DSW Inc. (NYSE:DSW) has had one of the strongest quarters in the company’s history:
Sources: SEC filings and author’s calculations.
Despite the fact that the overall growth rate is down, the fact of the matter is, they’ve had to take a lot of short-term hits in order to improve their long-term structure. However, they’ve still managed to exit out of their specialty business in Canada, and not take heavy losses. One of their main struggles in Canada has been with their smallest banner Town Shoes. The Town Shoes label has been suffering an identity crisis for an extended period of time. As a mid-luxury retailer, it has been lost in the chaos, struggling to find its voice in an increasingly competitive market. Annually, it pushed operating losses to $10 million, creating an unviable long-term platform. However, the story is not in Town Shoes, but more importantly in their other Canadian business, Shoe Company and Shoe Warehouse. The Town Shoes label itself consists of The Shoe Company, Shoe Warehouse, Town Shoes, and now DSW Designer Shoe Warehouse. The total brand generates around $340 million Canadian dollars (~$258 million USD). Nonetheless, 85% of the sales were being generated by The Shoe Company, Shoe Warehouse, and DSW. Therefore, in order to consolidate their Canada business, they’ve been cutting off weak links, in order to strengthen the overall business.
Expansion into the Kids Market
This quarter DSW successfully completed their goal, to bring the DSW Kids line nationwide this year. Generally, DSW has been pretty lacking in the kids category. But with all things considered, the kids category presents a huge growth opportunity for DSW. One of their biggest advantages going into this market is their recent success in digital marketing. Due to marketing investments they saw solid growth in new customer transactions, average money spent per member, rewards redemption, etc. All in all, this gives them a considerable edge going into the kids market. Kids and teens alike are very impressionable, and the ads you put out have an even greater effect on them than on adults. In general, the kid’s shoes they’ve put on the market are all incredibly cute, and they’ve brought in some big brand names such as Vans, Adidas, Nike, Converse, etc. to liven up kid’s shoes and put a fun twist on them. For example, they’ve offered a selection of boots from big brand names such as Bearpaw and Minnetonka, to expand the children’s boots category, a category that has generally been lacking. (Note: All shoe images sources from DSW.com.)
They’ve also introduced quirky sneakers and athletic shoes, to add more skews to their collection. DSW has done remarkably well-introducing styles into the boys market especially, considering the boys market is usually ignored. Partnering with the Shaq brand was an especially smart move, because of Shaq’s inherent brand value and affordable shoe styles.
Lastly, the third part of their strategy is to bring popular styles among teens, to the kids market.
The point that is being demonstrated here is that DSW has a lot of room to play here, and so far they are doing an incredible job of creating a hub of shoes that can appeal to a variety of consumers.
DSW is planning to acquire The Camuto Group with partner Authentic Brands Group for approximately $375 million. The Authentic Brands Group is a marketing company with a global brand portfolio of companies like Tapout, Herve Leger, Judith Leiber, Juicy Couture, Misook, Spyder, Nine West, Taryn Rose, Aeropostale, etc. DSW is planning to contribute $256 million to the purchase, to acquire the main wholesale and e-commerce business. The acquisition comes with the new distribution center in New Jersey, the licensing rights of Jessica Simpson, Lucky and Max Studio, and it gives the brand a 40% stake in a joint venture between DSW and Authentic Brands. The Camuto Group offers an array of styles and strengths, that could mesh nicely with DSW’s. Also, The Camuto Group introduces them to a new clientele base that can be taken advantage of as well.
Nevertheless, the biggest problem with the acquisition is the Authentic Brands Group. Frankly, they don’t bring anything to the table. One prime example to support this point is Juicy Couture. Authentic Brands bought Juicy Couture in 2013 and since then it has gone nowhere. While this is only one example, companies like Spyder, Tapout, and Tretorn have also gone nowhere under their command. This is incredibly concerning considering the fact that DSW has recently started having marketing success, but with this partnership, the poor judgment of Authentic Brands could ultimately weight them down.
Overall, the Vince Camuto Group is a timeless brand that provides an assortment of styles, that appeal to many age groups. In spite of that, they must tread carefully with the Authentic Brands Group for fear of them destroying an iconic company.
In conclusion, DSW has a great structure in Canada, especially with the consolidation plans being put into place. They have an excellent chance of maximizing profit and securing a strong following in Canada.
Secondly, with the growth opportunities being presented in the kids market and their newfound success in marketing, their chance to capitalize on this opportunity is phenomenal.
Lastly, with the acquisition of The Camuto Group, they’re expanding their portfolio to more versatile styles and new customers. But, the partnership with the Authentic Brands Group is scary, considering their abysmal track record in other acquisitions. However, I do have hope for DSW, and I think they can make this a Cinderella story.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.