Wall Street Puts Boot Into DSW

Discount shoe retailer DSW Inc. (DSW) turned in a great fourth quarter, returning to profitability and ringing up 16% higher sales. You wouldn't know the company did so well, though, by looking at its stock price, which dropped 11 percent after the news.

DSW's costs were higher, and it turned in slightly lower profits than estimated. Even so, the punishment from Wall Street seemed excessive. Stock prices are dictated more by the perception of the future than of any one quarter's results, but on that count, too, DSW looks in much better shape than Wall Street is giving it credit for.

A well-known discounter, it is in a retail sector has performed well. Plus, some of its competitors are suffering. Foot Locker (FL), saw fourth-quarter same-store sales fall 2.3 percent; DSW's rose 3.2 percent (and a healthy 12.9 percent for the year). Its cash position is good, in part because it has been cautious on expansion; DSW will add just 10 stores this year, to add to its 306 locations, said CFO Douglas Probst during a conference call.

At least one analyst, Susquehanna Financial Group's Christopher Svezla, is bucking the consensus. In a recent report, he said he was "impressed with management's operational discipline" and that if conditions remain favorable, the company could exceed its projected earnings growth of $1.35 and $1.45 per share.

Judicious expansion and healthy cash flow seem reasonable enough, given the economy's wobbly recovery. It probably says more about Wall Street than DSW that it sees caution as weakness.