DSW Turns in Solid Quarter Despite Weather Woes

The weather wasn’t kind to DSW Inc. in the first quarter, but the firm was still able to come out above analysts’ expectations.

“For them to have superseded last year’s earnings results is pretty remarkable, considering they put up a negative comp,” said Steven Marotta, senior equity analyst at CL King & Associates. (Comparable-store sales declined 2.4 percent as overall sales rose nearly 7.7 percent to $601.4 million.)

Although the cold start to spring in key parts of the country put a damper on DSW’s sales, Marotta said pent-up consumer demand in April helped turn things around.  “Given how tepid traffic has been in the first quarter, this earnings number just shows their deftness to outside factors,” he said.

DSW President and CEO Michael MacDonald noted in a conference call that the retailer adjusted inventories as soon as the weather began to change in key markets. “We responded very quickly and decisively to this dramatic turnaround in weather,” he said, adding that the firm focused more on open-toe looks in its marketing.

Camilo Lyon, analyst at Canaccord Genuity, said operational moves were key to DSW’s ability to recover in the quarter. “They exhibited very strong expense control and inventory management,” he said.

The chink in the armor for DSW was its luxury initiatives, which didn’t pan out as the retailer had hoped.

“Whether [the retailer has] an offering that’s successful within luxury brands remains to be seen,” Lyon said. “Clearly, there’s a lot of learning that needs to be done for [that category] to become a successful contributor to the business model.”  

According MacDonald, the company’s efforts for the balance of the year will concentrate on reducing its higher-end inventory and overhead related to Luxe810. “Our future approach to the luxury category will depend on our ability to buy the right mix of product, in quantities that we can digest and at costs that will allow us to at least break even in this business,” he said.

Notwithstanding DSW’s early disappointment in the category, the company maintains it is still important to have a presence in luxury because it presents an opportunity to broaden the consumer base.

“By selling luxury product, we advance ourselves in conversations with other better and prestige brands, who, today, don’t sell to us,” MacDonald said.

The retailer reported net income of $34.5 million, or 75 cents a share, compared with $39.9 million, or 89 cents, in the same period a year ago. (The company’ results were negatively impacted by the luxury initiative.)

On an adjusted basis, however, earnings per share were $1, beating the Street. (Analysts polled by Yahoo Finance had expected earnings of 90 cents.)

Looking ahead, the firm increased its full-year guidance and now expects EPS of $3.40 to $3.60, on flat to 2 percent comp-sales growth.

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