Dillard's, Inc. (NYSE: DDS) may soon be facing a board and management shake-up after a several large activist investors took their campaign for change a step further yesterday. Barington Capital and the Clinton Group revealed in a Schedule 13D/A filing with the SEC that they are now on the verge of launching a proxy battle to install their own candidates to the company's board of directors. The two activist hedge funds requested a list of shareholders and other documents that typically point to a proxy contest. Unfortunately, the company's poison pill gives the Dillard's family majority control (8 of 12 board seats), but many believe that the two funds will seek to put a minority slate of directors on the board to increase pressure. So, does this represent a catalyst that could make Dillard's a buy here?

Barington Capital originally contacted the company at the end of January, insisting that the vast vlaue potential of the company was not being realied. In their opinion, if the company were more effectively managed it would be worth substantially more than its current stock price. Furthrmore, the company's sizable asset base provides the company with a number of untapped options to create additional value for stockholders. More specifically, the activist hedge fund sees the following opportunities for improvement (in their own words):

1. Dillard's $7.5 billion revenue base offers significant margin leverage capable of producing sizable cash flow gains from any future operating improvements. The Company’s geographic concentration, especially in high-growth areas of the Southeast and Southwest United States, offers unique regional opportunities for its 331-store portfolio. Furthermore, the Dillard’s brand name is well-regarded in the department store sector and the Company has received above average scores in the area of customer loyalty according to a recently released survey by Brand Keys.Clearly, Dillard’s has the scale and brand recognition to be a successful retailer.

2. As Dillard’s trailing twelve month operating free cash flow margin is 2.4% versus 7.7% for its department store peer group, we believe that stockholders can realize enormous upside if margins can be improved to the levels achieved by the Company’s peers. We see a number of opportunities to immediately reduce the Company’s cost base, including by improving sourcing, rationalizing SG&A expenses and lowering capital expenditures. We also believe that there are a host of initiatives in inventory management and merchandising that can drive customer traffic and enhance margins. Among other things, we believe that Dillard’s needs to tighten its current assortment of offerings and vendors and consider a more regular promotional cadence, as its stores, in our opinion, are over-inventoried. In addition, we believe that Dillard’s needs to embark upon an aggressive re-merchandising effort that features new vendors (including exclusive offerings) and updated private label and in-house collections to differentiate its value proposition for customers. Furthermore, it is our belief that the Company needs to enhance its brand marketing by adding more image and lifestyle campaigns that communicate a revitalized message to the marketplace. We are convinced that each of these initiatives would add excitement and newness to the Dillard’s shopping experience and attract customers to its stores.

3. Dillard’s owns approximately 75% of its store portfolio, comprised of approximately 42 million square feet of retail real estate. Currently, the Company’s shares trade at only 0.5x its tangible book value of approximately $32.50 per share. This represents a significant discount to the Company’s peer group, which trades at an average tangible book value multiple of approximately 2.0x. We also believe that Dillard’s tangible book value is understated, since the current market value of the Company’s owned real estate far exceeds its depreciated book value. In fact, in a November 26, 2007 research report, Deutsche Bank estimated Dillard’s net asset value before taxes to be $59 per share. Deutsche Bank also notes that “actions taken to unlock the Company’s real estate value would be positive for the shares, as the NAV [net asset value] for Dillard’s [is] greater than the value based solely on operating fundamentals.” It is our belief that there are a number of measures that the Company can take to enhance the value of its real estate portfolio, including converting certain properties to higher and better use, closing underperforming stores and engaging in sale/leaseback transactions.

These are all classic activist arguments that really do have merit and should be considered by the board. Unfortunately, Barington was shunned by Dillard's and is now being forced to take more dramatic actions in order to unlock value. In the meantime, their investment (and that of other investors) is quickly deteriorating as the company repored slower same store sales, subpar operating performance, and a falling stock price. Many analysts estimate that Barington Capital and the Clinton Group could have around 12% support from institutions, which bodes well for their odds in getting at least one board seat. Combined, these factors make DDS a stock worth watching!

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Yahoo Inc. (NASDAQ: YHOO), in an attempt to continue to thwart Microsoft Corporation (NASDAQ:MSFT), announced it is extending the deadline for nominating directors to its board. Nominations were due March 14, but now Yahoo will accept them until 10 days following the announcement of the date of its annual meeting - a meeting which itself does not have a date set yet.

The nomination process is key because Microsoft will almost certainly try to nominate its own directors to Yahoo's board. Directors that would be friendly to the proposed takeover. Yahoo CEO Jerry Yang spoke on this point in his ongoing e-mail conversation with employees, the full text of which follows:

"Subject: update

yahoos

we want to update you on some news we announced this morning. yahoo!'s board has decided to extend the deadline for nominating directors to our board from march 14th to 10 days following our announcement of a date for our annual stockholders meeting. we have not yet announced the date of this year's meeting.

why did we do this?

in light of the current circumstances, this change removes an imminent deadline. microsoft, of course, could still choose to name directors, but our objective here is to enable our board to continue to explore all of its strategic alternatives for maximizing value for stockholders without the distraction of a proxy contest. it will also make it easier for you to continue to focus intently on delivering on our business strategies and creating value.

since we last updated you, our board and management team are aligned in ongoing efforts to explore a number of alternatives to create stockholder value. we believe we are making progress clarifying the many options available to us. and, of course, throughout this process, management and the board are both speaking with--and listening carefully to--our stockholders. this ongoing dialogue has provided us with helpful feedback.

let's all be clear about one thing: we have a great company, a company with a truly unique set of assets -- including our global brand, large worldwide audience, significant recent investments in advertising platforms, future growth prospects and the excellent momentum we have created behind our core business strategy. so it should come as no surprise that this situation is receiving such a high level of attention -- from national media to blogs.

we ask you to continue to put aside all the rumor and speculation you may be hearing. none of us should allow external reports to shift our focus away from doing what we do best -- transforming the experiences of our users, advertisers, publishers and developers, all while enhancing our leadership position in the online marketplace.

we want to thank all of you again for your continued hard work and dedication to yahoo!. we'll continue to update you as new information becomes available.

jerry and roy"

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Barnes & Noble Inc. (NYSE: BKS) shares fell sharply after the company warned that recessionary pressures will make 2008 a difficult year for the bookseller, as it now expects earnings to be well below analyst expectations. The bookseller also noted that the business environment remains very competitive despite record-setting sales of Harry Potter and improved sales of The Secret in late 2007 and 2008. Currently, Barnes & Noble trades below enterprise value at just over 12x earnings and many investors - including well-known activists - insist that it is cheap these days. So, is this bookseller a turnaround play or flop?

Famed activist Bill Ackman has been one of Barnes & Nobles most faithful supporters and still holds over $125 million worth of stock in the troubled company, according to his latest Schedule 13F filing. Many investors are predicting that he will eventually push the company to utilize its spare cash to pursue share buybacks in order to boost its earnings per share and encourage a higher share price to maintain its current multiples. However, he may run into problems if the company cannot sustain its growth as this is a key factor to encouraging and increasing multiples. Considering he is already sitting on a large loss, many are hoping he will take action to also turn around the business itself rather than focusing purely on unlocking value.

Some insiders have also shown faith in Barnes & Noble by purchasing large amounts of shares on the open market, according to recent Form 4 filings with the SEC. Chairman of the Board, Leonard Riggio, purchased 300,000 shares earlier this month at prices ranging from $32.29 to $33.86 in cash on the open market. These actions by such high ranking members suggest confidence in the company's management to turn the situation around and improve growth prospects, which would increase the company's trading multiple, especially if Ackman took action. Meanwhile, the company has already instituted a dividend and share buyback program aimed at encouraging investors to properly value the company.

Just what actions is the Barnes & Noble taking to orchestrate a turnaround? In its most recent 8-K, the bookseller said it was focusing its efforts on managing its expenses and working capital with a realistic view of market conditions, as well as continuing to refine its marketing strategies and grow the member program to maximize top line growth profitability. Unfortunately, these actions will take awhile to come to fruition as it now expects full-year earnings to come in between $1.70 and $1.90 per share for 2008 - flat with 2007 on an operating basis. However, the company believes that its strong balance sheet and free cash flow will give it flexibility to compete effectively in 2008 as well as continue to unlock value.

In the end, Barnes & Noble is a company with a strong balance sheet and a dedication to unlocking value. However, it has been struggling recently with its growth prospects, which has led to a lower valuation and share price. It will be interesting to see whether management can take action to turn this company around. Clearly, both major insiders as well as activists are confident which should lead many amateur investors to the same conclusion. Combined, these factors make BKS a stock worth watching closely over the next year or two!

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