DSW Has Easy Comps Into Q3 Report

MKM Partners expects sequential improvement in DSW Inc. (NYSE: DSW)’s third-quarter results, expected on November 22, given easy comparisons. The brokerage sees adjusted EPS of $0.50, which is $0.02 above the Street.

Quarter Expectations

However, MKM expects third consecutive quarter of negative same-store sales for the footwear retailer. The brokerage’s (1.0 percent) estimate is slightly below the Street's (0.7 percent). The estimate assumes continued weakness in women's and men's footwear and strong performance in athletic footwear.

“There may be some risk to the company's fall boot business from the unseasonably warm weather, but this may have been at least partially offset by an extended sandals season,” analyst Patrick McKeever wrote in a note.

That said, McKeever expects a 110 bps decrease in gross margin (Street has it down 170 bps) on lower IMUs, markdowns and the inclusion of Ebuys, which has substantially lower gross margins.

“While DSW is benefiting from the trend toward more casual ‘lifestyle’ apparel/footwear via its athletic business (14 percent of sales LY, up 200 bps), we expect the trend to continue to negatively impact the more traditional areas of the assortment,” McKeever highlighted.

Also, the analyst still cautious on the company’s Children's Footwear as he sees some risks and there could be some negative impact to margins as the mix is skewed toward athletic.

Analyst's Take

“Overall, we believe business remains generally difficult and view the stock (down 4 percent YTD vs. SPX up 7 percent, trades 14.8x) as being close to its fair value here,” McKeever noted.

McKeever has a Neutral rating on DSW shares, with a fair value estimate of $23.

At last check, DSW was up 2.53 percent at $23.48.

Image Credit: By Dwight Burdette (Own work) [CC BY 3.0], via Wikimedia Commons