DSW Inc. (DSW 17.65), a leading branded footwear and accessories retailer, sounded a familiar note when it reported its first quarter results this morning. The company, like many other retailers, said first quarter sales were challenging, and it backed up the assertion by reporting a 3.0% decrease in comparable sales on top of a 1.6% decline in the first quarter a year ago.
Total sales increased 1.4% to $691.1 million, including $22.3 million of revenues from Ebuys, the online shoe retailer DSW acquired in March 2016. Excluding that acquisition, total sales would have been down nearly 2.0% compared to the same period a year ago.
The Ebuys acquisition drove lower gross margin and operating income in the first quarter, DSW said, yet it did help drive growth in online sales.
DSW's reported gross margin decreased 180 basis points to 28.3% of sales and its operating margin fell to 5.9% of sales from 7.2% in the year-ago period. Reported net income was down 23.5% to $22.97 million or $0.28 per diluted share.
On an adjusted basis, DSW's net income was $25.7 million, or $0.32 per diluted share, the latter of which was shy of analysts' average expectation and down 20% from the same period a year ago despite a 2.4% decline in the weighted average diluted share count.
The first quarter results, therefore, were indicative of the challenges DSW continues to face with respect to increased competition from offline and online sources, as well as shifts in consumer buying preferences.
The upshot of the report is that DSW stood by its full year outlook for adjusted earnings in the range of $1.45 to $1.55 per diluted share. At the midpoint of that range, DSW, which is down 22.1% year-to-date, trades at 11.8x estimated FY17 earnings.
DSW remains solidly profitable, yet the weak comparable sales results underscore the fact that demand itself is not that solid. Management noted that trends improved as the first quarter progressed and that comps turned positive in April. Nevertheless, better signs on the sales front are needed to effect a more convincing turn in sentiment toward the stock.