Department stores are dead. Why is this stock up 100% in 3 months?

Department stores belong to the boomer generation. We can see many have failed to survive as times have changed as more shopping has gone online and brands are going more direct to the consumers.

The department stores that totally exited Singapore include Robinsons, John Little, Daimaru, SOGO, Yaohan, Oriental Emporium and more. Even those surviving ones are struggling – Isetan has downsized the number of stores in Singapore and Metro has diversified to real estate development.

This is not just a Singapore’s problem as we see it in bigger countries like the U.S. too. JC Penny was a high profile department store chain that filed for bankruptcy in 2020. Sears was the biggest retailer in the 1980s but filed for bankruptcy in 2018.

It is already an uphill battle for departmental stores to survive and maintain revenue and profit margins, much less think about growth prospect. It’s no wonder why most investors would shun these department store stocks for good.

But today, I would like to share with you an outlier.

Dillard’s is a department store chain that showed up in my momentum screen on 1 Sep 2021 and I bought it at $190.36. The share price has since gone up to $377.67 which is a gain of almost 100%!

I am as bewildered as you about a department store can go up that much. Let’s dissect why this is happening.

Why is Dillard’s share price going up so much?

First of all, Dillard’s is an upscale department store chain in the U.S. It has 282 retail stores in 29 states and mainly sell fashion brands and home decorations.

1) Recovery Play

The first reason is that the company has survived the worst of Covid. Its quarterly revenue dropped more than half during 2Q2020 but it has since recovered to pre-Covid numbers in 3Q2021.

With the recovery theme in play, investors believe that stocks like Dillard’s has been out of the woods and expect results to improve in a post-Covid environment.

What is more impressive is that they became more profitable than pre-Covid days. The 3Q2021 net profits of $185.66 millions is the highest in the past 5 years!

This leads to our second reason:

2) Special dividend per share of $15

Dillard’s is declaring a special dividend per share of $15 on top of an ordinary dividend of $0.20, given their great performance. It is common that some investors chase after such dividends, bidding up the share price in the process and only to dump them after they get the dividend payout.

Pro tip: don’t do such things. Because the share price will drop by the same amount and you gain nothing.

In fact, Dillard’s has been a consistent dividend grower and this is a sign of a fundamentally strong stock.

Here is the chart to show that Dillard’s has managed to raise dividend consistently by about 10% per year in the past 10 years. It also gave out a special dividend of $5 per share in 2021 and now, $15 in 2021.

3) Value stock mean reversion effect

Dillard’s is trading around a PE of 13x.

This isn’t expensive even though the share price has gone up. It also means that Dillard’s was probably a very undervalued stock a year ago. This is not difficult to understand considering that retail was badly affected by Covid.

It did suffer 4 quarters of losses. But it is also during such pessimistic times that the share price was undervalued. The price rebound is an effect of mean reversion happening to value stocks – ‘what goes down should come up’. This is the case for Dillard’s where the share price was too depressed and the recovery caused the share price to shoot up by a lot to cover the lost ground.

You can see the charts below.

The TTM Net EPS chart (middle chart) shows the earnings per share improvement in the last 3 quarters and although the price has gone up by a lot (top chart), the PE ratio (bottom chart) is still around its historical average.

Yes, the stock isn’t expensive even though the stock has doubled in 3 months.

“We-don’t-know-anything” approach to investing

The stock market always surprises. Sometimes what we think is a good stock can go down while a lousy stock can go up. Or there could be events that we didn’t expect to happen. I am sure you have such experiences before.

Conventionally, we were taught to do due diligence and to know a stock well enough before buying it. But the truth is that we don’t know what we don’t know and that is where the surprises lie.

We can flip that theory around, adopt a “we-don’t-know-anything” approach and let the market do the talking.

One way is index investing, buy the entire market since I don’t know what stocks to buy. Another way is to use a quantitative strategy, let the numbers decide for me instead of using my biased judgement.

The quantitative momentum strategy is what led me to discover Dillard’s. I am sure I wouldn’t have bought it if I was looking for a good business to buy – department stores are bad business in today’s context! I also believe many would have this view and prefer to flock to the e-commerce companies such as SEA, Amazon, Alibaba etc.

You can see the chart below whereby Dillard’s share price has gone up 700% as compared to 64% for Sea, 15% for Amazon and -51% for Alibaba in the past 1 year. Who would have thought?

We really don’t know a lot about stocks.

So maybe we should admit our ignorance and adopt a more quantitative approach to investing. We might be better off with higher returns and lesser effort.

P.S. I share how I screen for stocks like Dillard’s at a live webinar, join me to learn how you can apply this and grow your own portfolio.