Designer Shoe Warehouse Inc (NYSE: DSW) has two reportable segments: the DSW segment, which includes DSW stores and dsw.com, and the Affiliated Business Group (“ABG”) segment.
DSW offers a wide assortment of brand name dress, casual and athletic footwear and accessories for women, men and kids.
Source: Quarterly report ended October 31, 2015
Why I Bought It At $23.44
Back in December 2015, the stock’s price fell a lot due to a bad quarter 3 result.
It passed my qualitative checklist.
From a quantitative point of view, I felt that the stock is worth at least $26.78 based on a few assumptions (it was trading at $22-$24 range back then):
- The stock’s earnings per share will continue growing at 12.5% for the next 10 years- based on the fact that it grew at 14.5% for the past 9 years
- Assumed a discounted rate of 9% to get the present value of the stock
- A margin of safety of 30%
Why I Sold It At $27.50
- It reached my target price of $26.44
- I am uncomfortable with their decreasing profit margins- As you can see from the above graph, their revenue keeps on growing at an impressive pace but due to their decreasing profit margins, net income is stagnant
- I know I made a mistake in assuming a 12.5% Earnings Per Share growth rate for the next 10 years because their share buybacks cannot hide from the fact that their competitive advantage and earnings power is deteriorating (their EPS growth at 8.71% for the past 3 years as opposed to 14.49% for the past 9 years)
Assuming that they continue growing at the current 8-9% EPS growth per year for the next 10 year, I sold DSW at a price which I feel is already overvalued.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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