Overheard On Wall Street: DSW & Caleres

If you’re just coming up for air following New York Fashion Week mayhem, you’ll be happy to know that Footwear News has been keeping an eye on the markets for you.

Here, a couple of Wall Street musings we overheard this week.

DSW Inc.

DSW stirred Street chatter this week when it announced its intent to acquire off-price footwear-and-accessories e-tailer Ebuys Inc.

Analysts offered mixed commentary on the merger, which would cost DSW $62.5 million upfront.

“On the surface, this deal seems to complement DSW’s strategic efforts to increase its off-price buys by expanding its capabilities to purchase smaller odd lots of inventory DSW would not typically consider while also having a larger presence on EBay, Amazon and other marketplace sites,” Canaccord Genuity Inc. analyst Camilo Lyon wrote Wednesday. “That said, we have doubts about the long-term viability of the Ebuys business model because of its reliance on offering deeply discounted pricing on brands it sells, oftentimes disrupting vendor pricing strategies. … Now that DSW is the owner of Ebuys, there could be a direct conflict between the brands and DSW should the pricing tactics of Ebuys continue.”

CL King & Co. analyst Steve Marotta was more upbeat on the deal.

“Albeit rather small, we view the acquisition positively,” Marotta wrote Thursday. “First, the utilization of an (arguably) underutilized balance sheet is a plus. Furthermore, not only can DSW increase its vendors leverage for better terms and pricing, the company now has a unique channel to mark down (or, if necessary, purge) end-of-season inventory, the latter being accomplished with fewer messy and brand-degrading in-store promotions.”

A neutral Susquehanna Financial Group LLLP analyst Christopher Svezia upgraded his DSW price target, from $23 to $26, following the Ebuys announcement.

“[The Ebuys acquisition] should expand DSW’s digital capabilities, international reach and access to the off-price market,” Svezia wrote Thursday.

Caleres Inc.

In a note on Feb. 18, Svezia reiterated a positive rating on Caleres, which is expected to report Q4 earnings in early March.

Svezia said the firm’s “more focused and profitable sales” and the fact that it has “essentially exceeded expectations for the last 15 quarters while raising guidance as well,” are two key factors driving his confidence in the company.

“We don’t believe the recipe has changed despite flat share price performance to-date,” Svezia wrote. “Recall the recipe includes favorable comp and margin gains at Famous Footwear (comp gain in 14 of last 15 quarters) in addition to market share and distribution growth for wholesale brands.”

Svezia added, “We remain comfortable with our 22 cent Q4 earnings-per-share [estimate] and our FY16 outlook at 3.6 sales [growth] and 12.7 percent EPS growth. Ultimately, we believe Caleres is under-earning at an 5 percent EBIT margin while making the right investments to close the gap with peers by FY20.”

While Caleres pulled off a solid Q3, boosted by a 4.4 percent comparable-store-sales gain at Famous Footwear, the firm had missed Q2 revenue forecasts.


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