The decline sent DSW to lows that investors haven't seen since 2010:
DSW's first quarterly report of the year, released in March, showed a painful 7% decline in comparable-store sales over the key holiday shopping period. However, the shoe retailer benefited from a mix of cost cuts and higher prices that protected overall profitability. In fact, gross margin increased by half a percentage point to 25% of sales in the fiscal fourth quarter. As a result, adjusted net income shot higher by a healthy 43%.
From there, operating trends didn't rebound as much as management had hoped. DSW announced in May that comparable-store sales fell by 3% even as gross profit margin worsened. "First-quarter sales were challenging," CEO Roger Rawlins said at the time. Shareholders sent the stock down over 10% in the days following that quarterly report.
The deteriorating customer-traffic trends in the retail industry have put DSW in a tough operating position; it needs to ramp up costly investments in its online sales channels to position itself for growth. Some of the funds will come from sacrificing its physical expansion, since DSW is scaling back on new store openings and in-store remodels.
The good news is that Rawlins and his team still believe they'll generate between $1.45 and $1.55 per share in earnings for the full year. Comps will be at the low end of their guidance range, though, they warned in May. In the meantime, investors are likely to be pessimistic about this stock, at least until it becomes clear that the business has stabilized.