DSW Shares On Sale With New Initiatives

Aug.22.14 | About: DSW Inc. (DSW)

Summary

Shares down 35% on year, unjustly punished from poor first-quarter sales and guidance.

Strong dividend yield of 2.7%.

New smaller size stores in United States recognizes trend and should improve overall margins.

Acquisition in Canada provides entry of own brand while also controlling the dominant leader in the country.

If you were a shareholder of DSW (NYSE:DSW) in 2014, chances are you're looking at a large unrealized loss. Shares were hit hard by more than 27% in a one-day drop back in May, due to poor first-quarter earnings and guidance. However, with shares now trading 35% lower in 2014 and new growth initiatives coming, investors may want to try DSW shares on and see if the shoe fits.

Canada expansion could be the biggest reason to be bullish going forward. Several large retailers have failed or missed with their Canadian expansion. The DSW plan seems to be going in the right direction. The company acquired a 49.2% equity (50% voting power) interest in Town Shoes Limited, the largest branded footwear retailer in Canada. Town Shoes has 200 locations across the country.

Along with the acquisition, DSW is also bringing its namesake brand to the greater Toronto area. Two planned DSW stores will each be 20,000 square feet, representing the largest shoe stores in the country. Between DSW stores and Town Shoes stores, DSW is likely to see significant market share in the country. A new e-commerce platform is also being rolled out to capture additional Canadian sales.

DSW has 410 stores in 42 states and remains committed to having more than 500 stores across the country. Two new plans may bring that figure closer to reality. DSW launched two small format sales back in the fourth quarter and sees this becoming a growing trend. A typical DSW is 22,000 square feet. The new smaller stores are 10,000 square feet on average. The smaller stores feature the same core brands and products, but a smaller overall selection. The company is likely happy to trade selection and convenience for margin improvement and a possible sales turnaround.

DSW is also launching its Yellow Box Footwear brand into the retail channel. A concept store in California opened last week with another California store planned for September. Yellow Box has been on shelves since 1998, but was only recently given its own retail store in June in Miami, Florida. The Yellow Box brand is most recognized for its jeweled sandals and has been a staple in the footwear category for more than 15 years.

First-quarter sales fell 0.4%. Same store sales fell 3.7% due to heavy promotions and weather concerns. Adjusted earnings per share were $0.42. The company ended the quarter with $548 million in cash. While this quarter was bad and the guidance mentioned below was likewise worse than expected, I find it hard to believe it warranted a 25%+ drop in the share price.

Analysts on Yahoo Finance see the company posting earnings per share of $1.55 in fiscal 2015. This would be a decline from the $1.88 the company posted last fiscal year. Revenue is expected to increase 2.7% to $2.4 billion. For fiscal 2016, analysts see $1.77 in earnings per share from revenue of $2.6 billion, an increase of 6.5%. DSW issued new guidance for the full fiscal year. The company now sees 2015 earnings per share coming in a range of $1.45 to $1.60.

Shares of DSW trade at close to $28. This is towards the low end of the 52-week range ($23.45 to $47.55). As you can see, shares are down significantly from their yearly highs. The company also pays out a healthy 2.7% dividend yield, while investors await the turnaround that is likely coming.

Retail is hurting and shoes are no different. DSW has already done a good job of rebounding from the first quarter and projected sales slump by aggressively expanding in Canada through its partnership with Town Shoes and the new mega stores. In the United States, DSW is recognizing the trend to open smaller stores and grow its Yellow Box brand through strong stores in large highly engaging markets. DSW remains a great retail turnaround play and with strong cash flow and price to sales of around 1, makes a great buyout play as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.