Footwear retailer DSW (DSW 21.37, +1.77) trades 9.0% higher after reporting mixed Q4 results and guiding FY19 earnings and revenues in-line.
Earnings were better than expected for Q4 at $0.38 per share on comparable sales growth of 1.3%. Reported gross profit increased by 150 bps, driven by favorable sourcing, lower markdowns and occupancy leverage.
Despite the earnings result, the sales miss and the outlook were the likely impetus for the initially lower stock reaction. Shares have gradually moved higher as the session has progressed as investors put more stock into the comp beat and the liquidation of the eBuys business. Specifically, sales for Q4 missed market expectations, but grew 6.7% to $720.0 million.
Breaking down the sales result, the DSW segment, which includes DSW brick-and-mortar stores and dsw.com, reported net sales growth of 8.5% to $664.20 million. The ABG segment, which partners with multi-category and multi-channel retailed to drive shoe assortment and business strategies, reported net sales declines of 11.1% to about $55.78 million. In all, comparable store sales at the ABG segment, though smaller than the DSW segment, were the standout with growth of 9.8%. The DSW segment saw comparable sales growth of 1.0%, trimming the overall comps to 1.3%.
On taxes, DSW highlighted that as a result of the recent passage of the U.S. Tax Reform, it recorded an additional $10.1 million net tax expense resulting from the remeasurement of its net federal deferred tax assets, partially offset by the benefit of applying the new rate on the last month of the fiscal year. Based on its initial analysis of the U.S. Tax Reform, DSW estimates an effective tax rate of about 29% for fiscal year 2018 compared to its historical rate of 39%, with the benefit from the reduction in federal tax rate partly offset by other provisions in the new law.
Additionally, following a comprehensive evaluation of strategic alternatives for eBuys, DSW made the decision to exit the business. Consequently, the company revalued its remaining assets including inventory, fixed and intangible assets at liquidation value and reduced its contingent consideration liability. The company expects to complete the liquidation process in early 2018 and may incur additional one-time exit charges, which will be excluded from adjusted results.
Switching to guidance, the midpoint of the FY19 earnings guidance for DSW missed market expectations; the company sees FY19 EPS in the range of $1.52-1.67. Excluding the exit of non-core businesses and the 53rd week, DSW expects total revenues to increase between 2-4% for the year, assuming a comparable sales increase in the low single digit range and the opening of 3-6 net new locations for the DSW segment. Lastly, DSW assumes a tax rate of 29% for the year.