DSW: Mixed Earnings and Weak Outlook Send Shares Lower

DSW has just released its fourth-quarter report, so let's take a look and see if we should buy shares right now.

Mar 21, 2014 at 10:30AM

DSW (NYSE:DSW), the footwear retailer, has just released its fourth-quarter report to complete fiscal 2013. The results were mixed in comparison with expectations which caused DSW's shares to move over 3% lower in the trading day. Let's take a look and decide if this decline is our opportunity to buy or if we should avoid this stock for now.

Screen Shot

Source: DSW Facebook

The quarterly report
DSW released its fourth-quarter results before the market opened on March 18; here's a breakdown of the results and a year-over-year comparison:

MetricReportedExpected
Earnings Per Share $0.31 $0.29
Revenue $572.27 million $590.23 million

Source: Benzinga

Screen Shot

Source: DSW's Facebook

DSW's earnings per share decreased 11.4% and revenue decreased 3.7% year-over-year, as comparable-store sales remained flat. Gross profit fell 6.8% to $159.98 million and the gross margin took a slight hit, declining 90 basis points to 28%. Four new stores opened up during the quarter, bringing DSW's new total to 397 across 42 states, the District of Columbia, and Puerto Rico.

Key statistics aside, the highlight of the quarter came when DSW raised its dividend by 50%; the company will now pay out $0.1875 each quarter, with the first payment coming on April 15. Overall, it was a pretty dismal quarter for the shoe retailer and its outlook on fiscal 2014 did not help the situation...

Dsw Interior

Source: DSW

2014: Little growth seen here
In the report, DSW also provided its guidance for fiscal 2014; the company expects earnings per share in the range of $1.87-$2.02, excluding certain expenses, on revenue of $2.51 billion-$2.53 billion; these estimates fell below analysts' expectations, which called for earnings per share of $2.09 on revenue of $2.57 billion.

DSW added that it plans to open about 35 new stores, which will push its total count to approximately 432, and it now sees its long-term store build-out potential in the range of 500-550 stores. In summary, this outlook does not call for much growth during 2014, but the expansion plans would set DSW up for future success; however, I believe we should invest in companies that can outperform the market both today and in the future.

With the earnings and outlook numbers in hand, I believe the market reacted correctly by sending shares lower. The dividend hike came as the only true positive in the report, but that is not enough to create bullish sentiment.

How has the competition fared?
Brown Shoe Co. (NYSE:BWS), the company behind footwear retailers that include Famous Footwear and Shoes.com, is one of DSW's largest competitors and it recently released its quarterly results as well. Here's what the company accomplished from its fourth-quarter report released on March 14:

MetricReportedExpected
Earnings Per Share $0.14 $0.10
Revenue $600.0 million $622.6 million

Source: S&P Capital IQ

Vegas Post

Source: Famous Footwear Blog

Brown Shoe's earnings per share increased 55.6% and revenue decreased 3% year-over-year, as same-store sales at Famous Footwear declined 1.8%. Gross profit decreased 2.4% to $241.4 million, but the gross margin showed strength by expanding 20 basis points to 40.2%. Brown Shoe also gave its guidance on fiscal 2014, calling for earnings growth of 3%-10% and revenue growth of 2.7%-3.6%; this missed analysts' expectations, which called for earnings growth of 14.9% and revenue growth of 4%.

With both DSW and Brown Shoe showing slowed growth in the fourth quarter and both companies providing weak outlooks on the year ahead, clearly footwear retailers are simply seeing slowed traffic. This is not a good sign for either company or their competitors and investors should take this as a warning when considering an investment here; the reward may be high if things turn around, but I believe the risk is not necessary considering the strength we have seen in other industries, such as the quick-serve restaurant industry.

The Foolish bottom line 
DSW's dismal quarterly results and outlook on 2014 have sent its shares lower and I believe the market reacted correctly. DSW was not alone in its struggles during the quarter as Brown Shoe reported weak results as well, and this makes me believe that the footwear retail industry is too frail to invest in right now. Foolish investors should simply monitor the situation going forward and review the next set of quarterly results to determine if conditions have changed.

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Joseph Solitro has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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