DSW (DSW) Resets Expectations With A New CEO - Jefferies

Jefferies analyst, Edward Plank, thinks DSW (NYSE: DSW) is hitting the reset button for FY17. No change to Buy rating but the PT jumps to $33 from $31,

The analyst likes new CEO Roger Rawlins strategic view. Mr. Rawlins stressed focus, tempo and marketplace disruptions as key elements to boosting DSW’s competitive positioning—a clear vision DSW needed. Under his direction there is more potential for turnaround fundamentals to gain traction in the year ahead, now that inventories are clean, the trend backdrop is improving, and tech initiatives should deliver some efficiencies. DSW beat on 4Q with EPS of 14c while comp sales came in slightly positive--promotionally driven, but GM, while down 300 bp, wasn’t as bad as feared.

Merchandising suffered last year amidst numerous organizational and systems changes but should be corrected through 1) fueling the momentum in athletic with a deeper offering, 2) rejuvenating the women’s biz with more product newness, value and opportunistic buys (mgmt noted a resurgence of strong trends and that it is so far pleased with early 1Q reads), and 3) the roll out of a kids assortment in 220 doors by BTS.

Management blessed consensus with FY17 EPS guidance of $1.54-$1.64. But, 4-6c is coming from Ebuys and 10c from last year’s buyback. As such, we still see plenty of room to improve the EBIT profile, as GM is expected flat for this year (product mix shift, tough 1H compares, shipping cost pressure) and SG&A dollar growth targeted up low-teens (partially from Ebuys, but also higher incentive comp). As the core biz stabilizes, we look for EPS growth to accelerate in the years ahead, driven by topline gains and OM expansion off our estimated 7.5% rate this year.

DSW shares trade at 15x FY18 earnings, close to historical levels and the peer average. The $33 PT is based on 18x earnings.

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

Shares of DSW Inc. closed at $28.34 yesterday.

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