After reporting lower than expected fourth quarter sales Tuesday, DSW executives announced they are shutting down the Ebuys business, which the company acquired two years ago for an upfront payment of $62.5 million plus future payments contingent on performance. The "unplanned operating loss from Ebuys" was about 10 cents per share, without that earnings would have increased by 11%, Chief Financial Officer Jared Poff told analysts Tuesday, according to a transcript from Seeking Alpha.
Sales in the quarter rose 6.7% to $720 million from $674.6 million, missing the FactSet analyst expectation cited by Marketwatch for $728.2 million. Same-store sales rose 1.3% compared to last year's 7% decline, besting FactSet’s 1.2% forecast.
Net income in the quarter was $11.7 million, or 15 cents per diluted share, which included net after-tax charges of $18.8 million, or 23 cents per diluted share, excluding costs related to its Ebuys and Town Shoes acquisitions and the impact of U.S. Tax Reform. Adjusted net income rose 90% to $30.5 million, or 38 cents per diluted share, missing FactSet’s forecast of 27 cents.
After taking a $52.7 million write-down on the value of its Ebuys unit last year, DSW is leaving the debacle of its Ebuys venture behind it, leaving it better able to adjust merchandising and loyalty programs with a cleaner slate. In a note to clients on Wednesday, Wedbush analyst Christopher Svezia said shuttering Ebuys is the right call.
"That said, we are mindful of the risks with a more aggressive plan across seasonal categories to drive the business," he said in comments emailed to Retail Dive. "We need to see evidence that this will generate comp growth (balance between reg-price and clearance comp) after a period of more conservative inventory buys and a history of mixed comp and margin results."
Wedbush analysts remain "cautious" on the company’s Town Shoe acquisition, expected to close in the second quarter.
The footwear retailer has already begun to run "the core DSW business like a footwear retailer should, with merchants no longer distracted by learning new inventory management systems, greater accountability, and better discipline in planning seasonal categories," Wedbush also said, adding that is leading to sequentially improving same-store sales and margins in fiscal 2017. The company is also seeing good results from its in-store nail salons and shoe repair services, executives said Tuesday, according to a transcript from Seeking Alpha.
Looking ahead to fiscal 2018, DSW expects full year revenue growth to decline by 1% to 3%, with the exit of non-core businesses and the impact of the 53rd week, or excluding those factors, to increase in the 2% to 4% range. That assumes a same-store sales increase in the low single digit range and the opening of three to six net new DSW flagship stores, according to a company press release.
The company does face added risk this year. "While some progress is being made, we need to see evidence of further flow-through and sustainability in comp growth," Svezia said.