Warren Buffett Executive Buys 5.89 % – Pandemic Play !
Pandemic play – Is Warren Buffett sending a stalking horse right in the front door ?
This stock is up on news that key Buffett lieutenant Ted Weschler personally bought a 5.89 percent stake in the retailer.The bet looks like a classic value play based on Dillard’s valuable real estate portfolio.
The company’s strong balance sheet suggests a relatively low-risk play on a recovery from the pandemic.
Ted Weschler a Buffett henchman disclosed a 5.89 percent stake in department store chain Dillard’s (DDS). ,The stock is up 30 percent on news of the Weschler investment, which he made in a personal capacity.
As most readers know, Weschler serves as a top lieutenant to Warren Buffett, helping to run the Berkshire Hathaway’s (BRK.A) (BRK.B) investment portfolio and assist in dealmaking for the conglomerate. Prior to joining Berkshire, Weschler worked as a successful hedge fund manager in Virginia practicing value investing principles. His Peninsula Capital Advisors returned a market-crushing 1,236 percent between 1999 and 2011.
That an investor of Weschler’s caliber is interested in Dillard’s means that the stock is certainly worth a look. A few possible reasons stand out, including the company’s vast real estate holdings, strong balance sheet, and a return to profitability as the pandemic subsides.
Dillard’s As a Real Estate Play
Dillard’s, which was founded in 1938, comes from an era where it was considered prudent for retailers to hold real estate. The department store business is fading, but many of these old stalwarts own valuable property. In 2015, activist fund Starboard Value took a stake in Macy’s (M) with a plan for the retailer to spin off or sell its vast real estate portfolio, although management rebuffed this attempt to pry away assets. Cowen recently assessed Macy’s real estate at $5-8 billion, which far outstrips the market cap of less than $2 billion.
Dillard’s itself has come under pressure over its property holdings. As of FY 2019, the chain owned 244 of 285 stores outright. It also owns all of its distribution facilities and corporate offices. Snow Park Capital Partners argued in 2017 that Dillard’s real estate was worth $200 a share. The fund asserted that the company could earn more renting to other tenants than continuing to operate its “unproductive” core retail business – implying that Dillard’s was better off just shutting down altogether. Ultimately these efforts came to naught, as the Dillard family effectively controls the company and has the final say on such matters
As a non-essential business, Dillard’s followed other department stores in shutting down during the early stages of the pandemic. The company lost $162 million in Q4 after earning $77 million in profit during the same period the previous year. At a market cap of $1.2 billion, Dillard’s is currently trading at seven times its FY 2019 earnings.
Before the pandemic, Dillard’s was holding up fairly well for a department store. Sales might have been largely flat over the last decade, but at least they weren’t going down. Operating margins certainly weren’t on a good trajectory, declining from 6.5 percent in 2012 to 4 percent in 2019, but overall the company was doing okay. Management has always kept a conservative balance sheet. Today Dillard’s holds $1.5 billion in current assets – $83 million of that in cash – against $1.7 billion in total liabilities.
The stock has more than doubled from its pandemic lows. Weschler, it seems, started buying stock over the summer, when shares were still trading in the low-$20s. In that respect, it looks like he made a classic value play. At its lowest point, Dillard’s stock represented a relatively low-risk buy at less than three times its 2019 earnings with a huge margin of safety. By now Weschler has likely made a hefty paper gain on the investmen
Given his background, it doesn’t seem likely that Weschler would buy Dillard’s hoping to agitate for change, as activists did in the past. Rather, it seems to be a bet on Dillard’s present state. It’s possible that this isn’t a ‘buy and hold forever’ investment, but rather a relatively short-term pandemic recovery play, which is perhaps why Weschler bought the stock for his personal account and not for Berkshire.
On paper, the bull case for Dillard’s as a real estate play makes perfect sense. But these arguments have been bandied about for years, and department store stocks are still shedding value. Managements have mostly resisted calls to separate real estate assets; in the meantime, the value of those assets continues to decline as shopping malls fall out of favor with consumers. And not only is Dillard’s hanging on to most of its store fleet, it’s actually opening some new locations.
Although Dillard’s has done a stellar job of appealing to its core (older) customer, the company hasn’t shown much interest in adopting an omnichannel strategy. CEO Bill Dillard, 75, has presided over the company for 22 years. Like other elderly retail executives, Dillard has resisted change. Peers such as Nordstrom (JWN) and Macy’s have established online operations and experimented with new store formats. Dillard’s hasn’t been as focused on ecommerce (the chain doesn’t even have a mobile app).
In retrospect, Weschler’s investment seems like a shrewd move. Even with the recent bounceback, Dillard’s stock is still down over 20 percent for the year. I don’t think I am going to follow Weschler into this one, but Dillard’s may still work as a near-term bet on economic recovery. It isn’t a stock
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