Filing summary
Period and entity: This is DSW Inc.’s Form 10-K for the fiscal year ended January 28, 2012 (fiscal 2011, 52 weeks), compared primarily with fiscal 2010 ended January 29, 2011. The request metadata says “Designer Brands Inc.” and “2010 Q4,” which do not match the filing’s stated registrant and annual reporting period. The filing identifies the company as DSW Inc.
DSW operated 326 footwear stores in 40 states, dsw.com, and 336 leased departments at year-end. Its May 26, 2011 merger with former parent Retail Ventures, Inc. (RVI) was accounted for as a reverse merger, with RVI as accounting acquirer; prior-period financial information was retrospectively recast.
Key financial results
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net sales | $2,024.3 million | $1,822.4 million |
| Gross profit / gross margin | $653.9 million / 32.3% | $565.7 million / 31.0% |
| Operating profit | $151.5 million | $120.6 million |
| Net income attributable to shareholders | $174.8 million | $17.8 million |
| Diluted earnings per share | $4.54 | $0.82 |
| Cash provided by operating activities | $214.2 million | $127.0 million |
| Capital expenditures | $76.9 million | $52.3 million |
Comparable sales increased 8.3% overall (DSW segment: 8.6%); total sales rose 11.1%. DSW segment sales were $1,871.9 million and leased business division sales were $152.4 million. Operating margin was 7.5%, compared with 6.6% in fiscal 2010. Cash and investments totaled $429.6 million at year-end, including $79.0 million cash, $296.7 million short-term investments and $53.9 million long-term investments. Working capital was $560.5 million and the current ratio was 2.8.
DSW reported no outstanding borrowings under its $100 million revolving credit facility and no long-term debt at year-end. Facility availability was $82.7 million, with $17.3 million of letters of credit outstanding. The facility expires in June 2014 and is subject to borrowing-base limits and covenants.
Changes, unusual items, and outlook
- Sales and margins: Management attributed sales growth to more customer transactions and units per transaction. Gross margin improved 130 basis points, reflecting higher initial markups, lower markdown activity and occupancy-cost leverage. The leased division’s margin declined, partly due to markdowns associated with Filene’s Basement’s bankruptcy and liquidation.
- Earnings comparability: Fiscal 2011 included $17.3 million of merger transaction and other RVI-related costs, plus a $53.9 million non-cash charge for changes in derivative fair values. The PIES were settled in September 2011 through issuance of 3.8 million Class A shares; interest payments on the PIES ended.
- Tax benefit: Income from continuing operations included a $58.1 million income tax benefit, compared with a $60.0 million tax provision in fiscal 2010. The 2011 benefit was substantially affected by merger-related tax accounting, including release of an $88.6 million valuation allowance and reversal of a $87.4 million deferred tax liability. Management said the merger also enabled use of RVI tax attributes for cash tax savings; reported earnings therefore merit review alongside cash earnings.
- Contingencies: After Syms and Filene’s Basement entered bankruptcy, DSW recorded a $9.0 million liability for assumed lease guarantees. The disclosed potential exposure for the Union Square lease alone ranged from no loss to approximately $42 million, plus common-area, tax and insurance costs; a landlord lawsuit was pending. The Filene’s Basement pension plan was underfunded by $5.6 million, and DSW expected to fund any shortfall upon settlement and record a termination-related charge.
- Growth plans: Management planned 35–40 new stores and approximately $120 million of capital expenditures in fiscal 2012; the fiscal year was expected to have 53 weeks. It planned 15–20 store openings annually for the following three to five years. Distribution-center reconfiguration and fulfillment-center expansion were also planned.
- Key risks: The company cited execution of store expansion, fashion and markdown risk, economic and seasonal sales volatility, reliance on foreign sourcing and key vendors, dependence on Stein Mart and Gordmans supply arrangements, disruption or security incidents affecting systems and distribution, and risks related to cash and investments. Loyalty-program members generated about 88% of DSW store and online sales. Schottenstein Affiliates held approximately 75% of voting power, creating significant control and related-party considerations.
- Other obligations: Minimum operating lease commitments totaled approximately $1.017 billion. The filing states that stores, offices and distribution facilities are leased and accounted for as operating leases.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal control were effective.
Important facts for investors to verify
- Confirm the intended issuer and period: the supplied filing is DSW Inc.’s fiscal 2011 10-K, not a Designer Brands Inc. 2010 Q4 report.
- Assess earnings excluding merger-related tax benefits, derivative fair-value charges and transaction costs; compare those results with operating cash flow and future cash taxes.
- Review share dilution from the PIES settlement and warrants, including the March 2012 warrant exercise disclosed as a subsequent event.
- Track the outcome and ultimate range of exposure for Filene’s Basement lease guarantees and the pension-plan termination.
- Evaluate whether planned store growth and capital spending can sustain comparable-sales growth, margins and liquidity, given substantial lease commitments and reliance on leased-business partners.