With tight inventory controls feeding a 44.4% merchandise margin-a 600 basis points improvement over the prior year, DSW Inc. reported Q2 earnings jumped 69%. The margin gain made up for a 6% drop in same-store sales. Occupancy expenses deleveraged 110 basis points as a result of the negative comp in the quarter.


But the improved merchandise margin rate led to an overall 500-basis-point increase in gross margins to 28.3%. The SG&A rate increased 250 basis points to 23.4%, due mainly to the decrease in same-store sales and investments in its IT and e-commerce initiatives.

Inventories ended the quarter down approximately 4% on a cost per square foot basis, excluding the incremental inventory investment required for launching its e-commerce channel in June. DSW entered Q2 with inventory down 10% on a cost per square foot basis.

Regarding merchandise performance, Debbie Ferre, vice chairman and CMO of DSW, said on a conference call that women’s better brands overall saw a strong comp increase, continuing to reflect a “trade-down” of their popularity at department stores. In women’s dress, double-digit comp increases were seen in pumps and evening and those items are both projected to continue to perform well throughout the fall season. Other dress trends that worked well in Q2 included platforms, prints and stacked heels.

In seasonal areas, Ferre says customers are buying closer to time of need. Casual sandals continued to improve later in the quarter as customers responded to new fashion looks like flat sandals and gladiators. With customers buying closer to time of need, DSW has adjusted receipts in boots to support fashion trends early and flow basic items later.

“Early fashion boot reads are positive as new looks, such as slouch boots, western, riding and a flat boots, are checking well with the customer,” said Ferre.

For the fiscal year ending January 2009, the company reiterates its estimated annual same store sales in the negative mid-single digits and annual EPS guidance of 75 cents to 85 cents per share for fiscal 2008. That compares to earnings of 79 cents in fiscal 2007.