Pressing for change
Activist investor fund seeks to unlock Dillard’s real estate.
An activist investor fund will press for changes at Dillard’s Inc., believing there are ways the Little Rock-based company can add value for shareholders through its real estate holdings.
Jeffrey Pierce, who is managing partner at New York-based Snow Park Capital Partners, said Monday in an email the fund hopes to engage Dillard’s management and its board with a number of ideas that could unlock value for the minority shareholders who “believe in the company and its future.” Those ideas include leasing or repurposing store space for other retail tenants.
“We believe the value of Dillard’s vast real estate holdings is well north of $200 per share,” said Pierce, whose activist fund focuses on real estate securities. “With an average sales per square foot of approximately $125, it’s fair to say that Dillard’s may not be getting the highest and best use for some or all of their owned space. In fact, our estimated rental value to more productive retail tenants exceeds the company’s entire current income as a retailer.”
Dillard’s did not respond to a request for comment regarding Snow Park, which owns about 2 percent of the company’s Class A stock according to multiple reports. Activist investors purchase a large amount of a public company’s shares in hopes of driving change.
Dillard’s shares closed Monday trading down $5.05, or 6 percent, to $73.82.
The family-owned business has a large retail portfolio with 293 stores, including 25 clearance centers, in 29 states. The stores total 49.2 million square feet and Dillard’s owns about 44.1 million — or roughly 90 percent — of the square footage, according to the company’s 2016 annual report.
Ken Perkins, president of
● research firm Retail Metrics, said it’s no surprise to see activist investors look for ways to get some “relatively low-hanging fruit” with real estate, especially in a current retail landscape that has been dominated by bankruptcies and store closures.
Perkins pointed to Macy’s as another recent example. The company was pressed by investor Starboard Value LP, which wanted Macy’s to separate its real estate from its retail business.
“What they’re essentially asking is for a lot of these retailers to either form some form of a real estate trust and they lease back the real estate from them to operate their businesses or, as [Snow Park] has even suggested, maybe renting it out or subdividing it into more productive spaces where they lease it out to other businesses,” Perkins said.
But Perkins said doing so would leave one key question: What becomes of the retail business itself?
Dillard’s reported a 14 percent decrease in profits during the first quarter of the fiscal year. Earnings per share of $2.12 also declined from the previous year, but topped analyst estimates of $2.02 for the quarter. Revenue dropped 5.5 percent, while same-store sales fell 4 percent.
“I think that’s the question a lot of retail managements are going to have to be grappling with in terms of downsizing or being forced by activists to change the nature of their businesses to some extent,” Perkins said. “Because they are not generating a kind of sales per square footage and it only seems to be diminishing as mall traffic continues to decline.”
Snow Park’s campaign for change at the company is not the first time Dillard’s has been pressed by an activist investor that sees potential in the company’s real estate holdings.
In 2014, Marcato Capital Management LP released a report encouraging Dillard’s to create a real estate investment trust. Marcato, which owned a 4.9 percent stake at the time, believed the move would have increased the value of the combined companies to about $193 a share.
It’s not known if the latest push by an activist investor will yield results. The Dillard family controls the company through a separate set of Class B shares.
“It’s always a little trickier when there’s a Class A and a Class B [stock],” said Bob Williams, senior vice president and managing director of Simmons First Investment Group Inc. in Little Rock.
“Obviously, it’s in everyone’s best interest to have the shares be fully valued through whatever means possible. Frequently people differ as to the timing and when is the best opportunity to do so.”