What’s Next For DSW After CEO Exit & Slumping Sales?

After setting high expectations for DSW Inc. going into the back half of 2015, analysts are now humming a different tune.

The Columbus, Ohio-based company announced Tuesday, after the market close, the seemingly abrupt retirement of its CEO of six years, Mike MacDonald, effective Jan. 1, and lower-than-expected preliminary results for the third quarter. (Current DSW CIO and EVP Roger Rawlins has been named MacDonald’s successor.)

The disappointing results and guidance reflect internal issues in the company, exemplified by the accelerated departure (within the succession plan) of the current CEO and the recent resignation of the chief supply-chain officer,” wrote Sterne Agee CRT analyst Sam Poser. “We remain neutral until we can judge what the new CEO will bring to the table.”

For the third quarter, ending Oct. 31, 2015, DSW expects revenues of $665 million, with comparable sales declining by approximately 3.9 percent and earnings per share in the 41 cents to 44 cents range. The weaker-than-expected preliminary results, the company said, “reflect the general slowing of U.S. retail traffic and weak sales within DSW’s women’s footwear category, due in part to unseasonably warm temperatures during the quarter.”

Susquehanna Financial LLLP analyst Christopher Svezia downgraded the firm’s stock to neutral and lowered his price target to $23.

It appears that the company’s sales and margin opportunity will take longer than expected given a more promotional stance in upcoming quarters, tough compares into next year and an announced CEO transition,” Svezia wrote. “While we had sensed a rough quarter, results were more challenged than anticipated.”

DSW also lowered its full-year guidance, to $1.40 to $1.50, from $1.80 to $1.90 previously.

Before the firm missed comp and revenue expectations in Q2, analysts had been quite bullish on the chain — predicting robust sales in for the second half of 2015.

The upbeat forecasts were mostly due to the firm’s opportunistic buying strategy, which many thought would benefit significantly from the West Coast ports slowdown earlier this year.

“By all accounts, there’s plenty of inventory in the channel — this plays exactly to their strategy. They’re going to have four to six quarters of unimpeded product and pricing advantages relative to the department stores,” Canaccord Genuity Inc. analyst Camilo Lyon predicted during the FN Analyst Roundtable back in July. “Come holiday season and back-to-school, they’re going to be able to use these opportunistic buys at very attractive pricing to drive traffic through the stores.”

At the time, Poser shared Lyon’s sentiments.

Lyon and Poser have since downgraded the firm — with Lyon rating the stock a hold and Poser giving a neutral rating.

Macroeconomic factors such as unseasonably warm weather in the fall and weak retail traffic trends overall were the main reasons Lyon offered for his downgrade. Elevated inventory, which has plagued other shoe companies in Q3, is also a factor, Lyon said.

Not surprisingly, we expect DSW to take corrective action with its excess inventory position and promote heavily to exit the season clean,” Lyon wrote. “As such, we fully expect elevated promotions across the retail landscape, as both off-pricers and department stores (like Macy’s) battle for traffic. DSW has taken steps to reduce its expenses by $17 million, yet it’s not enough to lessen the blow from negative comps.”

DSW’s share price was down nearly 10 percent, to $22.09, at press time.

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