Filing summary
Period and entity: This is DSW Inc.’s unaudited Form 10-Q for the quarter and nine months ended October 28, 2017, compared with periods ended October 29, 2016. The request metadata says “Designer Brands Inc., 2016 Q3,” which does not match the filing: the registrant and reporting period shown are DSW Inc. and 2017 Q3.
Financial performance
| Metric | Three months ended Oct. 28, 2017 | Three months ended Oct. 29, 2016 | Nine months ended Oct. 28, 2017 | Nine months ended Oct. 29, 2016 |
|---|---|---|---|---|
| Net sales | $708.3 million | $696.6 million | $2,079.8 million | $2,036.8 million |
| Gross margin | 29.2% | 30.4% | 28.8% | 29.6% |
| Operating profit | $3.4 million | $62.9 million | $91.1 million | $151.2 million |
| Net income | $4.0 million | $39.0 million | $55.6 million | $94.0 million |
| Diluted EPS | $0.05 | $0.47 | $0.69 | $1.14 |
Quarterly sales rose 1.7%; nine-month sales rose 2.1%. Comparable sales declined 0.4% for the quarter and 1.0% for the nine months. Quarterly gross margin fell 120 basis points, chiefly due to higher shipping costs and markdowns. For the nine months, operating cash flow was $138.6 million, versus $110.8 million in the prior-year period; capital expenditures were $39.6 million versus $73.2 million.
At October 28, 2017, cash and cash equivalents were $149.5 million and short-term investments were $180.1 million. Current assets were $922.0 million and current liabilities $336.3 million. The company had no revolving-credit borrowings, $2.5 million in letters of credit, and $297.5 million available under its $300 million unsecured facility. Total liabilities were $483.0 million. It reported compliance with facility covenants.
Material changes and unusual items
- Quarterly earnings included $82.7 million of Ebuys goodwill and intangible-asset impairment charges: $53.8 million for goodwill and $28.9 million for intangibles. The impairment followed recurring Ebuys operating losses, increased marketplace competition, and reduced growth expectations; all Ebuys goodwill was written off.
- The company recorded a $31.2 million quarterly gain from the change in fair value of Ebuys contingent consideration; the nine-month gain was $28.9 million. The liability fell to $5.0 million at quarter-end from $33.2 million at fiscal year-end.
- DSW segment sales increased, but ABG sales declined, partly reflecting Gordmans store closures following its Chapter 11 filing. Ebuys’ gross profit performance weakened amid lower markups, inventory reserves, and higher fulfillment expenses.
- The company entered a new $300 million senior unsecured revolving credit facility, maturing August 25, 2022, replacing its prior secured facilities.
- The board authorized an additional $500 million in share repurchases. $524.1 million remained authorized at quarter-end; the company repurchased $9.4 million of shares during the nine months.
Outlook, risks and contingencies
Management expected approximately $75 million of fiscal 2017 capital expenditures, including store openings and remodels, technology, and other business projects. It intended to exercise its call option to acquire the remaining Town Shoes interest in the first half of fiscal 2018, and stated that cash, investments, operating cash flow, and available credit were sufficient to support operations, capital spending, repurchases, and the planned acquisition. The filing gives no specific sales or earnings forecast.
Key risks cited include execution and integration of the planned Town Shoes acquisition; Ebuys performance and integration; comparable-sales volatility, competition, fashion and consumer trends; reliance on affiliated and international partners; foreign currency movements; information-security and fulfillment disruptions; and lease and liquidity risks. A hypothetical 10% Canadian-dollar exchange-rate movement could produce a $14.8 million translation fluctuation initially recorded in other comprehensive income. The company disclosed ordinary-course legal proceedings, a lease guarantee extending to 2024, $21.6 million of noncancelable purchase and service obligations, and $0.2 million of construction commitments. Management said current legal proceedings were not expected to have a material effect.
Important facts to verify
- Confirm the intended company and period: the supplied filing is DSW Inc.’s 2017 Q3 report, not a 2016 Q3 Designer Brands filing.
- Assess the assumptions behind the Ebuys impairment and the remaining contingent consideration estimate, including the business’s ongoing operating performance.
- Track comparable sales, gross-margin pressures, and the impact of Gordmans closures and Ebuys fulfillment changes.
- Confirm timing, funding, and integration progress for the planned Town Shoes acquisition.
- Monitor capital allocation, including the large remaining repurchase authorization, liquidity, and credit-facility covenant headroom.