Canaccord Sees DSW (DSW) Valuation as Fair Following Q2 Results; Affirms at 'Hold'

Canaccord Genuity affirms DSW (NYSE: DSW) with a Hold rating and $23 price target, seeing shares fully valued at current levels amid Q2 results and maintained outlook.

The firm commented today, DSW’s Q2 adj. EPS of 35c beat our 33c estimate and consensus of 30c. That said, the 1.2% comp decline (a 300bp sequential two year deceleration) coupled with product margin contraction of -140bps underscores our concerns around the challenges DSW faces.

Specifically, we fear the mounting competitive pressure (from department stores, online retailers and off-pricers) coupled with DSW’s own strategic initiatives (increasing mix of kids, private label, athletic and closeouts) will continue to pressure AUR over the long run. The company also announced $25M in annualized expense reductions that we estimate will benefit 2017 EPS by ~13c; however, it does not solve the fundamental problem of driving both positive comp growth and merchandise margin expansion.

Despite the Q2 beat and reiteration of full year EPS guidance of $1.32-$1.42, the stock's weakness (-10%) can be linked to the implied expectation for significant traffic declines in the 2H as DSW laps the heavy markdowns (and consequently high traffic) from last holiday. While this is the correct course of action to take to retrain the consumer to buy at full price, these efforts will likely leave little room for EPS upside (barring significant intra-season chase/reorders) we believe.

For an analyst ratings summary and ratings history on DSW Inc. click here. For more ratings news on DSW Inc. click here.

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