DSW Comps Better Than Feared; Narrows 2013 Guidance


DSW pre-announced fourth-quarter revenue of $571 million (excluding $1 million related to the luxury initiative, our estimate was $590 million, Street $588 million) on a flat comp. Importantly, this makes DSW one of the few companies to actually report a comp acceleration (0.2% compared with – 0.7% last quarter) in a widely noted weak holiday quarter. DSW’s two-year comp trend slowed from 5.6% in the third quarter to 3.6% in the fourth quarter, despite its outsized exposure to the Northeast, while the other companies, on average, preannounced that the fourth quarter slowed 4.9 points on a 2-year basis sequentially and from 11.3% to 6.4%. While the comp was better than feared, total revenue was below expectations, ostensibly driven by lower new-store productivity.

Highly productive stores and levels of cannibalization were unchanged, with the only real callout related to geographic and weather disparities that impaired performance in certain areas. Inventories were clean throughout the quarter and left DSW in the enviable position of not needing to promote much to drive comp, thus we expect merchandise margins to be relatively in line with last year, with gross margins below the prior year given the negative deleverage on occupancy from a lower comp and up against the 53rd week last year. Furthermore, the company’s plan to extend the transition of boot selling paid off with the weather (and compared to last year’s lack of inventory in boots from transitioning too early). The company will release fourthquarter earnings before the market open on Tuesday, March 18.

Management narrowed 2013 guidance to $1.85-$1.87 (versus $1.80-$1.90 previously), compared to our $1.90 estimate and the Street at $1.87. As a result, we are lowering our fourth-quarter estimate to $0.29 versus $0.33 previously, our fiscal 2013 (ending January 2014) estimate to $1.86, versus $1.90 previously, and our fiscal 2014 estimate to $2.10, versus $2.18 previously.

We are taking a more-conservative stance on 2014, given the persistence of unfavorable weather and a weaker retail environment broadly. We estimate square-footage growth of 8% (35 stores for 2014 already announced), 3% comps, 40 basis points of gross margin expansion, and SG&A dollar growth slightly lower than sales (despite planned investment).

Separately, the company announced CFO Doug Probst will be retiring effective May 1, after a nine-year tenure. While unexpected by the Street, we believe Mr. Probst leaves the company in good standing with solid talent and infrastructure; furthermore, his departure will not change the timing of any upcoming projects.

We believe Helen Betsy Wallace, senior vice president of finance and principal accounting officer, who joined the company in May 2013, is a candidate for the role, given her previous experience serving in CFO roles with four companies since 2000 and the overlap between her and Mr. Probst’s position. Her most-notable CFO role was with American Skiing Company, a publicly traded resort company that had revenues in excess of $300 million.


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