DSW: Buy on the Weakness or Avoid in 2014?

2013 was one of the best years the stock market has ever seen, and numerous stocks reached all-time highs. DSW was one of those stocks, but it has since fallen hard. Let's take a look and see if this is our opportunity to buy DSW or if we should look elsewhere for an investment.

The shoe warehouse
DSW, or the Designer Shoe Warehouse, is a footwear and accessories specialty retailer in the United States. Its products include many types of shoes, boots, and sandals, as well as handbags and accessories such as hosiery. The company currently operates 393 stores in 42 states, the District of Columbia, and Puerto Rico, as well as its website, DSW.com.

Cause of the decline
On Nov. 25, DSW reached a fresh 52-week and all-time high of $47.55 and investors were happier than ever. However, Nov. 26 brought DSW's third-quarter earnings report and it did not impress the Street, which started DSW shares on a steep decline. Here's an overview of the key metrics along with a year-over-year comparison:

Earnings per share increased by 14% and revenue rose by 6.8%, but comparable-store sales declined by 0.7%. Although it was a mixed quarter, DSW raised its full-year outlook and it now expects to earn $1.80-$1.90 per share, which represents 7.1%-13.1% growth from 2012. This is troubling because, in the report, management described the third quarter as having a "promotional environment" to explain the weak revenue number.

I believe investors smelled blood in the water and realized that the holiday shopping season would only bring more promotions, beginning with Black Friday and Cyber Monday. In fact, since early December, retailer after retailer has cut its outlook due to the intense promotional environment, and just about every non-luxury shoe and apparel retailer has been sent to the woodshed.

And down we go...
After earnings were released, DSW was hit hard; it fell 4.8% in the next trading day and it has been a downward slope for the stock since then. The stock now trades more than 16.5% below the 52-week high it traded at before the release, and the negative momentum does not seem to be slowing. Here's the stock chart from Nov. 25 through Jan. 10:

Source: Yahoo! Finance.

How do the competitors stack up?
Two of DSW's largest competitors, Shoe Carnival and Brown Shoe , have also had tough times navigating the promotional environment. Shoe Carnival is a footwear retailer with 381 stores in 32 states and Puerto Rico to go with its online presence. Brown Shoe is a global footwear company with more than 1,200 retail locations in the United States, Canada, China, and Guam, along with several e-commerce sites, including Shoes.com. Take a look at this performance-related comparison using the same time frame that we discussed in regard to DSW's decline:

As of market close on Jan. 10.

As you can see, Brown Shoe has been the only one of the three to remain positive since Nov. 25, and it has fallen the least year to date. This could be because it has the best brand mix and because its earnings supported its raised outlook, or because of general investor confidence; regardless, the company's performance shows the strength of its brands and makes a strong case for Brown Shoe being the best investment option in the industry.

Shoe Carnival, on the other hand, had been the strongest performer until the beginning of January, when things quickly turned bad; the stock began to fall along with the overall market at the beginning of 2014, but as the market turned upward, the stock continued to fall. To make the situation even worse, Shoe Carnival cut its fourth-quarter outlook sharply; it now expects to earn $0.03-$0.06 per share on revenue of $203 million-$205 million after previously estimating that it would earn $0.18-$0.22 per share on revenue of $215 million-$219 million. This was an incredibly bad reduction, so I believe Shoe Carnival is not a good investment in today's market.

So what should we do?
I believe that the sharp decline in DSW is a buying opportunity; however, I want to wait for the company's next earnings release before initiating a position. I believe this is the correct way to go about it because I do not want to be a shareholder if the company were to cut its outlook, like Shoe Carnival, or if earnings miss estimates again. If DSW reports a solid quarter, chances are that it will not rise all the way back to its 52-week high, so we could buy on the way up. If negativity persists, look to Brown Shoe, as it is lining up to be the best option in the industry for 2014.

The Foolish bottom line
DSW is a great American shoe retailer that has been hit hard following a mixed third quarter. It trades more than 16.5% below its 52-week high and I believe this is an opportunity for investors to buy, but I want to see what its next quarterly report holds before initiating the position. Keep a close eye on this one and consider buying if its next report points toward a year of solid top- and bottom-line growth.

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The article DSW: Buy on the Weakness or Avoid in 2014? originally appeared on Fool.com.

Fool contributor Joseph Solitro has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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