DSW Downgraded To Accumulate At Johnson Rice

Johnson Rice’s David Mann downgraded the rating on DSW Inc. DSW from Buy to Accumulate.

Key 2016 Initiatives

Mann mentioned that among the key initiatives undertaken by DSW for 2016 are the expansion of the company’s underpenetrated athletic category, with the aim of capitalizing on the continuing athletic/athleisure trend.

The company also intends to roll out its kids footwear category across 200 stores ahead of the back to school season.

However, the analyst noted that despite these steps, the 2016 guidance was “somewhat muted”, primarily due to increased expenses and more or less flat gross margin.

Q4 Earnings

DSW reported higher than expected EPS for Q4, driven by better sales and lower gross margin pressure.

In addition, Q4 comp grew 0.7 percent, significantly ahead of the estimate of a decline of 4 percent. “Management took an aggressive promotional stance to gain share and clear inventory, with increased markdowns and higher marketing spend resulting in positive traffic,” Mann pointed out.

An increase of $10 million in marketing spend drove positive traffic trends, while comp for the athletic category grew 15 percent during the quarter, driven by fashion athletic products that were more “on-trend.”

For 2015, athletic sales increased 13 percent and accounted for 14 percent of the total sales. However, Mann mentioned that “athletic penetration still remains modest when compared to its family footwear competition. For 2016, management is focused on increasing athletic penetration with expanded assortment and increased marketing focus.”