DSW (NYSE:DSW) investors have been on a rough trip this year. The footwear seller's shares are down 30% since January amid struggles with declining sales and profitability.
Let's look at exactly how the stock got to this point, and where it could be headed from here.
How DSW has disappointed investors so far this year
There are a few good reasons why investors have punished DSW's stock. But let's start at the top line. Growth trends slipped into negative territory this year, with comparable-store sales clocking in at -1.5% through the first two quarters. That's not a happy position for any retailer, but at least DSW has plenty of company. Major national chains from Wal-Mart (NYSE: WMT) to Target (NYSE: TGT) have gone from comps growth in the 3% range to flat or slightly negative comps lately. Within the shoe industry, Finish Line (NASDAQ: FINL) has seen comps slow in recent quarters as well. Put in this context, DSW's experience doesn't seem especially bad.
However, the longer-term trend isn't very encouraging for DSW shareholders. The retailer's comps have been dropping for nearly four straight years, and are down significantly from the double-digit growth DSW enjoyed as recently as 2010.
As for the bottom line, profitability has held up fairly well even in the face of flagging sales growth. After hitting a high of 33% two years ago, gross profit margin slipped to about 31% of sales this past quarter. Yes, investors would prefer it if that trend reversed. But, again, almost all retailers have had to boost their promotions this year to keep customer traffic levels humming along.
What management is doing about it
CEO Mike MacDonald and his executive team have a plan to boost sales and profits back toward their historical levels. The good news for investors is that it goes beyond the basics of just getting pricing and selection back in line with what shoppers want.
While that's important, the company is also investing heavily to integrate online shopping into DSW's 400-store national footprint. Management calls this its "omni-channel" plan, and, as MacDonald said in a press release announcing last quarter's results, it should help DSW "respond to the rapidly changing customer shopping patterns and maintain our position of strength in the footwear industry."
MacDonald in August also pointed to improving trends through the early summer months as evidence that the company might have turned a corner. Comps were down, but the drop wasn't as bad as in the first quarter. And that positive momentum seemed to continue within the quarter as well. "We were encouraged by the sequential improvement in sales trends as the quarter progressed," MacDonald said.
Outlook and valuation
Those hopeful trends gave management the confidence to upgrade its full-year outlook, however slightly. A quarter ago, DSW expected negative overall comps in 2014, along with earnings of $1.52 per share. Now, that forecast sits at flat comps and EPS of $1.57, which equates to a valuation of about 19 times this year's earnings.
While that has come down significantly from the 27 forward P/E that shares were fetching last year, it still isn't particularly cheap, putting the stock about in line with the broader market valuation. That means investors buying into DSW stock at today's price have to expect business trends to keep improving, with more substantial earnings and sales growth upgrades on the way.
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.