DSW Concludes Stake Buyout in Town Shoes - Analyst Blog

DSW Inc. ( DSW ) has completed the purchase of a 49.2% stake in one of Canada's leading footwear retailers, Town Shoes Limited, for $68.7 million (CAD$75.5 million). The company had announced the deal last month. This marks its foray in Canada.

Shares of DSW rose 4.2% on the index following the buyout announcement.

DSW, which competes with Foot Locker, Inc. ( FL ), purchased the stake from some of the clients of Alberta Investment Management Corporation (AIMCo) and other minority shareholders. This stake buyout provides DSW with 50% voting control as well as board representation. Town Shoes is owned primarily by AIMCo, Callisto Capital, a Canadian private equity firm and some other minority shareholders.

As per the agreement, inked in April 2014, DSW is eligible to completely buy out Town Shoes at a pre-determined multiple of earnings before taxes, deprecation and amortization (EBITDA) after four years.

DSW expects this transaction (excluding one-time items) to be marginally accretive to earnings in 2014.

DSW was looking to venture into the Canadian market for quite some time. Town Shoes, with over 182 locations and revenues of CAD $291 million for its fiscal year ending Jan 2014 had emerged as a strategic option for DSW's ride on Canadian lands. With this acquisition, DSW will have an operating base in Canada that will help in expanding its brand across the country.

Notably, a number of retailers have crossed over to the Canadian territory with not-so-good results. We note that leading department retailer Target Corp. ( TGT ) had expanded to Canada in 2013, but failed to deliver the desired results, incurring an operating loss of $941 million in its first year of operation.

Another department retailer Big Lots Inc . ( BIG ) recently wrapped up its Canadian operations after suffering huge losses. Big Lots entered the Canadian market with the acquisition of Liquidation World Inc. in 2011.

DSW is also in an expansion spree at home. Since Apr 2014, the company has announced the opening of 7 new stores. These new stores are located in Manhasset, NY; Hyannis, MA; Laurel, MD; Washington, DC; DeKalb, IL; Ponce, PR; and Tempe, AZ. DSW's store openings signify the company's commitment to strengthen its network with the aim of driving top-line growth.

DSW is scheduled to report its first-quarter fiscal 2014 earnings on May 28, 2014. Our proven model does not conclusively show DSW is likely to beat the Zacks Consensus Estimate this quarter. This is because DSW carries a Zacks Rank #4 (Sell) and a negative Earnings ESP of 6.12% (the Most Accurate Estimate stands at 46 cents whereas the Zacks Consensus Estimate is 49 cents).

For a stock to outperform, it needs both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3. The combination of DSW's Zacks Rank #4 and negative ESP makes an earnings beat most unlikely.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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