DDS - Dillard's

[Gregmal]

I'll just link the thesis. As usual, Rick Pearson nails it.

 

https://moxreports.com/dillards-upside-perfect-storm/

 

https://moxreports.com/dillards-rebound-long-dds/

 

10Q should come out next week. Money says this trade has a pretty solid shot at making at least a buck or two.

 

DDS IMO is 2012 SHLD, without the debt, and with rather robust FCF. This has previous been a great trading vehicle and I expect it to continue to be one.

 

 

[Stuart D]

This is very interesting. I just started going through the proxy filings.

In 2013 Management owned 9.8% of class A shares (apart from voting rights are A and B shares equal?)

 

Every year since 2013 management have increased their ownership:

2013: 9.8%

2014: 10.9%

2015: 11.6%

2016: 13.6%

2017: 15.9%

2018: 19.1%

2019: 20.1%

[Stuart D]

I've got excel open to add up all the outstanding shares.

 

In this years proxy, as of 21-Mar-2019, management and large investment companies, e.g. Blackrock, Vanguard, etc. owned 88% of Class A shares combined, leaving 2.7m Class A shares remaining. If management and the large shareholders haven't sold their A-Shares (since March) then as of 3-August-2019, there will only be 1.7m Class A shares left.

 

1.7m shares x $70/share = $118m (to buy back the remaining shares)

 

The most recent 8-K says as of 3-Aug-2019 there is still $340m left in the buyback program. That means assuming Management, Blackrock, Vanguard, do not sell, the company has the capacity to buy 1.7m shares for $340m = $200 / share (average price).

 

This sounds too good to be true... what am I missing here?

[Spekulatius]

Just looking at this. The latest operating results have been pretty poor. Also, it seems that over the years, their Capex has been below depreciation for quite some time, which means that their stores are aging. Most stores are in flyover country where and old department store building may not be worth all that much. They sell buildings, but I haven’t seen a large profit. They do own some stores in Florida (39) and Texas (44)  which may be worth far above book.

 

Accelerated decay in operating results may be the main issue there. The shrinking float is interesting and makes it a very unappealing short, imo.

[Gregmal]

The situation is interesting, but to be clear, I have no interest in this as a long term investment or any of the fundamentals really. It just seems like an opportune setup to make a little money. If the trade doesn't work out, I think you have a margin of safety and history of price swings on your side that make holding at these levels OK. But the objective is to just swing this thing for a quick trade.

 

Some other commentary...

 

I spent the past couple weeks watching this trade. My goodness. Lighting a match in an old hay barn is what comes to mind. In late July this jumped 25% in like 30 minutes on nothing but a random Friday squeeze.

 

Ive been involved in plenty of these retailers with real estate stories. Macy's, Sears, SRG, to name a few. I've only ever made money trading them. I don't think they are good buy and hold investments. That said..... anyone care to take a look at a comparative chart between DDS and all those "retailers"? Or of their favorite investments vs DDS since the GFC? DDS vs AMZN since 1 Jan 2009? It doesn't necessarily change my opinion that I have little interest owning this as a long term buy and hold, but is really impressive nonetheless. Look at the shares outstanding 10 years ago as well.

 

Perhaps Dillard's is more ALX than SHLD...

[SHDL]

Interesting situation for sure.  It is very nice to see someone do share buybacks right every once in a while.  If their FCF holds up and the stock price stays where it is, they should be able to essentially take the company private in just a few years…

 

@Stuart D:  I wouldn’t expect Vanguard, BlackRock, and co. to not sell.  The index funds will be forced to sell as the float shrinks, and the actively managed funds (if there are any that own this stock) are also likely to take some chips off the table if the stock were to rally.

[RuleNumberOne]

I got excited after reading that moxreport. Then I opened the 10-Qs and latest earnings release and found (numbers in millions):

 

The net cash has gone from +214 in 2017 to -232 currently. Share repurchases over the last 2 years have come mostly from debt, not FCF.

 

Cash used in operating and investing activities is 34 over the last 6 months. Their share repurchases are close to the end of the road.

 

Accounts payable shows suppliers don't want to extend any credit. Contributing to negative cash flow.

 

Their 4 stores in California that show up on Google are in the middle of nowhere. If that is a pattern, their square footage may not be worth that much. Current EV is > $2 billion.

 

Their expenses haven't gone down as fast as revenues. Management looks trapped because cash flow is negative.

[Gregmal]

https://seekingalpha.com/instablog/6460311-unemon1/5349958-epic-short-squeeze-dillard-s-inc-nyse-dds-2-days-catalyst-will-surprise-market

[BG2008]

Looks like it's working already

[Gregmal]

Looks like it's working already

 

Yup. Took a bit off at 66 from 59. Not bad for a few days. But I still think if the buybacks numbers are anywhere near what is being projected in the Unemon post, this is a moonshot.

[Cardboard]

Thanks for the suggestion!

 

I looked up their financials which were not bad at all for a retailer to my great surprise: sales trend, balance sheet and cheap. I also shopped there before and thought it was fine but, I am old. LOL!

 

Anyway, bought some calls and already the stock is up over $2.50 since I bought...

 

Cardboard

[Gregmal]

Took more off a hair under $70. Locking in like 17 years worth of returns compounding 2% bonds. In 3 days.

[Stuart D]

By my rough estimates, in less than 1 year DDS will have bought back all shares not owned by Blackrock, Capital International, Dimensional Fund, LSV Asset management and Vanguard.

 

What happens then? @Gregmal, you were saying these funds will be forced to sell because of the float. Is that done automatically as per an index fund algorithm? or would DDS start calling them up (firm by firm) and asking to buy back shares.

 

Thanks again for posting, this has been a fun one to follow and learn.

[SHDL]

By my rough estimates, in less than 1 year DDS will have bought back all shares not owned by Blackrock, Capital International, Dimensional Fund, LSV Asset management and Vanguard.

 

What happens then? @Gregmal, you were saying these funds will be forced to sell because of the float. Is that done automatically as per an index fund algorithm? or would DDS start calling them up (firm by firm) and asking to buy back shares.

 

Thanks again for posting, this has been a fun one to follow and learn.

 

Let me see if I can help since I was the guy who made the comment about index funds.

 

The selling by index funds (at least those that use a float-adjusted weighting methodology) is supposed to be automatic and instantaneous.  So each time Dillard’s repurchases some shares, those index funds are supposed to sell some DDS shares in response to the shrinking float.  Whether this happens through a block transaction between the two parties I cannot say.

 

In practice though there can be a time lag between the share repurchases and the selling by the index funds, and I imagine that could lead to some interesting short term price action.  IIRC something like that happened during the 2008 VW infinity squeeze.

[writser]

The selling by index funds (at least those that use a float-adjusted weighting methodology) is supposed to be automatic and instantaneous.  So each time Dillard’s repurchases some shares, those index funds are supposed to sell some DDS shares in response to the shrinking float.  Whether this happens through a block transaction between the two parties I cannot say.

 

Do you have a source for this? Index funds simply track the index and as far as I know the free float adjustment in the index only happens during the quarterly reviews. At the very least that is the case for the FTSE indices which Vanguard is using (page 27+) and I'm 99.9% sure that that is the case for other indices too.

 

In March, September, and December, shares outstanding and free float will be updated to reflect the following:

• Changes greater than 1% for cumulative shares in issue changes

• Changes greater than 3 percentage points for cumulative free float changes*

*A constituent with a free float of 15% or below will not be subject to the 3 percentage points threshold and will instead be updated if the change is greater than 1 percentage point. For example, Company B with a free float of 8% would trigger a change if its free float moved to above 9% or below 7%.

 

The March, September, and December updates will be triggered by vendor changes and confirmed appropriately with the cut-off for new information occurring on the Friday five weeks prior to the review implementation.

 

Outside of the quarterly update cycle, shares and free float will be updated with at least two days’ notice if occasioned by primary or secondary offerings IF:

• There is a USD 1bn investable market cap change related to a primary/secondary offering measured by multiplying the change to index shares by the subscription price;

OR

There is a resultant 5% change in index shares related to a primary or secondary offerings AND a USD 250m investable market cap change measured by multiplying the change to index shares by

the subscription price. These changes will be implemented after the close on the day that the subscription period closes, assuming two days notice can be provided; if two days’ notice cannot be

provided prior to the end of the subscription period, the change will still proceed with two days’ notice and will be implemented at the earliest opportunity.

 

In principle an index simply represents a basket of stocks and it doesn't change overnight.

 

Your method doesn't make sense either. It would require all index funds to rebalance all their portfolios daily. A company like DDS isn't even required to disclose on a daily basis how many shares they bought back. How is Vanguard supposed to know how many shares they have to sell every day? Call them daily and hope they pick up the phone? And if an employee exercises stock options, should DDS call Vanguard to say: "hey, you have to buy 10 extra shares for your VT fund today?". Nah.

[SHDL]

writser,

 

Here’s a source for the S&P indexes:

 

https://us.spindices.com/documents/index-policies/methodology-sp-float-adjustment.pdf

 

If you go to p. 10 it says:

 

“Changes in [investable Weight Factors] resulting from certain corporate actions which exceed five percentage points are implemented as soon as possible or weekly depending on index methodology; changes of less than five percentage points are implemented at the next annual review.”

 

My reading of this is that “certain corporate actions” includes share buybacks and that by “as soon as possible” they mean “as soon as the relevant numbers are disclosed.”  The latter is one of the things I was alluding to when I said these adjustments can be delayed in practice.

 

As I understand, the trade off here is between what you mentioned (i.e., they don’t really know what the float is on a daily basis and they don’t want to rebalance too frequently either) and the desire to keep the float adjustments in line with what they know. 

[Gregmal]

Reduced much of my dollar value exposure and rolled into short dated slightly OTM calls. $70's for instance are a couple bucks. They seem mispriced given that the squeeze largely depends on numbers from 10Q which gets released by tomorrow. The squeeze play is on, and out there, so if it gains traction, it'll happen very soon.

[peridotcapital]

Why would DDS disclose their buyback activity during the first 4-5 weeks of Q3 in their Q2 10-Q filing?

[oscarazocar]

The 10-Q shows the number of shares outstanding on the filing date on the cover page, so by comparing that to number of shares outstanding at quarter end, you can back into the share buyback number so far in the current quarter.

[writser]

The 10-Q shows the number of shares outstanding on the filing date on the cover page, so by comparing that to number of shares outstanding at quarter end, you can back into the share buyback number so far in the current quarter.

 

This. Not 100% waterproof in all cases but DDS has no options, RSU's and does not issue shares so yeah, you can pretty much work it out.

[Gregmal]

Looks like they took out a bit over 300K shares. So about 1.5% of class A outstanding and about 3.2% of available float in roughly a month.

 

Bloomberg's most recent equity float shows 9.2M(now 8.9M) vs 8.6M shares short.

[Cardboard]

The guy was expecting 1,043,000 shares so 300,000 is a big miss.

 

Nonetheless thanks for the idea and profits as I cashed out late yesterday as it was already up 30%+ in matter of hours and you never know with options expiring in a few weeks.

 

I still like the thesis here of a cheap retailer with stable sales shorted to death. Will look into how to play it next.

 

Cardboard

[Gregmal]

The guy was expecting 1,043,000 shares so 300,000 is a big miss.

 

Nonetheless thanks for the idea and profits as I cashed out late yesterday as it was already up 30%+ in matter of hours and you never know with options expiring in a few weeks.

 

I still like the thesis here of a cheap retailer with stable sales shorted to death. Will look into how to play it next.

 

Cardboard

 

No problem, glad you made some money. I took much off and whats left is on the house.

 

I'd point out too that the 300K+ is what Pearson projected in his writeup. Unemon's 1M figure from a day ago would have been hard to pull off, and the stock probably would have went to $100 if they hit that. Either way, a lot can happen. Figures were as of 8/31 so I would project perhaps another 50-100K since then, although typically around $70 is where they tone it down.

 

"I expect to see a further 300-600k shares bought back during this post-PR window and that the float will drop further to around 9 million shares. See table below."

 

https://moxreports.com

 

Rick Pearson continues to be a monster. Definitely worth following if you guys don't already.

[RuleNumberOne]

The shorts are right. Dillards owns 248 stores totaling 44 million square feet. The average sale price of stores closed so far has been below what is required to justify the current EV. That moxreport guy is a pump-and-dump artist, he claims the real estate is worth $150-$300 per share but provides no proof. Some anonymous fellow posts on SeekingAlpha with similar tall claims (SeekingAlpha does not review blog posts). If shorts just hold, they will win eventually.

 

Today's 10-Q:

 

"During the six months ended August 3, 2019, the Company received cash proceeds of $22.0 million and recorded a related gain of $12.3 million for the sale of three store locations in Boardman, Ohio, Boynton Beach, Florida and Cary, North Carolina.

 

During the six months ended August 4, 2018, the Company received cash proceeds of $1.9 million from the sale of a location classified as an asset held for sale. These proceeds were being held in escrow for the acquisition of replacement property under like-kind exchange agreements. The Company used the proceeds for the acquisition of a replacement property at the Oaks Mall in Gainesville, Florida (104,000 square feet)."

 

The governance leaves much to be desired. Two-thirds of the board is appointed by the Dillards who own the privately-held Class B shares. The current 74-year-old CEO is the son of the founder. If he is too attached to the company and keeps buying a $40 stock at $70 per share using debt, who is going to stop him? Sales keep going down and the company loses money.

 

Munger's description of the stock market as a place "full of bullshit and craziness" is spot on.

 

248 stores x $6 million per store = $1.5 billion.

 

EV including the debentures is $2.3 billion.

[RuleNumberOne]

If the EV were to reset to $1.5 billion, with $550 million of net debt:

 

    - the price per share would be $38. (25 million Class A and Class B shares).