Benefiting from a rebound in sales and tighter expense controls, DSW Inc. reported earnings before non-recurring items jumped 48.1 percent, far exceeding Wall Street targets.
Adjusted to exclude charges tied to its test of luxury items as well as legacy charges from its merger with RVI (Retail Ventures Inc.), net income reached $44.6 million, or 97 cents, in the quarter, up from $30.1 million, or 66 cents, on an adjusted basis a year ago. Wall Street’s consensus estimate had been 80 cents a share.
Reported net income of $33.7 million, or 73 cents, included an after-tax loss of $1.5 million, or 3 cents, from its luxury test, and an after-tax charge of $9.3 million, or 20 cents, from the termination of the pension plan assumed in conjunction with the RVI merger. This compares to reported net income in the 2012-second quarter of $29.3 million, or 65 cents, which included an RVI-related charge of $700,000, or 1 cent a share.
Revenues in the quarter advanced 9.7 percent to $562 million. Comparable sales increased 4.4 percent on top of a 4.2 percent gain in the 2012 second-quarter. It also marked a sharp rebound from the first-quarter comp decline of 2 percent. For the half, comps are now ahead 0.8 percent.
On August 5, DSW indicated the comps would rise approximately 4.3 percent. At the time, it also raised its full year earnings guidance to $3.60 to $3.80 per share from its previous range of $3.40 to $3.60 per share.
The comp improvement in the quarter was driven by increases in conversion, average unit retail, and units per transaction.
On a conference call with analysts, Mike MacDonald, president and CEO, said that with the first-quarter softening, DSW adjusted its customer communications to reflect a stronger emphasis on value and placed a greater emphasis on expenses.
“When the dust settled, we finished the first half of fiscal 2013 with a 20 percent EPS increase, and with inventories that are current and in line with forward sales expectations,” said MacDonald. “In short, we made the best out of a difficult situation.”
By category, men's footwear, which has been receiving greater emphasis over the last few years, saw comps rise 12 percent, benefiting from upgraded fashion content, reduced style duplication, better in-stock positioning, and better size availability. Athletic footwear grew 5 percent, “driven by product innovation and price range expansion,” said MacDonald.
Accessories, including handbags and hosiery and also receiving more emphasis, grew comps 15 percent. Women’s footwear comps inched up 1 percent, with sandals rebounding strongly in the quarter. Key sandal styles were carried through August to take advantage of sales opportunities missed in prior years.
For the Fall season, its women’s footwear inventory mix will feature more casual and less dress looks with managing noting increased preference by the customer for casual versus dress styles and strong casual sales in the quarter. “Meaningful inventory dollars” will also be shifted into short booties and shooties and out of tall-shafted boots.
Geographically, all regions posted positive comps in the second quarter. Consistent with Q1, the strongest Q2 results came out of the West and the South, with more moderate increases in the Northeast, Midwest and Mid Atlantic.
Gross margins in the period improved 190 basis points to 33.2 percent. DSW’s merchandise margin picked up 190 basis points to 46.4 percent. driven mainly by lower markdowns. For the Spring season, or the first and second quarter combined, merchandise margin rate increased 70 basis points over last year to 46.4 percent.
DSW’s SG&A rate in the quarter was reduced 140 basis points to 20.5 percent, driven by lower pre-opening and marketing costs, and leverage in store, home office, and IT expenses.
Inventories increased 10 percent, in line with expectations. On a cost per square foot basis, inventories supporting DSW stores increased by 2.7 percent at the end of quarter.
DSW, which ended the quarter with 377 stores, remains on track to open 30 stores this year. Two of the new stores to open this fall will be roughly 10,000 square feet, versus the chain average of 22,000 square feet. If successful, the smaller concept, which will offer an edited assortment of all its categories, “will create a new growth vehicle for DSW, which could significantly expand our store count potential.”