Four Things Wall Street Is Saying About DSW After Q4

DSW store
A DSW store.
FN Archives.

DSW Inc. upstaged market watchers’ forecasts in Q4, reported Tuesday, after aggressive promotions helped the firm drive topline growth despite a lackluster holiday across the industry.

In addition to the better-than-expected quarter, DSW’s newly appointed CEO Roger Rawlins unveiled his strategy — centered on “tempo, focus and disruption” — to ramp up growth at the firm. One aspect of the company’s latest plans, according to Debbie Ferrée, DSW’s chief merchandising officer, will involve beefing up its assortment of kids’ shoes.

Analysts had been cautious about DSW ahead of Q4’s report, but has their tone changed following the results and management’s statements?

Here are four things analysts are saying about the firm now. 

Encouraging Developments But Not Convinced

“While we think DSW is taking positive steps to pursue growth, we also recognize that these actions are likely to pressure overall merchandise margins (kids and athletic carry lower margins), and we remain cautious as competition remains heightened with off-price, family footwear, and department stores targeting similar trends and buyers.” —Citi Research analyst Kate McShane

Analyzing Ebuys Purchase & Stability Of Promotional Momentum

“We continue to have questions about the direction of [average selling prices] and the impact to DSW’s financial model. ASPs are heading in a downward trajectory due to the rise of athletic, the addition of kids, a greater focus on price/value and the increasing mix of private label and opportunistic buys. … As evidenced by Q4, traffic responded to heavy promotions around the holiday. As promotions normalize, traffic will subside. Lastly, we remain skeptical of the long-term benefit that will accrue to DSW from its purchase of Ebuys, principally because it acts in direct contrast with how DSW has cultivated strong relationships with brands. Ebuys does not build brands, rather it diminishes their value by selling on marketplace sites at highly discounted prices.” —Canaccord Genuity Inc. analyst Camilo Lyon

Margins Versus Revenues

“While a margin opportunity remains, it may take longer and be less meaningful than the current bull case presumes as DSW appears more focused on sales rather than just the margin. FY16 guidance calls for an operating margin decline including a flat gross margin with many puts and takes. As such, while margin recapture is possible, we believe earnings growth will be more dependent on sales growth and leverage than anticipated. For us to be more constructive, we need to see comp accelerate and margin inflect sooner rather than later.” —Susquehanna Financial LLLP analyst Christopher Svezia

Sustaining the “Designer” In Designer Shoe Warehouse

“In order to get better brands, DSW has decreased their initial markup requirements from designer and fashion brands. To achieve higher gross margin, DSW is shifting to private labels and brands, which represented 11 percent of sales in FY15 and are expected to represent 15 percent in FY16. We realize that buying private labels can drive a higher initial markup, but more often than not it results in lower margins. Hence, you can’t take initial markup to the bank.” —Sterne Agee CRT analyst Sam Poser