by Susan J. Aluise | May 30, 2014 8:52 am
Warren Buffett’s advice to “be fearful when others are greedy and be greedy when others are fearful” is overplayed, overwritten and overdone. But it’s not wrong.
That’s why Wednesday’s 27% plunge in shares of shoe retailer DSW (DSW) — while awfully painful for anyone already long the stock — should be taken as a signal to shop, not avoid, the designer discount shoe company.
It was an earnings miss that shoved DSW stock off the cliff: The company announced quarterly earnings of 42 cents a share on $599 million in revenue — considerably below Wall Street’s expectations of 48 cents per share on $622.4 million in revenue. But other factors weighed on DSW stock as well.
For instance, that quarterly revenue also represented just a 0.5% improvement year-over-year, same-store sales dipped 3.7%, and DSW cut its full-fiscal year earnings forecast to between $1.45 and $1.60 a share — down from the $1.90 analysts had been expecting. The company attributed much of the bad news to unusually bad weather and aggressive discounts.
Bad news? Absolutely. Bad enough to put DSW stock into the recycle bin? Hardly.
Here are three reasons why I think DSW’s 27% plunge on Wednesday isn’t a warning for potential buyers to stay away:
Unseasonably cold weather slammed the entire retail sector. It’s just that for specialty retailers like DSW, the impact was particularly troublesome. Since DSW focuses on shoes and accessories, the cold weather had a murderous impact on its biggest spring promotion: sandals, which were down 12%.
DSW is regrouping and already keenly focused on the next big challenge: boots. In women’s footwear, boots drive nearly half of DSW’s business in the second half of the year. The company already has already moved aggressively to obtain attractive deals for a major holiday push.
In May, DSW closed on a 49% stake in Town Shoes Limited, the largest footwear and accessories retailer in Canada and a good play on that market. DSW has the option of acquiring the remaining interest in the next three or four years.
DSW also is in the early stages of its omnichannel strategy, through which it can use its 400 stores to act as fulfillment mini-centers for online orders. DSW will test new technology to give in-store customers access to its full inventory, expanding the assortment available at any single store.
Another important change: DSW’s distinguished buyer Crystal Kirkbride is now leading its Women’s footwear operations.
DSW’s value proposition — delivering upscale shoes and accessories at discounted prices — is still a winning play similar to the strategies of TJX Companies (TJX) and Ross Stores (ROST). The company maintained its quarterly dividend of 19 cents on Wednesday, so the current dividend yield sits at 3.2%. Meanwhile, the stock is trading at less than 12 times forward earnings and the outlook for the second half of the year remains solid.
After all, women will always love beautiful shoes — particularly if the price is right.
Just as every fashionista loves top designer shoes at half price, value investors should take a second look at a discount designer shoe chain with a sound business plan, solid leadership and an attractive dividend — particularly since DSW stock is down nearly 45% so far this year.
Although DSW will be working through headwinds for the next couple of quarters, stronger leadership in women’s shoes, an intriguing omnichannel strategy and special merchandise and promotions aimed at growing sales in the holiday season underscore why DSW’s drop is a great opportunity for investors to shop.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.
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