DSW Inc.: Step Into This Growth Retailer

DSW Inc (DSW) is a retailer that sells brand name dress and athletic shoes for men and women. It operates 215 stores in 32 states with 30 new stores opening every year.

It is announcing its Q4 and year-end results this Thursday and I think you should buy this stock ahead of the earnings. Here is why:

DSW specializes in designer footwear and buys from over 300 brands including Kenneth Cole, Via Spiga, Calvin Klein, Gucci and Addidas. Their business model allows them to sell such footwear at 20% to 50% less than department stores.

The company's inventory system allows it to sell 80% of its inventory without markdowns and keep the merchandise turn-over at over 4 times a year, double the turn-over at department stores. A typical store carries over 30,000 pairs of shoes and runs a successful loyalty program with over 6 million members.

In addition to its own stores, DSW runs 240 leased departments for other retailers, including Stein Mart. In fact, starting January, DSW became the exclusive shoe provider in all Stein Mart stores, which gives it over 100 additional retail outlets, and with 300 brands, they have a much larger variety than Shoe Pavilion.

The stock has been on a tear these last 6 months, rising 65% since September and currently sits less than 4% below its all time high. At 25 times earnings, the stock is by no means a bargain, however, it is growing at over 40% YOY and carries no debt.

Management has committed to increasing sales per square foot by 35% over the next 3-5 years and this coupled with the 30 new stores annually projected to open should keep EPS on the rise.

Full Disclosure: I am long DSW but my position can change anytime without notice.

DSW 1-yr chart:

Comments

[Amit Chokshi:]

Do you have an established valuation range for this company? The valuation doesn't seem to offer much of a margin of safety, especially when you consider that all of their growth is from new store development, don't you want to see some better comp store growth when you're paying 25+x EPS and over 14.0x EV/EBITDA? I like the company though. What do you think about RVI? RVI owns a lot of DSW but trades for a much better valuation, you also get Filene's Basement and struggling Value City which will prob be sold.

2007 Mar 28 08:50 AM

[Faisal Laljee:]

Yes I am not a big fan of 1% same store sales growth, but I think management realizes this and therefore, are committing to improving sales per square foot by over 30% over 3-5 years. Also, the management team there is relatively new so I expect good things. I will submit though that this is a bit of a momentum play, so valuation is going to be on the higher side.

2007 Mar 30 01:10 AM