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Gaining momentum from the recovery at its stores post the devastation caused by Hurricane Sandy, leading footwear and accessories retailer, DSW Inc. (DSW - Snapshot Report), achieved a Zacks #1 Rank (Strong Buy) status on December 29. Additionally, the company’s estimates witnessed a significant rise following the robust third quarter results and an encouraging outlook for fiscal 2012. The stock has amassed a year-to-date return of 52.1%, making DSW an attractive option for investors.

The Rank Driver

Strong top-line performance, healthy operating margin, rational store expansion strategy, strong financial position and a solid fiscal 2012 guidance justifies the stock’s Zacks Rank.

On November 20, DSW, which competes with J. C. Penney Company Inc. (JCP - Analyst Report),  posted better-than-expected fiscal third quarter 2012 earnings per share of $1.02, up 15.9% from 88 cents reported in the year-ago quarter. Moreover, earnings came in substantially ahead of the Zacks Consensus Estimate of 89 cents a share.

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 6.3% rise in comparable store sales. The company has experienced growth in its comparable store sales for 13 back-to-back quarters. Moreover, DSW surpassed the Zacks Consensus Estimate of $588 million.

Adjusted operating profit registered growth of 14.5% year over year to $74.7 million from $65.2 million, whereas operating margin expanded 30 basis points to 12.6% in the quarter. Further, DSW boasts a debt-free balance sheet, with cash and cash equivalents of $134.3 million at the end of the quarter.

Going forward, DSW expects adjusted earnings per share to be in the range of $3.30–$3.40 for fiscal 2012, representing an increase of approximately 11.7% from the prior-year earnings of $3.00 per share. The company continues to expect comps growth in the mid-single-digits range for the full year.

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.

Earnings Estimate Revisions

The Zacks Consensus Estimate for fiscal 2012 climbed 2.1% to $3.38 per share in the past 60 days, as 6 of 10 estimates were revised upwards. This represents a year-over-year surge of 12.6%. The Zacks Consensus Estimate for fiscal 2013 also inched up 2.1% to $3.87 over the same time frame as 7 of 10 estimates were raised, reflecting a year-over-year increase of 14.4%.

Valuation

The current forward P/E of 19.2x implies a premium of 24.7% to the peer group average of 15.4x. On a price-to-book basis, shares are currently trading at 3.4x, a 13.3% premium to the peer group average of 3.0x. Given the company’s compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 15.0%.

About the Company

Columbus, Ohio-based DSW Inc. operates as a branded footwear and accessories retailer in the United States. The company sells fashion, dress, casual, and athletic footwear and accessories for women and men through its DSW stores and dsw.com. It also sells kids' shoes on dsw.com and m.dsw.com. As of December 24, the company operated 364 stores in 41 states, the District of Columbia and Puerto Rico, and supplied footwear to 344 leased locations in the U.S. The company was founded in 1917 and has a market cap of $2.88 billion.

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