
DATE: Sunday, June 15, 1997                 TAG: 9706140232

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY KATHRYN HOPPER, FORT WORTH STAR-TELEGRAM 

DATELINE: LITTLE ROCK, ARK.                 LENGTH:  137 lines

DILLARD'S PINK GRANITE CORPORATE HEADQUARTERS

Dillard's pink granite corporate headquarters sits serenely on a bluff overlooking the Arkansas River, seemingly above the white water of today's turbulent retail marketplace.

But appearances can be deceiving.

Industry analysts predict that the United States may have only four or five national department store chains in 10 years, and they wonder whether Dillard's will be among them.

``Dillard's is either going to get larger or get bought out,'' Robert Buchanan, an analyst at NatWest Securities in New York, said in a recent interview with Bloomberg News. ``The onus is on them to expand quickly.''

Dillard's is doing just that. Last year the chain went on a buying spree, adding 16 stores, the biggest one-year total in its history. It also realigned its operating divisions and took other steps to better position itself for rapid growth.

Its financial position is strong, its stock going up. Although same-store sales in the first quarter were flat, William Dillard, the venerable 82-year-old chairman and chief executive, predicts that his stores will have a 5 percent jump in same-store sales. He said one of the strengths of department stores is that they are not dependent on one type of merchandise.

``We've always been a department store,'' he said. ``And the reason we've stuck with being a department store is because if menswear's not doing good, the home (department) may be. We're getting more different items to offer a customer than a specialty store.''

Still, with annual sales of $6.3 billion, Dillard's is half the size of its key national rivals: Federated Department Stores of Cincinnati, which owns Macy's and Bloomingdales among other chains, and May Department Stores of St. Louis, parent of Hechts and Lord & Taylor. May said last month that it wants to add 100 new stores by 2001.

Rumors that Dillard's could be swallowed by Federated or May have swirled around Wall Street for more than a year. Dillard's base in the booming Sunbelt makes it attractive to chains such as Federated that are heavily concentrated in the Midwest and Northeast.

But Buchanan cautions that an acquisition of the chain faces a significant roadblock: William Dillard, who founded it in 1938 and built it into a 255-store operation.

``I don't think he's given to entertaining well the notion of selling,'' Buchanan said. ``As long as he's with us, and I hope he's with us for a long time, I don't think he'll sell.''

Dillard is gradually handing more responsibility to the next generation.

Heir apparent William Dillard II, 52, serves as president and chief operating officer. Alex Dillard, 47, is executive vice president and Mike Dillard, 45, is vice president of the company. Dillard's daughter, Drue Corbusier, 50, runs the chain's Texas division, which is based in Fort Worth.

``It's getting closer to time to retire but I won't retire right now,'' William Dillard said in a brief interview after the company's recent annual shareholders meeting in Little Rock.

Elizabeth Pierce, an analyst at the Stephens Inc. investment firm in Little Rock, said the younger generation has some of the same fire in the belly that their father displayed in building the chain.

``They want to make it work,'' she said. ``They don't want to rest on their father's laurels.''

The annual meeting, attended by a handful of shareholders, was largely run by William Dillard II. He noted that the company cut into its profits last year by restructuring operating divisions. But he said those changes, coupled with an aggressive stock buy-back plan, will pump up earnings this year.

``We haven't done a good job adding shareholder value,'' William Dillard II said. ``But we're getting back on track. Doing things we need to do.''

Last year, the chain reconfigured its operating divisions, consolidating seven regional divisions into five with comparable weather conditions, merchandise requirements and media markets.

Dillard said the company was chugging along through the first quarter of 1996, but mistakes related to the reorganization appeared later in the year.

``As we moved things around, then we think we'd have the systems in place, but we found goods that slipped through the cracks,'' he said. ``The third quarter was the worst in company history, but by the fourth we started to bounce back.''

He said that, looking back, management could have handled things a bit better, but he maintains that the company is now better positioned to handle its rapid growth.

Dillard's is growing bit by bit, by making acquisitions from smaller regional players and picking up stores when national players such as Mervyn's and Macy put out the for sale signs.

This year, Dillard's plans to acquire 20 stores: 10 Mervyn's locations, which will bolster the chain's Florida holdings; seven Proffitt's stores, which will take the chain into Hampton Roads; and the three former Macy's stores in Houston.

Pierce, the Stephens analyst, likes Dillard's growth strategy of pushing into booming areas of the South and West. This year the chain is also opening 11 stores stretching west into California and Wyoming.

Analysts have also pointed out that Dillard's is a likely candidate to buy Dayton-Hudson's department store holdings, should the Minneapolis-based company decide to shed them. Those holdings include the 250-store Mervyn's chain. Dayton-Hudson may choose to focus on its thriving Target division.

William Dillard was coy when asked if additional acquisitions were planned.

``We'll continue to grow,'' he said, but he wouldn't elaborate.

Dillard's buying binge has been fueled through earnings, not debt. The company has kept its debt levels constant at about $100 million, with a long-term debt to capitalization of 30 percent.

``We've funded expansions 100 percent out of earnings,'' William Dillard II said. ``If you look at the larger retailers - May, Federated, Penney's - all of them are in the 50 percent range, debt to capitalization.''

He said Dillard's may have let its debt ratio get a bit low. Now Dillard's is using its capital to buy back shares. In February, directors authorized the purchase of up to $300 million of its Class A shares. The company also has Class B shares, which are held by William Dillard and his three sons.

In the first quarter, the company bought 1.9 million shares for $58 million at an average price per share of $30.80.

``The final proof in the pudding is Dillard's stock price is up,'' William Dillard II said at the May meeting.

Dillard's shares have risen 11 percent since the beginning of the year, closing Friday at... GET CLOSE.

Dillard's may have a strong balance sheet, but it's not immune to the malaise among department store retailers reeling from weak women's apparel sales. In the first quarter of this year, sales in Dillard's stores, open at least a year, the traditional barometer of retail health, were flat.

Last year, thanks to the new store openings, Dillard's total sales rose 7 percent, to $6.2 billion, from $5.9 billion, powered by improvements in menswear, cosmetics, and shoes and accessories.

``Some of the men's business is good, some not so good,'' William Dillard said. ``Women's apparel is improving. Suppliers are doing a better job with the merchandise.'' ILLUSTRATION: LOCALLY

Dillard's, which bought Proffitt's Virginia stores, will open for

business in Hampton Roads this fall in Greenbrier Mall and

Chesapeake Square in Chesapeake, Pembroke Mall in Virginia Beach and

Patrick Henry Mall in Newport News. In addition, it will take over

two department stores in Hampton's Coliseum Mall. Dillard's will

also open a 250,000-square-foot store in downtown Norfolk's

MacArthur Center in 1999. Dillard's is the first retailer to commit

to the 1.2 million-square-foot Stony Point Mall in Richmond.

FACT

Last year, Dillard's added 16 stores, its biggest one-year total

ever, and realigned its operating divisions to better podition

itself for rapid growth in a market that experts say will include