Filing identity and reporting period
The supplied filing is DSW Inc.’s Form 10-K for the fiscal year ended January 28, 2017 (fiscal 2016), not a 2015 Q4 filing. The metadata names Designer Brands Inc.; that is not the registrant identified in this filing. Fiscal 2016 comprised 52 weeks. The filing also provides quarterly data, including the quarter ended January 28, 2017.
DSW operated a U.S. footwear retail business through DSW stores and dsw.com, an Affiliated Business Group (ABG) supplying partner retailers, and Ebuys, acquired in March 2016. DSW also held an equity investment in Canada’s Town Shoes.
Financial results and position
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net sales | $2,711.4 million | $2,620.2 million |
| Gross profit / margin | $771.8 million / 28.5% | $768.4 million / 29.3% |
| Operating profit / margin | $200.2 million / 7.4% | $213.6 million / 8.1% |
| Net income | $124.5 million | $136.0 million |
| Diluted EPS | $1.52 | $1.54 |
| Cash from operations | $212.9 million | $242.7 million |
| Capital expenditures | $87.6 million | $103.9 million |
Fiscal 2016 revenue rose 3.5%, driven by Ebuys and non-comparable store sales; comparable sales declined 3.0%. DSW segment sales were $2,478.0 million, ABG sales $149.6 million, and Ebuys sales $83.8 million. Ebuys recorded a $5.6 million net loss for the period included in DSW’s results.
At year-end, cash and investments totaled $287.1 million, inventory was $500.0 million, total assets were $1,428.5 million, and shareholders’ equity was $937.5 million. DSW had no borrowings under its $100 million revolving credit facility and reported compliance with covenants. Letters of credit outstanding were $3.8 million, supported by restricted cash collateral. Reported operating lease obligations totaled $1,255.2 million; these commitments are distinct from funded debt.
Fourth-quarter fiscal 2016 net sales were $674.6 million, gross profit $168.8 million, operating profit $48.9 million, net income $30.5 million, and diluted EPS $0.38.
Changes versus the prior comparable period
- Sales increased $91.2 million year over year, but comparable sales moved from growth of 0.8% to a decline of 3.0%.
- Gross margin fell 80 basis points to 28.5%; management attributed the main pressure to Ebuys’ lower margins. DSW merchandise margin improved, but occupancy and distribution costs rose as a share of sales.
- Operating profit declined 6.3% and net income declined 8.5%. Operating expenses increased to 21.8% of sales from 21.2%.
- Cash from operations decreased $29.7 million. The company spent $50.0 million repurchasing shares and paid $65.1 million in dividends; year-end cash and investments fell $43.4 million from the prior year.
- DSW opened 34 stores and closed one; year-end store count rose to 501. The fiscal 2016 results include Ebuys, unlike fiscal 2015.
Outlook, commentary, risks, and unusual items
- For fiscal 2017, management planned approximately 15–17 DSW store openings and two to four closures, with about $66 million of capital expenditures. Fiscal 2017 was expected to comprise 53 weeks. The filing does not provide a quantified sales or earnings forecast.
- Management cited a planned dsw.com redesign, digital and omnichannel investment, expansion of kids’ footwear, and integration of Ebuys. Ebuys’ fulfillment operations were being consolidated into a larger Nashville facility.
- Fiscal 2016 net income included a $20.2 million favorable change in the fair value of Ebuys contingent consideration; management also reported $4.5 million of restructuring costs and net favorable pre-tax Ebuys-related adjustments of $12.4 million, or $0.09 per share. The contingent consideration liability was $33.2 million at year-end and depends on Ebuys’ future performance.
- After year-end, ABG partner Gordmans filed for Chapter 11 and announced liquidation plans. DSW reported approximately $8.0 million of inventory at cost, a $0.3 million receivable, and $0.3 million of net property and equipment at Gordmans locations at January 28, 2017. DSW estimated an annual after-tax loss of $4–$8 million. Stein Mart’s supply agreement was due to terminate in December 2017.
- Key risks include weak or volatile consumer demand and fashion trends, vendor concentration (three vendors supplied about 18% of merchandise), foreign sourcing and currency exposure, competition, technology or fulfillment disruption, Ebuys integration, and partner or franchise performance. The company also disclosed substantial lease commitments and related-party leases.
- Management and the auditor reported effective internal controls over financial reporting excluding Ebuys, which was excluded from the year-end assessment while being integrated. The auditor issued an unqualified opinion on the financial statements and on internal control, with that Ebuys scope limitation noted.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is DSW Inc.’s fiscal 2016 10-K, not a Designer Brands Inc. 2015 Q4 filing.
- Track comparable-sales trends, margin recovery, and the extent to which reported growth depends on newly acquired Ebuys.
- Assess Ebuys integration, future contingent consideration payments, and whether its low gross margin improves.
- Monitor Gordmans inventory recovery and losses, and the status of Stein Mart and other ABG relationships.
- Review cash deployment, planned capital spending, dividends and repurchases alongside lease obligations and the timing of credit-facility expiry.