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FOOTWEAR CHAIN DSW IS REVISING ITS STORE SPECS TO SLIP INTO MORE PRIME SITES

By Jennifer Hopfinger

DSW stores are shrinking — a perfect recipe for growth, the Columbus, Ohio-based specialty footwear retailer says. Typically, a DSW store measures about 25,000 square feet, though a few here and there reach 40,000 square feet. But now a downscaling is in the works, and the company is betting that this smaller format (about 15,000 to 19,000 square feet) will yield bigger opportunity.

“Our store size was limiting where we could locate,” said Peter Z. Horvath, DSW’s president. “The smaller format gives us access to sites that were out of the question in the past. While we do very well in the strip centers, next to retailers like PetSmart and Bed Bath & Beyond, we’re not stuck in the strips anymore. With the smaller format, we can now co-exist with great lifestyle fashion tenants such as Abercrombie & Fitch, Coldwater Creek and Ann Taylor Loft.”

Not that DSW is done entirely with building those bigger units, mind. It’s simply that of the 29 stores the company introduced last year, 25 were of the smaller size. Even so, practicality and adaptability are going to be the watchwords here, it seems.

“We plan to be opportunistic,” said Richard Golden, DSW’s senior vice president of real estate. “If we’re presented with a fantastic 25,000-square-foot location, we would want it, but we’ve proved to ourselves that we can be very efficient in a 15,000-square-foot store. It’s less about big or small, and more about what’s appropriate for the location. At the end of the day, we want to be in the best real estate locations, regardless of the type of shopping center.”

DSW ranks ninth in the $39 billion-revenue adult footwear market, with a 2.5 percent share of the U.S. market. DSW plans to grow primarily by rolling out about 30 stores per year.

The company has the biggest potential for growth on the West Coast, Horvath says, but has identified areas throughout the country where it would like to expand.

DSW expects to boost capital investments this year to $80 million, from $42 million last year. Part of the increase will go toward new-store growth. Currently, the company has about $172 million in cash on hand, and no debt.

Others are trying smaller stores too. In May the Giant Eagle grocery chain opened a 14,000-square-foot store in Pittsburgh that is about a quarter of the size of the standard Giant Eagle store.

The Home Depot is testing stores in urban areas and smaller towns that are half the size of its usual 70,000-to-100,0000-square-foot store. FedEx Kinko’s also announced a smaller prototype, at 1,800 square feet, versus its standard 6,000-square-foot store. Even consumer electronics big boxes are downsizing (page 60).

These smaller units give retailers the flexibility to choose real estate, often allowing them to locate closer to customers. Smaller stores also help landlords and developers in tenant selection.

DSW offers brand-name dress, casual and athletic footwear. Women’s shoes represented about 64 percent of sales last year, while men’s shoes accounted for roughly 17 percent. Accessories and other items made up the balance. The chain’s stores carry some 30,000 pairs of shoes in about 2,000 styles. Roughly 85 percent of the square footage is used for selling space; the stores need comparatively little storage space because most of the merchandise goes straight onto the selling floor.

The self-service format means shoppers can try on shoes at will. Department stores typically have a much smaller product offering, with salespeople checking for item availability. Thus, DSW’s merchandise sells at up to 50 percent off the department store prices.

The concept has been successful over the years. DSW was formed in 1991 in Dublin, Ohio, and completed an initial public offering in July 2005. The retailer has grown to 236 stores across 35 states. In addition, DSW runs 365 leased shoe departments inside other retailers, including all 267 Stein Mart stores. DSW’s loyalty program counts some 7.3 million members. Year-on-year net sales increased 12 percent last year, to $1.28 billion.

With less space in the smaller stores for shipments, DSW has switched from weekly to daily deliveries. The new format has forced the company to make each category more relevant, says COO Kevin M. Lonergan. “The core of our business is women’s shoes, so that’s our top merchandise priority,” Lonergan said. “We’ve narrowed the choices in accessories to primarily handbags and hosiery, which make a lot of sense with shoes, and we’ve whittled down the styles in men’s shoes — we don’t need to carry 28 different styles of black loafers.”

Further, DSW is changing the interior design. “We determined that if we’re going to fit in with higher-end lifestyle tenants, we needed to change the look and feel of our stores as well,” said Golden.

The new design is loftlike, with brick walls and wood floors. The bright white lighting of the older stores has been softened. These new stores feature a main drive aisle that improves traffic flow and creates space for special items. The clearance area is separate from the regular priced products, and this has improved store capacity. Bench seating in the aisles, which the company says created traffic congestion, has been moved, and the space between the aisles has been narrowed. The display fixtures have been placed higher, creating more vertical capacity. The checkouts have been moved from the front of the store to the side.

DSW estimates that customers spend about 40 minutes in its stores, and the new design is intended to improve the shopping experience. Seating areas equipped with televisions have been added in the men’s areas to help the guys as they wait for their women.

Five of the older stores are to be remodeled under the new design this year and, if the return on investment is good, more stores will be remodeled. “The acceptance level of our new format among the development community has been very high,” Golden said. “It has cracked open a lot of new opportunities for us.”

DSW’s new format helps landlords create an optimum tenant mix, says Ward Kampf, president of retail leasing at Thomas Enterprises, which has developed some 20 million square feet of retail property in seven states, primarily in the Southeast.

“The one category that’s always tough to fill is women’s shoes,” Kampf explained. “But DSW is a great fit. We can put them with Banana Republic and Chico’s, or we can put them with Old Navy and Target. DSW fits into regional malls, lifestyle centers and strips. Very few tenants can move around like that.”