Analysts Eye Kids’ Launch At DSW Ahead Of Q2 Earnings

Columbus, Ohio-based shoe retailer DSW Inc. is set to report its second quarter earnings Tuesday, before market open.

It’s been a big summer season for the company, which signed a deal with Apparel Group to open 40 new stores in the Middle East. The firm also announced it was getting into the kids’ shoe business in at least 200 of its U.S. locations and online. Here’s what to note ahead of Tuesday’s release.

Last Quarter: DSW reduced guidance after significantly missing Wall Street expectations on sales and profits.

• New Guidance: Full-year diluted earnings per share to range from $1.32 to $1.42 per share, down from $1.54 to $1.64 per share; 6 percent revenue growth, previously 8 percent to 10 percent; comps decline 1 percent to 2 percent, down from 1 percent to 2 percent growth.

• Results: Net income for the first quarter of 2016 declined 37 percent, to $30 million, or 36 cents per diluted share, from the year-ago quarter when net income was $47 million, or 53 cents per diluted share. Analysts expected the firm diluted earnings per share of 46 cents. DSW’s sales rose to $681 million, while comparable store sales slipped 1.6 percent. Market watchers expected sales of $700 million and flat comps.

This Quarter: Analysts are watching to see how comparable store sales, inventories and specific categories performed.

• Street Expectations: Analysts expect DSW to post diluted earnings per share of 30 cents and $657.5 million in sales.

• Top Issues: DSW is up against easier numbers this quarter and should beat them, but larger macro troubles in the market could prove to be a challenge in the long term. Competition from e-tailers such as Zappos and Amazon, and a shifting consumer, is a concern. Steve Marotta, analyst at CL King & Associates, said his top areas of concern were comparative store sales, how inventories were shaping up in relation to sales and margins, and general “pace of business” issues.

Analysts are also carefully watching the children’s launch. Camilo Lyon with Cannacord Genuity suggested that slow-moving summer sales means DSW could have marked-down merchandise earlier, which would eat into margins. He added, “While the addition of kids footwear to 200 stores likely helped drive additional sales, we wonder if it was dilutive to overall [average selling price] and gross margin. In addition, the increase in private label will likely also compress ASPs. In our view, it will be important for the new leadership team to show why its new strategies won’t be dilutive to overall ASPs while at the same time sacrificing margins to drive traffic.”

Jeff Van Sinderen at B. Riley & Co. said his attention was also focused on category performance, including kids. “We believe that athletic had the strongest metrics in Q2, and we will be particularly attentive to the results of the kids launch and BTS, as the company is focused on margin dollars, as opposed to margin rate,” he said.

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