A Daring and Risky Turnaround Strategy by DSW

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The world of corporate turnarounds never seems to run out of aggressive strategies. The case of DSW Inc. (NYSE: DSW) is one long-time turnaround when the actual turnaround just seems to be more and more elusive for its shareholders.

The backdrop for this story would seem to be the earnings report. There is far more to this story than just earnings. While the latest quarterly numbers were disappointing, DSW showed that it grew sales over the past year and the company’s earnings release and outlook to 2021 sound far more positive than the share price reaction has been.

There is a reason shareholders have some concerns here. The long-term plans for DSW come with big changes. That also means big risks.

DSW reported a quarterly loss of $45.7 million, or −$0.58 per share. That is down from a profit of $12 million ($0.15 per share) a year earlier and less than the Refinitiv (Thomson Reuters) consensus estimate for earnings of $0.04 per share.

DSW’s full-year adjusted earnings were reported as $1.66 per share, including $0.12 per share in items from the wind-down of operations of exited businesses. The company’s results also showed that it crossed the $3 billion revenue threshold for the first time ever, led by a 6% increase in comparable sales.

DSW is no new name for investors looking for “value stocks” in which the share price action looks worse than the underlying performance of the company. A double-digit percentage drop on this day is also only part of the story.

With shares at $25.36 ahead of earnings, DSW shares were barely positive from the $24.70 closing price on the last day of 2018. Its shares were also down almost 27% from the 52-week high of $34.63. The damage looks even worse considering that the stock’s highest price was above $47.00 in late-2013. Stocks have continued to soar since then, and what was almost a five-year bull market back then is now a 10-year one.

Being a discount retailer and wholesaler to the public has been a hard strategy for many companies. The threat of the continual migration to online sales and e-commerce, away from one store to an “unbricked” store, has been one issue for all brick-and-mortar retailers. Amazon owns Zappos, and every major retailer from Walmart and Target down to niche stores have been investing in their online and omnichannel models. Distributing the products of others, even if some of them may be bulk-buys and close-out deals, can have a limiting effect on margins with such strong competition for every available sales dollar.

DSW’s commentary in its earnings release has been far better than the share price would indicate. The company has seen five consecutive quarters of positive comparable sales, and it has seen seven consecutive quarters of positive footwear comparable sales. It has relaunched its rewards program and showed that digital demand grew by more than 30%. The company has also now completed two acquisitions that added two new segments (Canada Retail and Brand Portfolio) and has changed its in-store customer experience with the introduction of the W Nail Bar.

In a surprise move, DSW is planning an entire rebranding campaign. The company is changing its name to Designer Brands and is even changing its New York Stock Exchange ticker to DBI from DSW with an effective date of April 2, 2019. On top of the name change, the company plans to sell its own products to the public. DSW’s name change is taking place immediately.

DSW announced three-year strategic priorities and financial goals, and the name change is said to reflect its strategy along with what will be a unique business model. The company is targeting a 240 basis point gain in its gross profits over the next three years and is targeting adjusted earnings of $2.65 to $2.75 per share in 2021. It is also targeting approximately 5.5% revenue growth (CAGR) and $800 million cumulative cash flow over the next 3-year period.

The company plans to build exclusive brands and products for DSW and The Shoe Company through Camuto Group. On top of the expanding services of its W Nail Bar in stores, the company will offer custom insoles, shoe repair and shoe concierge services.