By Thomas J. Ryan
General consumers are still buying plenty of athletic footwear, despite also exhibiting a greater shift toward fashion styles.
Benefitting from improved gross margin, stringent expense management and continued momentum in the athletics category. DSW Inc. (NYSE:DSW) reported its first year-over-year quarterly earnings gain on an adjusted basis in five quarters. It also raised its earnings outlook for the year.
“Actions we took to strengthen the content, freshness and consistency of our assortment resulted in better regular price selling in women’s dress and casual categories,” said Roger Rawlins, DSW’s CEO, on a November 22 conference call with analysts.
One shortfall was comps, which declined 2 percent, its third straight quarter of comp declines. Strong double-digit gains in athletics weren’t able to offset a decline in boots due to mild weather in early fall. Added Rawlins, however, “In contrast to last year, we were able to manage inventories through cancellations and reorders, allowing us to enhance our merchandise margin.”
Net earnings in the third quarter eased to $39 million from $39.3 million, but improved from a per-share basis to 47 cents from 44 cents due to fewer shares outstanding in the latest period. The latest period included pre-tax charges of $3.1 million, or 2 cents per share, from the acquisition of Ebuys earlier this year and restructuring costs of $1.3 million, or 1 cent. Adjusted to exclude these non-recurring items, net income improved 6.1 percent to $41.7 million, or 51 cents, exceeding Wall Street’s consensus estimate of 48 cents.
Sales climbed 4.7 percent to $696.6 million, including $21.3 million from Ebuys. The 2-percent comp decline came against a drop of 3.9 percent in the year-ago quarter. Regular price comps were down 1 percent, while clearance comps decreased 6 percent. A low-single-digit increase in transactions was helped by an improvement in new customer acquisition. Traffic improved modestly in both offline and online channels, with store traffic turning positive during the back-to-school selling period. Average dollar sales remained below last year due to shifts in category mix, officials said. Digital demand increased in the low teens, including strong growth from its drop-ship business. DSW’s stores will fill close to 28 percent of online sales this quarter.
Athletic Sales Remain Strong
On the call, Deborah Ferree, vice chairman and chief merchandising officer, said the athletic category continues to expand at “very healthy double digits.” She added, “I am proud of how we’ve stayed ahead of the pack in athletic and with our merchandising initiatives. I’m confident DSW will capture even greater market share in the athletic category.”
Non-athletic fashion footwear is gaining steam as a trend. “Athletic has dominated customers’ wardrobes for the last couple of years and our research indicates a readiness to embrace fresh, feminine silhouettes in fashion apparel and denim,” Ferree said. “These non-athletic trends are in the early innings today, but we’re already chasing into a number of exciting styles. We anticipate the demand for these new emerging trends will build during late fall and continue into next spring.”
Overall women’s comps were in line with the chain’s average figures in the category, with healthy increases across a number of fashion offerings. Vulcanized fashion athletic footwear delivered double-digit comps within the women’s category, leading to an expansion of 400 basis points in category penetration in the third quarter. Men’s also performed in line, and athletic “continued to exert a strong influence in this category,” officials said. The men’s mix has been updated with a greater focus on value in dress and casual, greater athletic inspired styling and the addition of a number of new emerging brands. A new kids category was launched in 224 stores and contributed to the positive results during the back-to-school timeframe, and particularly supported in-store traffic and transactions.
Boot Weakness
While boot sales were expected to fall due to later deliveries as part of a new transition strategy, they were even softer than expected as the warm weather fueled demand for athletic, opened-up shoes and other casual styles. Said Ferree, “We continue to actively manage inventories and receipts in the category while balancing opportunities to extend the season into early spring.”
Adjusted gross margins increased 60 basis points. Lower clearance markdowns and last year’s inventory valuation reserve offset lower markups, higher shipping costs and the lower gross profit rate from Ebuys. Tighter buys and higher sell-through led to better margins in clearance merchandise. The quarter marked DSW’s first increase in gross profit dollars and gross margin rates since the second quarter of 2015. Operating expenses deleveraged 40 basis points this quarter due to the reversal of incentive compensation last year. Excluding incentive compensation, its SG&A rate was reduced by 110 basis points as a result of actions taken to create a more efficient organizational structure, strategically source key items and supplies and reduce discretionary spend, as well as the impact of some favorable timing of marketing spend. Excluding Ebuys, inventories were lower by 3.5 percent per square foot.
Looking ahead, DSW raised its full-year outlook to $1.35 to $1.45 per share, up from a range of $1.32 to $1.42 previously. The updated outlook assumes a low- to mid-single-digit comp decline for the fall season.
Jared Poff, CFO, said the company estimates that last year’s elevated promotional activity accounted for 350 basis points of comp headwind this year. He added, “We have bought into an exciting holiday campaign, but given the uncertainties in the current environment, we believe that it is more prudent to position our sales plan with sufficient flexibility while protecting our bottom line.”
Photo courtesy DSW
