DSW Q3 Mixed, Women’s Refresh in the Works

Market watchers applauded DSW Inc.’s prudent approach to costs and inventory management in the third quarter, but cited weaknesses in the women’s business.

“They managed their expense structure incredibly well in the face of underwhelming [comparable-store sales] and gross margins,” said Camilo Lyon, an analyst at Canaccord Genuity. 

Analysts said the Columbus, Ohio-based company was able to move quickly to address operational issues amid increasing competition and tepid consumer confidence.

“It’s a tougher environment, but they managed very well under the circumstances,” said Christopher Svezia, an analyst with Susquehanna Financial Group. “Inventory was well controlled, expenses were well controlled. Their inventory is clean going into the fourth quarter.”

DSW CEO Michael MacDonald noted the striking similarities between the first and third quarters, which were marked by unseasonable temperatures and weaker sales trends.

“We weathered another choppy and unpredictable quarter in terms of its volatile sales patterns, but … we adjusted quickly and effectively to rebalance inventories and adjust expenses in line with the changing sales trends,” he said in a conference call last week. The executive added that he was encouraged by the improvement in traffic and sales at the end of the quarter after a delayed start to the fall selling season.

Also impacting results was the partial U.S. government shutdown in October. “Not surprisingly, our sales trends were weak. We responded by taking selective price reductions and sharpening our value messaging to the customer,” MacDonald said.

Speaking to the overall business, Lyon said, “Given the promotional landscape, it seems as though there could be some doubt as to the value proposition DSW has to its competitors [particularly department stores].” He added, “Focusing on their women’s business is key. They are missing on key parts of the fashion trend, and it’s too important a part of the business to continue to underperform.”

DSW announced plans to put its women’s footwear segment under the microscope and make adjustments to stimulate growth following the disappointing 5 percent comp-sales decline for the quarter. “The casual business was working for a while and suddenly it’s not,” Svezia said. “Management needs to go back to the drawing board and decide what they need to do.”

The retailer saw earnings and sales rise for the third quarter, but revenues fell short of analyst estimates. Net earnings were $55 million, or 60 cents a share, compared with $50 million in the year-ago period. The retailer posted a 6.8 percent increase in third-quarter sales to $633 million, below analyst estimates of $647 million.

DSW opened 16 new stores during the quarter, including two small-format units, bringing the overall store count to 393 doors.

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