Hedge fund Marcato Capital Management makes new bet on Dillard's

NEW YORK, April 23 Wed Apr 23, 2014 1:14pm EDT

NEW YORK, April 23 (Reuters) - Hedge fund manager Mick McGuire of Marcato Capital Management has taken a new position in Dillard's and is betting the retailer's stock can climb to $155 a share, which would mark a 62 percent gain from its current level.

McGuire said in a regulatory filing on Wednesday that the department store operator has been turning itself around by closing underperforming stores, cutting expenses and buying back shares. He did not reveal the size of Marcato's stake.

McGuire released a presentation he made at the Active-Passive Investor Summit on Tuesday.

Dillard's, which underperformed its peers by 200 percent between 2000 and 2007, is currently trading at a 12 percent free cash flow yield and has been using all of its free cash to repurchase shares, McGuire said.

"Given the high insider ownership, if Dillard's maintains its free cash flow and share repurchase levels, then at the current stock price we estimate it would buy back nearly its entire float in the next five years," he added.

The stock traded at $95.48 a share at midday on Wednesday, down 0.4 percent, and has dropped 1.63 percent since the start of the year.

For Marcato Capital Management, which ranked as one of last year's best-performing hedge funds with a 26.16 percent return, the bet on Dillard's will be a passive investment.

Marcato sometimes engages in activist campaigns and owned 13 U.S. stocks at the end of the fourth quarter, including Lear and Sotheby's.

Marcato owns a nearly 7 percent stake in Sotheby's and McGuire has been urging that company to return more capital to shareholders and cut costs. This week he publicly backed hedge fund Third Point's slate in the proxy battle between the auction house and the hedge fund.

Marcato has been waging an activist campaign at Sotheby's since announcing the position last summer.

The new investment in Dillard's comes at a time that many U.S. retailers are facing tough headwinds. Staples and J.C. Penney recently said they would close some stores.

(Reporting by Svea Herbst-Bayliss; Editing by Dan Grebler)