DSW's Wild Ride

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The year has been wild for shoe retailers. In early 2007 the industry seemed to be hitting its stride. But during the summer all we saw were scuff marks from companies like Brown Shoe (NYSE: BWS), Foot Locker (NYSE: FL), Shoe Carnival (Nasdaq: SCVL), and Collective Brands (NYSE: PSS). As third quarter results trickle out, industry results look like a shuffle back and forth with no clear direction.  

I put DSW (NYSE: DSW) firmly in the shuffling camp. The stock has lost 44% of its value since the beginning of the year. It didn't help when management lowered annual guidance in October from around $1.65 a stub (11% higher than last year), to about $1.35 (at least 10% lower than last year).

The company reported better-than-expected Q3 results yesterday, which only added to investors' anxieties over "what the heck is going on with shoe retailers?"

Total sales were up 10% for the quarter, but comps were down 3%. Average unit retails were higher due to low markdowns on a clean inventory position, but traffic was down "significantly." Are you catching the up-down cadence here?

Expenses were favorable, down 250 basis points as a percentage of sales. Looks impressive, until you realize the biggest piece of this was a reduction in bonus accruals due to lower earnings expectations.

This netted out to $0.51 of earnings per share, up over 40% compared to last year, and blowing away analyst expectations of $0.34 (according to Thomson Financial). Full year guidance is now $1.24 to $1.29, at or slightly above street expectations, but below the $1.48 posted last year.

Commenting on these highly volatile results, management noted that weaker-than-expected sales trends have caused changes in promotional cadence and acceleration of markdowns, which makes the earnings look volatile. But they noted that 2007 is the first negative earnings year in a long time, and 2008 appears as though it will be more predictable.

DSW is a well-run company that has been tripped up by a dismal year for retailers in general. Look no further than recent results for segment leaders like Kohl's (NYSE: KSS) to understand the trend.

With its solid history of profitable growth, and a PE at 14 times last year's earnings, the stock appears to be priced attractively. But my feet will be a little more comfortable when I see evidence of a return to (relatively) predictable results.

For more thoughts on shoe retailers, read:

• DSW Loses Its Footing
• Shoe Carnival Stubs Its Toe
• Fool on the Street: Collective Brands Marches On