1. Key Statistics 2015:
BUY
Recommendation: Company Profile:
Designer Shoe Warehouse (DSW) offers a range of branded and designer dress, casual
and athletic footwear and accessories for women and men through DSW stores and
dsw.com. It also offers kids' shoes exclusively on dsw.com.
Sector: Consumer
Discretionary
Industry: Apparel Stores
Market cap: 2.21B
52 week high: $39.58
52 week low: $23.61
PEG: 1.66
P/E: 13.25
P/S: .84
EV/EBITDA: 5.72
P/B: 2.1
Beta: 1.02
ROA: 11.25%
ROE: 16.08%
Price Performance:
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5.00%&
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10/30/14& 12/30/14& 2/28/15& 4/30/15& 6/30/15& 8/31/15&
One&Year&Price&Performance&
DSW& S&P&500&
Investment Thesis:Risks:
• Unsuccessful execution of the omni-
channel strategy
• Fluctuations in prices of raw materials
needed for shoes
• Inability to maintain strong relationships
with its vendors
• Uncertain general economic conditions
in the U.S.
• Weather conditions
• Over reaction due to lower than expected retail sales in recent Retail Sales
Reports and lower than expected quarterly results from big names in the
shoe industry put downward pressure on industry players, with DSW’s
fundamentals remaining the same
• Expansion of DSW’s omni-channel strategy will increase top-line growth
• Financial stability allows DSW to invest in systems that will enhance its
operating efficiency
Analysts: Hailey Davis, Isabella Duarte,
Brandon Moore, Bridget Parsells
Equity Research | November 5, 2015 | NYSE: DSW
Current Price: $21 Intrinsic Value: $28.66 Target Price: $35 Implied Return: 36%NASDAQ: DSW
• Loyalty program & marketing strategies that drive customer traffic
• Affiliate Business Group
• Vast brand offerings
• Strategic Positioning of Stores
Catalysts: Competitive Advantages:
• Online shopping trend
• Improving disposable income
• Positive outlook on athletic shoe
category
2. Investment Thesis Breakdown
Shoe Industry: Omni-channel Expansion:
Financial Stability:
Disappointing retail sales in June and September that
was due to slowing job growth and overseas
turbulence that curbed discretionary spending created
downward pressure on the overall retail industry.
DSW's stock dropped among its peers because of the
conditions.
Weather conditions also adversely affected sales of
DSW and some of its industry peers in the third
quarter of 2015. Within its industry, its fundamentals
remain attractive, as the stock dropped further than its
competitors even though the revenues were missed on
for similar reasons.
DSW is expanding its omni-channel strategy, which will result
in previously store-only products to be also available online
and in the recently launched DSW mobile app. This will
respond to the trending customer preference of shopping
online by expanding the channels from which customers can
purchase from DSW. The options to Buy Online, Pick-up In-
Store and Buy Online, Ship To Store will be implemented in the
fourth quarter of 2015, which will expedite in-store pickup for
online sales. Furthermore, DSW's has turned all of its 449
stores into mini-distribution centers capable of fulfilling demand
that is originated elsewhere, which allows customers to
purchase shoes from a shop other than from where the
customer originally demanded the item.
DSW's omni-
channel has
been proven
successful
with it
trending to
well over
$100 million in
sales this year. Its omni-channel customers spend two to three
times more than its single channel customers, with its mobile
app playing an important role in converting single channel
customers. Mobile traffic has grown rapidly over the last two
years and now accounts for over 40% of online traffic.
With healthy cash flows, DSW has had and will continue to have the capability of investing in systems that will enhance its
operating efficiency in areas such as its supply chain, merchandise planning and allocation, inventory management,
distribution and labor management.
DSW has implemented an order routing fulfillment optimization for all its product categories. This proprietary technology is
designed to reduce markdowns by fulfilling orders from the slowest turning locations. It has also completed investments in its
supply chain to support size replenishment and size optimization. Size replenishment focuses on replenishing core styles at a
size level; size optimization allows it to effectively allocate sizes by store. All categories will be planned using an enterprise-
wide assortment planning system that will allow it to build assortments based on local customer profiles rather than just based
on store volume.
During fiscal 2014, DSW had invested in the installation of a new shipping sorter in its distribution center. This new shipping
sorter improved productivity and increased shipping capacity within its fulfillment center. Its fulfillment center processes
orders, which are shipped directly to customers using a logistics provider. Its ship from store program enables it to fulfill unmet
demand originating from either dsw.com or DSW stores from inventory that is located in other stores rather than only from its
inventory in the fulfillment center or the customer’s home store.
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 2
Recommendation: BUY
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$410,000$
Jul02005$
Jan02006$
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Total$Monthly$Retail$Sales$vs.$DSW$Stock$Price$$
Total&Monthly&Retail&Sales& DSW&Stock&Price&
3. `
DSW Rewards is a customer loyalty program that the company relies on to drive customer traffic, sales and loyalty. DSW
Rewards members earn reward certificates that offer discounts on future purchases. In both fiscal 2014 and 2013, shoppers in
the loyalty program generated approximately 90% of DSW sales. As of January 31, 2015, approximately 23 million members
were enrolled in DSW Rewards and have made at least one purchase over the course of the last two fiscal years, compared
to approximately 22 million members as of
February 1, 2014.The loyalty program gives
consumers an incentive to come back to DSW
rather than competitors due to the fact they will be
earning loyalty points and receiving discounts.
DSW is able to use data from the loyalty program to
inform shopping behaviors and trends, and that
allows the company to tailor its experience to how
customers are already behaving.
DSW’s new digital marketing strategies drove sales
for the second quarter of 2015. It uses advanced
analytics to deliver targeted messages throughout
the customer journey. It does so through on-site
search technology, email strategy, and digital media
targeting which results in increased customer
engagement and incremental sales.
Loyalty Program & Marketing Strategies:
13#
15#
17#
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23#
25#
2010# 2011# 2012# 2013# 2014# 2015#
Loyalty#program#customers#
Loyalty#program#
customers#
Unsuccessful execution of the omni-channel strategy:
Changes in weather patterns affect consumer
preferences, therefore if the store orders seasonal
products in bulk that do not meet weather
conditions, it could face inventory write downs that
would adversely affect revenue and margins.
DSW relies on its strong relationships with vendors to purchase
brand name and designer merchandise at favorable prices. If these
relationships are damaged, DSW may not be able to obtain a
significant merchandise at attractive prices, which would adversely
affect the business and financial performance. However, since its
beginnings DSW has been able to successfully maintain and create
new strong relationships with its vendors, therefore we do not see
this risk materializing.
Decreases in disposable income and in the consumer
confidence index, weak demand for apparel in the retail
sales report and increasing unemployment rate can
adversely affect sales and the financial performance of the
Risks
Recommendation: BUY
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 3
Competitive Advantages
Uncertain general economic conditions in the U.S.:
Weather conditions affecting seasonal sales:
DSW’s management is positioning the company as an
omni-channel retailer and is expected to make significant
capital investments and have significant expenses related
to this strategy. The failure or inability to execute the omni-
channel strategy would materially adverse the business,
financial and operating results, and how customer
expectations are met.
Inability to maintain strong relationships with its vendors:
4. Competitive Advantages Continued
Vast Brand Offerings:
DSW stores and dsw.com sell a large assortment of better-
branded and private label merchandise. Its products at each
store are geared toward the particular demographics of the
location. A typical DSW store carries approximately 24,000
pairs of shoes in approximately 2,000 styles compared to a
significantly smaller product offering at typical department
stores. A wide product portfolio enables DSW to cater to
various customer needs and broaden its market coverage,
which, in turn, increases the company's top-line growth.
91%$
57%$
8%$
13%$
38%$
6.30%$
79%$
Shoe%sales%as%%%of%revenue%%
DSW$
TJX$$
JCP$
ROST$
M$
AMZN$
FL$
DSW opens stores in high traffic areas, such as strip
centers and malls that attract more consumers into
the stores. It also plans to reposition existing stores
as opportunities arise.
As shown on the graph to the right, DSW opens
stores in the six states with the most popular cities
such as New York, Houston, Austin, Tampa, Miami,
and San Francisco to name a few.
DSW has revenue sharing licensing agreements
through its Affiliate Business Group (ABG) with
Steinmart, Gordmans, Yellow Box and Frugal Fannie.
DSW is able to leverage the store space of 370
additional locations and E-commerce channels
through ABG contributing 5.8% of revenue over the
past three years while not having to add the fixed
costs associated with these locations.
Affiliate Business Group:
41#
37#
33#
27#
22# 21#
States&with&20+&Store&Count&
California#
Texas#
New#York#
Florida#
Illinois#
Pennsylvania#
Recommendation: BUY
Strategic Positioning of Stores:
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 4
5. Recommendation: BUY
Suppliers & Demographics
DSW purchases merchandise in bulk directly from approximately 430 domestic and foreign vendors that provide a
discount for DSW that are passed onto the customers. Its vendors include suppliers who either manufacture its own
merchandise, supply merchandise
manufactured by others, or both. Most of its
domestic vendors import a large portion of their
merchandise from abroad.
If prices of raw materials increase, specifically
leather and rubber, its suppliers will pass the
increase onto DSW, which will in turn pass it
onto its customers and could lose revenues due
to price increases. However, according to the
graph shown on the right rubber is increasing
and leather is decreasing, therefore keeping
cost constant. This is expected to remain
constant in the successive years.
DSW’s customers include middle class
consumers with 28% of customers having
income ranging from $30,000-$60,000 and 31%
having income above $60,000. With the
economy continuing to show improvement, its growth will increase with consumers willing to spend more money on shoes.
Because DSW targets customers are middle class consumers, it will perform better with an improving economy.
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Commodity"price"for"rubber"&"leather"
Rubber"
Leather"
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 5
Industry Drivers
Relying on consumer spending, the shoe industry will
benefit from increased consumer spending over the
next five years with consumers using multi-channel
avenues such as online retail and mobile
applications. A greater number of Americans
returning to work, combined with improved home
ownership conditions, will increase consumer
confidence leading to increased discretionary
spending. Shoe store sales are expected to grow by
approximately 2.7% CAGR in the next five years as
per capita disposable income growth is projected to
peak in 2015 and then slow at a modest pace in
successive years.
One of the fastest growing trends in the apparel
sector is athleisure, where additional growth in sales is
expected. There is a growing proportion of the population participating in sports, thus athletic shoe wear is likely to be
purchased for style and function to wear whether the consumer is exercising or relaxing.
This shoe store industry is in the mature stage of the business cycle described as having tight profit margins, growth in sales
slower than GDP growth, and high competition placing downward pressure on prices. Increases in revenue will come from
increasing store counts in underserved markets and opening up more shopping channels that are convenient for the customer,
such as online stores.
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2010& 2011& 2012& 2013& 2014& 2015& 2016& 2017& 2018& 2019& 2020&
Per&capita&disposable&income&
Per&capita&disposable&income&
6.
Recommendation: BUY
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 6
Competitors
Finish Line (FINL): Shoe Carnival (SCVL):
The Finish Line, Inc. is a mall-based specialty
retailer of branded athletic footwear, apparel and
accessories. Finish Line operates in the US and
the District of Columbia.
Demographics: Middle to high level income
athletic people who practice sports. High quality,
known brand items.
Shoe Carnival is a family footwear retailer. The company's stores
offer dress, casual shoes, sandals, boots and athletic footwear for
men, women and children with a selection of both name brand and
private label merchandise. Shoe Carnival primarily operates in the
US, where it is headquartered in Evansville, Indiana.
Demographics: Moderate income, value conscious families.
Genesco Partners (GCO):
Foot Locker Inc. (FL):
Based in Nashville, Tennessee, is a specialty
retailer of branded footwear, licensed and
branded headwear, as well as a wholesaler of
branded footwear. Genesco also designs,
sources, markets and distributes footwear.
Genesco is represented by more than 2,225 retail
stores in the United States, Canada, and Puerto
Rico and is composed of five main business
segments; Journeys Group, Hat World/Lids
Group, Underground Stations Group, Johnston &
Murphy, and the licensed brands, consisting
mainly of the Dockers Brand.
Demographics: Relatively young consumers
(20-35 years of age).
Foot Locker, Inc. is a retailer of athletic footwear and apparel.
The company operates 3,473 athletic stores under various brand
names, including Foot Locker, Lady Foot Locker, Kids Foot
Locker, Champs Sports, Footaction and SIX:02. Foot Locker has
presence in 23 countries. It is headquartered in New York City,
New York.
Demographics: FootAction stores target urban customers who are
more brand and trend-conscious while Champs Sports target
sports enthusiasts with a broad array of footwear and sporting
goods equipment.
J.C. Penney Inc. (JCP):
Ross Stores Inc. (ROST):
J.C. Penney Company, Inc. is one of the leading
retailers in the US. The company offers a range of
family apparel and footwear, accessories, jewelry,
beauty products, and home furnishings through a
chain of department stores and the e-commerce
website jcp.com. JC Penney is the holding
company whose principal operating subsidiary is
J. C. Penney Corporation. J.C. Penney primarily
operates in the US.
Ross Stores is an off-price retailer of apparel and home
accessories. It sells products from other seasons at a marked
down price. Ross Stores is an off-price retailer that purchases
unwanted inventory from name-brand manufacturers,
department stores, and other retailers at an opportunistically
low price. ROST then sells them at heavy discounts off the
regular retail price. Carries more popular brands.
Demographics: Price-conscious middle class consumers and
consumers from the lower-income brackets.
7.
Recommendation: BUY
Competitors Continued
Competitor Analysis:
Throughout 2015, DSW’s and its competitors,
such as Shoe Carnival, Finish Line, and
Genesco prices decline because of missed
expectations in revenue. For instance,
unfavorable weather was a common factor for
less-than-expected sales of winter shoes.
• Shoe Carnival missed on revenues in both
first and second quarters and had its
guidance revised downwards.
• Finish Line, on the other hand, beat
revenues and earnings in the first quarter
but missed on revenues in the second
quarter due to a deceleration in same-store sales.
• Genesco missed on its revenues and earnings in the first quarter of the year and revised its full-year guidance downwards
7.30%&
4.70%&
2.66%&
2.40%&
14.50%&
5.80%&
5.50%&
Market&Share&&
DSW&
Finish&Line&
Shoe&Carnival&
Genesco&
Foot&Locker&
Payless&&
Brown&Shoe&Company&
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30"
2011" 2012" 2013" 2014" 2015" Forward""
Historical*P/E*Ra/os*0*Compe/tors*
DSW"
Finish"Line"
Shoe"Carnival"
Foot"Locker"
Genesco"
2"
2.5"
3"
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4"
4.5"
5"
2011" 2012" 2013" 2014" 2015"
Inventory)Turnover)
DSW)
Finish)Line)
Shoe)Carnival)
Foot)Locker)
Genesco)
Ratios Against Competitors
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 7
8.
Recommendation: BUY
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 8
Business Model
The DSW Business Model has recently switched to become customer-centric. All shoe inventory is strategically
placed on the sales floor to invite customers to try each shoe at his or her own pace. With all the inventory on
display, customers are welcomed to more tailored shopping experiences without sales pressure from employees
and without prolonged waiting times. The store continues to deliver everyday low prices instead of fluctuating
between regular and sales pricings.
Its stores are also mini-distribution centers capable of product deliveries. In cases where inventory is unavailable,
orders are directed for fulfillment from nearby locations. What differentiates DSW from other retailers is its ability to
understand meeting demand generated across the board, regardless of fulfilling orders from the same store.
Orders are taken from the mini-distribution channels and consolidated
between stores and from dot.com, making DSW more flexible to
gratify its customer needs.
Furthermore, DSW strives to place the correct shoes in their
correspondingly labeled boxes to avoid confusion and inventory
replenishment errors. DSW’s “size by store” model optimizes
inventory along with SAS data analytics. SAS automatically
recommends the most requested styles and sizes per individual
location to optimize inventory to meet demands. The result is a
reduction in obsolete inventory which would need to be sold at a
discount at season end, thus preventing loss of sales from stock-outs.
Revenue growth this quarter and general comparable store sales as
well as the omni-channel sales are benefitting from this switch in
processes. The store is highly benefitting from the implementation of its omni-channel where customers can
browse, compare, and order products from their smartphones in the DSW app, online from the website, and even
from sales personnel at in-store locations with timeliness, ease, and organization. Plus, the opening of multiple
small store concepts is improving from significantly smaller box sizes, thus presenting additional growth opportunity
for markets where only small stores can be placed.
9.
Recommendation: BUY
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 9
Valuation
EV/EBITDA Valuation:
Multiple valuation methods were used to arrive at a target price for 2020. The first model used is an EV/EBITDA multiple
model. DSW currently trades at an EV/EBITDA multiple below its five-year historical average. Its five-year historical average
EV/ EBITDA multiple is 7.81 times (see appendices page #19). We expanded the multiple over our investment horizon due to
its improved omni-strategy that will increase revenues. At 7.6 times EBITDA, DSW will have a market cap of over $2.9 billion
and an equity value per share of $35.83.
We conducted a
sensitivity
analysis on the
multiple to
account for the
improving efforts
of its marketing
strategy to help
drive customer
traffic.
EV/EBITDA Sensitivity Analysis:
10.
Recommendation: BUY
Price/Earnings Valuation:
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 10
A P/E model was also conducted to help obtain a price target for 2020. We modeled for P/E expansion. The historical P/E
multiple for the last five years is 17.51 (see appendices page #18). During our investment horizon, DSW’s P/E will expand to
a multiple of 17.42. DSW’s P/E multiple will continue to expand as as the economy continues to improve and consumers
spending more disposable income on shoes. DSW will take market share away from its competitors as it continues to improve
its omni-channel and marketing strategies to obtain customers.
Price/Earnings Sensitivity Analysis:
A sensitivity analysis was also conducted to reflect what the firm’s price target could be at different multiples during 2020. The
bear case assumes the P/E expands to only 16.42 and DSW’s 2020 EPS is $1.69. Yielding a 5.78% annualized return. The
bull case assumes the P/E expands to 18.42 and DSW’s 2020 EPS is $2.19. Yielding a 13.99% annualized return. According
to all of our multiples, there is still strong upside with very little downside risks at DSW’s current price. This supports our
recommendation of a strong buy on DSW.
11.
Recommendation: BUY
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 11
Free Cash Flow to Equity Valuation:
We used a free cash flow to equity model to value what DSW is worth today. Our model implies that the stock is 36.47%
undervalued on our base case scenario. The model has implied assumptions based on our expectations of the firm, its
competitors, and the industry landscape.
* Top line growth will increase with higher number of members joining the customer loyalty program and by improvements
in the omni-channel strategy
* Capital expenditures will increase at a moderate rate due to the firm’s plan on increasing its store count in future years to
come
* Using a 60-month regression, we arrived to a beta of 1.3 that was used in calculating the discount rate. Since shoes are
relativity inelastic, we believe this to be in line with our assumption.
Free Cash Flow to Equity Sensitivity Analysis:
We also conducted a scenario analysis by changing the discount rate and terminal price to account for the
possibility of unsuccessful election of the omni-channel strategy, fluctuations in prices of raw materials needed for
shoes, and uncertain general economic conditions.
The bear case implies that DSW is 27.97% undervalued, whereas our bull case implies that DSW is 45.26%
14.
Recommendation: BUY
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 14
Appendices Continued
15.
Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 15
Recommendation: BUY
Appendices Continued
16. Equity Research | November 5, 2015 | NYSE: DSW Analysts: Hailey Davis, Isabella Duarte, Brandon Moore, Bridget Parsells 16
Recommendation: BUY
Appendices Continued
Chief Executive Officer- Michael R. MacDonald
Mike MacDonald’s annual compensation has been consistent with company performance
over the past year. He has been the CEO and President of DSW Inc. since April 27, 2009.
Mr. MacDonald has over 30 years of business experience in all phases of retail, including
managing merchandising, marketing, stores, operations and finance functions. He has
served as a CEO, CFO, President and COO, CAO, as well as a Senior VP and Chairman of
varying retail and department stores such as Sacks, Marshall Field & co, Northern
Department Stores Group and ShopKo Stores Operating Co in addition to Carson Pirie Scott
& Co, Dayton Hudson Department Stores, and Boston Store and Younkers. Additionally, he
has been an Independent Director of Ulta Salon, Cosmetics & Fragrance, Inc.
The average tenure of the DSW management team is approximately 4.6 years in length,
which is about average. The average tenure of the DSW board of directors is roughly 8.3
years long. The length of tenure is also average. In the past month, more shares have
been bought than sold by DSW management and board of directors with only one seller in the past three months
while 501,750 shares were bought. Currently the company Insiders own 18.8% of DSW Inc.
Executive Vice President and Chief Executive Officer Successor- Roger Rawlins
Mr. Rawlins has extensive retail leadership experience including nearly a decade of
experience with DSW. Prior to his current role, Mr. Rawlins served as Executive Vice
President, Omni Channel, Senior Vice President and General Manager of DSW.com and
Vice President, Finance and Controller. Prior to joining DSW in 2006, Mr. Rawlins served
in leadership positions at HER Real Living and L Brands Inc.
Management:
