Fashion is fickle, and retailers trying to cater to changing consumer tastes face a constant challenge. For shoe retailer DSW (NYSE:DSW), the past several years have been tough, with the need to defend its turf from e-commerce competition at the same time that it's assessed its target markets in an attempt to identify the best growth opportunities.
Coming into Tuesday's fiscal second-quarter financial report, DSW investors would have been comfortable with only modest increases in earnings and sales. Instead, the retailer delivered stronger performance, leading many to conclude that its turnaround efforts have gained momentum toward eventual success.
The latest positive news from DSW
DSW's second-quarter results were quite good. Revenue jumped 16% to $795 million, which was a far cry from the 1% growth rate that most of those following the stock had expected to see. One-time charges pushed the company to a net loss for the quarter, but after accounting for those extraordinary items, adjusted net income of $50.9 million was 66% higher than the previous year's quarter, and adjusted earnings of $0.63 per share exceeded the consensus forecast among investors for $0.47 per share.
A substantial portion of the sales gains that DSW enjoyed came from the consolidation of the company's Canadian retail business into its overall corporate financial statements. However, with $72.5 million in revenue coming from Canada, that still left about 6% organic growth on the top line from DSW's domestic segment and its catch-all "other" category.
Fundamentally, DSW strengthened. Comparable sales, which exclude the impact of the Canada retail segment, were up 9.7%, soaring compared to the 2.2% figure that DSW had in the first quarter. A similar-size rise in comps for the U.S. retail market helped contribute to a nearly 10% jump in that segment's overall sales, and only a drop in other sales that stemmed from the retailer's decision to wind down non-core operations kept DSW's top-line growth from being even stronger. Comparable sales for the Affiliated Business Group unit were up an even sharper 12.2%, even as store counts continued to drop as part of the retailer's overall strategic shift.
CEO Roger Rawlins was happy about where DSW is. "We are thrilled to report record sales and earnings results this quarter," Rawlins said, "as our merchandise strategy and marketing investment fueled strong customer engagement, traffic, and transaction activity." The CEO also noted that the long-term connection the retailer is making with customers should turn into lifetime loyalty that will help DSW's results in the long run.
What's ahead for DSW?
Canada has been a key focus area for DSW, and the company now sees a new way forward for the region. As Rawlins explained, "After completing our strategic assessment of the Canadian marketplace, we have decided to close its smallest retail banner and focus on the three largest family footwear banners, which we believe have the most potential for future growth and profitability." That will result in the discontinuation of the Town Shoes brand, which has 38 stores, in favor of the Shoe Warehouse, Shoe Company, and DSW/Designer Shoe Warehouse concepts.
DSW also shared its enthusiasm on the guidance front for the full year. The retailer now sees earnings coming in between $1.60 and $1.75 per share, up $0.08 from its previous forecast. Revenue growth should come in between 6% to 9%, including $215 million in sales from its Canadian operations, up from expectations for a revenue decrease of 1% to 3%. Comps could rise by low- to mid-single-digit percentages, rather than the low-single-digit increase previously expected.
DSW investors were ecstatic about the results, and the stock soared more than 20% in pre-market trading following the announcement. With the retailer seemingly having turned the corner, shareholders want to see DSW take full advantage of better times to generate the profit and sales growth that they've waited to see for a long time.