Less Inventory Equals Less Sales, butr more profit

Implications: 1. Dillard's faces a tough competitive climate

2. It finally has abandoned its cluttered store concept and streamlined inventories

3. The net result is fewer sales, but increased profitability

Analysis: For years Dillard's employed a strategy of loading its stores with inventories, resulting in one of the highest inventories per square foot. This may have created more sales, but it also created more mark downs and profit pressures.

This year the stores seem less cluttered and stocked with fresher merchandise. The result has been fewer sales, but because of the fewer markdowns, gross margins improved by 1.4 basis points, resulting in a slight profit in the current quarter vs. a loss in the prior year.

Although the profit picture has improved in the short term, in the long term, Dillard's will have a tough time competing against giants like Federated Department stores, which is now twice as large as it was a year ago, after the merger with May. In addition, JC Penney has improved it's merchandising skills and seems to be making head way with the moderate customer. Eventually, Dillard's will need to improve its sales per square feet, while simultaneously maintaining or improving margins if it is to survive against these dominant players.