DSW Inc.
DSW
Headquartered in Columbus, Ohio, DSW is the second largest adult footwear retailer in the U.S. after Macy’s, with $1.7 billion in revenue in fiscal year 2011, or about a 4% share of the $40 billion, highly-fragmented adult footwear industry.
The company sells brand name and private label footwear and accessories, such as handbags and hosiery, at discounted prices, operating 318 stores in 39 states and dsw.com. Average store size is approximately 22,000 square feet, with 90% of the stores located in strip malls and lifestyle centers. Merchandise includes casual, dress and athletic shoes for both men and women. The company also started selling children’s shoes in the summer of 2011. DSW stores offer a good value proposition as merchandise is priced daily at 25% to 30% below manufacturer’s suggested price. Merchandise is sourced directly from more than 450 domestic and foreign vendors, with assortment at each store geared toward the particular demographics of the location. DSW offers a loyalty reward program with large member base (17 million in total, growing by approximately 100,000 per week), facilitating data mining of consumers’ purchasing behavior. Approximately 90% of DSW sales are generated from these members, who earn reward certificates, based on the amount of their purchases, that offer future discounts.
DSW also operates 352 leased departments within stores of four other retailers: 261 Stein Mart stores, 70 Gordmans stores, 20 Filene’s Basement stores and one Frugal Fannie’s store, which in aggregate generated about 8% of total DSW sales volume in 2010. The retailers provide sales associates and retail space, and collect rent from DSW as a percentage of net sales.
Since becoming a public company in 2005, DSW had grown sales and net income at compounded annual rates of 11% and 21%, respectively through 2010, as stores are added and margins expanded. Earnings per share had grown at an annual rate of 11%. The company aims to double net income by 2015, implying a compounded annual growth rate of 15%. Strategies include: 1) leveraging of technology to increase in-store sales conversion rates (the new size replenishment system and shoe locator system will ensure customers find what they want); 2) upgrading the dsw.com website to increase sales effectiveness; 3) reducing markdowns through the implementation of a shoe size optimization project by the end of 2011; 4) adding 10 to 15 new stores per year in the next three to five years; the company sees opportunities to grow to 400 stores; however a satisfactory outcome from the testing of two new stores in smaller markets (population of less than 400,000) could create opportunities for additional 50 stores; and 5) improving store productivity (higher sales per square footage) by adding children’s categories and by driving more traffic to the stores using DSW.com and targeted marketing.
The family of Ephraim Schottenstein, who acquired DSW in 1998, has experience in operating value retail concepts that include Value City Department Stores and Filene’s Basement. His son Jay Schottenstein is DSW’s current Chairman. The management team has an average of over 20 years of experience in the retail industry. The company also has excellent financial strength, with over $330 million in cash and no debt as of 4/30/2011. Moderate capital expenditure requirements also enabled DSW to generate excess cash in each of the past three years. With the unemployment rate still high in the U.S. and rising food/energy inflation, middle class Americans need to stretch their dollars. DSW, which offers quality brand name shoes and accessories at discounted prices, should be a compelling shopping venue for years to come.
