DSW, Brown Shoe, or Shoe Carnival: Who's Doing the Best?

DSW (NYSE: DSW  ) , Brown Shoe Co. (NYSE: BWS  ) , and Shoe Carnival (NASDAQ: SCVL  ) are three of the largest shoe retailers in the United States. All three companies have released earnings in the last two weeks, telling very similar stories. Let's break the reports down and figure out which shoe company could provide the highest returns for its investors.

The shoe giants
DSW, or the Designer Shoe Warehouse, is a footwear and accessories specialty retailer in the United States. Its products include all types of shoes, boots, and sandals, as well as handbags and accessories like hosiery. The company currently operates 393 stores in 42 states, the District of Columbia, and Puerto Rico, and its website DSW.com.

Brown Shoe Co. is a global footwear company that also sells accessories like hosiery, backpacks, tote bags, and gym-sacks. It operates retail stores under the names Famous Footwear, Naturalizer, and Sam Edelman. It also owns and operates several e-commerce sites, including Shoe.com and Famous.com. The company currently operates over 1,200 retail locations in the United States, Canada, China, and Guam, along with its large online presence.

Shoe Carnival is a footwear retailer that offers both brand names and private label products, in a very unique shopping atmosphere. Its stores feature games, contests, neon lighting and signs, and modern music, to make for an "energized" shopping experience. Some shoppers may not enjoy this type of shopping environment, but it puts the "carnival" in Shoe Carnival. The company currently operates 381 stores in 32 states and Puerto Rico, along with its website shoecarnival.com.

Recent reports

DSW

On Nov. 26, DSW released third-quarter results that did not impress the Street. Here's an overview of the key metrics along with a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $0.58 $0.58
Revenue $633.00 million $647.59 million
  • Earnings per share grew 14% 
  • Revenue increased 6.8%
  • Comparable-store sales declined 0.7%. 
  • Gross profit rose 6.3% to $212.87 million
  • Gross margin declined 14 basis points to 33.63% 
  • Opened 16 new stores during the quarter

Brown Shoe Co.

Brown Shoe reported third-quarter results on the same day as DSW and its report was also mixed. Here's a summary and a year-over-year breakdown:

Metric Reported Expected
Earnings Per Share  $0.63  $0.59
Revenue  $702.80 million  $705.53 million
  • Earnings per share grew 12.5% 
  • Revenue increased 1% 
  • Comparable-store sales increased 4.9%
  • Gross profit declined 0.4% to $278.2 million
  • Gross margin declined 50 basis points to 39.6%
  • Closed or relocated 22 stores and opened 11 new stores

Shoe Carnival

The last of the three to report was Shoe Carnival, who released mixed numbers after the close on Dec. 2. Here's an overview of its report and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share  $0.54  $0.53
Revenue  $235.80 million  $239.49 million
  • Earnings per share decreased 10%
  • Revenue decreased 3.6%
  • Comparable-store sales increased 0.7%
  • Gross profit decreased 7.1%
  • Gross margin declined 120 basis points to 30.1%
  • Opened 8 new stores during the quarter
A common flaw
All three released a mixed set of results, but the one statistic that rang true in every report was a declining gross margin. DSW described the third quarter as having a "promotional environment," which would explain the decrease. Brown Shoe gave no specific reasoning, but it does sport a much higher margin than the others, so investors can let this one slide for now. Shoe Carnival noted increased costs associated with distribution and occupancy, which could be from its expansion efforts, so this is an even trade off if it can bring it back up later. The companies will for sure want to get back on track as soon as possible, but Black Friday and Cyber Monday may cause margins to remain in this range or even fall for the next quarter.

Full-year expectations
In the reports, each company updated its guidance for the rest of the year. Let's take a look at what we can expect out of the retailers:

DSW

After its mixed report, DSW raised its full-year outlook and now expects to earn $1.80-$1.90 per share; this would represent 7.1%-13.1% growth from 2012. These earnings estimates assume comparable-store sales remain flat and the company achieves adjusted sales growth of about 4%-5%. I was surprised to see any sort of raised guidance from DSW after what I believe was a disappointing earnings report.

Brown Shoe

After its mixed release, Brown Shoe raised its guidance for the year. The company now expects to earn $1.36-$1.40 per share versus the previous estimate of $1.27-$1.32 per share. If the company earns $1.38 per share, this would represent 22.1% growth from last year. Brown Shoe also narrowed its 2013 sales guidance to $2.53 billion-$2.54 billion, which was in-line with the consensus analyst estimate of $2.54 billion. I believe this guidance is what caused the rise in the stock following its mixed results. 

Shoe Carnival

In its report, Shoe Carnival updated its expectations for the fourth quarter. The company now expects to earn $0.18-$0.20 per share, compared to $0.13 in the fourth quarter of 2012, an increase of 38.5%-53.9%. Net sales are projected to come in around $215 million-$219 million, with comparable-store sales rising 4%-6%; in comparison, Shoe Carnival reported net sales of $205.7 million the year before with comparable-store sales growing just 0.5%. The third quarter of 2013 was dismal compared to 2012, but the fourth quarter looks to be great, if the company can actually deliver.

And the overall winner is...
When reviewing the earnings reports and guidance going forward, I believe the best company in the shoe retail space is Brown Shoe Co. Its mixed report was much better than the other two and the raised guidance shows management's confidence going into the fourth quarter. DSW came in behind Brown Shoe and Shoe Carnival takes last place in this comparison due to its awful year-over-year performance in the third quarter.

Brown Shoe, DSW, and Shoe Carnival are all great companies who have the potential to match the growth of the overall market in 2014. I do not see any of the companies as being a top pick for next year, but Brown Shoe is setting up as the strongest option in the industry. Keep a close eye on Brown Shoe and DSW and consider initiating a position on any heavy pullback, but I would stay away from Shoe Carnival for a quarter or two.

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