Business context and reporting period
The supplied filing is DSW Inc.’s Form 10-K, not a filing under the name Designer Brands Inc. It reports fiscal 2013, the 52 weeks ended February 1, 2014; the prior comparable fiscal year ended February 2, 2013 and had 53 weeks. Accordingly, the metadata reference to “2012 Q4” does not match the annual reporting period in the filing. DSW operated 394 stores and dsw.com, plus footwear departments through affiliated retailers.
Key financial metrics
| Metric | Fiscal 2013 | Prior period |
|---|---|---|
| Net sales | $2.369 billion | $2.258 billion |
| Gross profit / margin | $739.3 million / 31.2% | $724.7 million / 32.1% |
| Operating profit / margin | $241.4 million / 10.2% | $236.8 million / 10.5% |
| Net income | $151.3 million | $146.4 million |
| Diluted earnings per share | $1.65 | $1.62 |
| Cash from operating activities | $301.4 million | $258.6 million |
| Cash and investments | Approximately $579 million | Approximately $410 million |
| Working capital / current ratio | $528.4 million / 2.9 | $546.5 million / 3.0 |
Capital expenditures were reported as $83.8 million. Net cash used in investing activities was $241.4 million, including net purchases of investments; financing activities used $26.4 million, primarily for dividends. The company had no outstanding borrowings and reported $49.4 million of availability under its $50 million revolving credit facility. Fiscal-end total assets were $1.421 billion and shareholders’ equity was $998.5 million.
Material changes versus the prior period
- Sales rose 4.9%; comparable sales increased 0.2%, versus 5.5% in the prior year. The filing attributes the comparable-sales result to higher conversion offset by lower customer traffic. Comparisons are affected by the prior year’s extra week.
- Gross margin declined 90 basis points. A failed expanded-luxury assortment test reduced gross profit by $16.5 million; excluding the test, management reported gross margin of 32.2% versus 32.1% and DSW segment merchandise margin of 45.3% versus 44.8%.
- Operating profit increased about 1.9%, while operating margin eased from 10.5% to 10.2%. Net income increased about 3.3%. The filing also reports a $14.7 million pension-plan settlement expense in operating expenses.
- Operating cash flow increased by $42.8 million, supported by working-capital changes and use of tax attributes. Federal net operating losses and tax credits were fully used during fiscal 2013.
- Cash and investments increased, while working capital decreased, primarily due to lower current deferred tax assets.
Outlook, commentary, risks and unusual items
- Management planned approximately 35 store openings in fiscal 2014, including six small-format stores, and approximately $115 million of capital expenditures. It described a longer-term plan for 15–20 annual openings and potential capacity for 500–550 stores, excluding small-format locations. These are plans, not earnings guidance.
- The company expected its omni-channel strategy to require significant investment and estimated a $10 million increase in operating expenses in fiscal 2014. It cited execution, cost and benefit uncertainty.
- DSW said operating cash generation, cash and investments, and available credit should fund operations, seasonal working capital, growth investment and dividends. The board increased the quarterly dividend to $0.1875 per share in March 2014.
- Principal business risks include fashion and markdown exposure, lower traffic or comparable sales, reliance on foreign sourcing and vendors, distribution or technology disruption, customer-data security, and execution of store expansion and omni-channel initiatives. The top three vendors supplied about 19% of net sales; loyalty-program members generated about 90% of DSW store and online sales.
- Affiliated Business Group sales were 5.8% of total sales. Loehmann’s filed for bankruptcy and began liquidating in January 2014, creating inventory exposure; the filing also cites a reserve related to the liquidation.
- A legacy Filene’s Basement Union Square lease-guarantee lawsuit remained unresolved. The recorded estimated liability was $3.4 million; the disclosed expected loss range was zero to $7 million, and an appeal was pending. Total minimum operating lease commitments were $1.076 billion.
- The Schottenstein Affiliates held approximately 48% of voting power and have related-party leasing and service arrangements with DSW. Deloitte & Touche gave an unqualified audit opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer and period: this is DSW Inc.’s fiscal-year 2013 Form 10-K, not a 2012 quarterly report or a filing labeled Designer Brands Inc.
- Assess underlying margin trends separately from the $16.5 million luxury-test impact and $14.7 million pension settlement, and account for the prior year’s 53rd week.
- Review the fiscal 2014 store-opening and capital-spending plans against actual execution, omni-channel costs and comparable-sales trends.
- Monitor the Union Square guarantee litigation, Loehmann’s liquidation exposure, long-term lease obligations and affiliated-retailer relationships.
- Check liquidity and investment accessibility, credit-facility covenants, and the effect of fully utilized tax attributes on future cash taxes.