DSW Beats, Raises Outlook

| About: DSW Inc. (DSW)

Columbus, Ohio-based DSW Inc (NYSE:DSW) reported first quarter 2011 earnings of 85 cents per share, which surpassed the Zacks Consensus Estimate of 75 cents and increased 27.0% from 67 cents in the prior-year quarter. The first quarter earnings include a charge of 2 cents related to the merger with Retail Ventures Inc.

The company reported strong results on the back of strong top-line growth and margin expansion. Consequently, the company raised its full-year outlook.

Quarter Highlights

The shoe retailer, DSW registered revenues of $503.6 million in the first quarter of 2011, up 12% year over year, driven by growth across all categories, particularly in men’s footwear. The reported revenues also outperformed the Zacks Consensus Estimate of $495 million.

Comparable stores sales climbed 10.8% in the quarter but were below the prior-year quarter level of 16.2%.

Gross margin expanded 140 basis points (bps) year over year to 12.6%, attributable to lower cost of sales and double-digit growth in the top line.

Operating margin also enhanced from 10.9% in the first quarter of 2010 to 12.6% while operating profit jumped 29% to $63.3 million.

Stores Update

During the quarter, DSW opened 7 new stores. The company currently operates 318 outlets.

The company plans to open 18 new stores in fiscal 2011.

Financial Position

DSW ended the quarter with cash and cash equivalents of $49.9 million and shareholders’ equity of $686.9 million.

Outlook

For 2011, the company expects earnings in the range of $2.65 and $2.80, excluding acquisition costs, up from the previous estimate of $2.60 to $2.75 per share. DSW expects comps to grow in the mid single-digit range in 2011.

Following an increased full-year outlook, a positive sentiment may be palpable among the analysts, and we could witness a rise in the Zacks Consensus Estimates in the coming days.

Our Take

The company reported strong first quarter results and also raised its earnings outlook for 2011. We believe that the company’s profit will increase in 2011 as DSW continues to focus on introducing innovative new products and invest in marketing activities to enhance its brand awareness and increase its market share.

On May 26, 2011, DSW completed the previously announced merger with its majority shareholder and wholly owned subsidiary Retail Ventures.

One of DSW’s primary competitors, J. C. Penney Company Inc. (NYSE:JCP) reported first quarter 2011 earnings of 28 cents a share, ahead of the Zacks Consensus Estimate of 25 cents, on the back of improved and exclusive merchandise assortments, and effective cost management.