Fitch upgrades Dillard's

Fitch Ratings said it upgraded Dillard's, Inc. issuer default rating and senior notes to BB from BB-, upgraded its capital securities to B from B- and affirmed the $1.2 billion secured credit facility at BB+.

The outlook is stable.

The agency said the upgrade reflects the company's improved credit measures, driven primarily by ongoing debt repayment, and the expectation for additional debt reduction over the near term. They also reflect Dillard's solid liquidity and extensive real estate holdings balanced against ongoing softness in the company's sales and the challenging nature of the department store sector.

Debt repayment combined with higher operating profit, with EBIT margin increasing to 4.2% in 2006 from 3.9% in 2005 due primarily to good inventory control, has resulted in a strengthening of the adjusted debt-to-EBITDAR ratio to 2.3x in 2006 from 2.7x in 2005, Fitch said, despite weak sales trends in Dillard's business.

While Dillard's has been employing a strategy of attracting younger and more affluent customers with upscale and contemporary fashions, Fitch said this strategy has not evolved to the point that it is driving meaningful incremental floor traffic, and comparable store sales were down 1% in 2006 following a flat 2005.

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