DSW Beats, Raises Guidance

DSW Inc. (DSW - Snapshot Report)– a leading footwear and accessories retailer – has recently reported better-than-expected fiscal third quarter 2012 (ended October 27, 2012) financial results, and also provided guidance for fiscal year 2012. The quarterly adjusted earnings per share came in at $1.02, escalating 15.9% from the comparable quarter’s earnings of 88 cents in the last year. Moreover, it came way ahead of the Zacks Consensus Estimate of 89 cents a share.

Including the one-time items, earnings for the third quarter stood at $1.10 per share compared with 75 cents in the prior-year quarter.

Quarter in Detail

Net sales for the quarter increased 11.7% year over year to $592.7 million from $530.7 million in the year-ago quarter, due to a rise of 6.3% in comparable store sales. The company experienced growth in its comps for thirteen back-to-back quarters. Moreover, DSW surpassed the revenue estimate polled by Zacks analysts of $588.0 million.

Gross profit for the quarter came in at $200.2 million, representing an increase of about 11.0% year over year. However, we observe a year over year contraction of 20 basis points in gross margin, which came in at 33.8%. The contraction in gross margin was attributable to fall in merchandise margin, partially offset by increased certificate redemptions from their reward members.

Adjusted selling general and administrative (SG&A) expenses, as a percentage of sales fell 50 basis points to 21.2%. The fall in SG&A expenses was mainly due to reduction in advertising expenses, lower incentive compensation and leverage on fixed costs, partially offset by rise in pre-opening costs related to the opening of 26 new stores in the quarter.

Adjusted operating profit registered a growth of 14.5% year over year to $74.7 million from $65.2 million, whereas operating margin expended 30 basis points to 12.6% in the quarter.

Other Financial Details

DSW boasts a debt-free balance sheet. The company ended the quarter with cash and cash equivalents of $134.3 million. Inventory at the end of the quarter stood at $422.5 million, increasing about 12.0% from the prior-year period. Shareholders’ equity came in at $858.5 million at the end of the quarter.

Capital expenditure for the quarter was $38.0 million mainly attributable to new store openings, various remodels and the launch of new distribution centers.

Guidance

DSW has raised its lower end of adjusted earnings per share guidance for fiscal 2012 to $3.30–$3.40, representing an average increase of approximately 11.7% from the prior-year earnings of $3.00 per share. Earlier, the company had guided earnings per share to fall in the range of $3.25-$3.40 for fiscal 2012. The Zacks Consensus Estimate for the fiscal stands at $3.30 per share.

The company continues to expect comps growth in the range of mid-single-digit for the full year. The guidance so provided by the company includes the effect of Hurricane Sandy.

Moreover, management disclosed that the company is planning to open a total of 39 new stores in the rest of fiscal 2012 and announced its plan of launching 25-30 new stores in fiscal 2013.

Peer Performance

DSW performed far better than its peer J. C. Penney Company Inc. (JCP - Analyst Report), which posted third-quarter adjusted loss of 93 cents a share against earnings of 18 cents in the year-ago quarter. The Zacks Consensus Estimate for the quarter was of a loss of 8 cents.

Conclusion

Columbus, Ohio-based DSW Inc. operates 364 stores in 41 states as of November 20, 2012, (including 26 new stores launched during the quarter and one new store opened in Riverhead, New York on November 20, 2012) and supplies footwear to 344 leased locations in the U.S. It also runs an e-commerce site www.dsw.com and a mobile website m.dsw.com.

DSW currently carries a Zacks #3 Rank, implying short-term Hold rating on the stockfor the next 1-3 months.