DSW (DSW)

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The combination of increasing fixed expenses and heavy discounting caused the company's gross margins to fall from 28.6% to 26.3% from 2006 to 2007. ^[2] Retail Ventures (RVI), owns 60% of DSW's common shares, and controls 90% of the voting rights. Until it disposed of most of its ownership stake in 2007, RVI also owned Value City Department Stores. Under this arrangement, DSW was able to share its fixed expenses with Value City. With RVI's sale of most of its stake in Value City, DSW's fixed expenses increased significantly. Moreover, since DSW lacks an international presence its fortunes are closely tied to general U.S. economic conditions, as all of its stores are located in the U.S. Falling discretionary spending in the U.S., in the wake of the U.S. housing market slump and a sputtering economy, forced the company to sell its already discounted merchandise at lower than usual prices.

Despite these near term difficulties, the company has committed itself to growing rapidly through 2010. DSW plans to open 30 new stores per year, and it has invested nearly 30MM in the 2008 launch of its website. In the short term, the store openings will drag on earnings, since it typically takes 2 years for new stores to achieve profitability. ^[3]

[edit] Company Overview

DSW sells branded footware in large retail stores, through leased departments in other retailers, and online at dsw.com. The stores themselves are typically very large (25,000 sq ft on average), located in shopping strips, and use most of their space (about 85%) for selling.

DSW leases shoe departments in 4 other retailers: 278 Stein Mart (SMRT) stores, 63 Gordman's stores, 36 Filene's Basement (BSMTQ) stores (Filene's Basement is entirely owned by DSW's parent company, Retail Ventures (RVI), and one Frugal Fannie's store. 13% of 2007 revenues came from leased department operations.^[4] Typically, DSW owns the merchandise and fixtures, and pays a percentage of sales to the lessor as rent.

Revenues have been growing consistently since 2005, fueled by the constant growth of new stores opening across the country. Operating Income as a percentage of sales dropped to 5.8% in 2007 from 7.9% in 2006. This is a result of increasing cost of goods sold, and not of fixed costs (i.e. operating expenses), which have been decreasing since 2005. Cost of goods sold rose to 73.7% of sales (from 71.4% in 2006) because of an increase in markdowns and an increase in occupancy expenses (mostly rent, which rose to 12.9% of sales from 12.2% in 2006).^[5]

Revenue vs. Operating Income^[6]

DSW has been consistently adding new stores across the country. In 2007, DSW added 61 stores (net of store closings).

DSW Geographic Breakdown^[7]

Comparable-store sales dropped 0.8% in 2007, in the presence of declining consumer confidence and othe recessionary macroeconic indicators. Additionally, DSW opened more than 61 new stores, which is significant because new stores are not generally profitable immediately, but, rather, spend time and money advertising in the community and building a customer base. DSW aims to have new stores be cash flow positive within two years of opening.

DSW Sales per Store^[8]

[edit] Trends and Forces

[edit] Drop in U.S. consumer spending forces discount

All of DSW's 260 stores are located in the United States. As a result, the company's sales are highly sensitive to general economic conditions. From mid 2007 through early 2008, the subprime lending crisis and the attendant housing slump and credit crunch led to a slow down in consumer spending. Since shoes are in many cases discretionary purchases, DSW was forced to discount its prices even more in oder to move its merchandise.

[edit] DSW loyalty program drives incremental sales

In 2007, 69% of net sales were to shoppers in DSW's loyalty program, which was an increase from 66% in 2006^[9] and 60% in 2005.^[10] Customers in the loyalty program ten to spend more than othe customers. For instance, in 2005, loyalty program customers spent 19% more per purchase than unenrolled customers.^[11] As of Feb 2, 2008, "DSW Rewards" had 8.6 million enrolled customers, which was up from 7.3 million in Februrary 2007.

[edit] DSW losing internal customer and expense sharer

DSW's parent company, Retail Ventures (RVI), which owns 60% of DSW, disposed of more than 80% of its ownership interest in Value City Department Stores.^[12] This has led to a number of Value City store closings, and additional closings are planned as well. Value City has acted as an internal customer of DSW's shoe processing and information technology services, so decreased Value City operations will lead to greater costs for DSW. Other fixed costs have been shared among Retail Ventures (RVI)'s subsidiaries in proportion to their sales. As Value City operations decline, DSW will be responsible for a greater portion of Retail Ventures (RVI)'s fixed costs.

[edit] Competition

According to NPD Fashionworld, the adult footwear market is a $36.6B industry..^[13] DSW competes mainly against departments stores. In 2005, DSW captured 2.3% of market share, based on dollar volume, and department stores accounted for 12.4%.^[14] DSW also competes with single-brand company stores and specialty retailers, as well as with independent shoe retailers and national chains.

DSW's main non-department store competitors are:

• Collective Brands, Inc. (PSS) (formerly Payless ShoeSource) is a brand-name shoe discounter with 3,954 domestic stores^[15] (DSW only has 259), but these tend to be in shopping malls and are much smaller (3,200 sq ft versus DSW’s 25,000 sq ft). Still, Payless stores, in aggregate, occupy roughly twice as much total area as DSW stores (12,652,800 vs. 6,475,000 sq ft in the United States). Payless has expanded internationally - they currently have 598 stores outside of the United States - while DSW continues to grow only domestically. Collective Brands, Inc. (PSS) has also purchased Stride Rite (SRR) and thus expanded into the children's footwear market; DSW only sells adult shoes.^[16]
• Shoe Carnival (SCVL) operates 291 stores in the Midwest and South. Stores are generally smaller than DSW’s (11,300 sq ft) but contain a similar number of shoes (29,000 compared to DSW’s 30,000).^[17]
• Shoe Pavilion (SHOE) operates 115 stores in the West and Southwest. Stores are smaller than DSW’s – 13,800 sq ft on average.^[18]

In terms of total revenue in 2007, Collective Brands, Inc. (PSS) was largest with $2.8 billion, and DSW followed with $1.3 billion. Shoe Carnival (SCVL) and Shoe Pavilion (SHOE) had revenues of $680 million and $120 million, respectively.

[edit] References

1. ↑ DSW 10-K, 4/17/08
2. ↑ DSW 10-K, 4/17/08
3. ↑ DSW 10-K, 4/17/08
4. ↑ DSW 10-K, 4/17/08
5. ↑ DSW 10-K, 4/17/08
6. ↑ DSW 10-K, 4/17/08
7. ↑ DSW 10-K, 4/17/08
8. ↑ DSW 10-K, 4/17/08
9. ↑ DSW 10-K, 4/17/08
10. ↑ DSW 10-K, 4/5/07
11. ↑ DSW 10-K, 4/5/07
12. ↑ DSW 10-K, 4/17/08
13. ↑ DSW 10-K, 4/5/07
14. ↑ DSW 10-K, 4/5/07
15. ↑ Collective Brands 10-K, 4/1/08
16. ↑ Reuter's Collective Brands Company Profile
17. ↑ Reuter's Shoe Carnival Company Profile
18. ↑ Reuter's Shoe Pavillion Company Profile