DSW's Fall Doesn't Provide An Entry Point

| About: DSW Inc. (DSW)

Footwear and accessories discounter DSW (NYSE:DSW) announced solid fourth quarter results Tuesday morning. Revenue jumped 16% year-over-year to $594 million, just a touch shy of consensus estimates. Earnings also fell short of consensus estimates, growing 35% year-over-year to $0.69 per share. Like we've seen from other retailers during the fourth quarter, guidance stole the show.

For the first 6 weeks of its 2013 fiscal year, DSW's same-store sales have declined 5% with weakness spread equally across geographies and categories. Naturally, weather took some of the blame, since the 2013 winter has been substantially colder than 2012. Management tried to avoid blaming the weather, but failed, saying on the conference call:

"…we haven't had enough good weather on a consistent basis to really measure the underlying sales trend when it is good. I'll give you a couple of stats. We have seen a material decline in our traffic, and it started almost at the onset of the fiscal year. And of course, that can be weather or it could be other factors, but here is an interesting stat. Last week, we had reasonably good weather in the west and as a consequence, our customer traffic was up a little more than 1%. We had a comparable sales increase in the west last week of about 12.5%. Now the interesting thing is if you look at seasonal sandals, which is kind of the poster child for categories that are affected by weather, seasonal sandals in the west last week were up 30%. In our weakest region, seasonal sandals were down 60%."

Later during the conference call, management said weather during the same period of 2012 was 10 degrees above average while 2013 is 15-20 degrees below average. We anticipate hearing weather cited as the standard excuse for retail weakness during the first quarter-and perhaps the second quarter-of 2013. Regardless, weather swings should (theoretically) balance out in the long-term.

Getting back to the fourth quarter, gross margins were slightly weaker than a year ago, declining 40 basis points year-over-year to 41.3%. We think gross margins could remain challenged in 2013, particularly if sales issues are company related rather than weather related. Even though gross margins declined, the company did a fantastic job controlling fixed costs, as SG&A declined 90 basis points year-over-year to 20.2% of sales. Although management indicated sales leverage might not be as strong in 2013, we're impressed by the firm's ability to control costs even as it invests in new stores and e-commerce initiatives. For the full-year, SG&A declined 10 basis points as a percentage of sales to 21.2%.

Looking ahead, the company is anticipating flat same-store sales growth for the full-year in spite of new opportunities for fashion jewelry and luxury. Since the company is forecasting a weak retail environment, the firm anticipates opening 30 new stores in 2013 compared to 39 in 2012. This guidance also translates to earnings per share of $3.30 to $3.40, suggesting earnings growth will be weak in 2013.

As we said earlier, we believe the weather excuse could be prominent throughout the first half of 2013, but we're not sure DSW provides much of a read for other retailers. We do not believe its results provide any insight into Finish Line (NASDAQ:FINL) or Footlocker (NYSE:FL), but it could spell weakness for a competitor like Nordstrom Rack (NYSE:JWN) that also targets females via designer brands at off prices.

Regardless, we do not believe DSW's fall provides an attractive entry point at this time. Given the firm's weak profit outlook, we would need to see shares fall below $50 before considering the name for the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Apparel Stores, Earnings
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