DSW: Quarter Shows Progress on Sales and Inventories

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By Brian Browning

DSW topped second-quarter earnings expectations on sales, SG&A expense, and the tax rate and raised full year 2014 guidance. While promotionally driven, the quarter demonstrated progress on sales trends and inventory clearance with the one-, two-, and three-year comp trends improving and inventory at cost per foot down 3.3% at the end of the quarter.

We believe that the better comp cadence, clean inventories, and upcoming fall initiatives (women’s footwear assortment changes, marketing, omnichannel investment, website upgrade, and mobile app launch) increase prospects for improved trends in the second half of the year. While the stock is now trading at 19.5 times our new 2014 EPS estimate and 16.9 times our new 2015 estimate, we see room for additional upside on the prospect of a rebound in sales, coupled with long-term growth initiatives in distribution, omnichannel, assortment planning, and new category drivers. Sales trends improved sequentially as the quarter progressed, with positive comps in all regions and categories for July.

While the company took a margin hit to get there, inventories are down 3.3% per foot at cost, leaving the company in much better position for fall. Inventories will continue to be planned conservatively, with chase emphasized. The Town Shoes investment contributed $0.01 in EPS this quarter; two stores have opened under the DSW banner with positive initial response.

New store performance is still below plan but materially improved versus last quarter (following overall cadence of business); new stores still exceeding IRR plans. Repurchased 2 million shares for $55 million in the second quarter with $43.2 million remaining on the current authorization; guidance reflects recent buyback but no additional purchases.

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