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: August 1, 2009
Business Overview: DSW is a leading U.S. branded footwear specialty retailer operating 306 stores in 39 states, an e-commerce platform (dsw.com), and 358 leased shoe departments for other retailers. The company is a controlled subsidiary of Retail Ventures, Inc. (RVI).
Key Financial Metrics
| Metric | Three Months Ended Aug 1, 2009 | Six Months Ended Aug 1, 2009 |
|---|---|---|
| Net Sales | $369.5 million | $755.3 million |
| Gross Profit | $97.8 million (26.5% margin) | $202.8 million (26.8% margin) |
| Operating Profit | $11.4 million (3.1% margin) | $23.5 million (3.1% margin) |
| Net Income | $7.6 million | $14.7 million |
| Earnings Per Share (Diluted) | $0.17 | $0.33 |
| Cash and Equivalents | $39.3 million | $39.3 million (Balance Sheet) |
| Short-term Investments | $139.7 million | $139.7 million (Balance Sheet) |
| Total Liquidity (Cash + ST Inv) | $179.0 million | |
| Long-term Debt | None | |
| Operating Cash Flow (6 months) | $36.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.4% for the quarter and 4.4% for the six-month period compared to the prior year. This growth was driven by new store openings and dsw.com sales, offsetting a decline in comparable store sales.
- Comparable Store Sales: Comparable store sales decreased 2.9% for the quarter and 3.8% for the six-month period, attributed to a difficult economic environment, reduced traffic, and lower units per transaction.
- Profitability Decline: Net income decreased 30.9% for the quarter and 30.8% for the six-month period. Operating profit margins compressed due to lower merchandise margins (increased markdowns) and higher operating expenses as a percentage of sales.
- Expense Increases: Operating expenses as a percentage of sales increased to 23.7% for the six months ended August 1, 2009, from 22.7% in the prior year, driven by higher marketing spend and depreciation.
- Investment Activity: Net cash used in investing activities increased to $51.9 million (six months) compared to $41.6 million in the prior year, primarily due to a decrease in maturities and sales of available-for-sale securities.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to spend approximately $30 million on capital expenditures for fiscal 2009 and plans to open nine new stores.
- Liquidity Strategy: The company maintains a strong balance sheet with no long-term debt and $129.8 million available under a $150 million revolving credit facility (expiring July 2010). Management is seeking to refinance this facility.
- Risk Factors:
- Economic Conditions: Continued economic slowdown may further reduce comparable store sales and increase inventory markdowns.
- Filene's Basement Bankruptcy: Liquidating Filene's Basement filed for bankruptcy. DSW has a receivable of approximately $0.6 million which is fully reserved. There is uncertainty regarding the collection of this amount and future expense allocation.
- Value City Bankruptcy: DSW has a proof of claim of $6.7 million against Value City, with no assurance of collection.
- Investment Risks: The company holds auction rate securities and other investments subject to market volatility and liquidity risks.
Investor Verification Checklist
- Comparable Store Sales Trend: Verify if the decline in comparable store sales (traffic and units per transaction) is stabilizing or accelerating in subsequent quarters.
- Inventory Management: Monitor inventory levels and markdown rates to assess the impact on future gross margins, particularly given the shift in clearance activity.
- Debt Refinancing: Confirm the terms and successful execution of the refinancing for the $150 million credit facility expiring in July 2010.
- Bankruptcy Recoveries: Track the status of claims against Value City and Filene's Basement to determine if any recoveries are possible beyond current reserves.
- Leased Department Performance: Assess the financial health of key leased department partners (Stein Mart, Gordmans) given the broader retail environment.