DSW reported fourth-quarter earnings, adjusted to exclude non-recurring items, slid 8.6 percent to $28.7 million, or 31 cents, on flat comparable-store sales.
Earnings came in better than its guidance calling for earnings between 28 to 30 cents a share. But the off-price shoe chain still surprised Wall Street with its subdued guidance for 2014.
Revenues are expected to rise 6 percent to 7 percent, with comparable sales growth in the low-single digit range. Full year earnings per share are projected to range between $1.80 to $1.95 per share, including expenses of $10 million, or approximately 7 cents per share, related to an “aggressive” push to build its omni-channel capabilities. That compares adjusted earnings of $1.88 per share in 2013.
Wall Street on average was expecting earnings of $2.09 a share and revenue growth of 9 percent for the current year.
“We are still operating in an uncertain environment, and we believe that value remains paramount to the consumer,” said Mike MacDonald, DSW’s president and CEO, on a conference call with analysts.
As reported, same-store sales were flat in the fourth quarter on top of the 3.6 percent comp growth last year. An increase in store conversion was offset by a decrease in store traffic. Total transaction for its DSW segment, which accounts for how the consumer is shopping both online and in store, were flat.
Excluding sales related to a discontinued effort to bring in more luxury goods, total sales for decreased 4 percent in the quarter to $571 million. Excluding the extra week in the year-ago fourth quarter, sales advanced 4 percent.
Among categories, Athletic was down mid-single digits with weakness in running due to the cold weather conditions. Debbie Ferree, DSW’s vice chairman and chief merchandising officer, described Athletic’s weakness as “just a function of timing, because when you look under the covers, we're actually pretty pleased with what we see between the technical piece of athletic and the fashion piece.” In particular, she noted that the “fashion piece of athletic is coming along very, very nicely,” and she sees some shifting away this year from technical and running towards fashion.
The flat comps were particularly impacted by a 3 percent decline in Women’s (non-athletic). Boots and sandals performed well in women’s, with a high-single digit gain in boots. But as noted first in its third-quarter conference call, MacDonald said his team sees “lifestyle shifts underway” in Women’s and has strengthened its merchant team to address those changes.
“We are also working with our suppliers to add freshness in the casual category, and increasing opportunistic buys, while simultaneously testing new resources,” said MacDonald. “All-in-all, we are cautiously optimistic about our women's business.”
Among other categories, Mens’ (non-athletic) was up low double-digits in the quarter while Accessories was up high single digits.
The South and West regions of the country produced comparable sales increases, while the Northeast, Mid-Atlantic and Midwest experienced small comparable sales decreases.
Merchandise margin in the quarter increased 40 basis points to 41.7 percent, driven by various systems enhancements and good inventory management. Management said it continues to benefit from its size optimization system that balances sizes in total, and by location. Its occupancy rate for the quarter was 100 basis points higher than last year, largely due to the 53rd week in the prior year, and flat comps in the current year. Despite one less week of sales, DSW’s SG&A rate in the quarter improved 10 basis points to last year, due to lower marketing, new store opening, and IT expenses.
In the year, net income, adjusted for the net loss from its luxury test and legacy charges tied to the merger with its former parent RVI, was $172.8 million, or $1.88 per diluted share, a gain of 13.5 percent over the prior-year’s adjusted results. Sales increased 4.9 percent to $2.4 billion with comparable-stores sales ahead 0.2 percent.
Assessing the year, MacDonald noted that DSW marked its fifth consecutive year of double-digit earnings growth in 2013 with its best-ever operating margin of 11.7 percent, on the strength of both merchandise margin expansion, and operating expense leverage.
DSW updated the build-out potential for full size units to a range of 500 to 550 stores, which compares to the 397 it had in operation at the year’s close. That excludes its exploration of locations in smaller markets. It opened two smaller stores in the fourth quarter with as many as six planned for 2014. Overall, it plans to open 35 stores in 2014, up from 30 in 2013.
Regarding its increased omni-channel investments, DSW recently established an eight-person team to manage implementation of its omni strategy, led by Roger Rawlins, who had managed DSW’s dot.com business for the last three years. Buying for both stores and the dot-com channels have been merged, but MacDonald said DSW will still “need to change some of our systems infrastructure, and create some new processes that don't currently exist.”
In all, DSW expects its omni-channel investments will increase its operating expenses by $10 million in FY14, and expects the overall omnichannel implementation will take place over the next three years.
“We are approaching the omni project as both a business necessity, and an opportunity to create competitive advantage. It's a business necessity because the customer expects to be able to shop seamlessly across channels.
McDonald noted that DSW is already seeing a payback from two omnichannel initiatives: its Shoephoria! System, which allows stores to fill out-of-stocks from its dot.com fulfillment center; and its new charge-send system, which enables dot-com orders to be fulfilled from store inventory. He estimates that these two programs are producing sales at an annualized rate of approximately $75 million.
“We are approaching the omni project as both a business necessity, and an opportunity to create competitive advantage,” said McDonald. “It's a business necessity because the customer expects to be able to shop seamlessly across channels.”
