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Sydnee Gatewood
Sydnee Gatewood
Articles (2594) 

Mason Hawkins' Firm Divests of Dillard's Stake

Longleaf manager exits position in popular department store chain

Southeastern Asset Management, the investment firm founded by Mason Hawkins (Trades, Portfolio) in 1975, disclosed it exited its stake in Dillard’s Inc. (NYSE:DDS) last week.

To achieve long-term capital growth, the Memphis, Tennessee-based firm, which manages the Longleaf Partners Funds, invests in a concentrated number of undervalued companies that have strong balance sheets and good management teams.

According to GuruFocus Real-Time Picks, a Premium feature, the firm sold its 1.9 million remaining shares of the Little Rock, Arkansas-based retail company on July 10, impacting the equity portfolio by -1.68%. The stock traded for an average price of $22.66 per share on the day of the transaction.

GuruFocus data shows Southeastern gained an estimated 55.95% on the investment since establishing a position in the second quarter of 2019.

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The well-known department store chain has a $551.48 million market cap; its shares were trading around $23.74 on Monday with a price-book ratio of 0.39 and a price-sales ratio of 0.1.

The median price-sales chart shows the stock is trading below its historical average, suggesting it is undervalued. The GuruFocus valuation rank of 10 out of 10 also supports this analysis as the price-book and price-sales ratios are currently near 10-year lows.

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In May, Dillard’s reported its first-quarter results, which were negatively impacted by the Covid-19 pandemic as it was forced to temporarily close its stores. The company posted a loss of $6.94 per share on $786.7 million in revenue. In comparison, it recorded earnings of $2.99 per share on $1.46 billion in sales a year ago.

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GuruFocus rated Dillard’s financial strength 5 out of 10. While the company has a low cash-to-debt ratio of 0.11, the high Altman Z-Score of 3.81 indicates it is in good standing and not at risk of going bankrupt. 

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The department store’s profitability scored a 7 out of 10 rating. In addition to declining margins, Dillard’s is being affected by negative returns that underperform a majority of competitors as well as a low Piotroski F-Score of 3, which suggests operations are in poor shape. It also has a predictability rank of one out of five stars, which is on watch as a result of declining revenue per share over the past year. GuruFocus says companies with this rank typically return an average of 1.1% annually over a 10-year period.

Lee Ainslie (Trades, Portfolio) is now the company’s largest guru shareholder with a 0.51% holding. Hotchkis & Wiley, Joel Greenblatt (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss and Chuck Royce (Trades, Portfolio) also own the stock.

Portfolio composition and performance

Southeastern’s $4.2 billion equity portfolio, which was made up of 34 stocks as of March 31, is largely invested in the communication services and industrials sectors.

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Other consumer cyclical stocks the firm owned as of the end of the first quarter were Hyatt Hotels Corp. (NYSE:H), Trip.com Group Ltd. (NASDAQ:TCOM), Mattel Inc. (NASDAQ:MAT) and Wynn Resorts Inc. (NASDAQ:WYNN).

According to its website, the Longleaf Partners Fund returned 14.81% in 2019, underperforming the S&P 500’s 31.48% return.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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