Analysts’ View of Limited Upside for DSW Inc. Looks Right

DSW stock - Analysts’ View of Limited Upside for DSW Inc. Looks Right

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There’s kind of a good news/bad news split for DSW Inc. (NYSE:DSW) stock right now. Fiscal year 2018, ending January 2019, guidance appears solid, with the company projecting 4 to 14% earning-per-share growth and positive comps. DSW stock itself touched a two-year high last month just before its first-quarter earnings report.

But despite an earnings beat in Q1, DSW stock still fell almost 6%. Meanwhile, two different analysts have questioned the stock over the past couple of weeks, undercutting some of the momentum DSW stock had gained.

With DSW trading above $24, it’s certainly not the worst stock in the market — or even in retail. A cash-heavy balance sheet reduces risk, and a 4%+ dividend provides income. But I wrote coming out of the Q4 report in March that I wasn’t terribly impressed with DSW — and that’s still the case. I don’t always agree with Wall Street, but in this case, I think the analysts are on point.

Analyst Questions

Heading into earnings, Deutsche Bank AG (USA) (NYSE:DB) downgraded DSW to a “hold,” with a target of $24. That move sent DSW down about 2.5%. Deutsche analyst Paul Trussell argued that it was mostly a valuation call, with DSW’s price-to-earnings having risen over three turns in the past year — and moving to above its full-year average.

Susquehanna followed on May 31, the day after the earnings report. Sam Poser made a similar argument, writing that the company is “doing the right things” to position itself going forward, but questioning how much growth already was priced in. Poser assigned a $26 price target to the stock.

Interestingly, the Street as a whole is rather bearish on DSW stock. Poser’s $26 figure remains the highest of 11 target prices, according to Yahoo Finance data. The average analyst sees DSW trading just below $23 — 5% below current levels.

And there’s some logic to both of the recent downgrades. It’s true that DSW isn’t exactly expensive, trading at 14x the midpoint of FY18 earnings-per-share guidance backing out net cash of about $2 per share. (That figure includes the about $35 million spent to acquire the rest of Canada’s Town Shoes, a deal that closed in the second quarter.) But as both analysts have pointed out, growth isn’t exactly torrid, either.

Indeed, as I detailed in March, FY18 guidance suggests pre-tax income will decline this year. Some of that pressure is coming from higher Selling, General and Administrative investments in marketing, a new loyalty program, and the company’s online presence. But same-store sales still are guided to the low single digits this year — and even a 2.2% increase in Q1 isn’t really that impressive.

All told, the cautious argument here is that DSW is performing reasonably well for a retailer — and is valued as such.

DSW Stock’s Footwear Rivals

Indeed, one of the issues with DSW stock, even at a muted valuation, is that peers look potentially more attractive. In January, I called Foot Locker, Inc. (NYSE:FL) the best buy in the sneaker place, and it remains intriguing even after a huge post-earnings jump last month. At less than 11x FY18 earnings per share (here, too, backing out net cash), it still looks attractive — and cheaper than DSW.

Shoe Carnival, Inc. (NASDAQ:SCVL), meanwhile, gained 21% after its earnings report — in which it raised full-year guidance. And while I’m not entirely sold on SCVL, it’s DSW’s closest peer — and itself trades at less than 15x EPS, even after the blowout Q1. Boot Barn Holdings Inc (NYSE:BOOT) has tripled just since November, thanks in part to 12%+ comps in its March quarter. There’s reason to take a long look at manufacturers like Nike Inc (NYSE:NKE) and Skechers USA Inc (NYSE:SKX) as well.

The performance of peers and suppliers takes some of the shine off the bull case for DSW stock. FL is cheaper. BOOT is growing much faster — and has much more room for new stores. I agree with the analysts: DSW is doing a nice job. But I also agree that I’m not sure there’s enough here to get all that excited, even at 14x EPS.

As of this writing, Vince Martin has no positions in any securities mentioned.


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