DSW's adjusted net income went up by 16.0 percent to $41.7 million in the quarter to Oct. 31, as higher margins helped offset a slight decline in same-store sales. This marks the company's return to year-on-year earnings growth, after four consecutive quarters of declines.
The U.S. footwear retailer said that tighter inventory management drove improvements in the gross margin which, combined with effective expense management, resulted in an increase in net income.
The group's sales rose by 4.7 percent over the year-ago quarter to $697 million, but comparable store sales went down by 2.0 percent. The DSW segment was up by 1.6 percent, while the Affiliated Business Group segment declined by 1.6 percent.
Customer traffic increased slightly at the group's stores, and transactions went up by a low single-digit rate. Athletic styles continued to drive sales in the stores, but the management mentioned a new fashion movement with women embracing more feminine silhouettes to go with denim. Overall, comparable store sales of women's shoes went down, with boot sales being even softer than expected, but vulcanized shoes and retro styles sold well.
Comparable sales were down for men's shoes as well, although DSW has broadened their assortment. Children's shoes performed above expectations, with higher traffic and transactions in the 224 DSW stores that have a kids' department.
Gross profit and comparable sales fared better at the DSW division, while the Affiliated Business Group suffered a steeper decline of 4.6 percent in comparable sales and saw gross margin fall.
The group's overall gross margin gained 0.5 percentage points to 30.4 percent, driven by improvements in inventory management. The company operated some 500 stores in November - up from 449 a year ago.
DSW's sales were slightly boosted by its acquisition earlier this year of Ebuys, an off-price e-commerce footwear and accessories retailer with a presence in North America, Europe, Australia and Asia. It contributed $21.3 million to the top line during the period, or just over 3.0 percent of DSW's total revenues.
Ebuys was initially expected to contribute about $100 million in sales this year. It is supposed to add a business to DSW's portfolio that will strategically scale its off-price sourcing capabilities, while expanding the group's presence in digital marketplaces and creating opportunities to serve international customers online.
The management said that the group's strength in omnichannel retailing will help it to thrive in a retail market that is consolidating, with customers increasingly anxious to get immediate delivery of any shoe they like on their smartphones. Key advantages offered by DSW will be its ability to ship orders taken online to its stores or to get them fulfilled at the store, as well as its new Feetz pop-up shops for customized footwear based on foot scanning.
Including pre-tax charges of $3.1 million from the acquisition of Ebuys and restructuring costs of $1.3 million, DSW's reported net income in the quarter reached $39.0 million.
The company also released figures for the nine months ended Oct. 29. Sales increased by 4.5 percent to $2,000 million, including $56 million from Ebuys. Comparable sales decreased by 1.6 percent for the period, performing better than in the same period a year ago, when they went up by 0.9 percent. Adjusted net income settled at $103.6 million.
Thanks to its strong performance in the third quarter, the management raised its expectations for earnings per share in the full financial year. DSW said that it reduced clearance markdowns, positioning the company to generate more profitable sales in the holiday season. Investors reacted positively to the announcement, sending the stock up by almost 8 percent in the regular trading session.