DSW Inc. — Form 10-Q summary
Period and entity: The filing covers the three months ended April 29, 2017, compared with the three months ended April 30, 2016. Although the request metadata says Designer Brands Inc. and 2016 Q1, the filing identifies the registrant as DSW Inc. and reports fiscal 2017 Q1.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $691.1 million | $681.3 million |
| Gross profit / margin | $195.2 million / 28.2% | $204.4 million / 30.0% |
| Operating profit / margin | $40.9 million / 5.9% | $48.7 million / 7.2% |
| Net income | $23.0 million | $30.0 million |
| Diluted EPS | $0.28 | $0.36 |
| Operating cash flow | $7.3 million | $9.8 million |
Sales rose 1.4%, reflecting incremental Ebuys and non-comparable sales, partly offset by a 3.0% decline in comparable sales. DSW segment sales were $624.8 million, ABG sales $44.0 million, and Ebuys sales (reported as “Other”) $22.3 million. Digital demand grew in the high teens, while comparable average unit retail and units per transaction declined.
Gross margin fell 180 basis points, primarily due to clearance timing and promotional activity. DSW merchandise margin declined; ABG was affected by Gordmans liquidation markdowns, and Ebuys by aged-inventory adjustments. Operating expenses were 22.2% of sales versus 22.6% a year earlier. The company reported $1.5 million in foreign-exchange losses and a $1.3 million loss from Town Shoes. Q1 2017 net income included $4.1 million in pretax charges related to Ebuys intangibles and contingent consideration, restructuring, and foreign exchange; the prior-year quarter included $4.5 million in specified Ebuys-related charges.
Liquidity, debt, and cash flows
At April 29, 2017, cash and cash equivalents were $79.7 million and short-term investments were $174.2 million; total cash, cash equivalents, and restricted cash were $82.6 million. Current assets were $882.1 million and current liabilities were $349.4 million. The company had no borrowings under its $100 million revolving credit facility, with $100 million available, and stated it was in compliance with covenants. Total liabilities were $526.2 million. Cash and investments declined from $209.2 million at January 28, 2017, as cash fell while short-term investments increased.
Operating cash flow was $7.3 million. Investing activities used $24.7 million, including $18.3 million of capital expenditures; financing activities used $15.4 million, primarily for dividends. Cash, cash equivalents, and restricted cash decreased $32.7 million during the quarter.
Changes, outlook, and key risks
- Gordmans: Gordmans filed for Chapter 11 and planned liquidation. It closed 19 stores in Q1 and expected to close another 30–37, mostly in Q2. Stage Stores was to acquire the remaining 50–57 stores; DSW agreed to provide services through fiscal 2017. DSW reported $0.6 million of inventory at cost at the remaining Gordmans stores to be closed and said it had collected pre-petition receivables and was current on post-petition receivables.
- Capital plans: Management expected approximately $66 million of fiscal 2017 capital expenditures and planned 15–17 DSW store openings. The filing gives no earnings or sales guidance.
- Town Shoes: DSW owned 46.3%, held 50% voting control, and intended to exercise its call option to acquire the remaining interest in Q1 fiscal 2018. The CAD-denominated investment and note receivable create currency exposure; a hypothetical 10% CAD move could cause a $14.2 million translation fluctuation in other comprehensive income. DSW said it did not use currency hedges.
- Other risks and contingencies: Ebuys contingent consideration was a Level 3 liability of $34.3 million, with no defined maximum earn-out. DSW disclosed ordinary-course legal proceedings it did not expect to be material, a lease guarantee that could require rent payments through 2024, and $0.9 million in construction commitments and approximately $15.0 million in noncancelable purchase and service agreements. Management cited risks including comparable-sales volatility, fashion and consumer shifts, partner financial condition, integration, foreign exchange, information systems, and liquidity.
- Accounting and dividend: The company adopted guidance affecting share-based payments and restricted-cash presentation. It expected the new lease standard, effective for it in fiscal 2019, to materially affect the balance sheet. A quarterly dividend of $0.20 per share was declared after quarter-end.
Investor verification checklist
- Confirm the intended issuer and period: this source is DSW Inc.’s fiscal 2017 Q1 filing, not a 2016 Q1 filing.
- Assess the persistence and causes of comparable-sales weakness and gross-margin compression, including markdowns and promotional activity.
- Track Gordmans store closures, liquidation markdowns, receivable collections, and the transition of stores to Stage Stores.
- Review Ebuys integration, aged inventory, profitability, and the assumptions behind its contingent consideration liability.
- Verify the timing, funding, valuation, and foreign-exchange implications of the planned Town Shoes transaction.
- Monitor cash and investment balances, seasonal inventory needs, planned capital spending, and compliance with credit-facility covenants.