Analysis: DSW on sound footing for better growth

Overall, this is a solid set of results from DSW which shows the company is moving in the right direction. The 0.6% rise in comparable sales may not be spectacular, but given it is the first time in over two years that the measure has been positive, we see it as an encouraging sign.



Despite the anemic same-store number, overall growth continues to trend higher. The Ebuys business, which DSW is in the process of integrating, partly helped to inflate the figures. As much as Ebuys is valuable for growth, we also see the division playing a strategic role in being a channel through which DSW can clear down excess inventory. Ultimately this should help margins in other parts of the business.



The main DSW brand has shown some encouraging signs of life this quarter as the company corrects some recent errors. That said, it is still too early to declare that the brand has been revived, especially as the 0.6% same-store increase remains soft. The addition of 30 more stores over the past year helped inflate the same store number to 4% growth on a total basis.



A particular area of success for the DSW brand is online. In our view, the recent redesign and relaunch of the website and mobile apps are helping to improve conversion and average transaction values. Over time we expect the improvements to pay further dividends.



As much as the digital changes are encouraging, we still believe that most DSW physical stores do not deliver a good enough experience. In our view, the store-based footwear proposition lacks excitement, is too focused on replacement purchases of more formal footwear, and is cluttered and hard to shop.



We are encouraged by the testing of a new warehouse format that places much more emphasis on visual merchandising and storytelling. This makes the DSW concept more 'shoppable' and allows space to be used more efficiently. Combined with some exciting new product launches - including exclusives with brands and some new own-label collections like the "Made in Italy" assortment - these steps should help to drive up both traffic and conversion.



The initiatives DSW is taking are important, not least as we see continued softness in the mainstream footwear market for at least the remainder of this year. Among the demographics DSW serves, finances remain a concern and shoes are often deprioritized in terms of the things people intend to buy. In some ways, one of DSW's jobs is to make footwear a more compelling and important purchase. Better marketing efforts, especially in digital, will be vital in supporting this.



Away from DSW, the ABG part of the business - which operates footwear concessions in other retailers - remains in substantial decline. This is mostly the result of withdrawal from some chains, including the bankrupt Gordmans. Fortunately, underlying comparatives are more stable, and there are future opportunities with businesses like Stein Mart.



Overall, we believe that DSW is headed in the right direction. While near-term results may remain soft, the company has put itself on a sound footing for better growth over the medium-term.