DSW Inc. took a significant impairment charge for Ebuys, an off-price online retailer acquired early last year, while also reducing its outlook for the year due to shortfalls at Ebuys and the impact of weather.
Shares of DSW were down $2.98, or 13.2 percent, to $19.55 Tuesday on the New York Stock Exchange.
The latest quarter included pre-tax charges totaling $52.7 million, or 40 cents per share, to cover almost all of the remaining goodwill intangible assets and contingent consideration liability of Ebuys.
On its third-quarter conference call, Jared Poff, CFO, said that since acquiring Ebuys in February 2016 it has encountered challenges in sustainably sourcing goods at the right cost that support the economics of its legacy business model. The impairment reflects a revision of its growth expectations since the acquisition.
“We still believe Ebuys experience and expertise operating on multiple marketplaces simultaneously and serving customers across the globe as valuable and unique,” said Poff. “To that end, we have installed new leadership at Ebuys and are deeply evaluating this model go forward and how it best fits within DSW’s growth strategy, while simultaneously aiming to shore up the operating losses of this business.”
DSW paid $62.5 million for Ebuys, the parent company of retail sites, ShoeMetro and ApparelSave, with a presence in North America, Europe, Australia and Asia.
The charge caused net income in the quarter to tumble 92.4 percent to $4 million, or 5 cents per share, down from $47 million, or 47 cents, a year ago.
Adjusted net income declined 13.9 percent to $35.9 million, or 45 cents, from $41.7 million, or 51 cents a share, in the same period a year ago. Results were below Wall Street’s consensus estimate of 53 cents. DSW estimated that the weather pulled down earnings by 5 cents a share in the quarter.
“Much of our core business performed in-line with expectations this quarter, despite an unusually severe hurricane season which impacted comps and earnings,” said Roger Rawlins, CEO, “Additionally, cold weather related product struggled to gain the traction we had anticipated; however, tight inventory management protected our bottom line from excessive markdowns and we ended the quarter with inventories below last year.”
In the quarter ended October 29, sales increased 1.7 percent to $708.3 million. Wall Street was expecting $709.7 million on average.
Comparable sales decreased 0.4 percent with a negative impact of 50 to 60 basis points from hurricane disruption. Footwear comps increased in the low single-digit range. Accessories declined in the low-teens.
“Mostly, comps consistent were consistent with softness during the middle of the quarter as temperatures turned unseasonably warm during our important September and October boots selling period. With the onset of more seasonal conditions, sales have improved starting with the back half of October,” said Poff. “While we were disappointed with this slowdown, our conservative position and inventory liquidity gave us flexibility to manage receipts and in the quarter at 3 percent per square foot below last year.”
Comps exclude its two locations in Puerto Rico, which remain closed due to Hurricane Maria. The hurricanes overall negatively impacted comps by approximately 50 to 60 basis points.
Reported gross profit decreased by 120 basis points due to its market share initiative, higher shipping expenses and costs related to the integration of Ebuys. Reported operating expenses, as a percent of sales, increased by 20 basis points, with higher technology and marketing expenses offset by lower overhead costs.
Poff noted that while weather posed some challenges during the quarter, DSW was encouraged with the progress in several key growth initiatives.
For the second quarter in a row, DSW achieved Its target for the women’s business with demand better balanced between women’s athletic and non-athletic assortments. Added Poff, “We have started to chase receipts in women’s footwear and are pleased with the results of our seasonal transition strategy.”
Online growth jumped 26 percent. Said Poff, “Our recent site redesign, growth in drop-ship and enhancements to inventory mobility drove a significant increase in online conversion and set new records for digital demand this quarter. In addition, demand on our mobile sites grew at a very strong rate with the number of active monthly active users tripled to last year.”
Its Power 25 group of stores exceeded the balance of the chain this quarter. Added Poff, “Given the disproportionate importance of our Power 35 group, we are excited with these results and will remain keenly focused on driving this momentum “
Kids exceeded plan and delivered strong positive comps as the category anniversaried its Phase 1 rollout this year. Demand across all categories was strong from both new and existing customers in kids. Currently, 60 percent of its warehouses have DSW kids and it plans to roll the category out to the balance of the chain by back-to-school 2018.
DSW updated its full year outlook for adjusted earnings in the range of $1.40 to $1.45 per diluted share to reflect lower expectations for Ebuys and the impact of weather related disruptions this quarter. Previously, adjusted earnings were expected in the range of $1.45 to $1.55 per share.
Photo courtesy DSW
