DSW (DSW 33.70, +6.50, +23.9%) is trading at better than three-year highs on Tuesday in reaction to the company’s blowout second quarter results and fiscal 2018 guidance raise.
All told, DSW’s Q2 had little to critique as earnings per
share (EPS) beat the Street expectation at $0.63 while revenue growth of 16.4%
to $793.7 mln, including $72.5 mln from the consolidation of its Canadian
retail business (which we’ll delve into in just a moment), handily
What’s more, DSW reported comparable sales which increased 9.7%, blowing out the market expectation. Additionally, reported gross profit, as a percent of sales, was up 280 bps due to favorable merchandise margin and occupancy leverage.
DSW ended the quarter with inventories of $597 mln compared to $527 mln last year. Excluding inventories from its Canadian acquisition, inventories per square foot increased by 12.0% and increased by 2.0% on a two-year basis.
Canadian Retail Business:
As part of the two-step acquisition, DSW completed the
remeasurement of previously held assets, including the equity investment and
note receivable from its initial investment in 2014, resulting in a non-cash
charge of $34.0 mln.
As a result of the current enterprise value exceeding the fair value of the acquired net assets, DSW recorded a goodwill impairment of $36.2 mln.
Upon the completion of its comprehensive review, DSW announced its renewed focus on its largest retail banners, Shoe Company, Shoe Warehouse, and DSW Designer Shoe Warehouse. DSW will then exit its full price, mall-based Town Shoes banner, which operates 38 locations, mostly by the end of the fiscal year.
The Canadian Retail acquisition is expected to generate approximately $215 mln in revenues and will be slightly accretive to Adjusted Earnings in 2018.
Fiscal 2018 Outlook:
DSW updated its full year outlook for adjusted earnings in the range of $1.60-1.75 per diluted share, compared to its previous range of $1.52-1.67 per diluted share. The company highlighted that the guidance does not include charges related to exit costs, restructuring or acquisition-related expenses, or operating losses from the Town Shoes banner, which the company believes will mostly close by the end of the fiscal year.
Further, management now expects revenues to increase by about 6-9%, compared to the previous guidance which called for a 1-3% revenue decline. Comparable store sales are now expected to be up in the low-to-mid single digit range vs previous guidance which called for a low-single digit increase.
Shoe peers SCVL +3.56% DECK +0.35% SHOO +0.09% SKX -0.44% CROX -0.45% trade split at this juncture as the broader retail group posts a modest move higher as evidenced by the 0.4% gain in the S&P Retail SPDR (XRT 51.73, +0.18).