Sit down, slip this on, and feel for your toe. Not sure? Not ready to buy just yet? Well, walk up and down the aisle a few hours. By tomorrow afternoon, DSW (NYSE:DSW) will have its Q1 2006 earnings report out, and you'll know if it's a buy.

What analysts say:

  • Buy, sell, or waffle? Five analysts follow DSW. Three of them call the stock a buy, and the other two a hold.
  • Revenues. On average, they're looking for 14% sales growth tomorrow, to $320.6 million...
  • Earnings. And for profits to more than double, with $0.35 per share.

What management says:
DSW has no intention of slowing its growth. In its last earnings report, the company cited plans to open a total of 30 stores this year, four of which were already open (plus three leased shoe departments) at the time of the fiscal 2005 earnings report. Existing stores, meanwhile, are predicted to grow their comparable-store sales by 3% to 5% this year. DSW aims to earn $1.22 to $1.25 in profits per diluted share on its sales, which would equal 22% to 25% in profits growth.

For more details on the fiscal year that was, read fellow Fool Jeremy MacNealy's write-up on the April news right here.

What management does:
Jeremy was considerably impressed with last quarter's results. But when I look at the trends in DSW's margins, reflected below, I remain underwhelmed. Rolling gross margins are still not back to where they were 18 months ago. And operating margins look glued to the 6% level, with net margins just a little more than half that.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

28.5

28.1

28.3

28.0

27.5

27.6

Op.

5.8

5.9

5.8

6.0

5.9

6.1

Net

3.3

3.6

3.4

3.3

3.3

3.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
For DSW to realize the "strong growth potential through new store rollout, comp store sales, and margin expansion" that it was promising a few months ago, the company needs to do two things: get some pricing power so that it can expand its gross margins, and control costs. Over the last six months, DSW grew sales by an impressive 19% year over year. But in the case of both cost of goods sold (COGS), and selling, general, and administrative expenses (SG&A), the company found itself incapable of capitalizing on the sales success by achieving its hoped-for margin expansion. Both COGS and SG&A outpaced sales growth at 20%, contracting margins as a result.

On the big picture, however, I agree with Jeremy: DSW has potential. Consumers clearly like its goods, as we can see on the balance sheet, where inventories grew only 10% in the last six-month period -- about half the rate of sales growth. And although it's true that accounts receivable nearly doubled during this same period, A/R makes up a very small portion of sales. Therefore, the rise in this metric probably shouldn't be given undue weight. That said, we'd hardly be unhappy if that discrepancy disappeared in tomorrow's results.

Competitors

Suppliers

Bakers Footwear (NASDAQ:BKRS)

Brown Shoe (NYSE:BWS)

Federated Department Stores (NYSE:FD)

Steven Madden (NASDAQ:SHOO)

Payless Shoesource (NYSE:PSS)



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Fool contributor Rich Smith does not own shares of any company named above.