Filing summary
Period and entity: The supplied filing is DSW Inc.’s unaudited Form 10-Q for the quarter ended October 27, 2012, with nine-month comparisons to October 29, 2011. This does not match the request metadata identifying Designer Brands Inc. and 2011 Q3; investors should verify the intended filing.
Business context and results
DSW sold footwear and accessories through its stores, dsw.com, and an Affiliated Business Group operating leased departments. At quarter-end it operated 363 DSW stores and 345 leased departments. It opened 38 stores in the nine-month period and closed one.
| Metric | Three months ended Oct. 27, 2012 | Nine months ended Oct. 27, 2012 |
|---|---|---|
| Net sales | $592.7 million, up 11.7% | $1,663.5 million, up 10.1% |
| Comparable sales | Up 6.3% | Up 6.1% |
| Operating profit | $78.4 million, versus $80.9 million | $191.1 million, versus $111.5 million |
| Net income | $50.1 million, versus $53.7 million | $119.3 million, versus $176.1 million |
| Diluted EPS | $1.10, versus $0.75 | $2.64, versus $4.30 |
| Gross margin | 33.8%, versus 34.0% | 33.2%, versus 33.6% |
| Operating cash flow | Not separately stated | $177.2 million, versus $130.9 million |
Financial position and liquidity
- Cash and equivalents were $134.3 million; short-term investments were $203.3 million and long-term investments $92.7 million at October 27, 2012.
- Current assets were $899.3 million and current liabilities $299.2 million; working capital was $600.1 million and the current ratio 3.0.
- No borrowings were outstanding under the $100 million revolving credit facility; availability was $90.9 million, with $9.1 million of letters of credit. The facility expires June 30, 2014.
- Nine-month capital expenditures were $83.6 million, compared with $55.3 million. Cash dividends paid were $113.1 million. DSW reported no share repurchases under its authorized $100 million program as of quarter-end.
Changes, outlook, and notable items
- Sales growth reflected comparable-sales gains and new stores. Management attributed comparable-sales improvement to traffic, conversion, and higher average unit retail; all merchandise categories were positive.
- Gross margin declined, with markdowns reducing merchandise margin and higher distribution and fulfillment costs—particularly supporting dsw.com growth—partly offset by occupancy leverage. Nine-month merchandise margin fell 60 basis points.
- Year-to-date operating cash flow benefited from use of inherited RVI tax attributes to offset taxable income; management expected cash tax savings to continue through the remainder of fiscal 2012 and fiscal 2013.
- Management expected approximately $110 million of fiscal 2012 capital expenditures, excluding the subsequent $72 million property acquisition; it planned one more store opening in fiscal 2012 and 25–30 openings in fiscal 2013. Management said existing cash, investments, operating cash flow, and credit availability should support operations, growth, and dividends.
- After quarter-end, DSW paid $72 million to acquire its headquarters, distribution center, and trailer parking lot from Schottenstein-affiliated sellers. The related-party transaction was approved by the audit committee; associated management and cost-sharing agreements were also disclosed.
- A $7.2 million insurance recovery was received in September for a previously disputed customer-data-theft claim: $5.3 million was recorded in operating income and $1.9 million in interest income. This unusual item supported reported third-quarter results.
- Prior-year results were affected by noncash derivative fair-value changes, PIES interest and settlement, merger-related items, and a substantial tax benefit from releasing a valuation allowance. These items make headline year-over-year profit and EPS comparisons less representative of underlying performance.
- Risks include fashion and demand shifts, markdowns and inventory management, economic weakness, store-opening execution, distribution disruptions, affiliated partner performance, and contingent Filene’s Basement lease guarantees. The Union Square and Bergen lease disputes had estimated potential loss ranges of $0–$8 million and $0–$3 million, respectively. The recorded liability for remaining lease guarantees was $6.7 million.
- Hurricane Sandy temporarily closed affected stores; all but one had reopened by the filing date, with the remaining damaged store expected to reopen late in 2012. The fourth-quarter impact and possible business-interruption insurance recovery were still being evaluated.
Key facts to verify
- Confirm the requested issuer and period: this document identifies DSW Inc. and a quarter ended October 27, 2012, not Designer Brands Inc. or 2011 Q3.
- Assess underlying earnings excluding the insurance recovery and prior-year derivative, merger, and tax effects; reconcile the reported EPS comparisons to those items.
- Track comparable sales, markdowns, inventory levels, and distribution costs as store and e-commerce expansion continues.
- Review the $72 million related-party property acquisition, tenant-renewal exposure, and associated management arrangements.
- Monitor Filene’s Basement guarantee litigation, pension-plan termination approvals, and the financial effects of Hurricane Sandy.