Morgan Stanley Still Bearish On DSW

Morgan Stanley’s Jay Sole maintained an Underweight rating on DSW Inc. DSW, with a price target of $19.

FY16 Guidance

Sole mentioned that the company’s FY16 guidance implies that the EPS CAGR for the last five years has been -3 percent. The factors responsible for this trend are expected to continue.

The analyst believes that there could be 33 percent downside risk to the stock valuation, while the risk/reward was negatively skewed.

“DSW's gross margin outlook calls for no change on a y/y basis. However, this bakes in 50-60 bps of erosion due to mix, higher shipping costs, and loyalty program expenses,” Sole noted.

Will Intended Steps Help?

The company intends to offset this by reducing markdowns, most of which are likely in 2H16. However, Sole expressed concern regarding the weak macro outlook, as well as the possibility that DSW would delay some of its investment spending.

Although this was likely to help SG&A in the near term and allow the company to “focus on maximizing recent supply chain and merchandizing improvements,” the analyst believes it could also hurt DSW’s competitive positioning in the longer term.

In addition, the acquisition of Ebuys is expected to reduce the company’s FY16 cash position by 64 percent from the previous estimate.

“Given DSW’s softer growth prospects, uncertain store growth plan, and secular competitive pressures, a more discounted multiple is fair in our view,” Sole added.