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DSW Announces Name Change, Product Shift After Surprise Q4 Loss

After a period of investments, acquisitions and share repurchases, DSW saw its stock drop by more than 13 percent Tuesday morning as investors reacted poorly to the retailer swinging into the red during the fourth quarter.

During its annual Investor’s Day meeting, the brand also announced that it would be rebranding itself as “Designer Brands” to reflect the new acquisitions, going into effect on April 2nd.

In a Nutshell: In 2018, DSW announced it would be entering a partnership with ABG to purchase 40 percent of the Camuto Group’s intellectual property, which was finalized in October.

DSW also expanded into Canada during the year, adding to its portfolio. Along with the new revenue streams, it relaunched its successful VIP program, which it said contributed to higher brand engagement, retention rates and average transactions per member.

The company also revealed that its operating expenses increased by 380 basis points in 2018 as a result of more marketing investments, better incentive compensation, lease exits and restructuring charges.

Sales: In the fourth quarter of FY18, DSW recorded 843.3 million in sales compared to $724.7 million in 2017. However, this number includes about $153 million from new revenue streams that were not available in the previous year. Judged on the basis of business that can be compared to 2017’s results, retail sales dropped by 1.8 in the quarter to $655.7 million from $667.6 million in the comparable time frame.

However, analysts predicted poorer sales than DSW eventually recorded, with the majority expecting fourth-quarter revenue of $841.53 million.

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For the full year, DSW hit a company-high revenue record at $3.2 billion, which was up 13.3 percent from 2017 including a boost of $310 million from the company’s recent acquisitions. Analysts predicted slightly less revenue for the brand at $3.18 billion.

When judged on a comparative basis, DSW’s annual sales improved by 6.3 percent—compared to a 0.4 percent decrease in the previous year—at $2.74 billion compared to $2.58 billion in 2017.

DSW expects a return to growth in FY19, predicting low double-digit revenue growth and comparable store sales in the low single-digit range.

Earnings: Although sales were healthy throughout the year, despite a drop in the fourth quarter, it was the company’s reported earnings that drew investor ire.

In the fourth quarter, DSW reported a diluted loss per share of 7 cents compared to EPS of 38 cents in Q4 of FY17. This came in well below analyst earnings expectations of 4 cents per share.

For the full year, DSW recorded a profit of $1.66 per share, also falling short of analyst expectations of $1.76.

DSW provided EPS outlook for FY19, stating it expects between $1.80 and $1.90 in annual earnings—a growth of 5 percent to 11 percent as the company continues to grow along with the possibility of a greater market share due to the Payless bankruptcy.

CEO’s Take: Growth was the keyword for DSW (soon to be Designer Brands) CEO Roger Rawlins. He credited the retailer’s acquisitions and unique business model as major reasons investors should look forward to the future.

“Fiscal 2018 was one of the best years in our company’s history from a comparable sales and earnings growth standpoint. We crossed the $3 billion revenue threshold for the first time and drove a 6 percent increase in comparable sales as we strengthened connections with our customers. We built a compelling product assortment, including the expansion of DSW Kids, a differentiated services offering with our W Nail Bar partnership, and the relaunch of our award-winning loyalty program. At the same time, we strategically positioned our company to grow share and enhance profitability through transformative acquisitions, creating an infrastructure that positions us to be a significant force in the footwear industry for years to come.”