These Retailers Have A Foot In The Dividend Door

Published Sun, 08 May 2016 20:00 CET by

The retailing industry has been the first to endure the negative effect of an unstable macroeconomic environment that forces many retailers out of business. On the other hand, the U.S. Census Bureau reports that the total sales for the first quarter of 2016 (January through March) were up 2.8% YoY. For the coming year, retailers with optimized distribution systems and enhanced supply chains are expected to stay ahead of the competition as consumers expect greater products and faster delivery when shopping online.
This article discusses two retailers that trade on the NYSE. Their average debt-to-equity ratio is 0.03 while their average beta is 0.64. Both metrics suggest financially healthy companies with effective debt management. Both deliver strong cash flows and dividends, with an average yield of 2.52% and an average payout ratio of 40%. Their average dividend per share is $0.95. According to the analysts following these companies, in 2016 they will sustain their cash flow performance and will remain focused on dividend payments, thereby returning shareholder value.

DSW and Foot Locker YTD Stock Performance Graph
DSW (NYSE: DSW) is an Ohio-headquartered company that operates as a branded footwear and accessories retailer in the United States. Through its DSW and Affiliated Business Group segments, DSW offers dresses, casual and athletic footwear, and accessories under various brands for men, women and children. The company’s network consists of 474 stores in 42 states as well as its online store and supplied footwear to 384 locations in the United States.

Full-Year 2015 Financial Results
Total revenues increased 5% YoY to $2.6 billion from $2.5 billion, generating a gross profit margin of 29.3%, slightly lower than 30.2% in 2014. Gross profit margin declined due to the company’s fall season promotional activity, although distribution costs were in line YoY. Total operating expenses reached $2.4 billion, up 6.8% YoY from $2.3 billion due to increased marketing and stock compensation expenses. Operating income was down 11.8% to $213.6 million from $242.1 million and net income was down 11.3% YoY to $136.0 million from $153.3 million, thereby affecting EPS, which declined 8.9% YoY to $1.54 from $1.69 in 2014. On the upside, DSW reported remarkable operating cash flow growth 22.9% YoY, reaching $242.6 million from $197.4 million, whereas free cash flow reached $132 million, an increase of 27% YoY. The company has no long-term debt.

Dividend Growth
DSW declared an annualized dividend of $0.80 per share, yielding 3.25% at a payout ratio of 52%, which is higher than the Apparel, Footwear & Accessories Industry payout ratio of 35%. The company has delivered a dividend growth of 1.1% or 2.8% annually since 2012 and it is expected to further increase its dividend as a result of strong cash flows.

2016 Outlook
For 2016, DSW will continue to expand into new markets with the proper store format and will extend its customer reach through new categories. Total revenues are expected to grow between 8% and 10% as a result of the opening of 32 net new stores and $100 million in revenues from Ebuys. Operating expenses are estimated to be about 10% higher due to increased marketing and store expenses. In terms of EPS, analysts estimate an average EPS of $1.66 through 2019, up 8% from current EPS of $1.54. Also, analysts expect 7% growth for 2017 and a 5-year average earnings growth of 9.33% per annum.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
DSW 23.84 21.23 36.75 12.29% -35.13% 2.01 16.08 0 0.62 52%
Foot Locker 60.78 52.73 77.25 15.27% -21.32% 8.37 16.02 0.05 0.65 29%

Foot Locker (NYSE: FL) is a New York-based athletic shoes and apparel retailer. Through its Athletic Stores and Direct-to-Customers segments, Foot Locker retails athletic footwear, apparel, accessories, and equipment under the Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02 brand names and sells athletic footwear, apparel, equipment, team licensed products, and private-label merchandise through Internet Websites, mobile sites, and catalogs. The company’s network consists of 3,383 stores in 23 countries in North America, Australia, Europe, and New Zealand as well as of 48 Foot Locker franchised stores in the Middle East, and the Republic of Korea and 16 franchised Runners Point stores in Germany.

Full-Year 2015 Financial Results
In 2015, Foot Locker has recorded an all-time best performance in many areas, including an adjusted EBIT of 12.8%, increased EPS, and higher revenues. This was the result of the company’s focus on productivity, sales, and ROIC. Moreover, Foot Locker has added 111 new stores to its network, has closed 151 stores and has remodeled or relocated 209 stores in the fiscal year 2015. The company’s financial results for the full-year 2015 are as follows:

  • Revenues up 3.6% to $7.4 billion from $7.1 billion
  • Gross profit margin 33.8% from 33.2%, an increase of 1.8% YoY
  • Total operating expenses up 3.7% YoY to $6.6 billion from $6.4 billion
  • Operating income up 3.3% YoY to $841 million from $814 million
  • Net income up 4.0% YoY to $541 million from $520 million
  • EPS $4.29, up 20.5% YoY from EPS $3.56
  • Operating cash flow $745.0 million, up 4.6% YoY from $712.0 million

Dividend Strength & Outlook
Foot Locker has announced a 10% increase in its quarterly dividend to $0.275 per share, thereby declaring an annualized dividend of $1.10, yielding 1.79% at a payout ratio of 29%. The payout ratio is slightly lower than the average Apparel, Footwear & Accessories Industry payout ratio of 35%. Moreover, at the end of 2015, Foot Locker had $637 million remaining on the $1 billion share repurchase program authorized in 2014. Its dividend growth for the period 2010-2016 is 83.3% or 13.9% annually, indicating the company’s focus on cash dividends.
Due to its solid financial position and a history of generating strong cash flows, Foot Locker is expected to continue returning a substantial amount of cash to shareholders while investing in strategic initiatives that can drive its financial performance forward. Analysts estimate an average earnings growth of 10.48% through 2020 and an average EPS of $5.28 from current EPS $3.84, a 37.4% increase.