The DBI quarter was less messy than we expected (see our 3/10 note DBI | 3-Bagger Intact, But Mind the Quarter). Don’t get me wrong – it was ugly. But a little less ugly than expected. The company put up a -20% comp in core DSW (vs the Street at -21%). We thought it could be as bad as -30%. Total revenue came in slightly below, however, given weakness in the Camuto Group – that’s the company’s branded/wholesale arm, which is separate from the DSW comp. The Canadian business also remains weak – impacted by store closures – which is consistent with other retailers we see that sell in Canada. Ultimately EPS was a loss of $0.53, less bad than the Street at ($0.68) – and a penny better than our model. The important thing for us is that the rate of change is getting better on the margin. A -20% comp is atrocious, but compares to -30% in 3Q, and -42% in both 1Q and 2Q. Very solid sequential improvement there. We also saw a 200bp improvement in the underlying gross margin trend, and an annualized rate of lower SG&A of about $80mm (or about $0.90 per share annually). Part of that is driven by Canadian store closures (not paying wages) and was also driven by a 25% headcount cut at Camuto, so some of the spending might come back when revenue returns next year, but it makes us incrementally more bullish on the flow-through rate of revenue upon reopening. Another impressive stat is that 46% of the DSW’s assortment was athleisure – mind you that this compares to 6% three years ago. Athletic comped +19% during the quarter, while ‘Dressy’ shoes comped down over 60%. The takeaway is that the company is moving quicker with changes in its assortment than we had anticipated. What we don’t want to see is the company stuck with a greater assortment of athletic at the precise time that the consumer is starting to move away from casual – that’d be a thesis buster. But we think that management is keenly aware of where mix needs to be in 2H of this year when we think there is a rebound in higher-end apparel spending. All in, we heard nothing that causes us to change our estimates or our view that this will be a $30-$40 stock over a TAIL duration. It’s going to be a bumpy ride on the road to recovery, but based on what we see in the TAIL model, we think that the stock is a steal at $15.
Reminder that we are presenting a Black Book deep-dive on DBI next Wednesday to outline our full thesis around the underlying earnings power and the potential and the roadmap for the stock.
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