DSW's Shoes Are Made For Profits

Founded in 1991 and with roots dating back to the 1960s, DSW Inc. (DSW) has grown to represent a distinctive facet of the multi-billion dollar footwear industry, with its traditionally expansive sales floors and product selection.

The firm’s ubiquitous spatial layout along with a customer self-serve policy, have given rise to a low-cost business strategy with staying power. McDonald’s (MCD) taught consumers the art of self clean-up and DSW has taken this self-dependence to a new level, focusing on scale discounts and minimal employee utilization to maintain profit margins.

Originally a wholly owned subsidiary of Retail Ventures Inc (RVI), DSW was spun off from its parent in July of 2005. Having raised over $260 million in its IPO, the firm surpassed the $190 million target earmarked for the full repayment of outstanding debt to RVI. As of the completion of the spin-off, DSW became a constituent in the Clear Spin-Off index which is licensed for the Claymore/Clear Spin-Off ETF, symbol (CSD).

Having comprised over 30% of RVI revenues before the separation, DSW has solidified its history of profitability as an independent company. Despite some earnings fluctuations in the initial two year period, same-store sales grew steadily, along with the number of national locations. This expansion has been a factor in the firm’s valuation, which has experienced a 60% price appreciation since the stock’s solo debut.

Fundamental data supports a continued optimistic forecast, with trailing twelve month net income growth of 57.65%. Calculating this statistic for the two full years of the firm’s operation yields a figure of 151.1%. Profitability figures are also encouraging, with DSW’s operating margin of 7.59% which is slightly above the 7.12% industry average. Its return on equity [ROE] of 18.08% is also slightly above its peers at 17.70%.

Though an initial valuation analysis using the price to earnings [P/E] ratio points to an inflated market value, factoring in earnings growth through the trailing 12 month price to earnings to growth [PEG] ratio of 0.51 signals that the stock may still have some fancy footwork in store for investors in the stock.

Disclosure: DSW Inc. [DSW] is a constituent in the Clear Spin-Off index licensed for the Claymore/Clear Spin-Off ETF [AMEX:CSD]. Mr. Corn is CEO and founder of Clear Indexes LLC which publishes the index and he owns shares of the ETF: CSD. He does not directly own shares in [DSW].

DSW 1-yr chart