Business context and reporting period
This filing is DSW Inc.’s unaudited Form 10-Q for the quarter ended August 3, 2013, covering fiscal 2013’s second quarter and first six months. The supplied metadata identifies Designer Brands Inc. and “2012 Q2,” but the filing itself names DSW Inc. and reports 2013 periods; investors should verify the intended issuer and period. DSW operated 377 stores and dsw.com, alongside 351 affiliated shoe departments.
Key financial metrics
| Metric | Three months ended August 3, 2013 | Six months ended August 3, 2013 |
|---|---|---|
| Net sales | $562.1 million, up 9.7% | $1,163.4 million, up 8.7% |
| Gross profit / margin | $183.4 million / 32.6% | $366.4 million / 31.5% |
| Operating profit / margin | $54.0 million / 9.6% | $108.3 million / 9.3% |
| Net income | $33.7 million | $68.2 million |
| Diluted EPS | $0.73 | $1.49 |
| Operating cash flow | Not separately provided for the quarter | $147.1 million |
At August 3, cash and equivalents were $68.9 million; short- and long-term investments totaled $430.8 million. The company had no borrowings outstanding. Current assets were $776.9 million and current liabilities were $303.8 million; reported working capital was $473.1 million. Shareholders’ equity was $930.7 million.
Material changes versus comparable periods
- Quarterly comparable sales rose 4.4%, versus 4.2% a year earlier. First-half comparable sales rose 0.8%, versus 6.0% a year earlier; customer traffic weakened, partly offset by improved conversion, average unit retail, and units per transaction.
- Quarterly gross margin improved to 32.6% from 31.3%, mainly from lower markdown activity. First-half gross margin declined to 31.5% from 33.0%, largely reflecting inventory adjustments from an unsuccessful expanded online luxury test.
- Excluding the luxury test, first-half gross margin was 33.3%, versus 33.0% a year earlier. The test reduced first-half gross profit by $18.4 million: $9.1 million in sales benefit was more than offset by $27.5 million in cost of sales, including inventory adjustments.
- Quarterly net income increased from $29.3 million to $33.7 million. First-half net income was $68.2 million, compared with $69.2 million, which included $1.3 million from discontinued operations.
- First-half operating cash flow increased to $147.1 million from $101.5 million, primarily due to working-capital changes. Cash and equivalents declined by $12.2 million from the fiscal-year start.
Outlook, commentary, risks and unusual items
- Management expected approximately $100 million in fiscal 2013 capital expenditures and planned approximately 30 new stores, including two small-format locations. It gave no specific earnings or sales forecast in the provided filing text.
- The company completed settlement of the Filene’s Basement pension plan in the second quarter. The filing reports a $14.7 million operating-expense impact; the settlement involved a $5.0 million company contribution and reclassification of pension losses from accumulated other comprehensive loss. Reported first-half net income includes the settlement effects.
- On August 2, DSW amended its secured revolving facility, reducing commitments from $100 million to $50 million, with a five-year term. A separate letter-of-credit facility allows up to $50 million. The facilities include restrictive covenants, a $125 million minimum cash and short-term-investments requirement, and a $200 million annual capital-expenditure limit. Outstanding letters of credit were $16.1 million; revolving availability was $33.9 million.
- Management cited uncertain economic conditions, lower store traffic, inventory and markdown risk, fashion and vendor risks, store expansion, distribution and information systems, and affiliated-partner and lease risks. The filing identifies Filene’s Basement lease guarantees, with a recorded liability of $6.5 million; disclosed expected loss ranges were $0–$7 million for Union Square and $0–$3 million for Bergen, New Jersey.
- Subsequent events included a declared $0.25 quarterly dividend and a proposed two-for-one stock split, subject to shareholder approval. A $100 million share-repurchase authorization had not been used as of August 3.
Important facts for investors to verify
- Confirm that the intended filing is DSW Inc.’s 2013 second-quarter 10-Q, rather than a Designer Brands Inc. filing or a 2012 period.
- Review the effect of the luxury-test inventory adjustments and whether the business can improve performance without sacrificing core merchandise margins.
- Assess comparable-sales trends, particularly traffic and women’s footwear, and the execution and returns of planned store openings.
- Check the pension settlement’s income-statement treatment and the status and potential exposure of the Filene’s Basement lease-guarantee litigation.
- Monitor liquidity and covenant headroom under the reduced revolving facility, including the treatment of cash and investments and outstanding letters of credit.