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4 Reasons To Add Positions Of DSW Shares

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4 Reasons To Add Positions Of DSW Shares
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DSW Inc. (NYSE: DSW) could see the benefits of its new "Kids' Footwear" initiative beginning in the third quarter and then become "meaningfully more accretive" moving into FY17 and FY18, according to a note from Buckingham Research.

Kickin' Kids Shoes

On July 1, DSW rolled out Kids' Footwear in 203 of its 468 stores with plans to expand to 227 by the end of the third quarter. Notably, the specialty footwear retailer is entering the $4 billion kids' footwear market for the first time.

"We estimate Kids' Footwear will add $31+ million in sales and $0.02 in EPS in the second half of this year becoming more accretive in FY17 and FY18," analyst Scott Krasik wrote in a note.

"By FY20, we estimate Kids' Footwear could generate 7–10 percent of DSW's sales and potentially add almost $0.30 to EPS," Krasik continued.

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As such, the analyst recommends investors begin or add to positions based on the following four points:

    1. "Sales trends likely improved after Memorial Day when weather normalized consistent with what DSW saw in early 1Q16 when it comped +MSD."
    2. "Store checks and conversations with suppliers suggest inventory will be clean exiting 2Q."
    3. "Sales and margin comparisons ease in 2H when Kids' Footwear is added and DSW improves its promotional messaging and athletic assortments" and
    4. "Valuation remains attractive at 5.1x our FY17 EV/EBITDA estimate. At current levels, we view the risk/reward as favorable (15 percent downside/25 percent upside)."

Rating, Estimates And Justification

In addition, Krasik raised his price target on the stock by $3 to $27, which implies a potential upside of 13 percent over Tuesday's close.

The analyst maintained his Buy rating on the stock, citing that DSW can take market share over time from both department stores and independent retailers, which control over 30 percent of the U.S. footwear market.

Krasik noted DSW has the potential to reach an 8–9 percent EBIT margin and he expects a 6.5 percent EBIT margin this year. Further, DSW ended the first quarter with about $3.30 of cash and offers a 3.4 percent dividend yield at current levels.

Shares of DSW closed Tuesday's regular trading session at $23.87.

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Latest Ratings for DSW

DateFirmActionFromTo
Dec 2016Standpoint ResearchDowngradesBuyHold
Nov 2016Standpoint ResearchInitiates Coverage OnBuy
Nov 2016WedbushInitiates Coverage OnNeutral

View More Analyst Ratings for DSW
View the Latest Analyst Ratings

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