Believing the store closings across retail are working in its favor, DSW Inc. reported second-quarter earnings that handily topped Wall Street estimates while logging its first quarterly same-store gain since 2015.
The footwear off-pricer still kept its earnings guidance for the year, although most analysts had been setting their annual earnings targets at the lower end of DSW’s outlook.
Shares of DSW on Tuesday jumped $2.74, or 18.4 percent, to $18.43 Tuesday on the New York Stock Exchange.
On a conference call with analysts, Roger Rawlins, CEO, said the results show DSW’s strategy of product differentiation and customer centricity is resonating with DSW customers. Particularly encouraging was its largest category, women’s, which turned positive in the quarter and marked the first time women’s achieved its original plan since 2014.
DSW also saw a mid-single-digit comp increase in regular-price product “during a typically clearance-dominated quarter.” At the same time, DSW reduced clearance markdowns and ended the season with 10 percent less inventory.
“We competed effectively during one of the largest promotional events this quarter, and with the successful expansion into categories by kids and athletics, we have increased our ability to capture market share of new customers,” said Rawlins. “We saw a sequential improvement across all selling metrics, and with disciplined expense management, our operating profit improved to a healthy rate. As you can see, our first half results give us confidence that we are on the right track.”
In the quarter ended July 30, adjusted net income climbed 5.2 percent to $ 30.6 million, or 38 cents per share, from $29.1 million, or 35 cents, a year ago. Wall Street’s consensus estimate had been 29 cents.
Net earnings reached $28.6 million, or 35 cents per diluted share, including pre-tax charges totaling $3.2 million, or 3 cents per diluted share, related to the acquisition of Ebuys, restructuring costs and foreign exchange loss. In the year-ago period, net earnings were $25 million, or 30 cents a share, after non-recurring charges.
Sales increased 3.3 percent to $680.4 million. Same-store sales inched up 0.6 percent compared to last year’s 1.2 percent decrease. The last time it showed an increase in same-store sales was the fourth quarter of 2015.
“We extended the positive momentum from April into the second quarter with a sequential improvement across all selling metrics,” said Jared Poff, CFO, said on the call.
Gross margins at the DSW segment improved 120 basis points to 30.6 percent, driven to improved sourcing, less clearance, and lower markdowns. The unfavorable impact from reserve adjustment and inventory management and Ebuys however reduced this gain to a 50 basis point increase for the second quarter. Merchandising margin improved to 44.1 percent from 43.1 percent.
Including sales from its ABG leased-department segment, gross margins improved to 28.9 percent from 28.4 percent.
Reported operating expenses as a percent of sales improved by 10 basis points to 21.9 percent, with higher selling and technology expenses offset by lower overhead costs.
Inventories were $527 million compared to $556 million for the same period last year. Excluding Ebuys and Gordmans, inventories decreased 10 percent on a cost per square foot basis.
Among categories, athleisure continued to outperform with growth in both performance and fashion athletic areas. Poff said on the call, “We are putting exciting new athletic-inspired fashion into the assortment with new brands and exclusive offerings to feed the strong demand.”
Asked if the weakness in athletic footwear cited by other chains is impacting DSW, Rawlins said the chain has long been underpenetrated in the category and that’s partly DSW continues to gain market share in t athletics. Said Rawlins, ” I think a lot of the volatility that we are reading about in many other places, yes, that’s something we are going to monitor and manage our inventory, but we feel like we still have significant market share that we can gain in that area, because we were so underpenetrated to where many of our competitors were.”
The positive comp in women’s was due to a strong customer response to our merchandize initiatives” with an increased mix of regular price sales. The mix included a “higher degree of freshness as its lean inventory position as the company was able to respond to increased sandal demand in the period by bringing in product.
The men’s category also posted sequential improvement in sales during the second quarter. The CFO noted that Kurt Person, who has worked for Foot Locker, Dick’s Sporting Goods and Academy Sports, has joined the company as its new GMM for men’s and athletic. Said Poff, “Under Kurt’s leadership, we will continue to reposition our men’s business with an increased distortion towards the casual lifestyle.”
Kids, now in 60 percent of its locations, continues to percent well and will reach an additional 100 locations next spring.
Among other initiatives, DSW’s website redesign has significantly improved conversion and increased mobile traffic, both of which drove a 27 percent increase in digital demand. Poff also said DSW is seeing “a strong and direct correlation between digital demand growth in a geographic market and the existence of a brick and mortar warehouse.” An increasing number of shoppers are choosing to shop online and pick-up in store and returning or exchanging online purchases at the store level.
The retailer’s Power Store initiative, which features a more tailored assortment at high-volume stores, is starting to improve conversion and comp trends. For the quarter, its power stores closed the gap with the balance of the chain, an improvement of 300 basis points of comp versus 2016’s overall level.
Rawlins believes DSW is already benefiting from efforts to deepen connections with customer, as well as its vast mix and unique in-store experience.
He added “As we’ve already have seen across multiple sectors of retail, office supply, electronics, sporting goods, at the end of the day only the strongest will survive. And DSW will be one of the few survivors in this retail consolidation.”
Rawlins also said DSW has a three-pronged approach to further differentiate its experience. The first is the launching of new rewards program that will enable its members to earn rewards quicker with additional incentives to buy more to unlock additional value. The program will also move beyond transactional-based points include services like shoe repair.
Second, DSW is rolling out a new store design after finding that its current fixture package and layout utilizes less than 20 percent of the cubic capacity of its locations. A new design being tested at a location near its headquarters in Columbus, OH increases the capacity on the floor by over 30 percent. Stated Rawlins, “The new layout enables us to tell more compelling product stories and creates room for new and exciting ways to serve previously unmet customer needs. This initiative is a cornerstone to unlocking the power of the DSW warehouse with a synchronized and efficient infrastructure that virtually connects DSW with our customer at any point.”
Finally, DSW is co-developing proprietary technology that is expected to provide store associates with more time for customer engagement by increasing operational efficiency. Rawlins elaborated, “This technology puts customer-facing data such as personalized offers, wish list, and past purchase history, all in one place, finally, enabling the customer and associate experiences to converge across all mediums.”
Photo courtesy DSW
