DGI Adventure – 11-23-2015 Investment Thesis – DSW Inc (DSW) – $20.00/share

Please visit the core
article on my
investment thesis process
for a full explanation of the components of this

Dividend Cycle

DSW should go ex-dividend sometime in the middle of
December. The current quarterly dividend has held at $0.20/share for all three
quarters this year and I wouldn’t expect an increase until next year. The last
increase came with the first quarterly dividend payment and represented a 6.6%
raise over the previous dividend of $0.1875/share. That increase vaulted DSW to
“Challenger” status, having raised dividends for 5 consecutive years.


At the $20.00/share price point I can buy 75 shares for
$1,506.95 (including $6.95 trade commission). The share price closed at $23.05
yesterday, but the robots and whackos have brought it up to $23.46 in
afterhours trading. Presumably that’s connected to the fact that DSW is going
to announce Q3 earnings tomorrow at 8:30am eastern time. Maybe we’ll get a 13%
drop? I’m going to see what happens in the morning, and then decide from there.
There are still a couple more weeks before the ex-dividend date as well…In the
meantime, let’s take a look at what makes me want to own DSW.

QC (Quantitative Case)


LOL (Limit Order
Logic) – $20.00

Mr. Market has not been kind to DSW’s share
price lately. As recently as April of this year, it nearly touched
$40.00/share. There is some very solid support at the $21.00 range both near
and long term. $21.11 marked the monthly high in March of 2007. Then, as you
know the world nearly ended, and it took 4 years for the price to climb back to
that point. (Interestingly, it wasn’t too long after that recovery that the
company started to pay a dividend.) 


DSW – 10 Year Chart from Yahoo Finance

The 52-week low of $21.23 was set recently on November 4th.
The afterhours robots were in a frenzy because the CEO, Michael McDonald announced
he was going to retire. The stock opened 11.5% below the previous day’s closing
price. Jim Cramer had some really
great insight
. While that was a wild swing, it doesn’t show up very
dramatically on the daily charts. Much more impressive is the bloodletting at
the end of August. You’ll remember that on August 24th someone put
peyote in Mr. Market’s coffee and he went on a rampage. Things improved but everyone was pretty
jittery the rest of that week. Guess who reported earnings on August 25th?


DSW – 6 Month Chart from Yahoo Finance

I’m really curious to see what happens tomorrow morning when
the company reports Q3 earnings. The company already gave some negative
guidance about it in October, so you’d think the bad news is already “priced
in”.  A nice gaff fishing opportunity
might present itself though too.  

QWaF (Qualitative
Warm and Fuzzy)

The case for DSW is not unlike the
case for Gap Inc.
(GPS – Full disclosure: long
54 shares $28.13/share), namely it is a bet that the American consumer
would rather buy shoes than invest
in their 401K
. Low gas prices, low unemployment, and (gradually) increasing
wages are good for consumer discretionary spending. Period.

Plus the DSW recent growth story is a much rosier picture
than Gap’s. Old Navy has been carrying all the weight and is barely able to
make up for negative growth at the Gap’s other brands. DSW is still growing
pretty robustly, albeit at a slower pace than the last decade, which is why the
share price is depressed. It’s still growth though and it’s primarily driven by the
company’s extremely successful membership program. According to DSW nearly 90%
of its sales come from returning customers. Take a heaping of customer loyalty,
combined with a strong investment in an “omnisystem” sales model (i.e. seamless
integration between brick and mortar stores with online shopping convenience)
and sprinkle in the popular concept of investing in smaller store formats, and
you have a recipe for a strong brand with a lot of runway in front of it. The
innerwebs are the current bogeyman for retail. “Omnichannel” is a corporate
buzzword solution to traditional retail’s troubles with online retailing, but
in this case it might actually be more than buzz. Shoes are the sort of thing
most people would probably prefer to see (and try on) in person at a brick and
mortar store. But online retailers have much more flexibility in inventory
control. “Omnichannel” solves the problem. It looks something like this:

My wife: “I love these shoes, but I want them in a different

DSW Sales Associate: “We don’t have that color here, but we
can just order the color you want on line and have it delivered to your home.
Do you have your rewards card with you today?”

Finally, with 8% insider ownership of shares, I feel
comfortable that management is going to do what it can to keep the current
streak of increasing dividends going.

CPR (Cold and Prickly

Michael McDonald, the current CEO and ostensibly author of
the amazing growth story over the last 6 years is going to retire at the end of this year. The
new guy, Roger Rawlins, has been in the retail business since 1988, and is
currently DSW’s Chief Innovation Officer. Whatever that means, he might have
had something to do with the whole omnichannel thing.

Generally speaking the American consumer hasn’t been
spending the way everyone wants them to lately, and retail in general is
something of a question mark. There are plenty of people trying to sell shoes,
so DSW will have to continue to innovate to stay in front of the curve.
Considering they have a good track record at doing exactly that, and they generate
loads of cash with zero long term debt, I’m willing to give them a chance.

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