DSW Enters Canadian Territory

DSW Inc. (DSW) is set to enter the Canadian market with a deal penned to acquire a 44% stake in a leading Canadian footwear retailer, Town Shoes Limited. The all cash deal is pegged at $62 million or CAD $68 million.

Town Shoes is owned primarily by Alberta Investment Management Corporation (AIMCo) and a private equity firm, Callisto Capital.

Per the deal, DSW will purchase the 44% stake from Alberta Investment and may acquire extra shares from other minority shareholders as part of its preliminary investment. This stake buyout will provide DSW 50% voting control as well as board representation.

Additionally, the deal makes DSW eligible to completely buyout Town Shoes at a pre-determined multiple of earnings before taxes, deprecation and amortization (:EBITDA) after four years.

The transaction, already approved by the board of directors of both the companies, is likely to conclude in May 2014 (subject to regulations). DSW expects this transaction (excluding one-time items) to be marginally accretive to earnings in 2014.

DSW claimed that it was seeking to foray in Canada for quite some time. Town Shoes, with over 182 locations and revenues of CAD $291 million for its fiscal year ending Jan 2014 has emerged as a strategic option for its 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.

Recently a number of retailers have crossed over to the Canadian territory with not-so-good results. Citing a few examples, we note that leading department retailer Target Corp. (TGT) had expanded to Canada in 2013, but failed to deliver desired results witnessing an operating loss of $941 million in its first year of operation. Though, management remains hopeful of a turnaround in fiscal 2014 backed by better inventory position and marketing and merchandising initiatives to promote brand awareness, we remain skeptical.

Another department retailer Big Lots Inc. (BIG) recently wrapped up its Canadian operations after suffering huge losses. Notably, the company had ventured into Canada with the acquisition of Liquidation World Inc. in 2011. However, after careful business evaluation, Big Lots decided to exit from Canada and focus on other areas such as e-Commerce and omnichannel capabilities.

Currently, DSW has a Zacks Rank #4 (Sell).

Key Pick from the Sector

Investors interested in the retail sector could consider Barnes & Noble Inc. (BKS) with a Zacks Rank #1 (Strong Buy).

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