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DSW Returns to Bottom-Line Growth

By Dan Caplinger – Mar 13, 2018 at 5:11AM

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Could 2018 be a winning year for the shoe retailer?

The retail industry has moved in fits and starts over the past several years, with brick-and-mortar businesses striving to keep up with the revolution in e-commerce. For shoe specialist DSW (DBI 0.35%), 2017 was full of high points and low points, and the key holiday season loomed large in how the company would build momentum toward the beginning of 2018.

Coming into Tuesday's fiscal fourth-quarter financial report, DSW investors were looking to see solid gains in an effort to bounce back from a tough third quarter. The shoe retailer's results turned out to be even better than most had anticipated, and it believes that strategic moves should help it refocus even more successfully in the coming year. Let's look more closely at DSW and what its latest results say about its future.

DSW store location with an empty driveway in front of it.

Image source: DSW.

DSW bounces back

DSW's fourth-quarter results were a breath of fresh air from the retailer. Sales climbed 7% to $720 million, which was a bit less than investors had expected. Yet adjusted net income of $30.5 million soared by 90% from year-ago levels, and the resulting $0.38 per share in adjusted earnings bested the consensus forecast among those following the stock for $0.27 per share.

Some one-time impacts affected the company's reported results. The fourth quarter in 2017 had an extra week compared to 2016's period, and that added $35.6 million to revenue, or about 5 percentage points of sales growth. It also boosted earnings by $0.06 per share. Conversely, tax reform dealt DSW a blow of about $10.1 million, with the revaluation of deferred tax assets costing the retailer more than it got back in the last month of the quarter from the lower corporate tax rate on income.

Fundamentally, DSW made some progress toward a recovery. Comparable sales were higher by 1.3%, reversing the year-ago 7% plunge and providing investors with some encouragement about how the holiday season went. More successful sourcing of inventory and fewer promotional markdowns helped boost gross margin by 1.5 percentage points, and operating expenses were down slightly as a percentage of sales thanks to cost control measures that DSW put in place.

DSW noted many of the milestones it reached during the year. Digital demand hit its highest level in nine years, and 2017 was the first year of rising operating profit and earnings per share since 2013. Expansion of concepts like the Power 35 and DSW Kids were important for DSW's overall business strategy, and a new store design along with tech-enhanced capabilities point toward a brighter future. Meanwhile, the continued contraction in the Affiliated Business Group segment went according to plan, even as comps were favorable for the unit.

CEO Roger Rawlins was happy with how 2017 turned out. "Our initiatives drove comparable sales growth and strong margin improvement at the DSW segment this quarter," Rawlins said, and "the sales inflection at our Power 35 locations, including our Lab store where we have introduced an elevated warehouse experience, prove our initiatives are gaining traction." The CEO also sees its efforts as helping to provide a possible roadmap for future sales growth.

What's next for DSW?

Perhaps the biggest strategic move for DSW was its decision to exit the Ebuys business. After having gone through an evaluation of alternatives for the business, DSW pulled the plug and took a one-time charge to cover the liquidation of it. The retailer expects liquidation to be complete in early 2018, helping it put Ebuys behind it and instead focusing more of its attention on its core business.

At first glance, DSW's fiscal 2018 guidance didn't look all that spectacular, but it's important to keep some key adjustments in mind. Full-year revenue will likely fall 1% to 3%, but that includes both the exit of Ebuys and the impact of having one less week in the 2018 fiscal year. Adjusting for those factors, revenue should rise 2% to 4%. DSW expects earnings growth of 4% to 14%, coming in at $1.52 to $1.67 per share on an adjusted basis. Those numbers are roughly in line with the consensus forecast among those following the stock, although it's not entirely clear to what extent they had factored in strategic moves.

DSW rewarded shareholders with a dividend boost. Citing tax reform and other cash flow-enhancing measures, the shoe retailer will now pay $0.25 per share on a quarterly basis, up 25% from its previous payout.

DSW investors celebrated the results, and the stock jumped 7% in the first hour of trading following the announcement. There's still further to go on the road to recovery for the shoe retailer, but DSW has put all the elements in place to support continued improvement in the year to come.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends DSW. The Motley Fool has a disclosure policy.

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