Aided by solid growth across all its major categories and fewer markdowns, DSW Inc. reported profits increased 22.6 percent in the first quarter.
Earnings reached $47.4 million, or 53 cents a share. Earnings, adjusted for non-recurring gains, came to 51 cents per share, ahead of Wall Street's consensus estimate of 47 cents.
Sales climbed 9.4 percent to $655 million, ahead of the Street’s target of $653.4 million. Comparable sales increased by 5.1 percent compared to last year's decrease of 3.7 percent.
Transactions for the DSW segment increased in the low-single-digit range. DSW didn’t repeat an unprofitable online promotion from last year resulting in lower conversion online, but in-store-conversion rates increased. Average unit retail increased in the low-single digits, while units per transaction were flat, resulting in a low-single-digit increase in average dollar sales. Total traffic for the quarter including stores online and mobile was up 7 percent to last year.
Gross margins expanded 110 basis points. Merchandise margin increased 85 basis points. DSW’s spring assortment saw better sell through rates, which improved markdowns by roughly 155 basis points. Those gains were partly offset by lower initial markup, costs related to its rewards program and higher shipping expenses. Combined, these factors negatively impacted merchandise margins by 70 basis points.
Occupancy, distribution and fulfillment center rates for the total company leveraged by 25 basis points compared to last year. Operating expense rates delivered by 10 basis points in the quarter, with stock and incentive compensation deleverage, partially offset by the leverage of store and home-office expenses.
On a conference call with analysts, Mike MacDonald, DSW’s president and CEO, said the healthy performance came despite “challenges created by West Coast port delays.”
By category, women’s comps grew 4 percent with regular price comps stronger than clearance comps. The women’s casual and dress businesses, both most impacted from the port delays, saw solid gains. Comps for the seasonal business increased in the high single-digit range, helped by the early release of pre-buys that bolstered its sandal inventory position.
Athletic grew low-double digits in athletic, driven by fashion athletic. Said MacDonald, “We allocated more open-to-buy dollars from the casual category into athletics and provided effective marketing support to help drive our athletic momentum.”
In the Q&A session, Debbie Ferree, vice chairman and chief merchandising officer, said both the fashion and performance side of athletic are seeing “nice comp increases.” The faster grower, however, is fashion, contributing 46 percent of the athletic business versus 40 percent last year.
She added on athletic, “I am pleased with the brands that we have obviously are resonating well with our customer. And the values that we've got on those brands are resonating well. We actually don't start lapping big headwinds or big increases until Q4 of this year. So, I think we have a nice tailwind in athletic ahead of us for the next couple of quarters.”
The men's business increased comps in the low single-digit range. Growth in men's seasonal and fashion areas partly offset softness in the traditional dress areas. Men's boots saw a healthy sales increase. Accessories comped up in the low-single-digit range led by fashion accessories, hosiery and jewelry
Inventories at the end of the quarter were up 13.8 percent on a cost per square foot basis. Excluding pre-buys, inventories were up 8.5 percent on a cost per square foot. The increase in pre-buy inventory was due to the purchase primarily of fall 2015 pre-buys and a multi-season buy of hard to access brands. DSW estimated that close to half of the 8.5 percent increase related to the timing of deliveries.
With the opening of 18 new stores, DSW's store base increased by 10 percent and total square footage increased by 7.4 percent over last year.
MacDonald said the performance benefited from its ship-from-store program, which has expanded assortments for customers. A test of new endless aisle technology is taking place in 10 stores, including digital displays in five of the stores and an associate-facing mobile app in all 10 locations. Said MacDonald, “The digital displays provide extended colors, sizes, product reviews and related styles through strategically located touchscreens.”
Later this year DSW will roll out buy online/pick up in store and buy online/ship to store.
DSW continues to guide full year EPS to a range of $1.80 to $1.90. Full-year comps are expected to expand in the low-to-mid-single digits and full-year net sales to increase in the 7 percent to 8 percent range.
DSW plan to open 35 to 40 new stores this year including nine small-format stores. Full-year merchandise margin is expected to improve modestly, with lower markdowns partly offset by category mix, shipping expenses and expenses related to enhancing its rewards program. Operating expenses are expected to increase in the low-double-digit range for the full-year, driven by higher stock and incentive compensation expense.
