Estimates have been rising for DSW Inc. (DSW) after management raised its guidance for fiscal 2011 on January 10.
It is a Zacks #2 Rank (Buy).
DSW has a very solid balance sheet and has been rewarding shareholders through the initiation of a regular quarterly dividend and a $2 per share special dividend. Valuation is attractive too, with shares trading below the industry median.
Company Description
DSW Inc. is a specialty retailer focused on branded footwear. The company operates 326 stores in 40 states and also supplies footwear to 364 leased locations in the United States.
It is headquartered in Columbus, Ohio and has a market cap of $2.1 billion.
Third Quarter Results
DSW reported better than expected results for the third quarter of 2011. Earnings per share came in at 88 cents, beating the Zacks Consensus Estimate of 80 cents. It was a solid 11% increase over the same quarter in 2010.
Net sales rose 8% to $530.7 million, driven by same-store sales growth of 5.2% (on top of 10.1% growth last year).
While many retailers have been struggling with rising costs squeezing gross profit, DSW’s gross profit margin actually expanded, from 32.5% to 34.0% of net sales. Meanwhile, operating profit increased 18% year-over-year as the company leveraged its fixed expenses.
Outlook
On January 10, management raised its EPS guidance for 2011 from a range of $2.90-$2.95 per share to $2.96-$2.99. The company also announced that it plans to accelerate new store openings in 2012 to between 35 and 40, ahead of its long-term goal of 15-20 new stores per year.
This prompted analysts to raise their estimates for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).
The Zacks Consensus Estimate for 2011 is now $2.98, within guidance, and representing 24% growth over 2010 EPS. The 2012 consensus estimate is currently $3.31, corresponding with 11% EPS growth.
As you can see in the company’s Price & Consensus chart, consensus estimates have been consistently rising over the last several months:
Returning Value to Shareholders
DSW boasts a solid balance sheet with over $8 per share in cash and no debt. This allowed the company to initiate a regular quarterly dividend of 15 cents per share in 2011. This translates to a dividend yield of 1.2%.
Additionally, on August 10 the company announced a special cash dividend of $2.00 per share.
Valuation
The valuation picture looks very reasonable for DSW. Shares trade at 14.6x 12-month forward earnings, a discount to the industry median of 17.3x, and a discount to its historical median of 17.5x.
It price to book ratio of 2.5 is also below the industry median of 2.7.
The Bottom Line
With rising earnings estimates, strong growth projections, shareholder-friendly management and reasonable valuation, DSW offers investors a lot of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
