Fancy Footwork at DSW

Since the launch of its IPO in mid-2005, Columbus-based footwear specialty retailer DSW (NYSE: DSW  ) has performed quite well for buy-and-hold investors. Its stock price has risen 47% since then, and the company's Q1 results -- released after the closing bell on Wednesday -- provided delightful news to its shareholders, lifting the stock 4.5% in after-hours trading.

Although the company announced that its net sales decreased by 11% versus its 2006 Q1, with same-store sales also dropping by 3.6%, its EPS actually increased by 35% and management is maintaining its full-year outlook for its estimated earnings range. The sales trend at DSW stood in stark contrast to those of footwear retailers Payless ShoeSource (NYSE: PSS  ) and Crocs (Nasdaq: CROX  ) , both of which recently announced impressive Q1 revenue growth. Payless has also announced plans to acquire rival Stride Rite Corporation (NYSE: SRR  ) .

So how does a retailer increase its EPS on a decrease in revenue and same-store sales? In its conference call, company management attributed this realization to improving product margins, sound inventory management, and prioritization of expenses. The company did note that its sandal sales were hurt by an unseasonably cold quarter; however, the retailer has its sights set on the big picture.

DSW plans to open 30 new stores during FY 2007, and it's also making a significant investment in improving its e-commerce channel in an effort to provide for future sales growth. Management also noted that it has made significant investments in improving the company's IT infrastructure and its home office.

The company's decreases in net sales and same-store sales were a bit disconcerting, but they're not a complete surprise, given the general state of the retail market and a chilly spring. Shareholders can most likely expect a decrease in margins in Q2, as DSW drops prices in an effort to clean up its inventory in preparation for the back-to-school season. While Q2 earnings may suffer because of this practice, the company's sound business strategy should prove beneficial as it rolls out new footwear models in the fall. For buy-and-hold investors with money tied up in DSW, the company's Q1 results and full-year outlook give little reason not to stay the course.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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