The Virginian-Pilot
                             THE VIRGINIAN-PILOT 
              Copyright (c) 1997, Landmark Communications, Inc.

DATE: Sunday, January 12, 1997              TAG: 9701110742
                                            LENGTH:  165 lines


Lana Berry sees the Dillard's department store in suburban Raleigh as a shopper's Eden - a place where she can gleefully sift through racks and racks of clothing, everything from moderately priced sweaters to the ritziest ball gowns.

``The selection is excellent,'' said Berry, as she walked to the Dillard's at Carey Towne Center last weekend with her daughter, Ann, in tow. ``They have wonderful upscale stuff.''

These are words William Dillard Sr. would like to hear echoed when his company debuts six Hampton Roads stores this fall and then a massive anchor store in downtown Norfolk's MacArthur Center in 1998.

Whether his Little Rock, Ark.-based chain succeeds in this market depends on Dillard's ability to expand its presence here and woo shoppers loyal to mainstays Leggett's, Hecht's, Sears and J.C. Penney, retail analysts said.

Proffitt's, which is selling its Hampton Roads stores to Dillard, could not.

Where Proffitt's failed, Dillard plans to flourish. And history has shown that this 250-store chain, with deep pockets and aggressive expansion plans, can conquer new territories.

In Arizona, for example, Dillard pounced on Dayton Hudson Corp.'s Diamond's chain in 1984 and then vowed it would move into a leading market position within five years. It renovated its nine Diamond's stores and then opened four more, almost doubling its square footage in the market to 2.1 million square feet.

``Today, Dillard's is clearly in the No. 1 position in the state of Arizona, head and shoulders above all other retail department stores in the area,'' the company boasted in its 1990 annual report.

Closer to Hampton Roads, it's not as clear whether Dillard has met with success.

As part of its purchase of J.B. Ivey & Co., Dillard took on three stores in the Raleigh area in 1990. Two years later, it built an upscale department store, with arched entrances and peach-colored marble, at Carey Towne Center in the Raleigh suburb of Carey.

While Dillard still plans to expand at least one of its Raleigh-area stores, competitors have retained strong leads. A survey of local shopping patterns shows Hudson Belk, J.C. Penney, Sears and Hecht's marching ahead of Dillard.

No. 1 Hudson Belk, a division of Charlotte-based Belk companies, shows no signs of bowing to Dillard.

``Raleigh is one of our strongholds,'' said Darrell Williams, a spokesman for the Belk companies. ``We do very well there.''

Indeed, shoppers interviewed last weekend said Hudson Belk had the edge when it came to customer service, while Dillard had an advantage with a bigger selection of clothing.

Several Dillard's customers in the Raleigh area, however, criticized the stores' return policies, saying they were too strict. Even Lana Berry, a Carey resident who frequently shops at Dillard's, said she dreads returning merchandise.

``I've been hassled even when I've had a receipt,'' she said.

Dillard may have a different plan for Raleigh than it had for Arizona. The company has indicated that it may be comfortable with sales in smaller stores, as long as they reap profits.

But Paul Berg, a retail analyst with Morgan Keegan & Co., said it would be a mistake to assume that Dillard is comfortable lagging behind its competitors. Indeed, the retailer hasn't finished in Raleigh. It plans to almost double the size of its North Hills Mall department store to 213,000 square feet, The News & Observer of Raleigh reported in November.

If Dillard wants to succeed in Hampton Roads, it needs to expand its presence here, said retail analyst Kenneth M. Gassman of Davenport & Co. in Richmond.

As part of the deal announced last month, Dillard will move into Proffitt's locations at Greenbrier Mall in Chesapeake, Chesapeake Square Mall, Pembroke Mall in Virginia Beach and Patrick Henry Mall in Newport News. It will take two department stores in Hampton's Coliseum Mall.

But most of the Proffitt's buildings in Hampton Roads, hand-me-downs from Hess's, are 80,000 square feet or under - a tight squeeze compared to other local department stores.

Dillard officials initially expressed interest in expanding some stores, but they haven't specified locations. They didn't return telephone calls last week.

The Hampton Roads stores will close in March, when Dillard takes over, and will likely reopen in the fall. Dillard is expected to take on many of Proffitt's employees.

The chain is saving its best - and most posh - department store for MacArthur Center, a three-level, upscale mall being built in downtown Norfolk. At 250,000 square feet, this Dillard's will be about twice the size of any current department store in Hampton Roads. The Norfolk mall is scheduled to open in 1998.

In addition, Dillard may be eyeing other area malls. It has knocked on Lynnhaven Mall's doors before, and has been warmly received by the Virginia Beach mall's management.

A wary Hecht's, however, hasn't been as welcoming. In 1992, it purchased the Thalhimer's locations in at Lynnhaven, effectively blocking Dillard (and Proffitt's) from entering the mall.

Hecht's now has two department stores in Lynnhaven.

``Hecht's is nervous about (Dillard's entrance into Hampton Roads),'' said one local mall manager. ``It knows that Dillard is a strong competitor in any market. That's why Hecht's has done so well here. It hasn't had the competition.''

To lure Hecht's and other rivals' shoppers, Dillard needs to avoid Proffitt's mistakes. Proffitt's, an Alcoa, Tenn.-based chain, never managed to expand in Hampton Roads. And it had early stock problems - such as being out of certain merchandise or clothing sizes - that became evident to local shoppers, analyst Gassman said.

``They made the wrong first impression, and that turned consumers off,'' he said. ``They were never able to recover from that initial disappointment.''

Dillard officials are anxious to please and convinced that shoppers will flock to their stores.

``We think there are a lot of customers we will appeal to,'' James Freeman, chief financial officer of Dillard's, said last month. ``Our merchandise assortment is pretty broad and tends to be more upscale. We think that will fit very nicely with the consumers in your area.''

Dillard tends to eschew promotional sales in favor of everyday low pricing, according to the company's Securities and Exchange Commission filings. For example, its stores might drastically mark down merchandise. But they generally won't promote big clearances or special ``Midnight Madness'' sales.

It was unclear whether the chain could claim to have the lowest prices overall. In Raleigh, department store chains had similar prices on Liz Clairborne clothing, Guess jeans and Levi's, though each retailer didn't necessarily carry the same items.

Customers won't find linens, bath towels and other home furnishings at many Dillard stores. The retailer shifted away from this area in favor of offering more clothing, cosmetics and accessories.

And Dillard certainly tries to make most of its space. In Raleigh, Dillard's store are crammed with merchandise, so tightly at some locations that shoppers can barely navigate around the clothing racks.

Some analysts have questioned whether Dillard's strategy is working at a time when it takes exciting promotions to entice shoppers.

Recently, Dillard has faltered. While sales rose about 6 percent to $1.49 billion in the third quarter ended Nov. 2, 1995, earnings fell 38 percent to $31.6 million. That's down from $51 million in the previous year.

After climbing to $41.38 a share on May 3, 1996, the company's stock has dropped. On Thursday, the retailer's stock closed at $29.88.

Dillard has not yet released its fourth-quarter results, which include the make-it-or-break-it holiday sales. But it said same-store sales, which show revenues at stores open at least a year, fell 2.6 percent percent in the five weeks that ended Jan. 4.

But Dillard shows no sign of long-term problems. With about 250 stores and nearly $6 billion in sales, it is among the largest department-store chains nationwide and considered to be one of the best-run.

The company's computer system is considered one of the best in the industry. With a keystroke, company officials can track Ralph Lauren apparel sales in one region and Clinique cosmetics purchases at other stores.

Though its growth rate has slowed as the number of acquisition prospects has declined, the retailer continues to sniff out smaller opportunities. Its purchase of Proffitt's Virginia stores, which also include two stores in the Richmond area, is evidence of the chain's desire to grow.

``You either grow or you wither,'' William Dillard Sr., chairman and chief executive officer, said in a May 1994 article in The Wall Street Journal. ``In retail, the big are getting bigger, and the small are vanishing from the scene.'' MEMO: [Related story also on page D1 of The Virginian-Pilot for this

date.] ILLUSTRATION: [Color Photo]


The Virginian-Pilot

Dillard took on three stores in the Raleigh area in 1990. Two years

later, it built an upscale department store at Carey Towne Center in

the Raleigh suburb of Carey.


by CNB