Business Context and Reporting Period
Company: DSW Inc. (Note: Metadata lists "Designer Brands Inc.", but the filing text identifies the registrant as DSW Inc., a leading U.S. branded footwear specialty retailer and controlled subsidiary of Retail Ventures, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended May 1, 2010
Operations: Operates 311 DSW stores and dsw.com, plus 354 leased departments for four other retailers (Stein Mart, Gordmans, Filene's Basement, Frugal Fannie's).
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $449.5 million | $385.8 million |
| Gross Profit | $147.4 million | $105.0 million |
| Gross Margin | 32.8% | 27.2% |
| Operating Profit | $49.1 million | $12.1 million |
| Operating Margin | 10.9% | 3.1% |
| Net Income | $30.2 million | $7.1 million |
| Diluted EPS | $0.67 | $0.16 |
| Cash & Equivalents | $141.9 million | $82.1 million |
| Short-term Investments | $152.4 million | $164.3 million |
| Total Liquidity (Cash + ST Inv) | $294.2 million | $246.4 million |
| Long-term Debt | $0 | $0 |
| Operating Cash Flow | $21.0 million | $14.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16.5% year-over-year, driven by a 16.2% increase in comparable sales. Traffic, conversion rates, and average unit retail all contributed to the growth.
- Margin Expansion: Gross margin improved 560 basis points to 32.8%, primarily due to reduced markdown activity and better inventory management. Operating margin expanded 780 basis points to 10.9%.
- Profitability: Net income surged 322% to $30.2 million, reflecting the combination of sales growth and expense leverage.
- Segment Performance: The DSW segment (stores and e-commerce) saw comparable sales rise 17.7%, while leased departments grew 2.2%.
- Balance Sheet: Total assets increased to $886.8 million. Inventory levels rose to $286.7 million, consistent with seasonal build-up and increased sales demand.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company invested $9.2 million in the quarter for new stores, remodels, and IT. Total fiscal 2010 CapEx is expected to be approximately $50 million, with plans to open roughly ten new stores.
- Liquidity Strategy: Management maintains a cash management strategy to support operations and growth. The company has no long-term debt and significant liquidity ($294.2 million).
- Credit Facility: The company has a $150 million secured revolving credit facility expiring July 5, 2010. No borrowings were outstanding as of May 1, 2010, with $138.7 million available. Management is negotiating a replacement facility, noting that terms may not be as favorable as current ones due to market conditions.
- Risks: Key risks include the ability to secure a replacement credit facility, general economic uncertainty affecting consumer traffic, supply chain disruptions, and the financial condition of leased department partners.
- Dividends: The company does not anticipate paying cash dividends in the foreseeable future; earnings are expected to be retained for business development.
Investor Verification Checklist
- Credit Facility Renewal: Verify the status of negotiations for the replacement credit facility expiring in July 2010 and potential changes in terms or covenants.
- Inventory Levels: Monitor inventory turnover and markdown rates to ensure the current high inventory levels ($286.7 million) align with sales velocity and do not lead to future margin compression.
- Comparable Sales Sustainability: Assess whether the 16.2% comparable sales growth is sustainable given the strong performance across all merchandise categories.
- Related Party Transactions: Review ongoing transactions with Retail Ventures, Inc. (RVI), which owns 62.3% of DSW, and Schottenstein Stores Corporation (SSC), particularly regarding lease agreements and shared services.
- Capital Allocation: Track the execution of the $50 million CapEx plan and the opening of new stores to ensure they meet profitability targets.