What do you get when you spin off a good business from one that's underperforming? Usually you get a rising stock price. And that's exactly what happened after shoe retailer DSW (NYSE:DSW) left the Retail Ventures (NYSE:RVI) nest.
The reason the company's stock price has been rising is that it's performed well, and the third quarter was no different.
Sales for the quarter increased 10%, and same-store sales rose a respectable 2.6%. The real story was in the margins, though. They were up across the board, leading to a 44% increase in diluted EPS from $0.25 to $0.36 per share (here's a full numbers breakdown). The improved performance gave management the confidence to increase its earnings guidance for the year to $1.35-$1.38 from $1.24-$1.27.
Given my affinity for spin-offs, DSW is a business I keep my eye on. Unfortunately, I haven't followed it closely enough, given it's up more than 56% since coming public, including today's rise to almost $38 per share. So a couple of things stood out in a recent interview President Peter Horvath and Chief Merchandising Officer Debbie Ferre did with Footwear News.
They have an ambitious goal of moving from a 2.5% market share to a number closer to 10%. It's always good to set goals, but that one seems to be particularly big, especially given the fragmented nature of the industry.
What's their plan of attack? Good merchandising is certainly a key, and that means getting the right merchandise for the right season and balancing brand-named products from Columbia Sportswear (NASDAQ:COLM), Guess? (NYSE:GES), Crocs (NASDAQ:CROX), and Timberland (NYSE:TBL) with a new private label collection.
It also means opening new stores in new markets and continuing to be opportunistic with its leased operations, like those inside department store Stein Mart (NASDAQ:SMRT). But the most important thing, in my opinion, is to continue to be known as a retailer that offers customers a good experience and a good value. That's why its loyalty program is a key component.
The company continues to generate lots of free cash flow, but a thumbnail valuation leads me to believe it's pretty close to fairly valued -- especially considering the stock price was up more than 10% this morning. Perhaps if I keep my eyes open a bit more, I'll catch an opportunity on a dip.
For more from the sultans of shoes, check out:
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Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. He is currently ranked 84 out of 13,678 investors in Motley Fool CAPS. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.
