DSW's Increased Competition, New Loyalty Program Is Weighing On Margins

DSW Inc. DSW's margins continue to be pressured in a confluence of factors, according to a new analyst note.

The Analyst

Susquehanna analyst Sam Poser downgraded DSW from Neutral to Negative rating and lowered his price target from $26 to $22.

The Thesis

Increased digital competition and gross margin pressure due to increased variable costs related to DSW’s new loyalty program will challenge margins according to Poser, who says to sell DSW.

The analyst said losses associated with Town Shoes, the Canadian footwear retailer the company acquired in May, will negatively impact its FY2018 outlook. DSW is also expected to purchase Camuto Group’s China sourcing, becoming the licensee of Camuto’s footwear brands ,a move Poser said will go against DSW’s core competency as a retailer.

Increased competition from Famous Footwear and Shoe Carnival, Inc. SCVL who have both improved their digital presence cause DSW to run a 20-percent off sale for its loyalty customers towards the end of the quarter.

“It’s hard to make money giving 20% off sandals and including free shipping,” Poser said.

The continued gross margin pressure is expected to impact the entire balance of the year and the decision to rollout a lower-margin kid’s business to all stores also influenced Poser’s decision to reduce his gross margin forecast from 29.9 percent to 28.3 percent.

DSW is set to announce its second quarter earnings report Aug. 28.

Price Action

DSW shares traded down 4.8 percent to $26.50 at time of publication.

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