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Will Cannabis Products Drive Shoppers to DSW's Stores?

By Leo Sun - Updated Apr 20, 2019 at 9:53PM

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The footwear retailer starts selling more CBD-infused personal care products across the US.

Check out the latest DSW earnings call transcript.

Last fall footwear retailer DSW ( DBI 5.69% ) tested out sales of Green Growth Brands' Seventh Sense CBD-infused muscle balms, body lotions, body washes, and foot creams at 10 of its stores. CBD is the nonpsychoactive ingredient in marijuana that treats pain.

DSW stated that 74% of Seventh Sense's products that were placed on its shelves were sold. Based on that strong initial demand, DSW plans to sell nearly 55,000 more units of Seventh Sense's CBD products across 96 of its 515 U.S. stores. The recent passage of a U.S. farm bill legalizing CBD derived from hemp allows retailers like DSW to test out sales of new CBD products in their stores.

A marijuana leaf on a table.

Image source: Getty Images.

DSW CEO Roger Rawlins cited North America's "widespread adoption" of CBD-infused products as an example of shifting consumer behavior across the retail industry. But will these products drive a significant number of shoppers to DSW's stores, or is this just another headline-grabbing attempt to ride the coattails of the cannabis market?

DSW doesn't need CBD to survive

In recent years DSW struggled against tough competition from bigger retailers and e-tailers, the bankruptcies of major footwear retailers, and top footwear brands launching their own brick-and-mortar stores and direct-to-consumer channels. DSW tried to offset that slowdown with acquisitions, but many of those purchases failed to generate sustainable returns.

DSW realized that it needed to streamline its business to survive. It divested weaker subsidiaries like the e-commerce site EBuys, the footwear chain Gordmans, and Town Shoes' namesake brand (but retained its Shoe Company and Shoe Warehouse stores). It renovated its stores, offered a wider selection of shoes, and tested out shoe repair, manicure, and pedicure services at several locations to bring in more shoppers.

A woman shops for shoes.

Image source: Getty Images.

DSW also expanded its e-commerce ecosystem and loyalty program, which now reaches over 25 million members. All those efforts clearly paid off over the past year, as its comps growth accelerated and its gross margins expanded.

 

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Comps growth

1.3%

2.2%

9.7%

7.3%

Gross margin

26.5%

28.9%

32.1%

32.6%

Operating margin

4.7%

5.4%

3.1%

6.4%

Source: DSW quarterly reports.

DSW's growth is especially remarkable compared to that of its industry peers. In their most recent quarters, Shoe Carnival's ( SCVL 2.86% ) comps rose 4.5% with a gross margin of 30.2%, while Foot Locker ( FL 0.11% ) reported 2.9% comps growth with a gross margin of 31.6%. Analysts also have a much rosier outlook for DSW than Shoe Carnival or Foot Locker.

 

YOY revenue growth

YOY earnings growth

DSW

14%

13%

Foot Locker

2%

9%

Shoe Carnival

1%

8%

Next fiscal year's estimates. Source: Yahoo Finance.

In other words, DSW isn't selling CBD products as an eleventh hour effort to boost its sales. Instead, this is merely part of the retailer's broader push to sell a broader range of non-footwear products and services to attract more shoppers.

But CBD could attract some shoppers

DSW's ability to sell nearly three-quarters of Seventh Sense's stocked products clearly indicates that consumer interest in CBD-based personal care products is climbing. That's why it wants to bring the products to nearly a fifth of its U.S. locations.

This rollout won't move the needle for DSW on its own, but it clearly indicates that the retailer wants to boost its store traffic and sales per customer with new products. Therefore we could see DSW launch other niche personal care products in the future -- which could widen its moat against competing retailers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Designer Brands Inc. Stock Quote
Designer Brands Inc.
DBI
$13.94 (5.69%) $0.75
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$44.64 (0.11%) $0.05
Shoe Carnival, Inc. Stock Quote
Shoe Carnival, Inc.
SCVL
$38.81 (2.86%) $1.08

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