Business Context and Reporting Period
Company: DSW Inc. (Note: Metadata listed "Designer Brands Inc." but the filing text identifies the registrant as DSW Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2010
Business Overview: DSW is a leading U.S. branded footwear specialty retailer operating 310 stores and dsw.com, alongside 353 leased departments in partner retailers (Stein Mart, Gordmans, Filene's Basement, Frugal Fannie's). The company is a controlled subsidiary of Retail Ventures, Inc. (RVI), which owns approximately 62.2% of outstanding shares.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2010 | Six Months Ended July 31, 2010 |
|---|---|---|
| Net Sales | $415.1 million | $864.7 million |
| Gross Profit | $125.7 million (30.3% margin) | $273.1 million (31.6% margin) |
| Operating Profit | $38.1 million (9.2% margin) | $87.2 million (10.1% margin) |
| Net Income | $23.5 million | $53.6 million |
| Diluted EPS | $0.52 | $1.20 |
| Cash & Equivalents | $73.0 million (as of July 31, 2010) | |
| Short-term Investments | ||
| Long-term Investments | $19.3 million (as of July 31, 2010) | |
| Total Debt | ||
| Operating Cash Flow (6mo) | $18.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12.3% for the quarter and 14.5% for the six-month period compared to the prior year. Comparable sales rose 12.0% (quarter) and 14.1% (six months), driven by increased transaction volume and customer traffic.
- Margin Expansion: Gross profit margin improved significantly to 30.3% (quarter) and 31.6% (six months) from 26.5% and 26.8% in the prior year periods. This was primarily due to reduced markdown activity as sales exceeded expectations.
- Profitability: Net income surged 210% for the quarter and 265% for the six-month period. Operating profit margin expanded 700 basis points year-over-year for the six-month period to 10.1%.
- Expense Management: Operating expenses as a percentage of sales decreased to 21.1% (quarter) and 21.5% (six months) from 23.4% and 23.7% respectively, aided by leverage from sales growth and reduced impairments of long-lived assets.
- Investment Activity: Capital expenditures totaled $18.1 million for the six months, focused on new store openings, remodels, and IT infrastructure.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to spend approximately $50 million on capital expenditures for fiscal 2010.
- Store Expansion: The company plans to open nine stores in fiscal 2010 and intends to open 10 to 15 stores annually for the next three to five years.
- Liquidity: The company maintains a strong liquidity position with $272.0 million in cash and short-term investments. On June 30, 2010, DSW entered into a new $100 million secured revolving credit facility (expiring 2014) with $72.2 million available as of July 31, 2010. There is no long-term debt outstanding.
- Risks: Key risks include the ability to open new stores profitably, supply chain disruptions, fluctuation in comparable sales, and general economic conditions affecting consumer spending. The new credit facility includes restrictive covenants limiting additional indebtedness and dividend payments.
- Dividends: The company does not anticipate paying cash dividends in the foreseeable future, as earnings are expected to be retained for business development.
Investor Verification Checklist
- Comparable Sales Sustainability: Verify if the 14.1% comparable sales growth is sustainable given the strong performance across all merchandise categories.
- Inventory Levels: Monitor inventory balances ($309.1 million) relative to sales velocity to ensure markdowns do not increase in future quarters.
- Capital Expenditure Execution: Track the $50 million capital expenditure plan against actual spending and the timeline for the nine planned store openings.
- Credit Facility Covenants: Review the specific restrictive covenants in the new $100 million credit facility regarding dividends and additional debt.
- Related Party Transactions: Note the significant ownership by Retail Ventures, Inc. (RVI) and monitor related party transactions, including the non-cash capital contributions received.