DSW Beats Estimates, Gaps Higher

Shoe retailer DSW

reported third quarter earnings before the open this morning, beating analyst earnings per share estimates by $0.13, reporting an adjusted earnings per share of $1.02. Sales increased by 11.2 percent to $592.7 million and same store sales were up 6.3 percent during the quarter. The share price gapped up at the open, trading as high as 69.35 and is still more than eight percent higher mid-day. "We are pleased with our third quarter results. Comparable sales grew for the 13th consecutive quarter and earnings increased at a double digit rate," stated Mike MacDonald, president and CEO in a press release announcing the third quarter results. "During the quarter, we opened a record 26 new stores. We also paid a special dividend of $2.00 per share to DSW shareholders this quarter, the second such dividend in the last 13 months. Finally, we continued to make strategic investments that will enable DSW to maintain its growth trajectory." DSW has been one of the big success stories in retail over the past few years. The company has managed to grow sales and earnings consistently by expanding its retail sales network. The company has 346 stores in 41 states, the District of Columbia and Puerto Rico. The company has expanded from 172 stores at the end of 2004 and plans to open a net 25 to 30 new stores in the next year. “Our core focus is to create a distinctive shopping experience that satisfies both the rational and emotional shopping needs of our DSW customers by offering them a vast, exciting assortment of in-season styles combined with the convenience and value they desire,” the DSW website says. “Our DSW stores average approximately 22,000 square feet and carry approximately 24,000 pairs of shoes. We believe this combination of assortment, convenience and value differentiates us from our competitors and appeals to customers from a broad range of socioeconomic and demographic backgrounds.” At the same time as it announced earnings, DSW raised its guidance for the rest of the year to February 2, 2013. Adjusted earnings per share for the full year are expected to come in at $3.30 to $3.40, including the impact of Hurricane Sandy. According to the company website, DSW derives about 28 percent of sales from the Northeast, which was heavily impacted by the storm. Some analysts have noted that DSW's reported net income has declined for the last two quarters. Indeed, the company reported that reported net income was $50.1 million in the third quarter compared to $53.7 million in the third quarter of 2011. However, the 2011 figure includes a $13.9 million non-cash benefit resulting from a merger. Adjusting for one-time items, adjusted earnings were $46.6 million compared to adjusted earnings of $39.8 million in the third quarter of 2011. Given that the non-cash impact of last year's merger was so large, it makes sense to look at the adjusted numbers to get a true picture of growth. Several analysts have reduced their fourth quarter estimates ahead of today's release and are at the lower end of company guidance. It is possible that there will be some disappointment on fourth quarter numbers if the impact of Sandy is larger than expected during the holiday shopping season. But overall, management has been very successful at growing DSW and the company has consistently beaten analyst estimates over the past few years. Tuesday's gap up is probably a bit overdone. DSW is not a heavily traded share. Nasdaq reports short interest of 3.5 million shares, equal to more than five days' worth of trading. The sharp gap up was probably related short covering. Investors may want to wait for the dust to settle around the shorts before looking to take advantage of DSW's strong sales and earnings growth.