0229
-0.0218
0.0164
-0.0276
0.0303
0.0366
0.0122
0.0077
0.0005
-0.0360
0.0164
0.0108
-0.0178
-0.0174
0.0111
0.0162
0.0496
0.0060
0.0540
-0.0131
0.0168
0.0153
0.0104
0.0499
0.0801
0.0073
-0.0181
-0.0286
-0.0616
0.0559
0.0851
-0.1115
0.0034
-0.0807
-0.0744
-0.0110
-0.0637
0.0348
-0.0370
0.0641
0.0075
0.0765
0.0839
-0.0071
0.1207
-0.0826
-0.0572
0.0605
-0.0105
Liabilities & Stockholders Equity
Current Liabilities
5.23%
Source
St. Louis FedCP
Long Term Debt
7.30%
10-K
Other Liabilities
6.82%
10-K
Capital Lease Obligations
5.71%
EST
Subordinated Debentures
5.60%
10-K
Deferred Income Taxes
10.50%
10-K(projection)
Total Liabilites
Weight
$
1,147,392
$
1,058,946
$
259,111
$
31,806
$
200,000
$
479,123
$
3,176,378
0.361227
0.018892
0.333382
0.024337
0.081574
0.005563
0.010013
0.000572
0.062965
0.003526
0.150839
0.015838
0.068728
WACD = 6.8%
WACC = MVD/ (MVD + MVE)*kd + MVE/ (MVD + MVE)*ke
WACC = {(3176378/5516919)*.068}+ {(2340541/5516919)}(.1102)
WACC = .0858 or 8.58%
CAPM = rf + B(mrp)
CAPM = .05 + .90297(.0667)
CAPM = .11022 or 11.022%
67
10 Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.279596746
R Square
0.07817434
Beta
0.905245255
Adj. R2
0.065005402
6.50%
ke
0.110379859
11.04%
Adjusted R Square
0.065005402
rf
Standard Error
0.129697328
mrp
72
Observations
Coefficients
Intercept
X Variable 1
0.05
0.0667
Lower 95%
Upper 95%
Lower 95.0%
0.01287579
Standard Error
0.015510939
0.830110294
t Stat
0.409298595
P-value
-0.018059802
0.043811383
-0.018059802
0.905245255
0.371543375
2.436445694
0.017379253
0.16422537
1.646265141
0.16422537
SUMMARY OUTPUT
Beta
Adj. R2
ke
rf
mrp
Regression Statistics
Multiple R
0.317844122
R Square
0.101024886
Adjusted R Square
0.085525315
Standard Error
0.097162833
0.902967533
0.085525315
0.110227934
0.05
0.0667
8.55%
11.02%
60
Observations
Lower 95%
Upper 95%
Lower 95.0%
Intercept
0.010096015
Coefficients
Standard Error
0.01261565
0.800277023
t Stat
0.426816148
P-value
-0.015156952
0.035348981
-0.015156952
X Variable 1
0.902967533
0.353685935
2.553020758
0.013332478
0.194988219
1.610946846
0.194988219
SUMMARY OUTPUT
Beta
0.637689061
Multiple R
0.175720495
Adj. R2
0.009809816
0.98%
R Square
0.030877692
ke
0.09253386
9.25%
Adjusted R Square
0.009809816
rf
Standard Error
0.088138657
mrp
Regression Statistics
Coefficients
X Variable 1
0.0667
48
Observations
Intercept
0.05
Lower 95%
Upper 95%
Lower 95.0%
0.02024214
Standard Error
0.013890724
1.457241552
t Stat
0.151842914
P-value
-0.007718437
0.048202717
-0.007718437
0.637689061
0.526740762
1.210631694
0.232220339
-0.422585084
1.697963207
-0.422585084
SUMMARY OUTPUT
Beta
Regression Statistics
Multiple R
0.164389594
Adj. R2
R Square
0.027023939
ke
-0.001593004
rf
Adjusted R Square
Standard Error
-0.001593
-0.16%
0.09934614
9.93%
0.05
mrp
0.095386949
0.739822185
0.0667
36
Observations
Lower 95%
Upper 95%
Lower 95.0%
Intercept
0.019144103
Coefficients
Standard Error
0.016546149
1.157012599
t Stat
0.255331638
P-value
-0.014481718
0.052769925
-0.014481718
X Variable 1
0.739822185
0.761315456
0.971768247
0.338028881
-0.807356961
2.287001331
-0.807356961
SUMMARY OUTPUT
Beta
Regression Statistics
0.110545211
Multiple R
0.029140944
Adj. R2
-0.04456675
-4.46%
R Square
0.000849195
ke
0.057373366
5.74%
-0.044566751
rf
Adjusted R Square
Standard Error
Observations
0.05
mrp
0.079723306
0.0667
24
Lower 95%
Upper 95%
Lower 95.0%
Intercept
0.016119782
Coefficients
0.017214608
0.936401342
0.359232866
-0.019581129
0.051820693
-0.019581129
X Variable 1
0.110545211
0.808426415
0.136741216
0.892479
-1.566028551
1.787118973
-1.566028551
68
Standard Error
t Stat
P-value
7 Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.27959675
R Square
0.07817434
Adjusted R Square
0.0650054
Standard Error
0.12969733
Observations
72
Coefficients
Intercept
X Variable 1
0.01287579
0.90524526
Beta
Adj. R2
ke
rf
mrp
Standard
Error
0.015510939
0.371543375
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.31784412
R Square
0.10102489
Adjusted R Square
0.08552531
Standard Error
0.09716283
Observations
60
Coefficients
Intercept
X Variable 1
0.01009601
0.90296753
0.830110294
2.436445694
Beta
Adj. R2
ke
rf
mrp
Standard
Error
0.01261565
0.353685935
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.1757205
R Square
0.03087769
Adjusted R Square
0.00980982
Standard Error
0.08813866
Observations
48
Coefficients
t Stat
t Stat
0.800277023
2.553020758
Beta
Adj. R2
ke
rf
mrp
Standard
Error
t Stat
0.905245255
0.065005402
0.104106255
0.0478
0.0622
P-value
0.409298595
0.017379253
0.902967533
0.085525315
0.103964581
0.0478
0.0622
P-value
0.426816148
0.013332478
0.637689061
0.009809816
0.08746426
0.0478
0.0622
P-value
Intercept
0.02024214
0.013890724
1.457241552
0.151842914
X Variable 1
0.63768906
0.526740762
1.210631694
0.232220339
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.16438959
R Square
0.02702394
Adjusted R Square
-0.001593
Standard Error
0.09538695
Observations
36
Coefficients
Intercept
X Variable 1
Beta
Adj. R2
ke
rf
mrp
Standard
Error
t Stat
0.739822185
-0.001593004
0.09381694
0.0478
0.0622
P-value
Lower 95%
Upper 95%
0.018059802
0.16422537
0.043811383
1.646265141
Lower 95%
Upper 95%
0.015156952
0.194988219
0.035348981
1.610946846
Lower 95%
0.007718437
0.422585084
Lower 95%
1.157012599
0.255331638
0.73982219
0.761315456
0.971768247
0.338028881
0.110545211
-0.044566751
0.054675912
-4.46%
5.47%
Coefficients
Standard
Error
Upper 95%
0.048202717
1.697963207
Lower 95.0%
0.007718437
0.422585084
-0.16%
9.38%
0.016546149
rf
mrp
Lower 95.0%
0.015156952
0.194988219
0.98%
8.75%
0.0191441
Beta
Adj. R2
ke
Lower 95.0%
0.018059802
0.16422537
8.55%
10.40%
0.014481718
0.807356961
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.02914094
R Square
0.00084919
Adjusted R Square
0.04456675
Standard Error
0.07972331
Observations
24
Upper 95%
0.052769925
2.287001331
Lower 95.0%
0.014481718
0.807356961
0.0478
0.0622
t Stat
P-value
Intercept
0.01611978
0.017214608
0.936401342
0.359232866
X Variable 1
0.11054521
0.808426415
0.136741216
0.892479
69
6.50%
10.41%
Lower 95%
0.019581129
1.566028551
Upper 95%
0.051820693
1.787118973
Lower 95.0%
0.019581129
1.566028551
5 Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Coefficients
Intercept
X Variable 1
Beta
Adj. R2
ke
rf
mrp
0.279596746
0.07817434
0.065005402
0.129697328
72
0.01287579
0.905245255
Standard
Error
0.015510939
0.371543375
t Stat
0.905245255
0.065005402
0.108832481
0.048
0.0672
6.50%
10.88%
P-value
Lower 95%
Upper 95%
Lower 95.0%
0.830110294
2.436445694
0.409298595
0.017379253
0.018059802
0.16422537
0.043811383
1.646265141
-0.018059802
0.16422537
Beta
Adj. R2
ke
rf
mrp
0.902967533
0.085525315
0.108679418
0.048
0.0672
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.317844122
0.101024886
0.085525315
0.097162833
60
Coefficients
Intercept
X Variable 1
0.010096015
0.902967533
Standard
Error
0.01261565
0.353685935
t Stat
8.55%
10.87%
P-value
Lower 95%
Upper 95%
Lower 95.0%
0.800277023
2.553020758
0.426816148
0.013332478
0.015156952
0.194988219
0.035348981
1.610946846
-0.015156952
0.194988219
Beta
Adj. R2
ke
rf
mrp
0.637689061
0.009809816
0.090852705
0.048
0.0672
Upper 95%
Lower 95.0%
0.048202717
-0.007718437
1.697963207
-0.422585084
Upper 95%
Lower 95.0%
0.052769925
-0.014481718
2.287001331
-0.807356961
Upper 95%
Lower 95.0%
0.051820693
-0.019581129
1.787118973
-1.566028551
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.175720495
0.030877692
0.009809816
0.088138657
48
Coefficients
Intercept
X Variable 1
Standard
Error
t Stat
P-value
0.02024214
0.013890724
1.457241552
0.151842914
0.637689061
0.526740762
1.210631694
0.232220339
Beta
Adj. R2
ke
rf
mrp
0.739822185
-0.001593
0.097716051
0.048
0.0672
0.98%
9.09%
Lower 95%
0.007718437
0.422585084
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.164389594
0.027023939
-0.001593004
0.095386949
36
Coefficients
Standard
Error
t Stat
P-value
Intercept
0.019144103
0.016546149
1.157012599
0.255331638
X Variable 1
0.739822185
0.761315456
0.971768247
0.338028881
Beta
Adj. R2
ke
rf
mrp
0.110545211
-0.04456675
0.055428638
0.048
0.0672
-0.16%
9.77%
Lower 95%
0.014481718
0.807356961
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.029140944
0.000849195
-0.044566751
0.079723306
24
Coefficients
Standard
Error
t Stat
P-value
Intercept
0.016119782
0.017214608
0.936401342
0.359232866
X Variable 1
0.110545211
0.808426415
0.136741216
0.892479
70
-4.46%
5.54%
Lower 95%
0.019581129
1.566028551
1 Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Coefficients
Intercept
X Variable 1
Beta
Adj. R2
ke
rf
mrp
0.279596746
0.07817434
0.065005402
0.129697328
72
0.01287579
0.905245255
Standard Error
0.015510939
0.371543375
0.905245255
0.065005402
0.107840942
0.049
0.065
t Stat
P-value
0.830110294
2.436445694
0.409298595
0.017379253
Beta
Adj. R2
ke
rf
mrp
0.902967533
0.085525315
0.10769289
0.049
0.065
6.50%
10.78%
Lower 95%
Upper 95%
Lower
95.0%
-0.018059802
0.16422537
0.04381138
1.64626514
-0.0180598
0.16422537
Lower 95%
Upper 95%
Lower
95.0%
-0.015156952
0.194988219
0.03534898
1.61094685
0.01515695
0.19498822
Lower 95%
Upper 95%
Lower
95.0%
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.317844122
0.101024886
0.085525315
0.097162833
60
Coefficients
Intercept
X Variable 1
0.010096015
0.902967533
Standard Error
0.01261565
0.353685935
t Stat
P-value
0.800277023
2.553020758
0.426816148
0.013332478
Beta
Adj. R2
ke
rf
mrp
0.637689061
0.009809816
0.090449789
0.049
0.065
8.55%
10.77%
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.175720495
0.030877692
0.009809816
0.088138657
48
Coefficients
Intercept
X Variable 1
Standard Error
t Stat
P-value
0.98%
9.04%
0.02024214
0.013890724
1.457241552
0.151842914
-0.007718437
0.04820272
0.637689061
0.526740762
1.210631694
0.232220339
-0.422585084
1.69796321
0.00771844
0.42258508
Beta
0.739822185
0.001593004
0.097088442
-0.16%
9.71%
Lower 95%
Upper 95%
Lower
95.0%
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.164389594
0.027023939
0.001593004
0.095386949
36
Coefficients
Adj. R2
ke
rf
mrp
Standard Error
0.049
0.065
t Stat
P-value
Intercept
0.019144103
0.016546149
1.157012599
0.255331638
-0.014481718
0.05276992
X Variable 1
0.739822185
0.761315456
0.971768247
0.338028881
-0.807356961
2.28700133
0.01448172
0.80735696
Beta
0.110545211
0.044566751
0.056185439
-4.46%
5.62%
Lower 95%
Upper 95%
Lower
95.0%
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.029140944
0.000849195
0.044566751
0.079723306
24
Coefficients
71
Adj. R2
ke
rf
mrp
Standard Error
0.049
0.065
t Stat
P-value
Intercept
0.016119782
0.017214608
0.936401342
0.359232866
-0.019581129
0.05182069
X Variable 1
0.110545211
0.808426415
0.136741216
0.892479
-1.566028551
1.78711897
0.01958113
1.56602855
3 Month Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.279596746
R Square
0.07817434
Adjusted R Square
0.065005402
Standard Error
0.129697328
Observations
72
Intercept
X Variable 1
Coefficients
0.01287579
0.905245255
Standard
Error
0.015510939
0.371543375
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.317844122
R Square
0.101024886
Adjusted R Square
0.085525315
Standard Error
0.097162833
Observations
60
Intercept
X Variable 1
Coefficients
0.010096015
0.902967533
Standard
Error
0.01261565
0.353685935
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.175720495
R Square
0.030877692
Adjusted R Square
0.009809816
Standard Error
0.088138657
Observations
48
Intercept
X Variable 1
Coefficients
0.02024214
0.637689061
Standard
Error
0.013890724
0.526740762
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.164389594
R Square
0.027023939
Adjusted R Square
0.001593004
Standard Error
0.095386949
Observations
36
Intercept
X Variable 1
Coefficients
0.019144103
0.739822185
Intercept
X Variable 1
72
0.90524526
0.0650054
0.10779035
0.0456
0.0687
t Stat
0.83011029
2.43644569
P-value
0.4092986
0.01737925
Beta
Adj. R2
ke
rf
mrp
0.90296753
0.08552531
0.10763387
0.0456
0.0687
t Stat
0.80027702
2.55302076
P-value
0.42681615
0.01333248
Beta
Adj. R2
ke
rf
mrp
0.63768906
0.00980982
0.08940924
0.0456
0.0687
t Stat
1.45724155
1.21063169
P-value
0.15184291
0.23222034
Lower 95%
-0.0077184
-0.4225851
Beta
Adj. R2
ke
0.73982219
-0.001593
0.09642578
-0.16%
9.64%
rf
mrp
Standard
Error
0.016546149
0.761315456
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.029140944
R Square
0.000849195
Adjusted R Square
0.044566751
Standard Error
0.079723306
Observations
24
Coefficients
0.016119782
0.110545211
Beta
Adj. R2
ke
rf
mrp
Lower 95%
-0.0180598
0.16422537
Lower 95%
-0.015157
0.19498822
Lower 95.0%
-0.0180598
0.16422537
Upper 95.0%
0.043811383
1.646265141
Upper 95%
0.035348981
1.610946846
Lower 95.0%
-0.01515695
0.194988219
Upper 95.0%
0.035348981
1.610946846
Upper 95%
0.048202717
1.697963207
Lower 95.0%
-0.00771844
-0.42258508
Upper 95.0%
0.048202717
1.697963207
Upper 95%
0.052769925
2.287001331
Lower 95.0%
-0.01448172
-0.80735696
Upper 95.0%
0.052769925
2.287001331
Upper 95%
0.051820693
1.787118973
Lower 95.0%
-0.01958113
-1.56602855
Upper 95.0%
0.051820693
1.787118973
0.98%
8.94%
0.0456
0.0687
P-value
0.25533164
0.33802888
Lower 95%
-0.0144817
-0.807357
Beta
Adj. R2
ke
0.11054521
-0.0445668
0.05319446
-4.46%
5.32%
t Stat
0.93640134
0.13674122
Upper 95%
0.043811383
1.646265141
8.55%
10.76%
t Stat
1.1570126
0.97176825
rf
mrp
Standard
Error
0.017214608
0.808426415
6.50%
10.78%
0.0456
0.0687
P-value
0.35923287
0.892479
Lower 95%
-0.0195811
-1.5660286
Appendix 3: Intrinsic Valuation Models
A. Discounted Dividends
Years from valuation
date
Dividends per share
Present Value Factor
1
2008
$0.16
0.901
2
2009
$0.16
0.811
3
2010
$0.16
0.731
4
2011
$0.16
0.658
5
2012
$0.16
0.593
6
2013
$0.16
0.534
7
2014
$0.16
0.481
8
2015
$0.16
0.433
9
2016
$0.16
0.390
10
2017
$0.16
0.352
Present Value of Future
Dividends
$0.14
$0.13
$0.12
$0.11
$0.09
$0.09
$0.08
$0.07
$0.06
$0.06
Total Present Value of
Forecast Future
Dividends
Continuing (Terminal)
Value (assume no
growth)
Present Value of
Continuing (Terminal)
Value
$0.51
Estimated Value per
Share (1/31/07)
$1.45
Implied Value (4/1/07)
Observed Value
Diff
$0.94
$1.45
$1.48
32.88
-31.43
Sensitivity Analysis
g
0
0.02
0.04
0.06
0.10
$1.63
$1.78
$2.04
$2.57
0.1102
0.11
$1.48
$1.60
$1.78
$2.11
0
0.12
$1.36
$1.45
$1.58
$1.80
0.13
$1.26
$1.32
$1.42
$1.57
0.14
$1.17
$1.22
$1.29
$1.40
Actual Price per share
$32.88
Cost of Equity
Growth Rate
73
1/31/2007
2007
Ke
Terminal
$0.16
B. Free Cash Flow
FCF growth
0.0237
0.0687
0.0297
0.0291
0.0241
0.0240
0.0240
0.0240
0.0239
1
2008
2
2009
3
2010
4
2011
5
2012
6
2013
7
2014
8
2015
9
2016
10
2017
386,353
395,238
404,315
413,588
423,061
432,739
442,626
452,726
463,045
473,586
Cash Provided (Used) by Investing
Activities
(70,104)
(71,506)
(58,349)
(57,340)
(56,439)
(57,285)
(58,144)
(59,017)
(59,902)
(60,800)
Free Cash Flow (to firm)
316,249
323,732
345,966
356,248
366,622
375,454
384,482
393,709
403,143
412,786
0.921
0.848
0.781
0.719
0.662
0.610
0.561
0.517
0.476
0.438
291,205
274,490
270,112
256,114
242,700
228,864
215,808
203,487
191,863
180,895
FCF
2007
Cash Flow from Operations
377,657
Discount Rate (8.58% WACC)
Present Value of Free Cash Flows
Total Present Value of Annual Cash
Flows
2,355,538
Continuing (Terminal) Value (assume no
growth)
4,799,837
Present Value of Continuing (Terminal)
Value
2,103,431
Value of the Firm (end of 2007)
4,458,969
Book Value of Debt and Preferred Stock
3,260,362
Value of Equity (end of 2007)
g
0
0.01
0.03
0.04
0.086
$14.90
$18.35
$28.92
37.65
1,198,607
0.090
$12.31
$15.32
$24.36
31.59
Estimated Value per Share (1/31/07)
14.70
0.095
$9.37
$11.94
$19.45
25.25
Implied Value (4/1/07)
14.90
0.100
$6.73
$8.93
$15.23
$19.95
Actual Price per share
$34.40
0.105
$4.34
$6.24
$11.57
$15.46
WACC
0.0860
Terminal Growth
74
Sensitivity Analysis
0.00
WACC
C. Residual Income
AEG check figure (change in
RI)
(21,909)
(22,167)
(22,493)
(22,636)
(22,979)
(23,261)
(23,550)
(23,753)
(24,246)
1
2
3
4
5
6
7
8
9
10
2008
2009
2010
2011
perp
Forecast Years
2007
2012
2013
2014
2015
2016
2017
Beginning BE
Earnings
Dividends
2,340,541
235,527
13,045
2,563,023
238,389
13,045
2,788,366
241,313
13,045
3,016,634
244,301
13,045
3,247,890
247,292
13,045
3,482,136
250,470
13,045
3,719,561
253,655
13,045
3,960,170
256,909
13,045
4,204,034
260,233
13,045
4,451,222
263,720
13,045
4,701,896
267,098
13,045
Ending BE
Ke
"Normal" Income
2,563,023
0.1102
2,788,366
3,016,634
3,247,890
3,482,136
3,719,561
3,960,170
4,204,034
4,451,222
4,701,896
4,955,949
282,445
307,278
332,433
357,917
383,731
409,896
436,411
463,285
490,525
518,149
Residual Income (RI)
(44,056)
(65,965)
(88,132)
(110,625)
(133,261)
(156,241)
(179,502)
(203,052)
(226,805)
(251,051)
Discount Factor
Present Value of RI
0.90
(39,683)
0.81
(53,519)
0.73
(64,407)
0.66
(72,820)
0.59
(79,013)
0.53
(83,442)
0.48
(86,350)
0.43
(87,983)
0.39
(88,520)
0.35
(88,257)
BV Equity 2006
Total PV of RI (end 2007)
Continuation (Terminal) Value
PV of Terminal Value
(800,881)
Estimated Value (1/31/07)
1,018,148
Estimated Value per Share
Implied Value (4/1/07)
Actual Price per share
Growth
Ke
75
2,563,023
(743,993)
(2,278,139)
Sensitivity Analysis
g
0
-0.1
-0.2
-0.3
-0.4
-0.5
0.10
$15.05
$19.93
$21.56
$22.37
$22.86
$23.18
0.11
$12.71
$17.51
$19.20
$20.06
$20.59
$20.94
0.12
$10.90
$15.43
$17.13
$18.02
$18.57
$18.94
$34.40
0.13
$9.40
$13.64
$15.32
$16.21
$16.77
$17.15
0
0.14
$8.16
$12.10
$13.72
$14.61
$15.16
$15.54
12.49
12.71
0.1102
Ke
(251,051)
D. Abnormal Earnings Growth
AEG
EPS
DPS
DPS invested at 11.02% (Drip)
Cum-Dividend Earnings
Normal Earnings
Abnormal Earning Growth (AEG)
PV Factor
PV of AEG
Core EPS
Total PV of AEG
Continuing (Terminal) Value
PV of Terminal Value
Total PV of AEG
Total Average EPS Perp (t+1)
Capitalization Rate (perpetuity)
Intrinsic Value
2008
238,389
13,045
1,438
1.000
3
2011
247,292
13,045
1,438
248,730
271,223
(22,493)
0.731
(16,438)
4
2012
250,470
13,045
1,438
251,908
274,544
(22,636)
0.658
(14,900)
5
2013
253,655
13,045
1,438
255,093
278,072
(22,979)
0.593
(13,625)
6
2014
256,909
13,045
1,438
258,347
281,608
(23,261)
0.534
(12,423)
7
2015
260,233
13,045
1,438
261,671
285,220
(23,550)
0.481
(11,329)
8
2016
263,720
13,045
1,438
265,158
288,911
(23,753)
0.433
(10,292)
9
2017
267,098
13,045
1,438
268,536
292,782
(24,246)
0.390
(9,463)
(85,872)
78,685
0.1102
Sensitivity Analysis
g
714,017
Implied Value Per Share (4/1/07)
8.91
Actual Price per share
2
2010
244,301
13,045
1,438
245,739
267,906
(22,167)
0.811
(17,985)
(33,515)
8.76
g
1
2009
241,313
13,045
1,438
242,751
264,659
(21,909)
0.901
(19,734)
238,389
(126,189)
Intrinsic Value Per Share (1/31/07)
Ke
76
2007
235,527
13,045
0.1102
0
34.4
Ke
0
-0.1
-0.2
-0.3
-0.4
-0.5
$12.92
0.10
$9.25
$11.45
$12.19
$12.56
$12.78
0.11
$8.91
$10.73
$11.37
$11.70
$11.90
$12.04
0.12
$8.59
$10.08
$10.64
$10.93
$11.11
$11.24
0.13
$8.26
$9.49
$9.97
$10.23
$10.39
$10.50
0.14
$7.93
$8.95
$9.37
$9.60
$9.74
$9.84
(24,246)
0.390
(9,463)
References____________________________
1. Dillard’s Website: www.dillards.com
2. Yahoo Finance: www.finance.yahoo.com
3. Epinions: www.epinions.com
4. Edgar Scan, PWC: http://edgarscan.pwcglobal.com
5. Federated Department Stores: www.federated-fds.com/index2.html
6. Saks, Inc.: www.saksincorporated.com
7. JC Penney: www.jcpenney.com
8. St. Louis Reserve: http://research.stlouisfed.org/fred2/categories/22
77