Analysts Say Investors Overreacted To DSW’s Q2

DSW
A DSW storefront.
Courtesy of DSW Inc.

It was hard to miss DSW Inc.’s decline in early and mid-day trading Tuesday, when U.S. markets — and major shoe players — experienced a short rally.

Immediately following its Q2 earnings release, the Columbus, Ohio-based footwear-and-accessories retailer’s stock took a dive, eventually falling more than 11 percent, hitting a 52-week low of $27.27 on Tuesday.

But analysts say investors’ reaction did not match the company’s second-quarter performance.

Susquehanna Financial LLLP analyst Christopher Svezia reiterated a positive rating on the stock and said that while “in-line results can be disappointing, yesterday’s reaction certainly feels overdone.”

“We point to a few things likely driving this reaction: comp decelerated to 1.8 percent, versus 5.1 percent in 1Q; product-margin gains were more subdued, at 100 basis points; and the aforementioned, along with an in-line 2Q, adds more pressure against strong 2H15 compares,” Svezia wrote in an Aug. 26 note.

DSW reported an increase of 7 percent in revenues, year-over-year, to $627 million, and net income of $37.6 million, an 11 percent rise. Revenues missed Wall Street’s forecast, while its EPS was in line with predictions.

“During a slew of mixed-to-weak retail earnings reports,” Svezia said, “we don’t feel an 11 price [share price] drop is justified.”

Sterne Agee CRT analyst Sam Poser also maintained his buy rating on DSW’s stock and said investors might be disappointed with DSW’s same-store-sales in Q2 but largely “missed the bigger picture” in the sell-off.

“DSW is now running a much cleaner and healthier business than in years past, and the high end of management’s guidance is achievable,” Poser wrote yesterday. “Improvements and efficiencies will only continue as DSW rolls out its order-routing system later in 2015 and assortment planning in 2016. We expect 2H15 acceleration as fashion trends continue to improve.”

Although CL King & Associates analyst Steve Marotta rates the firm’s stock neutral, he shared Poser and Svezia’s sentiments on investor overreaction.

“A combination of factors compels us to be slightly more optimistic compared to previous periods,” Marotta wrote on Aug. 25. “First, the stock was seemingly over-punished for the sales miss. While we have some concerns about new-store productivity and comp consistency, the stock reaction appeared more vicious than we would normally expect.”

Marotta added that he expects SG&A expenses to lever in FY16 after two years of deleverage, “a dynamic often acting as a positive catalyst to valuation multiple.”

DSW’s share price was up approximately 3 percent at press time Wednesday.