Press­ing for change

Ac­tivist in­vestor fund seeks to un­lock Dil­lard’s real es­tate.

Northwest Arkansas Democrat-Gazette - - FRONT PAGE - ROB­BIE NEISWANGER

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.”

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