Business context and reporting period
The supplied filing is DSW Inc.’s unaudited Form 10-Q for the three months ended May 4, 2013, compared with the three months ended April 28, 2012. This does not match the request metadata’s “2012 Q1”; the filing is for fiscal 2013 Q1. The registrant is DSW Inc., not Designer Brands Inc.
DSW operated 376 stores, dsw.com, and 348 shoe departments through its Affiliated Business Group. It opened 12 stores during the quarter and reported two segments: DSW and Affiliated Business Group.
Financial performance and position
| Metric | Quarter ended May 4, 2013 | Comparable prior period |
|---|---|---|
| Net sales | $601.4 million | $558.6 million |
| Gross profit / margin | $183.0 million / 30.4% | $192.6 million / 34.5% |
| Operating profit / margin | $54.3 million / 9.0% | $65.3 million / 11.7% |
| Continuing-operations net income | $34.5 million | $38.6 million |
| Diluted EPS from continuing operations | $0.75 | $0.86 |
| Operating cash flow | $42.3 million | $35.5 million |
| Capital expenditures | $19.8 million | $23.6 million |
Sales rose 7.7%, while comparable sales fell 2.4%. DSW segment sales were $562.9 million and Affiliated Business Group sales were $38.4 million. The effective tax rate was 36.8%, versus 41.3%.
At May 4, cash and equivalents were $82.4 million, short-term investments $213.2 million, and long-term investments $134.1 million. Current assets were $799.7 million and current liabilities $264.2 million; management reported a 3.0 current ratio and $535.5 million of working capital. There were no borrowings under the $100 million revolving facility; availability was $89.4 million, with $10.6 million in letters of credit. The filing reports no long-term debt outstanding.
Material changes and management commentary
- Gross margin fell 410 basis points and operating margin fell 270 basis points year over year. Net income from continuing operations declined about 11%.
- Management attributed much of the gross-margin decline to the online luxury test: its $5.3 million sales benefit was more than offset by $21.8 million of cost of sales and inventory adjustments, a net gross-profit impact of $16.5 million. Excluding the test, gross margin was 33.5%, versus 34.5% a year earlier.
- Comparable-sales weakness reflected lower traffic, partly offset by improved conversion and small increases in average unit retail and units per transaction. Women’s footwear comps fell 6%; men’s rose 8% and accessories rose 11%.
- Occupancy expense and distribution/fulfillment costs increased as a share of sales, associated with lower average store sales and dsw.com growth. Operating expenses as a share of sales improved by 40 basis points, mainly from lower new-store opening costs and home-office overhead.
- Operating cash flow increased year over year, primarily due to working-capital changes. Inventory increased $1.5 million during the quarter, while accounts payable declined $17.5 million and prepaid expenses and other current assets increased $16.5 million.
Outlook, risks, contingencies, and unusual items
- Management expected fiscal 2013 capital expenditures of approximately $110 million and planned to open 25–30 stores. It stated that operating cash, investments, and credit-facility availability should support operations, seasonal working capital, growth spending, and dividends.
- The company was testing an expanded online luxury assortment; its future approach depended on being able to buy products that would at least break even. Pop-up stores were used to liquidate apparel not intended for the future assortment.
- Key disclosed risks include comparable-sales and traffic volatility, fashion and inventory/markdown exposure, competition, new-store execution, e-commerce and fulfillment disruption, vendor and affiliate relationships, economic conditions, leases, and risks associated with legacy Retail Ventures liabilities.
- Legacy Filene’s Basement lease guarantees included a recorded $6.6 million liability. The Union Square lawsuit had an estimated loss range of $0–$7 million; the Bergen, New Jersey matter had a range of $0–$3 million, with the guarantee capped at $3 million. The court denied the Union Square landlord’s summary-judgment motion in April 2013. Management said other pending legal matters were not expected to be material.
- The Filene’s Basement pension plan was in termination proceedings; the recorded underfunded liability was $4.5 million. Management expected settlement to relieve DSW of the obligation and anticipated reclassifying $8.8 million of accumulated other comprehensive loss to net income upon settlement.
- After quarter-end, on May 29, 2013, the board declared a $0.25-per-share quarterly dividend and announced an extension of the share-repurchase program. No program repurchases had been made as of May 4, 2013.
- The prior-year quarter included a $5.3 million noncash warrant fair-value charge and $1.3 million of income from discontinued operations; neither was reported in the current quarter.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is DSW Inc., quarter ended May 4, 2013, despite the Designer Brands Inc./2012 Q1 request metadata.
- Assess whether the luxury-test inventory adjustments were isolated or likely to recur, and whether the company’s stated break-even condition for future luxury buying was achieved.
- Track comparable sales, traffic, and gross-margin recovery, particularly in women’s footwear and as new stores and online sales expand.
- Review cash deployment and liquidity against the $110 million fiscal 2013 capital-spending plan, store-opening plans, dividends, and the revolving facility’s covenants.
- Monitor the outcomes and potential cash exposure from the Filene’s Basement lease guarantees and pension-plan settlement.