Filing and reporting period
The supplied filing is DSW Inc.’s Form 10-K for the fiscal year ended February 3, 2018—not a Designer Brands Inc. filing for “2016 Q4.” Fiscal 2017 comprised 53 weeks; fiscal 2016 comprised 52 weeks. The additional week affects year-over-year comparisons.
DSW operated a U.S. footwear and accessories retail business, including DSW stores and dsw.com, alongside affiliated-retailer supply arrangements and an equity investment in Canadian retailer Town Shoes. DSW was the only reportable segment.
Financial results
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $2.800 billion | $2.711 billion |
| Gross profit / margin | $789.4 million / 28.2% | $771.8 million / 28.5% |
| Operating profit / margin | $125.0 million / 4.5% | $200.2 million / 7.4% |
| Net income | $67.3 million | $124.5 million |
| Diluted EPS | $0.83 | $1.52 |
| Cash from operations | $191.0 million | $212.9 million |
| Capital expenditures | $56.3 million | $87.6 million |
Comparable sales declined 0.4% company-wide (DSW segment down 0.5%); reported sales rose 3.3%, supported by new-store sales and the 53rd week. DSW gross margin improved to 30.1%, but consolidated gross margin fell as Ebuys inventory was written down. The filing reports cash and investments of $300.5 million at year-end, inventory of $501.9 million, total assets of $1.414 billion, and shareholders’ equity of $950.4 million. No revolving-credit borrowings were outstanding; $298.1 million was available under the $300 million facility. The filing does not present conventional debt outstanding at year-end.
Material changes and unusual items
- Net income fell by about 46% year over year. Fiscal 2017 results included $89.4 million of Ebuys impairment charges, $9.3 million of Ebuys inventory write-downs, and a $32.7 million gain from eliminating its contingent-consideration liability. Management reported $55.5 million of net after-tax charges, or $0.69 per diluted share, from identified items including Ebuys, restructuring, foreign exchange, and tax reform.
- DSW decided to exit Ebuys after recurring losses and competitive pressures; it expected to end operations in early fiscal 2018. Ebuys recorded $72.0 million of net losses in fiscal 2017, including impairment and inventory charges.
- The Tax Cuts and Jobs Act caused $10.1 million of additional net tax expense, primarily from remeasurement of deferred tax assets. Management said its assessment was provisional and could be adjusted as guidance and analysis progressed.
- Operating cash flow declined to $191.0 million, which management attributed mainly to working-capital payment timing associated with the extra week. The company invested $57.4 million in additional Town Shoes loans during the year.
Outlook, liquidity, and risks
Management planned approximately seven to nine new U.S. DSW stores and about $77 million of capital expenditures in fiscal 2018; these plans excluded additional capital spending after acquiring Town Shoes. It intended to exercise its call option to acquire the remaining Town Shoes interest in the first half of fiscal 2018. Management expected cash, operating cash flow, investments, and credit availability to cover operations, seasonal working capital, capital spending, repurchases, and the Town Shoes acquisition. No specific earnings or sales guidance was provided.
The quarterly dividend was increased from $0.20 to $0.25 per share in February 2018. A $500 million additional repurchase authorization was approved in August 2017; $524.1 million remained available at fiscal year-end, though the program could be suspended or discontinued.
Key disclosed risks include intense retail and e-commerce competition; fashion, weather, and consumer-spending uncertainty; vendor concentration (three vendors supplied about 20% of merchandise); reliance on Stein Mart supply arrangements; cyber and technology disruptions; foreign sourcing and currency exposure; and execution, integration, and financing risks related to Town Shoes. The company reported $1.140 billion of future minimum operating lease obligations. It had no material off-balance-sheet arrangements and said current legal proceedings were not expected to be material.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is DSW Inc.’s fiscal 2017 10-K, not a 2016 Q4 filing for Designer Brands Inc.
- Assess underlying performance separately from Ebuys impairment, inventory write-downs, contingent-consideration gains, and tax-reform charges; reconcile the stated $55.5 million net after-tax adjustment to the detailed disclosures.
- Check subsequent filings for the completion, purchase price, financing, and integration results of the planned Town Shoes acquisition, and the actual closure costs and lease disposition for Ebuys.
- Monitor comparable sales, margins, cash generation, and the effect of the additional fiscal week when comparing periods.
- Review the long lease commitments, Town Shoes receivable and currency exposure, and the terms and covenant headroom of the revolving credit facility.