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Could the Worst Finally Be Over for DSW?

By Dan Caplinger - May 30, 2018 at 10:33AM

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A solid quarter suggests yes, even if shareholders don't seem so certain.

Mounting a turnaround effort is always a difficult process, and investors inevitably have to deal with successes and setbacks. Shoe retailer DSW (DBI 7.91%) has had to deal with plenty of turmoil, both because of its own business challenges and due to the tough environment for the retail industry more broadly.

Coming into Wednesday's fiscal first-quarter financial report, DSW investors weren't certain exactly which way the shoe and accessories specialist would see its key business metrics go. DSW's results exceeded expectations, extending a new streak of year-over-year earnings growth and seeing sales climb higher. Yet even though the numbers suggest that optimism is warranted, not everyone seemed fully satisfied with the report.

DSW Shoe Warehouse location seen from outside the store, with parking lot on a hazy overcast day.

Image source: DSW.

How DSW kept the good times rolling

DSW's first-quarter results came in a lot better than many had feared. Revenue was higher by 3%, to $712.1 million, which was a slower growth rate than in the fiscal fourth quarter, but still better than the 1% top-line decline that those following the stock were expecting to see. Adjusted net income climbed an impressive 23%, to $31.5 million, and that worked out to adjusted earnings of $0.39 per share, beating the consensus forecast for $0.37 per share.

DSW's core numbers looked favorable. Comparable sales were higher by 2.2%, accelerating by nearly a full percentage point from their pace three months ago. Gross margin improved by nearly half a percentage point, with the company attributing the boost to its strategic decision to wind down its Ebuys business. That move created some one-time operating expenses that weighed on overall costs, and the company had to deal with foreign exchange losses, as well as some expenses related to its acquisition of Town Shoes. Yet that didn't prevent DSW from seeing real progress, with tax rate reductions playing a key role in driving profit gains.

From a segment perspective, DSW's overall game plan continued to move forward. The core DSW segment saw revenue climb 7% on a 2% gain in comps, with nine new stores opening during the period to take total square footage above 10.5 million. Yet on the Affiliated Business Group side of the company, 90 store closures sent segment sales down almost 40% despite comps growth of 5.1%.

CEO Roger Rawlins celebrated the news. "We are pleased this quarter to report our second consecutive positive comp for DSW Inc.," Rawlins said, "and the fourth positive footwear comp in the DSW brand." The CEO was thrilled to see the retailer return to revenue and earnings growth.

Can DSW keep up the pace?

One way DSW plans to keep up its positive momentum is by revamping the way it rewards its most loyal customers. The company launched a new loyalty program several weeks ago, with features that should be a vast improvement over DSW's previous program. As Rawlins put it, the "new integrated and cross-channel loyalty program," dubbed DSW VIP, "delivers a simpler points system and new benefits like shoe donations, free shipping, and points giving." The general idea is to give Designer Shoe Warehouse a greater ability to acquire and retain customers for the long run.

Yet some shareholders might have been disappointed with DSW's decision not to make any major changes to its full-year guidance. The retailer merely said that it still expects earnings to be between $1.52 and $1.67 per share. That represents growth of between 4% and 14%, but given the nice performance to start the year, DSW's apparent reluctance to project future success throughout the coming year seems to indicate some concerns that could weigh on future performance.

DSW's stock dropped 7% in pre-market trading following the announcement. It seems that there's considerable skepticism among the ranks of shareholders, and unless DSW puts together a longer-lived streak of growth, some seem to expect the possibility of a return to more challenging times in the near future.

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