Investing.com -- Fitch Ratings has revised the outlook for Dillard’s (NYSE: DDS ), Inc. from stable to positive and affirmed its Long-Term Issuer Default Rating (IDR) at ’BBB-’. The ratings agency has also affirmed the company’s secured credit facility at ’BBB’, its unsecured notes at ’BBB-’ and its capital securities issued by Dillard’s Capital Trust I at ’BBB’.

The positive outlook is due to Dillard’s progress in improving its EBITDA to around $900 million from about $400 million in pre-pandemic 2019, strong free cash flow (FCF) generation and low EBITDAR leverage around 0.5x. However, the rating is balanced by challenges faced by mall-based retailers and Dillard’s modest scale.

Dillard’s performance has been stronger than its main competitors amidst recent department store volatility. The company’s EBITDA is expected to stabilize at more than double pre-pandemic levels with margins around 13%, which is well above its peers. This performance is partly due to new brand introductions that improve its merchandise mix and well-controlled inventory.

Dillard’s ratings also benefit from its good financial flexibility and limited debt position. The company has a modest debt load of around $420 million, compared with over $500 million in projected annual FCF beginning in 2025 and just over $1 billion of cash and short-term investments at the end of 2024.

However, Dillard’s faces challenges in the department store industry due to secular shifts that have reduced mall visits and changed shopping patterns. This has negatively affected the mid-tier apparel and accessories space. The companies with the best chance of maintaining their market share will be those with a strong omnichannel platform, good relationships with vendors and customers, and good cash flow for reinvestment.

Dillard’s EBITDA decreased to about $920 million in 2024 from a $1.3 billion peak in 2022/2023 due to shifts in consumer spending towards services and away from goods. Fitch projects Dillard’s 2025 EBITDA will decline to the high-$800 million range due to ongoing topline challenges.

Despite its good performance, Dillard’s more modest scale, geographic concentration in key Southern markets and less developed omnichannel model could serve as disadvantages over time in an increasingly competitive space. The company has made good progress on attracting key merchandise vendors and building out e-commerce capabilities, but its somewhat smaller scale could limit its longer-term ability to grow e-commerce business and ancillary revenue streams like marketplace and digital advertising.

As of Nov. 2, 2024, Dillard’s had $980 million of cash and $775 million available on its $800 million asset-based lending (ABL) credit facility, which matures on April 28, 2026. The company’s modest capital structure consists of $321.8 million of unsecured notes due between 2026 and 2028 and $200 million of subordinated debentures due 2038.

In 2024, Dillard’s revenue was $6.3 billion across 244 stores and 28 clearance centers in 30 states concentrated in the southeast, central and southwestern U.S. Fitch projects Dillard’s retail revenue will remain near 2024 levels of $6.3 billion over the next 12-24 months, due to ongoing headwinds negatively affecting discretionary goods categories like apparel.

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