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DSW Makes the Most of a Tough Holiday Season

By Dan Caplinger - Mar 15, 2016 at 10:33AM

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The shoe retailer's earnings dropped, but not as much as expected.


Image source: DSW.

The retail sector has been under pressure lately, and many companies have had difficulty during the most recent holiday season. DSW (DBI 2.15%) specializes in shoes and other accessories, and its stock fell sharply throughout the last half of 2015 as investors worried about the prospects for the industry generally. Even though shoe sellers like sports-oriented Foot Locker (FL 0.75%) had released encouraging earnings reports, DSW investors came into Tuesday's fiscal fourth-quarter financial report bracing for significant declines in earnings. As it turned out, the company's results weren't as bad as some had expected. Let's take a closer look at how DSW did last quarter and what's ahead for the company in the future.

DSW finds some top-line growth
DSW's fiscal fourth-quarter results didn't blow the lights out, but they were still stronger than the industrywide picture would have suggested. Revenue grew 5% to $672 million, which was far better than the consensus forecast for roughly flat sales compared to the year-ago holiday quarter. On the bottom line, net income was down more than 60% to $11.8 million. But earnings of $0.14 per share were still double what investors had expected to see from the company, helped by a reduction in outstanding shares.

Looking more closely at DSW's numbers, comparable-store sales rose at a modest 0.7% rate. That compared unfavorably to Foot Locker's nearly 8% rise in the same quarter and reflected the relative popularity of the athletic niche compared to DSW's more broad-based footwear approach.

Results at DSW's two primary segments showed relatively uniform growth within the company. The core DSW segment, which makes up almost 95% of sales, saw revenue rise 4.9%. The Affiliated Business Group, under which DSW supplies footwear to nearly 400 leased locations in the U.S., posted a 7% increase in sales. ABG's comps were relatively strong at 4.1%, but that part of the business has gross margins that are much lower than what the core DSW segment produces. Promotional activity during the holiday quarter squeezed those margins companywide, costing DSW about 3 percentage points in gross margin to 29.3%.

For the most part, DSW's fourth-quarter figures mirrored what happened throughout the year. Revenue gains for the year of 5% matched the quarterly performance, and comps grew 0.8%.

CEO Roger Rawlins nevertheless focused on the positives from the period. "We acted quickly to drive sales and gain market share," Rawlins said, "in the face of a challenging retail environment." He also noted that even though promotions cut margins, he believed "they were the right steps to expand our customer base and exit the year with a clean inventory position."

Looking ahead for DSW
DSW also celebrated some big strategic moves during the year. The company opened 40 new stores in the U.S. during 2015, along with 11 new Town Shoes DSW locations in Canada. Digital demand has been strong, and customers have responded favorably to the in-store pick-up option. With the DSW.com website now better optimized for search engines, the company believes that it's moving forward aggressively to capture greater market share.

The optimism shows in the company's guidance. DSW expects to grow revenue between 8% and 10% in the current fiscal year, and comparable-store sales growth should accelerate slightly to a range of 1% to 2%. Earnings of $1.54 to $1.64 per share would compare relatively favorably with the current consensus forecast for $1.57 in earnings for the year.

Much of the revenue growth will come from DSW's recent purchase of e-commerce off-price footwear retail specialist Ebuys. With a presence across the globe, Ebuys could extend DSW's market into untapped geographical areas, and DSW expects about $100 million in sales from the unit during fiscal 2016. Given that Foot Locker and other rivals have tapped the online segment quite strongly, DSW's move will be vital to keep up with its peers.

DSW shares reacted positively to the news, climbing about 3% in the first hour of regular trading following the announcement. Conditions in retail could remain tough for a while, but DSW is taking steps to secure its future growth and continue looking forward in its strategic vision.

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Stocks Mentioned

Designer Brands Inc. Stock Quote
Designer Brands Inc.
DBI
$12.81 (2.15%) $0.27
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$24.71 (0.75%) $0.18

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