Business context and reporting period
The supplied filing is DSW Inc.’s unaudited Form 10-Q for the quarter ended July 28, 2012—not a 2011 Q2 filing. The filing identifies the registrant as DSW Inc., rather than Designer Brands Inc.; verify the company and period requested against the source record. DSW operated 337 stores in 41 states, dsw.com, and 343 leased departments.
Financial performance and liquidity
| Metric | Three months ended July 28, 2012 | Six months ended July 28, 2012 |
|---|---|---|
| Net sales | $512.2 million, up 7.5% | $1,070.8 million, up 9.3% |
| Comparable sales growth | 4.2% | 6.0% |
| Gross margin | 31.3%, versus 32.7% | 33.0%, versus 33.4% |
| Operating profit | $47.3 million, versus $26.0 million | $112.7 million, versus $30.6 million |
| Net income | $29.3 million, versus $145.9 million | $69.2 million, versus $122.4 million |
| Diluted EPS, net of noncontrolling interests | $0.65, versus $3.96 | $1.54, versus $3.54 |
Prior-year net income and EPS benefited substantially from merger-related tax items and valuation-allowance release; prior-year results also included significant noncash derivative charges. These items make reported year-over-year earnings comparisons less representative of underlying operations. Current-period gross margin was pressured by markdowns; management said clearance activity normalized markdowns toward historical levels.
For the six months, operating cash flow was $101.5 million, compared with $65.5 million; investing cash flow was negative $123.4 million, including $45.7 million of capital expenditures. Cash and equivalents were $61.1 million, short-term investments $319.9 million, and long-term investments $103.8 million at quarter-end. Net working capital was $653.1 million and the current ratio was 3.5. DSW had no outstanding debt; its $100 million revolving facility had $69.9 million available and $30.1 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Six-month sales increased 9.3%, with comparable sales up 6.0%; the prior-year comparable-sales increase was 11.5%.
- Six-month gross margin declined 0.4 percentage points, while DSW segment merchandise margin declined 0.7 points, primarily from increased markdowns.
- Operating profit rose, but reported net income fell because the prior-year comparison included a large tax benefit and merger-period items. The prior-year period also included PIES and warrant fair-value charges and PIES interest expense; the PIES had been settled in 2011.
- Operating cash flow increased, partly because RVI tax attributes reduced cash taxes. DSW invested more in capital expenditures than in the prior-year half.
- Warrants were fully exercised by July 28, 2012; the $29.3 million warrant liability reported at January 28 was eliminated.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2012 capital expenditures of approximately $115 million and planned to open approximately 35–40 stores. It stated that cash, investments, operating cash flow and facility availability should support operations, seasonal working capital, growth investments and dividends.
- The company authorized up to $100 million of share repurchases over 12 months; no program repurchases had occurred by July 28. The board subsequently declared a $0.18-per-share quarterly dividend, payable September 28, 2012.
- Risks cited include economic weakness affecting traffic, sales and markdowns; fashion and competition; inventory management; new-store execution; distribution and fulfillment operations; vendor and leased-partner relationships; and risks associated with cash and investments.
- Legacy Filene’s Basement lease guarantees remain contingent. DSW recorded a $6.9 million liability; estimated loss ranges were zero to $8 million for Union Square and zero to $3 million for Bergen, New Jersey. Landlords had filed lawsuits, and the company disputed or questioned enforceability and exposure.
- After quarter-end, an appeals court affirmed a $6.8 million award in DSW’s insurance dispute relating to a 2005 customer-data theft. DSW had not recorded the recovery and said it would recognize it upon receipt of cash; further appeal remained possible.
- DSW reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the requested issuer and reporting period: the provided filing is DSW Inc., quarter ended July 28, 2012, despite the metadata naming Designer Brands Inc. and 2011 Q2.
- Assess earnings excluding prior-year tax benefits and merger/derivative effects, and monitor ongoing markdowns and gross-margin trends.
- Track cash generation against store expansion, distribution and fulfillment investments, dividends, and the authorized repurchase program.
- Review the ultimate outcome and possible exposure from the Filene’s Basement lease-guarantee litigation and the timing/collectability of the $6.8 million insurance award.