DSW Delivers Strong Quarter, But Camuto Acquisition Keeps Canaccord Neutral

DSW Inc. (NYSE: DSW) delivered an impressive third-quarter beat Tuesday, but complexities and uncertainty around the business are keeping a notable analyst on the sidelines. 

The Analyst

Canaccord Genuity analyst Camilo Lyon maintains a Hold rating and raised the price target from $27 to $28.

The Thesis

DSW reported Q3 adjusted earnings of 70 cents per share, beating estimates by 19 cents Tuesday. Sales came in at $833 million, beating estimates by $39.64 million. Comps grew 7.3 percent in the quarter and gross margin swelled by 316 basis points.

The retailer's strategy of buying deeper in key items is paying dividends, and the strong performance in boots — which drove over 79 percent of the volume increase year-over-year — should increase, Lyon said in a note. (See his track record here.) 

Despite these impressive numbers, uncertainty surrounding the company’s acquisition of the Camuto Group last year is keeping Canaccord on the sidelines for now, even as the M&A deal is expected to add $100 million in revenue in the fourth quarter.

“While DSW is helping with the operational and financial challenges Camuto has been plagued with, management expects modest dilution/accretion next year and more meaningful accretion in [2020]” the analyst said. 

The complexities of operating a retail business with DSW, a vendor with Camuto and a Chinese sourcing arm under one roof cannot be ignored, Lyon said. 

“Therefore, while we commend management for delivering a strong performance in the core DSW business, we are reluctant to become more positive on the stock until we better understand the P&L implications from Camuto." 

The Price Action

DSW shares were down 0.8 percent at $24.81 at the close Wednesday. 

Related Links:

Cowen Predicts Lululemon's Traffic, Conversion, Comps Will Grow In 2019

Susquehanna Bullish On Canada Goose: 'We Foresee A Long Runway For Margin Expansion'