DSW Finishes 2016 With Strong Profits Despite Sales Concerns

By Dan Caplinger Markets Fool.com

Shoe retailer DSW (NYSE: DSW) has been far from immune from the funk that has shaken the brick-and-mortar retail industry, and longtime shareholders have suffered dramatic losses during the footwear and accessories seller's period of weakness. Coming into Tuesday's fourth-quarter financial report, DSW investors wanted to see modest gains on the top and bottom line, and the company was able to deliver on part of that promise. Yet revenue concerns still persist, and many wonder whether DSW can keep making more from less.

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Let's take a closer look at DSW to see how it did and what's coming in 2017 for the footwear specialist.

DSW puts an end to fiscal 2016

DSW's fourth-quarter results were mixed in most investors' eyes. Revenue was up, but only by 0.4% to $674.6 million, falling short of the 3% growth that many of those following the stock had hoped to see. However, net income nearly tripled from year-ago levels, and even after accounting for a big one-time gain from extraordinary items, adjusted earnings of $0.20 per share topped the consensus forecast for $0.16 per share.

Image source: DSW.

Looking more closely at the numbers, DSW still faces some clear challenges. A 7% plunge in comparable sales was particularly harsh, especially given that it came after a relatively flat performance in the year-ago period that should have made the comparison easier. The Ebuys business made up a slightly greater portion of DSW's overall sales, but it still constitutes just 4% of the company's revenue.

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Yet DSW has also aimed to maximize its productivity. Gross profit climbed by half a percentage point, and DSW said that it was able to reduce the number of markdowns it made and also obtain more favorable sourcing deals with suppliers. On the operating front, reductions in store-related expenses and corporate overhead helped produce a half-percentage-point cut in operating expenses as a percentage of sales. DSW achieved the gains despite incurring costs related to restructuring and other factors.

Both of DSW's key segments were weak. The namesake DSW retail segment saw revenue fall almost 4% on a 7.1% drop in comparable sales. Meanwhile, the Affiliated Business Group segment took a nearly 2% hit on its top line, posting a 6% fall in comps. Only the "other" segment produced enough sales to produce an overall rise for DSW's total revenue.

CEO Roger Rawlins tried to turn attention to the path ahead. "After making fundamental changes to our core business last year," Rawlins said, "we are laser-focused on driving comp growth through our merchandise and allocation initiatives and the elevation of our customer's digital experience." The CEO also pointed to inventory management and product-focused marketing to boost margin and produce strong results.

Can DSW climb higher?

DSW also believes that it can get more from the full range of its various stores. In Rawlins' words, "We are building a foundation to support the growth of Ebuys and Town Shoes and to leverage synergies across all of our retail brands."

DSW's guidance for the 2017 fiscal year reflected the company's enthusiasm. The company expects revenue to climb 3% to 5%, which is consistent with what most investors expect from the retailer. Earnings of $1.45 to $1.55 per share would be slightly on the low side of what those following the stock were looking to see, however. More concerning is the fact that DSW's growth will come entirely from 12 to 15 new locations, and the retailer expects comparable sales for the year to be flat or in the negative low single digits.

DSW investors nevertheless seemed happy with the results, and the stock climbed 2% at midday following the announcement. If the shoe retailer can overcome the difficult conditions that its peers have dealt with lately, then it's possible that 2017 will be a much better year for DSW and its shareholders.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends DSW. The Motley Fool has a disclosure policy.