Filing identity and reporting period
The supplied filing is DSW Inc.’s unaudited Form 10-Q for the quarter ended July 29, 2017—not a Designer Brands Inc. filing for 2016 Q2 as indicated in the request metadata. It compares the three- and six-month periods ended July 29, 2017 with those ended July 30, 2016.
DSW operated its retail and e-commerce business, affiliated shoe departments, and other activities including Ebuys and franchise operations. It also held a 46.3% equity interest in Canadian retailer Town Shoes.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $680.4 million vs. $658.9 million, up 3.3% | $1,371.5 million vs. $1,340.2 million, up 2.3% |
| Gross margin | 28.9% vs. 28.4% | 28.6% vs. 29.2% |
| Operating profit | $46.7 million vs. $39.6 million | $87.6 million vs. $88.3 million |
| Net income | $28.6 million vs. $25.0 million | $51.6 million vs. $55.0 million |
| Diluted EPS | $0.35 vs. $0.30 | $0.64 vs. $0.67 |
Quarterly gross-margin improvement was attributed mainly to lower markdowns; the first-half decline reflected weaker margins earlier in the year and pressure in affiliated and Ebuys activities. Comparable sales were up 0.6% in the quarter but down 1.3% for the first half. DSW quarterly comparable sales rose 0.6%; first-half DSW comparable sales fell 1.3%.
Six-month operating cash flow was $44.6 million, down from $61.1 million. Investing activities used $35.3 million, including $28.1 million of capital expenditures; financing activities used $31.5 million, primarily for dividends. Cash and cash equivalents were $89.3 million and short-term investments were $182.1 million at July 29, 2017. The company reported no borrowings under its $100 million revolving facility and was covenant-compliant. Total liabilities were $466.3 million; the filing does not present a separate total-debt figure.
Material changes and notable items
- Quarterly sales growth reflected new-store sales and positive comparable sales, partly offset by Gordmans store closures. First-half growth was driven by non-comparable sales despite negative comparable sales.
- Gordmans filed for Chapter 11 in March 2017; 49 stores closed during the first half. DSW agreed to provide services to 58 stores acquired by Stage Stores through fiscal year-end.
- Ebuys’ gross profit was negative in the quarter and first half, with higher markdowns, inventory reserves, and fulfillment costs during its transition to a single fulfillment center.
- The company recorded foreign-exchange losses of $0.7 million for the quarter and $2.2 million for the first half, related to Canadian instruments associated with the planned Town Shoes investment.
- At quarter-end, the Ebuys contingent-consideration liability was $36.5 million. The quarter’s net income included $3.2 million of pre-tax charges related to Ebuys amortization and contingent consideration, restructuring, and foreign-exchange losses.
Outlook, liquidity, risks, and contingencies
Management expected fiscal 2017 capital expenditures of approximately $70 million, planned 15 store openings and two to four closures, and stated that it intended to exercise its Town Shoes call option in the first half of fiscal 2018. Management believed operating cash flow, cash and investments, and credit availability were sufficient for operations, seasonal working capital, planned investment, and the Town Shoes transaction. No earnings or sales guidance is stated.
After quarter-end, the board authorized an additional $500 million share-repurchase program; a quarterly dividend of $0.20 per share was declared. On August 25, 2017, DSW replaced its existing facilities with a $300 million unsecured revolving credit facility maturing in 2022, subject to financial covenants. The company reported compliance as of that date.
Key disclosed risks include consumer demand and fashion trends, competition, affiliated-partner financial condition, Gordmans’ bankruptcy, Ebuys integration and performance, foreign-currency exposure, information-security and fulfillment disruptions, and lease obligations. A hypothetical 10% change in the Canadian dollar could cause a $15.3 million translation fluctuation in other comprehensive income. Pending legal proceedings were described as not expected to be material. The company also disclosed a lease guarantee extending to 2024, $0.7 million of construction commitments, and approximately $13.0 million of noncancelable purchase and service obligations.
Important facts for investors to verify
- Confirm the intended issuer and period: this is DSW Inc.’s July 29, 2017 quarter, not Designer Brands Inc. or 2016 Q2.
- Track comparable-sales trends, first-half margin pressure, and whether Ebuys’ markdown and fulfillment costs improve.
- Monitor Gordmans-related sales exposure and the status, funding, and terms of the planned Town Shoes transaction.
- Review execution of the expanded repurchase authorization and the new credit facility’s covenants and borrowing capacity.
- Assess Canadian-dollar exposure, contingent consideration estimates, and the potential obligations under the lease guarantee.