Shoe retail specialist DSW (NYSE: DSW) has had an up-and-down 2017. Just when the company seemed to be stuck in the malaise that has overcome the retail industry, DSW was able to produce solid results that pointed toward a potential turnaround. Yet just as quickly, changing fortunes can take away the positive momentum that has taken so long for a company to build.
Coming into Tuesday's third-quarter financial report, DSW investors wanted to see some evidence that the company could sustain the progress it had made in recent quarters. Instead, DSW's results showed new obstacles to growth, and adverse events weighed on the retailer's turnaround. Let's take a closer look at DSW to see what it said about its prospects down the road.
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DSW's latest struggles
Third-quarter results for DSW reflected a return of difficulties for the shoe retailer. Revenue was up 1.7% to $708.3 million, but that was a bit less than what most of those following the stock had expected to see. Adjusted net income dropped 14% to $35.9 million, however, and that resulted in adjusted earnings of $0.45 per share. That compared unfavorably with the consensus forecast for $0.53 per share.
DSW's core fundamental metrics took a hit during the quarter. Comparable sales fell 0.4% from year-earlier levels, failing to build on the second quarter's positive comps, which had been the first time in more than two years that the company had seen gains in that measure. Gross profit also suffered declines, falling more than a percentage point due to higher shipping expenses and the company's initiative toward building market share. Higher technology and marketing expenses also boosted the percentage of sales taken up by operating expenses, weighing on operating margin figures as well.
Severe weather may have been the primary cause of disappointing results at DSW. The retailer said that comps took a hit of about 0.5 percentage points to 0.6 percentage points due to the impact of hurricanes that hit key markets during the quarter. The numbers suggest that the comps figure would once again have been positive had it not been for the storms.
DSW's various businesses showed mixed performance. The Affiliated Business Group, which works with outside partners to market products, suffered a 14% decline in segment revenue, compared to gains of 2% for the core DSW retail segment and 6% for the segment that covers Ebuys and other sources of revenue. Yet most of the decline in the Affiliated Business Group came from store closings, as segment comparable sales were actually up 0.5% from year-ago levels.
CEO Roger Rawlins pointed to the new factors hurting DSW's results. "Much of our core business performed in line with expectations this quarter, despite an unusually severe hurricane season which impacted comps and earnings," Rawlings said. "Additionally, cold weather related product struggled to gain the traction we had anticipated." The CEO did say that good inventory management helped the company avoid big markdowns.
Can DSW bounce back?
DSW thinks that the future could be bright. Rawlins pointed to multiple initiatives, including its Power Stores, the expansion of DSW Kids, and the company's new Lab Store. DSW is also testing services with its rewards program to try to distinguish itself from other shoe retailers.
Yet Ebuys hasn't worked out as well for DSW as the company had hoped. The retailer took a nearly $53 million impairment charge against the carrying value of the business, noting that it needed to ease off on overly ambitious growth assumptions related to Ebuys.
DSW also pulled back from its more optimistic earnings guidance from earlier in the year. The shoe specialist now sees full-year adjusted earnings coming in between $1.40 and $1.45 per share, down $0.05 to $0.10 per share from its previous projections.
Investors were upset by the news, and DSW stock quickly dropped 12% in morning trading following the announcement. It will likely take a strong holiday season to prove to DSW's shareholders once and for all that the signs of strength the shoe retailer showed earlier in the year were only temporarily interrupted by hurricanes and other issues this quarter.
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