DSW: Conservative But Compelling

Earlier this morning, DSW (DSW) reported 1Q08 results that were essentially in-line with expectations. The company generated $0.23 per share, missing the consensus estimate by a penny, and reiterated its full-year earnings guidance range of $0.75-$0.85.

At first glance, management's fiscal 2009 EPS guidance range (representing a 30%-38% decrease y/y) seems overly conservative. However, the company faces stiff headwinds from not only the deleveraging effect that negative single-digit comps will have on the occupancy expense line item, but also e-commerce channel development costs and IT improvements. Because of these incremental expenses, management expects operating expenses to increase by at least 200 basis points throughout the balance of the year (or more than 22.5% of sales), making it incredibly difficult to outperform earnings expectations. Disciplined inventory management should offset some of the impact, but we doubt it will be enough for the company to significantly exceed its outlook for the year.