Business context and reporting period
DSW Inc. (the registrant named in the filing; the request’s “Designer Brands Inc.” label does not match the filing) filed this unaudited Form 10-Q for the quarter ended August 4, 2018, and the six months then ended. The filing compares the quarter with the period ended July 29, 2017; despite the request metadata, this is fiscal 2018 Q2, not 2017 Q2. DSW sells footwear and accessories through U.S. retail and e-commerce, Canadian retail, affiliated retail arrangements, and franchise operations.
On May 10, 2018, DSW acquired the remaining interest in Town Shoes Limited (TSL), bringing it into the consolidated results and creating a Canada Retail segment. DSW decided to exit TSL’s Town Shoes banner, comprising 38 locations, while focusing on its three other Canadian banners.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
| Metric | Three months ended August 4, 2018 | Six months ended August 4, 2018 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $795.3 | $1,507.4 | Quarter +16.4%; six months +9.6% |
| Net income (loss) | $(38.4) | $(14.1) | Prior year: $28.7 and $51.5 |
| Diluted EPS | $(0.48) | $(0.18) | Prior year: $0.36 and $0.64 |
| Operating profit | $24.5 | $62.9 | Prior year: $46.9 and $87.5 |
| Gross profit margin | 32.1% | 30.6% | Prior year: 29.2% and 28.9% |
| Operating cash flow | Not stated for quarter | $106.6 | Prior six months: $44.6 |
Quarterly comparable sales rose 9.7% companywide (U.S. Retail +9.6%); six-month comparable sales rose 5.8%. Management attributed growth to comparable sales, TSL and non-comparable store sales, partly offset by the loss of Gordmans and Ebuys sales. U.S. Retail merchandise margin improved, with management citing lower markdowns; consolidated gross margin also benefited from the exit of Ebuys.
At August 4, cash and cash equivalents were $216.0 million and investments were $73.1 million. Current assets were $977.1 million and current liabilities $375.2 million. Total liabilities were $525.5 million; the filing reports no outstanding revolver borrowings, $1.2 million in letters of credit, and $298.8 million of available borrowing capacity under the $300 million facility. DSW was in compliance with its financial covenants. Six-month capital expenditures were $32.1 million, dividends paid were $39.9 million, and cash increased by $40.1 million.
Material changes, unusual items, and outlook
- The quarter’s loss included a $36.2 million goodwill impairment that fully eliminated TSL goodwill, a $34.0 million loss on remeasurement of previously held TSL assets, and a $12.2 million foreign-currency translation loss reclassified to non-operating expense. Management reported total net after-tax charges of $89.3 million, or $1.11 per diluted share, primarily related to the Canadian acquisition.
- TSL contributed $72.5 million in quarterly sales and a $38.5 million net loss, including the goodwill impairment. DSW recorded $3.1 million in acquisition-related costs during the first half.
- Six-month income tax expense included an additional $24.0 million associated with a valuation allowance on deferred tax assets and nondeductible discrete items, primarily connected to TSL. The reported effective tax rate was 203.3%; the company said its accounting for U.S. tax reform remained provisional.
- DSW estimated $20–25 million in total Town Shoes exit costs, including lease exit charges, severance, and inventory write-downs. It expected to complete the exit by the end of fiscal 2018 or early fiscal 2019. It also reported $4.5 million in Ebuys lease exit charges and $0.4 million in Town Shoes lease exit charges during the first half.
- Management expected approximately $90 million in fiscal 2018 capital expenditures and planned nine new U.S. DSW stores, with no planned Canadian openings post-acquisition. It said cash, investments, operating cash flow, and revolver availability should support operations, seasonal working capital, capital expenditures, and share repurchases for the next 12 months and foreseeable future. No specific earnings or comparable-sales forecast is provided.
- Management cited risks including execution and expected benefits of the TSL acquisition, consumer demand and fashion trends, competition, vendor and distribution dependencies, information security, leases, foreign exchange, and economic conditions. A 10% Canadian-dollar move was estimated to cause a $5.0 million translation fluctuation and $4.6 million revaluation effect. The company reported no material changes to previously disclosed risk factors and no material expected liability from current legal proceedings.
- The board declared a $0.25-per-share quarterly dividend payable October 5, 2018. No shares were repurchased under the public repurchase program during the first half; $524.1 million remained authorized.
Key facts for investors to verify
- Confirm the fiscal period and issuer identity: the filing is DSW Inc.’s fiscal 2018 Q2 report, not a 2017 Q2 filing.
- Assess underlying U.S. Retail performance separately from TSL and the acquisition, impairment, remeasurement, tax, and exit charges.
- Track TSL integration, Canadian banner performance, Town Shoes closure timing, and whether total exit costs remain within the $20–25 million estimate.
- Review inventory, working-capital cash flow, and the planned $90 million fiscal-year capital expenditure program.
- Monitor tax-accounting adjustments, foreign-currency exposure, lease obligations, and compliance with revolver covenants.