The rise of e-commerce was widely expected to kill the brick-and-mortar retail industry. Amazon’s dominance is undeniable as the company’s sales keep growing largely at the expense of traditional retail chains. Among the biggest victims are lower-quality malls as well as department stores. Revenues at Kohl’s (NYSE:KSS), Macy’s (NYSE:M) and Nordstrom (NYSE:JWN) have been stagnant for years. The same can be said about southern department store chain Dillard’s Inc.
But Dillards (NYSE:DDS) is an exception in one very important aspect. The company made the same amount of sales in 2022 as it did in 2008. Yet, its stock has been a 150-bagger over the same time period. More recently, it is up from a 2020 low of roughly $25 a share, to over $380 as of this writing. How did that happen? The answer has everything to do with competent management.
Dillard’s reduced its working hours in a smart way, which led to lower labor costs without the loss of revenue. It also started managing its inventory levels much more prudently. On top of that, it opportunistically repurchased huge chunks of its own stock. Taken together, these steps not only boosted profits, but also reduced the number of shares these profits are divided by to arrive at EPS. The result was a meteoric stock price surge to over $400 in late-2021.
No trend lasts forever, though, and Dillard’s shares spent the following two years trading in a narrowing range between $200 and $400. A company cannot keep cutting costs indefinitely. Analysts already expect EPS to fall next year. So, can the uptrend resume soon and how far can it go? Elliott Wave analysis might help us find the answer.
A quick look at the daily chart of Dillard’s stock reveals that the past two years have produced a triangle correction. This is a corrective pattern, which consists of five sub-waves, labeled A-B-C-D-E, and is known to precede the final wave of the larger Elliott Wave structure. It occurs in the position of wave B of an A-B-C zigzag or, as in this case, as wave (IV) of a bigger impulse pattern, marked (I)-(II)-(III)-(IV)-(V).
It is the same kind of pattern we recently found on the daily chart of Costco (NASDAQ:COST) stock. And it logically leads to the same conclusion, that we can expect more upside to a new all-time high in the fifth wave. The bulls’ problem is that once wave (V) is over, a notable decline is very likely to begin. But let’s not examine that triangle pattern in a vacuum. The weekly chart below shows its place within the larger impulsive structure.
Dillard’s’ weekly chart reveals its phenomenal uptrend from $2.50 in 2008. It can be seen as an incomplete five-wave impulse, whose first four waves are already in place, but the fifth and final wave is still missing. The triangle correction we saw earlier fits in the position of wave (IV). Once wave (V) completes the pattern somewhere near the $500 mark, it would be time for a three-wave retracement back to the support of wave (IV) near $250. That’ll be a decline of about 50%.
It’s been a great ride, which made the Dillard family incredibly wealthy. However, let’s not forget that this is just a department store chain with a great management, but not a great company in and of itself. We think the bulls would do well to start taking profits once they’ve reached a new all-time high.