While DSW Inc. has shown incredible growth in the athletic category and overall sales over the last few years, it is about to get another big boost to its business that will most likely help to increase traffic flow, while putting some pressure on its current vendor base. The family footwear retailer will get a test of Nike women’s product in about 30 stores for spring ’06 with plans to expand beyond that number based on the success of the program.

Regarding the fiscal second quarter for this year, DSW said that category performance aligned well with its preseason investments in seasonal products, and well as athletic and women’s dress product. Management said that demand for sandals is lasting longer and boot demand is starting earlier. They said women’s fashion athletic is still a growth driver going into Q3, following a “strong performance” in the first half.

Comparable store sales for the second quarter increased 3.3% on top of a 3.0% gain in the same period last year. Women’s comps increased 4.3%, while the men’s business inched up just 0.3%.

Athletic comp sales were up 7.4%, due to gain in fashion athletic. Accessories comps declined 8.0%. Management said women’s fashion athletic is still a growth driver going into Q3, following a “strong performance” in H1.

DSW said all regions reported positive comps, but the highest rate of comp gains came out of the western stores.

The gross margin decline was attributed to increased markdowns that more than offset an increase in IMU’s. However, the GM decline that was more than offset by a 170 basis point improvement in SG&A.

The Q2 2005 bottom line results include $3.9 million of interest expense on dividend notes to the company's controlling shareholder, Retail Ventures, Inc. that were repaid in full from the net proceeds of DSW's initial public offering at the end of June 2005.

Pro forma net income for Q2 increased 30% to $11.6 million, or 26 cents per share, compared with $8.9 million, or 20 cents per share, for the year-ago period.

DSW used $196.6 million of the $278 million in net proceeds from the IPO to repay in full $190.0 million in dividend notes and accrued interest to RVI.

Inventories were up 23% at quarter-end, but were up just 3.3% on a cost per square foot basis. Total units per square foot decreased 1%, while average cost per unit rose approximately 4% versus last year.

Management hinted at a shift in real estate strategy, one that is in contrast to “decisions made by previous management” that focused on bigger formats that averaged 26,000 square feet.

Going forward, management pointed to 20 completed deals for 2006 that will average about 21,600 square feet in size. DSW opened seven stores and added one leased department during the second quarter of 2005. As of July 30, 2005, the company operated 184 DSW stores and 232 leased shoe departments. Since that date, the company has opened three more stores and added two more leased shoe departments.

They are forecasting first year performance at about $214 per square foot for the smaller stores, compared to about $173 per square foot for the store opened in 2005. The move is part of their strategy for increased sales productivity, rightsizing the stores, and improved market and site selection methodology.

>>> No doubt the addition of Nike will add to the expected improvement in 2006 as well…