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DSW Jumps on Earnings Growth, Holiday Cheer

By Dan Caplinger – Nov 22, 2016 at 8:28PM

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The shoe retailer is still dealing with falling same-store sales, but it has high hopes for the near future.

The retail industry has gone through tough times lately, and that has hurt DSW (DBI 1.29%). The footwear and accessories retailer has lost more than half of its value since late 2013, and coming into Tuesday's third-quarter financial report, DSW investors weren't certain that the company would be able to rebound as strong as they had hoped to see. DSW's results were mixed, with unexpected weakness in its top-line figures, but efforts to boost its profitability paid off. Let's look more closely at how DSW did and what it sees ahead.

Image source: DSW.

DSW gets into stride

DSW's fiscal third-quarter results were generally solid. Sales climbed by 4.7% to $697 million, which was slightly slower than the 7% growth rate that most investors were looking to see. However, adjusted net income jumped 16% from year-ago levels to $41.7 million, and that worked out to adjusted earnings of $0.51 per share. That was $0.03 per share higher than the consensus forecast among those following the stock.

Taking a closer look at DSW's business, it's clear that the shoe retailer hasn't solved all of its problems. Comparable sales fell once again, dropping 2%, and the company was only able to say that the decline was only half what DSW suffered in the third quarter of 2015. The Ebuys line continued to play a minor role in the business, contributing $21.3 million to the top line, or just over 3% of DSW's total revenue.

In a stark reversal to what we've seen from DSW recently, the company managed to post an improvement in its margin figures. Gross profit margin was up more than half a percentage point on an adjusted basis, with DSW explaining that less extensive clearance markdowns and a lack of an inventory valuation reserve helped to offset higher shipping costs. Incentive compensation weighed on operating profit, but excluding its impact, adjusted operating expenses improved by more than a full percentage point. Inventory was higher on an overall basis, climbing by about 8%, but when adjusted for a greater number of square feet, DSW's inventories fell by 3.5%.

DSW saw different results on a segment-by-segment basis. The DSW retail segment posted a 1.6% sales gain, while the Affiliated Business Group segment suffered a sales decline of the same percentage. Gross profit and comps were also better at the DSW division, while the Affiliated Business Group suffered more dramatic 4.6% declines in comps and saw gross margin fall.

CEO Roger Rawlins was excited about the progress that DSW has made. "This quarter reflects the first step in our return to year-over-year earnings growth," Rawlins said, breaking a string of four consecutive declines in the bottom line. The CEO attributed smart inventory and cost management for the gains.

What's ahead for DSW?

DSW also has high hopes for the future. In Rawlins' words, "Looking ahead, we remain steadfast in delivering consistent execution as we drive shareholder returns and capture market share in the long term." Overall, DSW expects to see further gains to its bottom line as a result of its initiatives.

Specifically, DSW raised its earnings guidance for the full year. The company now believes it will see $1.35 to $1.45 per share in earnings, up $0.03 from its previous guidance.

DSW has been optimistic about its stock's prospects as well. The company bought back 2 million shares during the third quarter, spending $42.7 million in the process. That brings DSW's total amount spent on share repurchases to $159 million over the past four quarters, and although that has caused DSW's cash balance to fall by nearly half, it nevertheless reflects the company's commitment to returning capital to shareholders.

DSW investors were pleased with the results, sending the stock up almost 8% in the regular trading session following the announcement. With the news, DSW now appears poised to overcome retail headwinds throughout the industry and goes into the holiday season more energized than ever. 

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends DSW. 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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