DSW Inc. (NYSE:DSW) said athletic shoes again delivered strong gains in the first quarter, encouraging the chain to take more steps to become a key shoe destination for the athleisure customer.
But the athletic gains were not enough to offset widespread weakness in other categories, causing the off-price shoe chain to fall short of Wall Street targets. Management also sharply lowered its full-year guidance and said it was launching an expense-reduction program.
Adjusted earnings are now expected to come in the range of $1.32 to $1.42 a share, down from guidance of $1.54 to $1.64 previously and compared to $1.54 in 2015. Comps are now expected to decline 1 to 2 percent after being expected to expand 1 to 2 percent. Gross margins, which were projected to be flat, are now expected to decline 100 to 150 basis points.
“We believe this is the prudent thing to do as we work to improve how and what we buy, where we allocate goods and how we execute in the field,” said Roger Rawlins, DSW’s CEO, of the revision on a conference call with analysts. “This decision will help us manage inventories, expenses and capital investments as we continue to make progress through the back half of the year.”
Excluding non-recurring charges, earnings in the quarter ended April 30 fell 30.8 percent to $32.8 million, or 40 cents per share, missing Wall Street’s consensus estimate of 46 cents.
After pre-tax charges of $4.5 million, or 4 cents a share, from purchase accounting, transaction costs and fair market value accounting charges resulting from the acquisition of Ebuys, net income was $30 million, or 36 cents.
Sales increased 3.9 percent to $681 million, including $15.1 million from Ebuys. Comparable sales decreased 1.6 percent compared to last year’s increase of 5.1 percent.
After a strong early start, sales weakened measurably in late March through the balance of the quarter. Comps of the DSW segment decreased 1.4 percent. Transactions increased 1 percent in the quarter, offset by a 2 percent decline in average dollar sale. Regionally, cold weather regions outperformed the chain while warm weather regions underperformed the chain.
On the call, Debbie Ferree, DSW’s vice chairman and chief merchandising officer, said athletic “significantly outperformed” at the DSW chain with a mid-teens comp increase.
“The athletic category continues to show remarkable momentum,” Ferree said. “Our athletic penetration is running 200 basis points higher than last year, led by new offerings in fashion and performance athletic.”
DSW is also extending the active trend into women’s non-athletic with an expansion of athletic-inspired casual offerings.
“We have no doubt this business is on track to achieve record levels this year,” Ferree said. “Working with our branded partners, we’re capitalizing our already strong fashion athletic assortment to transform DSW as an important destination for the athleisure customer.”
In other categories, weakness was seen in casual sandals, closed-up dress, women’s evening and men’s casual. Women’s dress and casual sandals comped up in the low-single-digit range with the strength in the category primarily during pre-Easter. With casual sandals slowing down post-Easter, inventories are being repositioned appropriately and expected to lead to margin pressure in the second quarter.
Comps in the traditional women’s categories declined in the quarter “as we navigate what could be a long-term shift toward the active comfort casual space,” Ferree said. She added, “We will measure our progress in women’s using the combined results of our athletic and non-athletic businesses.”
Men’s saw a mid single-digit comp decline to account for close to 100 basis points of its first-quarter comp decline. Dress was positive in men’s but the casual trend was softer than expected with a similar shift into athletic fashion. Added Ferree, “We will continue to look for new brands and products that will infuse freshness and growth into the men’s casual category.”
The accessory category delivered a mid-single-digit comp decline but an increase in gross margin dollars with some regained momentum in handbags.
Companywide, adjusted gross profit decreased 250 basis points due to higher markdowns and the addition of Ebuys. Adjusted operating expense rate deleveraged by 90 basis points due to increased marketing spend, technology investments and higher corporate expenses.
Beyond increasing the number of brands within the contemporary, better and athletic space, Rawlins said DSW is working with its vendor partners to bring in a larger number of exclusives to its mix. Closeout products are also being added to strengthen its value offering. In the first quarter, its closeout penetration increased 60 basis points to 12 percent. Finally, increasing private-label offerings will be a focus, including launching a new men’s brand.
Other initiatives include focusing on bringing consistent assortments across its store base, fully leveraging its omni-channel capabilities such as buy online pickup and buy online ship to stores, and launching kids footwear to half the chain after a successful test.
Rawlins, who was promoted to CEO at the beginning of the year, also noted that after having invested in technology, new stores, marketing and support services, sales have grown, but expenses have expanded at a faster rate. As a result, DSW has initiated a process to streamline its organizational structure, increase transparency and establish direct accountability across the business resulting in a number of organizational changes.
“We will continue our journey in the second quarter as we conduct a comprehensive assessment of our organizational needs and processes in order to leverage our teams, do more with less and focus on fewer priorities,” Rawlins said. “We expect these changes to improve earnings and more importantly, reinforce DSW’s competitive position in a rapidly changing environment.”
