Hedge Funds Report Stake in Dillard’s

New York, Dillard's Inc. shares on Tuesday afternoon rose 3.4% after two New York-based hedge funds reported a stake in the department store company, saying Dillard's shares are significantly undervalued.

Barington Capital Group and Clinton Group, which together accumulated a stake of approximately 5.3% in Dillard's, also sent a letter dated Tuesday to the Little Rock, Ark.-based company’s board outlining recommendations for strategic and operational improvements.

"If the company were more effectively managed, it would be worth substantially more than its current stock price," the letter from the investment group said. "The vast value potential of the company is not being realized. Dillard's is an undervalued asset with tremendous opportunity for improvement.

The investment group proposed that the retailer reduce its cost base—including better buying—tighten its assortment of offerings and vendors, and update its private-label merchandise that will set it apart from its department store peers, the group said.

"The disappointing financial performance of Dillard's must be addressed," the letter said. "While we acknowledge that the market conditions in the department store sector have been challenging over the past few quarters due to concerns with a weakening U.S. economy, the magnitude of Dillard's recent weak results cannot be attributed to the economy alone."

The letter also said Barington has tried to reach out to Dillard's board and chief executive William Dillard II several times during the past six months, though it said that hasn't been met with any response from the company.