DSW Gets Back on the Right Foot

The retail industry has gone through huge changes in recent years, and that's affected players from the largest big-box department stores down to niche stores in shopping centers and strip malls across the nation. This time last year, footwear specialist DSW (NYSE: DSW) was going through difficult times, as many shoe manufacturers were looking at ways to go direct to consumers with their products rather than using intermediary retailers.

Coming into Tuesday's fiscal third-quarter financial report, DSW investors wanted to see solid double-digit percentage growth throughout the business. DSW's results went one better than that, with even higher numbers as well as expectations for a prosperous holiday season.

How DSW ran past its peers

DSW's third-quarter results continued the positive momentum that the retailer has generated recently. Sales were higher by 17% to $833 million, accelerating from their pace of growth in the fiscal second quarter and easily eclipsing the 12% rate that most of those following the stock were looking to see. Adjusted net income soared 56% to $57.9 million, and that produced adjusted earnings of $0.70 per share, far above the consensus forecast among investors for $0.51 per share.

As we've seen in recent quarters, DSW's growth came from a mix of sources. The company's move to consolidate its Canadian retail business added more than 11 percentage points of sales growth to its overall numbers, but the U.S. retail segment did manage to sport a 10% rise in revenue. Even with the winding down of its Town Shoes concept and reduced emphasis on the DSW Affiliated Business Group unit, organic revenue growth came in at around 6%.

Comparable sales were up across the board. The key U.S. retail unit saw a 7.3% rise, which matched that of the company overall. Affiliated Business Group saw slightly weaker comps of 6.5%, and falling store counts showed that the division is having less of an impact on the overall business than it has in the past.

CEO Roger Rawlins celebrated the news. "The nationwide roll-out of DSW Kids drove the most successful back-to-school season in our history," Rawlins said, "and our recently acquired Canadian business delivered the best results in the last five years." In addition, the CEO pointed to investments in merchandising, marketing, and employees in helping DSW sustain its upward trajectory.

Can DSW win the race?

DSW is especially enthusiastic about its recent acquisition of Camuto Group, which will give it both operational and distribution facilities in Brazil, China, and the U.S. along with licensing rights to a host of well-known brands, including Lucky Brand, Max Studio, and Jessica Simpson footwear. Some have criticized the purchase as eating into DSW's financial health at a pivotal time, but for the company's part, Rawlins thinks that the move "brings powerful design and sourcing capabilities in-house and new streams of revenue from one of the leading lifestyle brands in fashion footwear."

DSW was impressed enough with its performance that it boosted its guidance once again. New adjusted earnings projections for $1.70 to $1.85 per share were higher by $0.10 per share from previous guidance, and the company now sees a huge boost of 12% to 14% for revenue for the full year, far above the 6% to 9% range it previously anticipated. An upgrade in comparable sales growth to mid- or high-single-digit percentages was also a sign that DSW is firing on all cylinders going into the holidays.

DSW investors couldn't have been happier with the news, and the stock jumped 12% in premarket trading following the announcement. With its worst times behind it, DSW looks like it's on a path to keep putting its best foot forward for the foreseeable future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends DSW. The Motley Fool has a disclosure policy.