DSW Reports Solid Q4, But Outlook Still Cautious

DSW Reports Solid Q4, But Outlook
DSW said more full-priced selling helped boost margins during the fourth quarter.

BOSTON — DSW Inc. profited nicely from an uptick in consumer demand late last year, and the company hopes to build on that success in 2010 — though it still offered a somewhat conservative forward guidance.

“We have the opportunity to use our strong fall season performance as a new base from which we can grow further,” Michael MacDonald, DSW president and CEO, said on the firm’s quarterly conference call, held last week. “There are risks, however. I believe the biggest risk is trying to do too much too soon.”

As a result, DSW said it expects earnings per share in full-year 2010 to be in the $1.35-to-$1.45 range, versus analyst estimates at the time for $1.40. Comps are seen increasing in the mid-single digits.

Wall Street was subsequently cautious on the firm’s shares last week. DSW’s middle-of-the-road guidance, combined with a fourth-quarter earnings miss versus analyst expectations, sent the stock down more than 10 percent last Tuesday, the day of the report. (The stock closed at $26.33 from $29.43 the prior day.)

Patrick McKeever, senior analyst at MKM Partners, wrote in a report following the earnings that “some investors may have been looking for more upbeat indications on current sales trends.” He noted that the shares already trade at a premium to his full-year 2010 earnings estimate.

Further, the analyst said for the first quarter he expects “some top-line moderation,” while also noting that DSW management was “a bit cautious about early sandal sales.”

The analyst expects comps to rise 8 percent in the first quarter. But he said that “boots drove more than half the total sales increase in the first half of 2009, and while boots seem to be becoming more of year-round product, their contribution to sales and earnings diminishes significantly as temperatures warm.”

Meanwhile, to drive sales and earnings, some initiatives DSW said it will undertake this year include “size replenishment, precision marketing, key item factorization, private brand growth, increasing offerings in extended sizes and dimensions, growing men’s accessories, providing even stronger values to our customers and undergoing store remodeling.”

The retailer also plans to bow 10 stores this year and expects its e-commerce business to continue to perform well. In addition, DSW will turn to the toning category to drive sales.

“We believe based on the numbers we’ve seen so far — which certainly does not account for all the new brands and new products that are coming in — this could be as high as 3-plus percent penetration [in sales] to our business. So we’re getting exceptionally strong sell-throughs right now. We’re very excited about it,” said Debbie Ferrée, chief merchandising officer of DSW.

The Columbus, Ohio-based value retailer said it swung to a fourth-quarter profit from a loss the prior year on a 16 percent rise in revenues. The firm had earnings of $13.4 million, or 30 cents a diluted share — 2 cents shy of Wall Street projections — compared with a loss of $7.5 million, or 17 cents, a year ago. Revenues in the quarter rose to $402.7 million, from $348.2 million, and same-store sales increased 12.9 percent.

CFO Douglas Probst said on the call that the retailer had higher regular price selling and lower markdowns during the quarter.

For the year, DSW said it earned $54.7 million, or $1.23, compared with a profit of $26.9 million, or 61 cents, a year ago. Revenues increased to $1.6 billion from $1.46 billion.

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