Higher Expenses Drag Down DSW

NEW YORK — Increased investments in technology and marketing, coupled with a decrease in units per transaction, took a toll on DSW Inc. during the first quarter.

“It’s another disappointing quarter,” said Patrick McKeever, an analyst at MKM Partners, who lowered his full-year earnings estimate to 16 cents a share from 22 cents after the results. “Gross margin was a bright spot,” he noted, “but selling, general and administrative expenses are under significant pressure from planned increases in advertising and IT spending. And operating margin is likely to register another sharp drop in the full year.”

Susquehanna Financial Group analyst Christopher Svezia attributed DSW’s 31 percent drop in profits to a much-needed spend on infrastructure updates, which although poorly timed with the recession, will eventually put the retailer on even technological ground with its competitors. “They’ve made significant investments in things such as merchandise allocation, size enablement and their dot-com business, which are all required systems in the footwear business,” he said. “In the longer term, they’re the right things to do, but by the time they’re going to benefit the company, we could be a couple of years out.”

The Columbus, Ohio-based retailer reported last Wednesday a net income of $7.1 million, or 16 cents a diluted share, for the first quarter ended May 2, compared with a profit of $10.3 million, or 23 cents, in the year-ago period.

Revenue for the first quarter increased by 5 percent to $385.8 million, from $366.3 million in last year’s first quarter. The company narrowed its same-store sales decrease to 4.7 percent from 5.4 percent in the first quarter of 2008.

DSW also released earnings-per-share guidance for the full year to range between 30 and 35 cents, below analyst forecasts for 46 cents. The company expects same-store sales to decline in the mid-single digits.

The firm’s new president and CEO, Michael MacDonald, also outlined his top 10 opportunities to improve sales trends during a conference call with analysts.

Some of his points included improving future store formats, implementing a size system for customers and further developing DSW’s Website. MacDonald singled out the men’s and accessories businesses as possible growth avenues.

“We need to be known for more than just women’s shoes,” he said. Beyond growing top-line revenue, he explained, “we also have opportunities to both expand margins and reduce expenses.”

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