S&P revises Dillard's outlook to negative

Standard & Poor's said it has revised its outlook on Dillard's Inc. and related entities to negative from stable. Ratings on the company, including the BB corporate credit rating, were affirmed.

"The outlook change reflects disappointing sales and earnings for the fiscal third quarter; these results were far different from those of the company's peer group," explained S&P credit analyst Gerald Hirschberg. "Moreover, it is now less likely that Dillard's credit measures for 2003 can be maintained at levels characteristic of the current rating. Therefore, results for the upcoming holiday will weigh more heavily on the company's future credit profile."

Little Rock, Ark.-based Dillard's operations continue to be affected by intense competition, and management indicated that unseasonably warm temperatures hindered third-quarter sales. This resulted in heavier-than-anticipated markdowns, an approximate 20% drop in EBITDA, and a decrease in lease-adjusted EBITDA coverage of interest to 2.2x from 2.4x, despite lower interest expense.

S&P said that after several years of poor performance, the company managed to have a relatively good year in 2002, with improved operating margins, EBITDA, cash flow protection, and leverage. Maintenance of the rating was predicated on a continuation of progress in 2003, but many of the same adverse macroeconomic factors that Dillard's and the rest of the retail sector faced in 2002 are unchanged.

S&P said first half results were disappointing, and the recent 4% decline in same-store sales for August 2003 was worse than that of the peer group, suggesting that the economy and low consumer confidence are taking a heavier-than-average toll on Dillard's business.

At Feb. 1, Dillard's had $400 million of secured revolving credit facilities that expire in 2005. The company also maintains a credit card securitization facility, which provides up to $500 million of borrowing capacity; about $480 million was available at Nov. 1. Balance sheet cash is minimal.

The company's overall liquidity is considered good, the agency said. The company was in compliance with all covenants under the bank line of credit throughout 2002, and maintained full availability. In addition to its bank facilities, Dillard's has substantial unencumbered real estate assets, and has $750 million of availability from an outstanding shelf registration.

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