While reporting fourth-quarter earnings that were well above year-ago levels due to improved margins and expense controls, DSW Inc. said it was adding Under Armour to its mix in time for back-to-school season.
Debbie Ferree, vice chairman and chief merchandising officer, said on a conference call with analysts, “It’s a collaboration where we are developing unique product and it will be unique product for DSW with their design team.”
The addition comes as athletics reached new highs for DSW for the third year in a row. Ferree said strong full-price selling and better sourcing decisions improved the profitability of the business. Growth is expected to continue in 2017, driven by both core athletic performance styles as well as athleisure components within its non-athletic men’s and women’s offerings.
“With our growing partnerships we’ve put together an exciting assortment in retro and fashion athletic merchandise to fuel the athletic momentum,” said Ferree.
In the fourth quarter, sales increased 0.4 percent to $674.6 million, including $27.9 million of revenues from Ebuys. Same-store sales dropped 7 percent after inching up 0.7 percent in the year-ago period.
Reported gross profit increased by 50 basis points, driven by a significant reduction in markdowns and favorable sourcing costs, partially offset by the expected deleverage in occupancy expense, the increased mix of acquisition revenues and 10 bps of inventory step-up costs related to Ebuys.
Reported operating expenses improved by 50 basis points, with reductions in store-related expenses and corporate overhead, partly offset by 20 basis points from the amortization of Ebuys intangibles and restructuring expenses.
Reported net income was $30.5 million, or 38 cents per diluted share, which included a net favorable adjustment 18 cents per share related to the reduction of its contingent consideration liability, the amortization of acquired intangibles and inventory step-up costs related to Ebuys, and restructuring expenses. Adjusted net income reached $16.5 million, or 20 cents per diluted share, an increase of 43 percent over last year and exceeding Wall Street’s consensus estimate of 16 cents.
On a conference call with analysts, Jared Poff, CFO, noted that the company had positioned the back half of the year for a mid-single-digit comp decline, with its focus on reducing the need for excessive promotions.
“Despite the choppiness from weather and external geopolitical factors we were pleased to achieve our comp guidance for the back half of the year,” he said. “Our disciplined execution enabled us to sell a higher mix of regular-price merchandize in the fourth quarter. Our brand focused campaign and amplified value messaging for product helped sell though rates during the holiday period. In addition our effective digital marketing strategy drove even stronger traffic online and email conversion this quarter.”
Ferree said boots made up 30 percent of the mix is the largest category during the fourth quarter.
“At the start of the Fall season, we positioned the category for lower comps and accounted for shift between tall and short boots,” said Ferree. “This conservative positioning protected our business during a choppy environment. The warm weather at the beginning of the quarter stimulate sales of fashion boots, athletic and casual footwear. With the onset of cold weather in December our merchandizing and marketing strategy created a stronger than expected demand in boots which allow our team to deploy some pre-buys we’d allocated for next year.”
The strong results from its cold-weather business, coupled with its decision to chase a number of fashion styles early in the third quarter, DSW beat its forecast for the season. Ferree added, “This spring we’ve positioned inventories appropriately, with transitional merchandize and a sandal assortments that we will carry in our warm doors all year round.”
The influence of athletic supported its men’s business, but overall results have been below plan. Added Ferree, “We are aggressively managing our assortment of core items while increasing the freshness within men’s dress and casual with relevant sport influenced fashion.”
For the year, sales increased 3.5 percent to $2.7 billion, including $83.9 million from the company’s acquisition of Ebuys. Comparable sales decreased by 3 percent compared to last year’s 0.8 percent increase.
Reported net income was $124.5 million, or $1.52 per diluted share, which included a net favorable adjustment of 6 cents per share related to the reduction of its contingent consideration liability, the amortization of acquired intangibles, transaction costs and inventory step-up costs related to Ebuys, and restructuring expenses. Adjusted net income was $120.1 million, or $1.46 per diluted share, a 5 percent decrease from last year.
On a conference call with analysts, Roger Rawlins, CEO, said the company’s continued growth in digital demand outpaced the industry. DSW entered into digital marketplaces with its Ebuys acquisition. Other accomplishments for the year included successfully launching DSW Kids in almost half of its locations, a heightened focus on talent, rightsizing its cost structure and building out its enabled network.
“I’m also proud of the dramatic change in our financial performance with adjusted earnings per share improving from a decline of 21 percent in Spring to an increase of 22 percent this Fall,” said Rawlins. “These results were driven by changes to strengthen our organization, our renewed focus on inventory discipline and executing with greater focus and tempo. We’ll spend some time this morning reviewing the steps we took to strengthen the foundation in 2016 and discuss how we transition the business to our next stage of growth.”
For the current year, DSW expects revenue growth of 3 percent to 5 percent, with comparable sales to range from a flat to low-single-digit decline compared to the prior year. The company expects to open 12 to 15 net new locations.
Full-year adjusted earnings per share is expected to range between $1.45 to $1.55 per diluted share. Guidance includes the estimated impact from the discontinuation of the company’s leased business with Gordmans up to 10 cents per share.
Photo courtesy DSW