Shoe retailers DSW (click ticker for report: ) and Brown Shoe Company (BWS) posted better-than-expected second-quarter results.
DSW
On Tuesday, DSW’s second-quarter release revealed that its sales surged 9.7% year-over-year to $562 million, easily exceeding consensus expectations. Earnings per share adjusted for luxury testing and the termination of Retail Venture Inc’s pension plan increased 47% year-over-year, to $0.97.
Image Source: Valuentum, Company Filings
After same-store sales slipped 2.4% during the first quarter, DSW returned to growth in the second quarter, with same-store sales 4.4% higher than the same period a year ago, re-accelerating the two-year comp trend (8.6%). Not only has DSW added some new merchandise to stores with necklaces and other small accessories, but management pointed to strength in men’s as a key contribution to productivity growth. CEO Michael McDonald expounded on these ideas and as well as the divergence in growth based on category, saying on the conference call:
“…men’s footwear recorded comparable sales growth of 12%. We attribute this to a continuous upgrading of our fashion content, reduced style duplication, better in-stock positioning and better size availability. Athletic footwear grew by 5%, which was driven by product innovation and price range expansion. Comparable sales in women’s footwear grew by 1%. Sandals rebounded strongly in the quarter. Also, we have continued to carry key sandal styles through August to take advantage of sales opportunities that we may have missed in prior years. Casual footwear also recorded strong growth in the quarter, reflecting an increased preference by the customer for casual versus dress styles.”
McDonald’s insight reveals that women’s footwear didn’t perform exceptionally well. We think it is important to monitor this trend going forward since women’s footwear still accounts for the lion’s share of DSW’s revenue.
On top of posting solid sales gains, DSW saw its gross margin jump 130 basis points year-over-year, to 32.6%. Management believes the additional retail scale and further development of private label brands could pad the gross margin a bit more going forward. Though we understand why management would be bullish about possible developments, we remain cautious because private-label rollouts don’t necessarily work as well as planned. Look no further than Foot Locker’s (click ticker for report: ) gross margin pressures as private label sales fail to keep pace with sales of other brands.
SG&A declined 140 basis points year-over-year to 20.5% of total revenue. Lowering marketing expenses and fixed-cost leveraging helped this expense line to decline substantially.
Looking ahead, DSW upped its full-year earnings outlook to $3.60-$3.80 per share from $3.40-$3.60 based on the stronger second quarter results. The firm also increased its comp sales outlook to low-single-digit growth from 0-2% growth. Fundamentals are improving slightly at the footwear retailer, but the firm’s valuation looks incredibly rich.
Brown Shoe Company
Brown Shoe Company is slightly down market from DSW, known for its Famous Footwear retail outfits as well as wholesale brands like Edelman shoes and Dr. Scholl’s. In its second-quarter report, also released Tuesday, revenue increased 10.1% year-over-year to $622 million, exceeding consensus expectations. Adjusted earnings-per-share more than doubled year-over-year to $0.33, also well above consensus estimates. Free cash flow year-to-date stands at $5 million, equal to less than 1% of total revenue.
Image Source: Valuentum, Company Filings
Same-store sales growth at Famous Footwear accelerated strongly, growing 6.8% year-over-year during the second quarter (its second-quarter stacked comp was 10.7%). With the firm back on track, the company was able to open 19 new stores and relocate another 14 during the quarter. Unlike DSW, Famous Footwear did not seem to struggle with its women’s assortment, though management did not provide the same segment specific detail.
On the wholesale side, sales jumped 12% year-over-year to $181 million. Naturalizer, Brown Shoe’s largest wholesale brand, which has struggled recently, saw 17% sales growth during the quarter as retailers’ experienced strong demand. Management also noted that Dr. Scholl’s performed well.
The cost side of the equation also improved at Brown Shoe Company, as gross margins rose 70 basis points year-over-year to 41% and SG&A declined 30 basis points year-over-year to 37.2% of sales. The company continues to invest in e-commerce initiatives, but strong sales growth has helped the firm leverage fixed costs.
Image Source: BWS 2Q FY13 Report
Though second-quarter performance was relatively solid, the Street was not happy about guidance. Management’s adjusted earnings-per-share target of $1.27-$1.32 and its sales outlook of $2.53 billion to $2.56 billion fell short of consensus estimates.
Valuentum’s Take
After a ho-hum second quarter at Foot Locker and retail sales that were pretty lackluster across the board in recent months, it seems that consumers flocked to the off-priced high-end shoes at DSW and the value offerings of top brands such as Nike (click ticker for report: ) and Sperry Top-Sider at Famous Footwear. This could be an aberration, but it is certainly interesting to note that footwear was a pocket of strength. Shares of DSW look overpriced at this time, and we are evaluating the firm as a potential put option candidate in the portfolio of our Best Ideas Newsletter.