Dillard's (DDS): Assessing Valuation After Strong Cash Flow Despite Softer Profits

If you are following Dillard's (DDS), last week's earnings might have caught your attention. While the company reported slightly lower net income compared to last year, investors were quick to look past the soft profit numbers. That is because Dillard's generated stronger free cash flow than its earnings might suggest, a signal visible in its negative accrual ratio. When accounting figures paint a conservative picture but cash keeps flowing in, it often reassures the market that underlying business performance is holding up.

This confidence has been reflected in Dillard's share price, which has shown strength over the past year. Despite muted earnings growth, momentum in the stock has not faded, driven in part by ongoing share buybacks and a steady dividend. Over the past year, Dillard's has surged roughly 71% and is also up more than 21% since January. The stock’s three-year and five-year returns remain impressive, underscoring just how resilient investor sentiment has been, even as reported profits dipped.

So the big question now is whether investors are looking at an undervalued retail powerhouse or if the market is already pricing in every bit of Dillard's free cash flow potential.

Price-to-Earnings of 14.9x: Is it justified?

Dillard's currently trades at a price-to-earnings (P/E) ratio of 14.9x. This figure is significantly lower than the average P/E ratio of its peer group, which stands at 26.1x, and also below the global multiline retail industry average of 22.2x. By this metric, the company may appear undervalued relative to its competitors and the broader sector.

The price-to-earnings ratio compares a company’s share price to its earnings per share, providing a measure of how much investors are willing to pay for each dollar of net income. In the retail sector, where earnings volatility is common, a lower P/E can signal market caution or an overlooked opportunity.

Despite a period of declining earnings and revenue, Dillard's P/E indicates that the company presents stronger value compared to industry norms. However, when compared to its estimated fair price-to-earnings ratio of 8.1x, the current market price is still considered expensive. This suggests that the market may be factoring in future potential that extends beyond next year’s projected earnings.

Result: Fair Value of $554.05 (ABOUT RIGHT)

See our latest analysis for Dillard's. However, shrinking annual revenue and a negative trend in net income growth could put pressure on Dillard's valuation and test investor optimism in the coming quarters. Find out about the key risks to this Dillard's narrative.

Another View: Our DCF Model Paints a Different Picture

Taking a step back from earnings multiples, our SWS DCF model approaches valuation by estimating the present value of Dillard's expected future cash flows. This method actually suggests that the shares are roughly fairly valued. Could this indicate that the market has already considered much of what lies ahead?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Dillard's for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Dillard's Narrative

Keep in mind that you can always dig into the numbers yourself and develop your own perspective in just a few minutes. Do it your way.

A great starting point for your Dillard's research is our analysis highlighting 2 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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