Filing summary: DSW Inc. Form 10-Q
Period and entity: The supplied filing is for the quarter ended October 31, 2015, with year-to-date results for the nine months then ended. This does not match the request metadata of Designer Brands Inc., 2014 Q3: the registrant named in the filing is DSW Inc. (ticker DSW). Investors should verify the intended company and period.
Business context
DSW operated 465 U.S. stores and dsw.com; its Affiliated Business Group (ABG) supplied footwear to partner retailers. DSW also held a 46.3% equity interest in Canada’s Town Shoes. In the first nine months, DSW opened 36 stores and closed two; ABG added 13 shoe departments and ceased operations in eight.
Financial performance
Amounts below are in USD millions except per-share data and percentages.
| Metric | Three months ended Oct. 31, 2015 | Prior-year quarter | Nine months ended Oct. 31, 2015 | Prior-year period |
|---|---|---|---|---|
| Net sales | $665.5 | $669.9 | $1,948.2 | $1,855.9 |
| Operating profit | $63.3 | $79.8 | $196.5 | $194.4 |
| Net income | $39.3 | $49.6 | $124.3 | $122.5 |
| Diluted EPS | $0.44 | $0.55 | $1.39 | $1.35 |
| Gross margin | 29.9% | 32.6% | 31.0% | 31.2% |
| Operating margin | 9.5% | 11.9% | 10.1% | 10.5% |
Cash flow and investment: Nine-month operating cash flow was $145.3 million, versus $131.5 million. Cash capital expenditures were $79.9 million; management reported $82.2 million of capital expenditures on an accrual basis. Cash used in investing activities was $6.8 million, and cash used in financing activities was $110.9 million, principally for dividends and share repurchases. Cash and equivalents ended at $90.0 million, compared with $59.2 million at January 31, 2015.
Liquidity and debt: Current assets were $677.1 million and current liabilities were $287.1 million, yielding working capital of $390.0 million and a 2.4 current ratio. The company reported $306.5 million of long-term investments and no short-term investments at quarter-end. It had no borrowings under its $50 million revolving credit facility, which had $50 million available; the filing reports no long-term debt outstanding. The facility includes a minimum cash-and-investments covenant of $125 million, as defined in the agreement.
Changes and management commentary
- Quarterly sales declined 0.6%; comparable sales fell 3.9%. Nine-month sales rose 5.0%, with comparable sales up 0.9% and growth also supported by new stores.
- Management attributed the quarterly comparable-sales weakness to weather, a weak macro environment and execution. Lower average selling prices and fewer units per transaction weighed on sales; store traffic fell at a low-single-digit rate, while online traffic and conversion improved.
- Quarterly gross margin contracted 270 basis points, primarily due to marketing-related markdowns and a lower-of-cost-or-market adjustment on a special inventory purchase. Nine-month gross margin declined 20 basis points.
- Quarterly operating expenses were 20.4% of sales versus 20.7% a year earlier, helped by lower incentive-compensation accruals. Year-to-date operating expenses rose to 20.9% of sales from 20.7%, reflecting store expense and overhead deleverage.
- By category, quarterly comparable sales were down 8% in women’s footwear and 5% in accessories, flat in men’s footwear, and up 12% in athletic footwear.
Outlook, risks and unusual items
- No specific earnings or comparable-sales guidance is provided. Management expected fiscal 2015 capital expenditures of approximately $115–$120 million for stores, remodels, technology and other projects.
- Management said cash from operations, cash and investments, and revolving-credit availability were expected to support operations, seasonal working capital, growth spending and dividends. It also noted that weaker economic conditions could reduce traffic and comparable sales, increase inventory and markdowns, and pressure cash flow and profitability.
- DSW implemented Buy Online Pickup in Store and Buy Online Ship to Store during the quarter. Management said it had added promotional measures and planned a more aggressive approach to pricing and marketing.
- DSW completed its prior $150 million repurchase authorization, buying 2.1 million shares for $63.1 million during the nine months. On November 2, 2015, the board authorized an additional $200 million program. A $0.20-per-share quarterly dividend was declared after quarter-end.
- DSW’s Town Shoes-related Canadian-dollar investments expose it to foreign-exchange risk; the company said it did not use hedging instruments. Year-to-date results included a $3.3 million foreign-exchange gain in non-operating income, while foreign-currency effects also reduced other comprehensive income.
- Other items include a $0.4 million impairment of one ABG store, compared with $5.0 million of impairments for seven stores in the prior-year period; $0.9 million of store-closing expenses related to the Yellow Box test-store closures; and a $2.0 million benefit from a final distribution tied to Filene’s Basement, recorded in the first quarter.
- Management considered pending legal proceedings not material. Construction commitments were $1.2 million; leases for 23 planned stores carried total annual rent of $6.2 million, with $8.5 million of expected construction and tenant allowances. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm whether the intended filing is DSW Inc. for the quarter ended October 31, 2015, rather than Designer Brands Inc. or 2014 Q3.
- Assess whether quarterly sales and margin weakness persisted after the reported weather, macroeconomic and execution pressures, and whether markdowns continued.
- Review inventory growth and seasonal working-capital needs alongside operating cash flow and planned capital spending.
- Check covenant calculations for the $125 million minimum cash-and-investments requirement and monitor liquidity as repurchases, dividends and expansion continue.
- Evaluate Town Shoes investment and note-receivable exposure, Canadian-dollar movements, and the potential future transaction options described in the filing.
- Verify subsequent results and actual execution of the $200 million repurchase authorization and the stated capital-expenditure plan.