Consumer discretionary

DSW Inc. (DSW) Shares Fully Valued at Current Levels: Canaccord Genuity

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DSW’s average unit retail will remain under pressure in the long run

Following the second quarter earnings report of DSW Inc. (NYSE:DSW), Canaccord Genuity affirmed a Hold rating and a $23 price target on the stock. The price target reflects to a 3.96% downside potential over the last close of $23.95. DSW stock closed, up 2.66% yesterday. The firm weighed in on the company as it saw shares fully valued at current price levels.

While DSW maintained its full year outlook, non GAAP adjusted earnings came in at 35 cents per share, versus the firm’s estimate of 33 cents per share and $0.30 of the consensus. The firm highlighted 1.2% decline in comparable sales combined with -140 basis points contraction in product margin, which underscores analyst’s concerns around the challenges faced by DSW.

Moreover, the firm said DSW’s average unit retail will remain under pressure in the long run, given the company’s own strategic initiatives along with the increasing competition from online retailers, off-price retailers and departmental stores. DSW also announced annualized expense reduction of $25 million, which would benefit 2017 earnings per share by 13 cents, according to the firm. However, DSW’s fundamental problems of driving strong comp growth and expansion of merchandise margin would still persist.

“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,” wrote Canaccord Genuity analyst. The firm sees this as an accurate approach to retrain consumers to buy at full, rather than off price. In addition, “these efforts will likely leave little room for EPS upside (barring significant intra-season chase/reorders) we believe.”   

DSW has a market capitalization of $1.76 billion, with a 17.57 price to earnings ratio. The stock has a 52 week high price of $30.70, and a 52 week low of $18.51.

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