DSW stock (NYSE:DSW) is falling heavily today. Why? Well the company has just reported its Q3 earnings and they have widely disappointed the Street. Let us discuss:
It wasn’t all terrible news, as total sales increased. However, comparable sales were pretty weak. Below are the third quarter operating results:
- Sales increased 1.7% to $708.3 million.
- Comparable sales decreased 0.4% with a negative impact of 50 to 60 bps from hurricane disruption.
- Reported gross profit decreased by 120 bps due to our market share initiative, higher shipping expenses and costs related to the integration of Ebuys.
- Reported operating expenses, as a percent of sales, increased by 20 bps, with higher technology and marketing expenses offset by lower overhead costs.
- Reported net income was $4.0 million, or $0.05 per diluted share, including pre-tax charges totaling $52.7 million, or $0.40 per diluted share, related to net non-cash impairment charges related to goodwill and intangible assets, offset by a reduction in contingent consideration related to the Company’s acquisition of Ebuys.
- Adjusted net income was $35.9 million, or $0.45 per diluted share, including weather related impact of approximately $0.05 per diluted share.
Goodwill and Intangible Assets Impairment
DSW stock is also being pressures as DSW updated its long term expectations for Ebuys based on its performance over the last eighteen months. Although Ebuys brings valuable proprietary capabilities to compete on digital marketplaces, DSW believes it is necessary to moderate the growth assumptions assumed at the time of the acquisition. As a result, DSW significantly reduced its future contingent liability while simultaneously impairing the carrying value of goodwill and intangible assets related to the original target price of the acquisition. The total net non-cash charges related to the impairment of Ebuys’ goodwill and intangible assets was $52.7 million, or $0.40 per diluted share, and is not included in the Company’s Adjusted results.
Looking at Year-to-Date Results
The year-to-date results for DSW also leave something to be desired, and help us understand why DSW stock is taking a hit:
- Sales increased 2.1% to $2.1 billion.
- Comparable sales decreased 1.0% compared to last year’s 1.6% decrease.
- Reported gross profit decreased by 80 bps, driven by incremental clearance activity and inventory reserves and distribution costs related to the ongoing integration of Ebuys.
- Reported operating expenses, as a percent of sales, improved by 10 bps due to tighter expense management.
- Reported net income was $55.6 million, or $0.69 per diluted share, including pre-tax charges totaling $59.9 million, or $0.45 per diluted share, related to acquisition and impairment costs, restructuring expenses and foreign exchange loss.
- Adjusted net income was $92.2 million, or $1.14 per diluted share.
Balance Sheet Highlights
- Cash and investments totaled $330 million compared to $216 million in the third quarter last year.
- During the quarter, the Company acquired 0.5 million shares for $9.4 million and has $524 million remaining in its current share repurchase program. Since 2013, the Company has returned to shareholders over $600 million in dividends and share repurchases.
- Inventories were $547 million compared to $563 million for the same period last year. Excluding Ebuys and Gordmans, inventories decreased 3% on a cost per square foot basis.
We do like the dividend and yield on DSW stock. DSW stock is falling, upping the yield. Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend will be paid on December 29, 2017 to shareholders of record at the close of business on December 15, 2017.
Fiscal 2017 Annual Outlook
Here is what is really killing DSW stock. The company updated its full year outlook for adjusted earnings in the range of $1.40 to $1.45 per diluted share to reflect lower expectations for Ebuys and the impact of weather related disruptions this quarter. Guidance does not include net charges related to the impairment of goodwill and intangible assets.
Let DSW stock fall. We need to wait to see a sustained turn-around, and positive comparable sales. While we like the yield here, and the company as a whole, as investors we are in a holding pattern.
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