The other shoe keeps dropping at DSW Inc. (NYSE: DSW). The footwear retailer reports quarterly results on Tuesday afternoon, and market sentiment heading into the holiday period's financials isn't very encouraging. The stock has fallen for three consecutive months, and it's also trading lower so far in March. A pair of analysts have downgraded the stock in recent days, with a third Wall Street pro lowering his price target on DSW stock.
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The market's holding out for modest growth when DSW reports shortly after Tuesday's market close. Analysts are forecasting a profit of $0.16 a share, just ahead of the $0.14 a share it posted during the prior year's holiday quarter. The pros also see net sales clocking in at $691.5 million, 2.9% higher than a year earlier.
Growth on both ends of the income statement may seem worthy of heel-clicking excitement, but the top-line growth isn't organic. DWS completed the purchase of Ebuys -- an online discounter of footwear and accessories -- in March of last year. Ebuys has been padding sales at DSW, and will continue to do so until the deal is eclipsed during the current quarter. Ebuys accounted for 3.1% of the net sales during the fiscal third quarter, so it may essentially account for all of the growth in Tuesday's report.
Image source: DSW.
Winning back Mr. Market
Comps have been negative at DSW. Expansion and the Ebuys purchase are what have been keeping the top line growing. Net sales climbed 4.7% higher during the retailer's fiscal third quarter, but that was held back by a 2% slide in comps. If net sales rise a mere 3% this time around, it will probably be on the heels -- no pun intended -- of another same-store sales decline.
Analysts have been cooling on the stock. Betty Chen downgraded the stock from buy to neutral on Thursday. She's concerned about the store traffic headwinds that she sees continuing into the current quarter. Chen feels that cost-savings initiatives at DSW won't be enough to offset the competitive pressures on its sales and margins. She lowered her price target from $25 to $21. It's not a good sign when a prominent Wall Street pro lowers her rating on a once-trendy retailer just three trading days before it announces quarterly results.
A week earlier, it wasCleveland Research analyst Daryl Boehringer lowering his rating on the shares from neutral to underperform. His concern is that Tuesday's report won't show any progress in improving the chain's fundamentals. A few days before that, we had Camilo Lyon at Canaccord slashing his price target on the stock from $23 to $19 after disappointing retail channel checks.
All three analysts feel that the weakness at DSW will linger into 2017, so it will be up to the retailer on Tuesday afternoon to convince the market otherwise. DSW may be clawing its way back from a big hole -- it posted four straight quarters of double-digit percentage decreases in adjusted earnings per share before bouncing back during the third quarter -- but it's going to have to do more than that to impress jaded investors.
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