Makeover at Dillard's: Store Moving Upscale, Adding More Fashion

As activist investors raise the heat, Dillard's Inc. says its turnaround strategy is sound but concedes that reinventing a department store takes time.

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In a letter to the retailer's board in January, the investment firms complained that their recommendations to improve shareholder value had been ignored. "Unfortunately, it appears to us that you have...also done little to improve the company on your own initiative, as Dillard's financial results have gone from bad to worse since our initial communication in June 2007,'' the letter said.

Barington Capital and Clinton Group, seeking to bolster their case, pointed to Dillard's operating losses of $24.5 million and $6.5 million for the second and third quarters ended Aug. 4 and Nov. 3, respectively, and said the retailer had not reported a boost in annual same-store sales since 1999. A 12 percent decline in same-store sales during January, after a 5 percent drop in December, is almost certain to add fuel to the fire.

There are limits on the level of change that an activist investor can generate. The Dillard family has about a 13 percent ownership in the company and controls substantial voting power.

The move by the hedge funds comes as retailers such as Saks Inc., Target Corp. and Sears Holdings Corp. also find themselves under increasing pressure from stakeholders.

Dillard's insists that the message has not been ignored. "Our goal to improve comes from within,'' said Bull, who declined to comment on the critique from Barington Capital and Clinton Group.

Among the long-term initiatives is reversing the ratio of moderate to better product. Moderate-price goods once accounted for an estimated 65 percent or more of what was for sale. That figure is now less than 45 percent, depending on the category.

"We knew moderate, promotional product was not working, and we changed the old philosophy of 'stack it high and let it fly,' of my grandfather's day to more edited, fashionable product," Dillard said.

He pointed to intimates, shoes, accessories and contemporary apparel as success stories where sales improved more than in other areas, such as juniors and misses' apparel, though he did not provide figures.

Wall Street analysts, however, echoed the criticisms of Barington Capital and Clinton Group. "Dillard's has shown years of underperformance; we're not seeing improvement," Adrianne Shapira, managing director of Goldman Sachs & Co., said in an interview.
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