DSW Laces Up to Run

Although online retail businesses are thriving, it's a good bet that brick-and-mortar shoe retailer DSW (NYSE: DSW  ) , with its 2,000 styles and standard return policy, will continue to pull in enough customers to grow its business comfortably. One problem that customers don't face at DSW but do at an online retailer, such as Zappos.com or Motley Fool Rule Breakers pick Overstock.com (Nasdaq: OSTK  ) , is that sizes don't mean the same thing to every shoe manufacturer. So if a company gets the idea that a size 12 shoe should be branded with a 13 badge, all you can do as an online consumer is go through the hassle of mailing the shoes back or giving them to a size-12-footed friend or relative.

So DSW is alive and growing, as evidenced by its second-quarter results. Since opening its first store in the heart of Buckeye country in Dublin, Ohio, in 1991, it has established more than 180 locations in 32 states. In the latest period alone, it increased its store count by seven, representing a 3.9% jump.

Taking a look at its fiscal-2005 Q2 numbers, we'll find that DSW is also doing a solid job of increasing sales. Comparable same-store sales rose 3.3% compared with the same period a year ago, a figure that helped increase the company's net sales by 17.8% to $276.2 million.

Net income climbed marginally by 4%, and at first glance it may appear that DSW's earnings were lagging because of operational difficulties. But that's not the case: Its operating margins increased from last year's level of 6.7% to the current level of 7.5%.

Instead, the reason for the drag on its bottom line is that DSW was spun off from Retail Ventures (NYSE: RVI  ) but RVI still has a controlling interest in DSW shares. Over the past quarter, DSW repaid $3.9 million in interest expense to its former parent company. If we exclude this payment, then DSW's earnings per share actually increased 23% year over year to $0.39.

Increasing sales, improving profit margins, and a clean balance sheet add up to a valid reason to add this stock to an investor's watch list. DSW is putting a good foot forward and is worthy of further consideration.

Overstock.com is aMotley Fool Rule Breakersrecommendation.

Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.


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