Business context and reporting period
This filing is DSW Inc.’s unaudited Form 10-Q for the quarter ended November 3, 2018, not a 2017 Q3 filing as indicated in the request metadata. DSW operated U.S. retail, Canadian retail (following its May 2018 acquisition of Town Shoes Limited, or TSL), and other businesses. The filing reports three- and nine-month comparisons with the periods ended October 28, 2017.
Financial performance and liquidity
| Metric | Three months ended Nov. 3, 2018 | Nine months ended Nov. 3, 2018 |
|---|---|---|
| Total revenue | $833.0 million, up 17.2% | $2,340.4 million, up 12.2% |
| Comparable sales | Up 7.3% | Up 6.3% |
| Gross profit / margin | $271.1 million / 32.6% | $730.8 million / 31.3% |
| Operating profit / margin | $53.1 million / 6.4% | $116.0 million / 5.0% |
| Net income / diluted EPS | $39.3 million / $0.48 | $25.3 million / $0.31 |
| Operating cash flow | Not separately reported for the quarter | $147.3 million |
For the nine months, operating cash flow was $147.3 million versus $138.6 million a year earlier. Investing activities used $41.0 million and financing activities used $60.6 million. Cash and cash equivalents were $222.4 million at November 3; investments were $71.8 million. Current assets were $983.3 million and current liabilities $381.5 million. There were no credit-facility borrowings at period-end; $293.8 million remained available after letters of credit.
At November 3, total liabilities were $532.2 million and shareholders’ equity was $942.4 million. The company paid $59.9 million in dividends during the nine-month period. It reported no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Quarterly revenue rose 17.2%, driven by TSL sales, 7.3% comparable-sales growth, and non-comparable store sales; exits of Gordmans and Ebuys partly offset growth. Quarterly U.S. Retail comparable sales rose 7.3%, versus a 0.4% decline in the prior-year quarter.
- Quarterly gross margin increased to 32.6% from 29.4%, attributed principally to improved merchandise margin, lower markdowns, and the exit of Ebuys. Operating expenses as a share of revenue increased, reflecting marketing and incentive spending, lease-exit and acquisition costs, restructuring, and TSL consolidation.
- Nine-month net income fell to $25.3 million from $55.5 million. Results included a $34.0 million loss on remeasurement of previously held TSL assets, a $12.2 million foreign-currency translation loss reclassified to expense, and $29.1 million of goodwill impairment. The nine-month effective tax rate rose to 62.6% from 39.0%, including $25.1 million of additional tax expense related primarily to TSL-related charges and deferred-tax valuation allowances.
- TSL was consolidated beginning in the second quarter. Its reported nine-month sales were $152.6 million and its net loss was $39.1 million, including goodwill impairment. The company decided to close the 38 Town Shoes locations by fiscal year-end.
Outlook, commentary, risks, and unusual items
- Management cited stronger customer traffic, growth across product categories and channels, effective inventory management, regular-price selling, and increased digital demand. It expects Canadian online-platform upgrades and new loyalty programs to support future growth, and views Camuto Group as a source of design, sourcing, branded-product, and wholesale capabilities.
- On November 5, 2018, after quarter-end, DSW acquired Camuto Group for $170.8 million net of acquired cash and acquired a 40% interest in the ABG-Camuto joint venture for $56.8 million. The combined purchase was funded with available cash and $160.0 million of revolving-credit borrowings. The credit facility was subsequently expanded to $400 million. These transactions were not reflected in the November 3 balance sheet.
- Management estimated $20–$25 million of total costs to exit the Town Shoes banner, including lease-exit charges, severance, and inventory write-downs. Fiscal 2018 capital expenditures were expected to be approximately $80 million; $48.5 million had been spent in the first nine months.
- DSW expected adoption of the new lease standard in fiscal 2019 to add approximately $0.9 billion of lease assets and $1.0 billion of lease liabilities to the balance sheet, excluding Camuto leases. Management said cash, investments, operating cash generation, and credit availability were expected to support operations and planned needs over the next 12 months and foreseeable future.
- Key risks include integration and realization of benefits from TSL and Camuto, fashion and consumer-demand changes, reliance on overseas manufacturing and exposure to trade tensions and tariffs, wholesale-customer and licensing relationships, distribution and information-security disruptions, foreign-exchange movements, and lease obligations. The company reported compliance with financial covenants at November 3; its leverage covenant was temporarily increased following the Camuto acquisition. It reported that disclosure controls were effective.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers the quarter ended November 3, 2018, despite the request’s “2017 Q3” label.
- Assess the quality and sustainability of comparable-sales and gross-margin gains, including the effects of promotions, product mix, and discontinued businesses.
- Track TSL’s performance and the costs and timing of closing Town Shoes, as well as final purchase-accounting estimates and any further impairment or tax adjustments.
- Review Camuto integration, the $160.0 million post-quarter borrowing, resulting leverage and covenant headroom, and the joint venture’s expected economics.
- Monitor lease-standard adoption, inventory growth, seasonal cash requirements, and the estimated $20–$25 million Town Shoes exit costs.