DSW Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended November 2, 2013; comparable periods ended October 27, 2012. The request metadata says “2012 Q3,” but the filing itself is for 2013 Q3. The registrant named in this filing is DSW Inc.
Business context
DSW sold branded footwear and accessories through its stores and website, and supplied shoe departments for affiliated retailers. At period end it operated 393 DSW stores and 356 affiliated shoe departments. It opened 29 DSW stores during the first nine months.
Financial performance
| Metric | Three months ended Nov. 2, 2013 | Three months ended Oct. 27, 2012 | Nine months ended Nov. 2, 2013 | Nine months ended Oct. 27, 2012 |
|---|---|---|---|---|
| Net sales | $633.0 million | $592.7 million | $1,796.4 million | $1,663.5 million |
| Operating profit | $88.3 million | $78.4 million | $196.5 million | $191.1 million |
| Net income | $55.0 million | $50.1 million | $123.2 million | $119.3 million |
| Diluted EPS | $0.60 | $0.55 | $1.34 | $1.32 |
| Gross margin | 33.6% | 33.8% | 32.2% | 33.2% |
| Operating margin | 13.9% | 13.3% | 10.9% | 11.5% |
| Net margin | 8.7% | 8.5% | 6.9% | 7.2% |
Quarterly sales rose 6.8% and net income rose about 9.7%; nine-month sales rose 8.0% and continuing-operations income rose about 4.4%. Comparable sales were down 0.7% in the quarter, versus growth of 6.3% a year earlier; nine-month comparable sales increased 0.2%, versus 6.1%.
- Cash flow: Nine-month operating cash flow was $204.2 million, compared with $177.2 million. Investing activities used $182.1 million, including $65.5 million of capital expenditures and net purchases of investments. Financing activities used $13.6 million. Cash and equivalents ended at $86.9 million.
- Liquidity and debt: Cash plus short-term investments totaled $282.2 million; long-term investments were $234.7 million. The current ratio was 2.9. DSW had no borrowings under its facilities; revolving availability was $49.2 million. The $50 million secured revolver requires at least $125 million of cash and short-term investments and limits annual capital expenditures to $200 million.
- Balance sheet: Total assets were $1.392 billion and shareholders’ equity was $981.2 million at November 2, 2013. Inventory was $424.1 million, up from $393.8 million at fiscal year-end.
Material changes and unusual items
- The nine-month reported gross margin fell 100 basis points. Management attributed much of the decline to the luxury assortment test, which reduced gross profit by $15.7 million, including inventory adjustments. Excluding the test, gross margin was 33.4%, compared with 33.2%.
- The luxury test added $2.8 million to third-quarter gross profit, but management described the broader test as unsuccessful and said future luxury plans depend on sourcing products that can at least break even.
- Nine-month operating expenses included a $14.7 million pension settlement charge. DSW completed settlement of the legacy Filene’s Basement pension plan during the period; the filing reports a $8.9 million after-tax settlement loss reclassified from other comprehensive loss.
- Prior-year comparisons included a $5.3 million insurance award, partly offset by $1.3 million of related expense, and a $6.1 million noncash charge related to warrants. The prior-year nine-month results also included $1.3 million of discontinued-operations income.
- On November 4, 2013, after quarter-end, DSW completed a two-for-one share split. It changed voting power: Class A voting power rose from 38% to 57%, while Class B fell from 62% to 43%. A quarterly dividend of $0.125 per share was announced November 26.
Outlook, risks and contingencies
- Management expected fiscal 2013 capital expenditures of approximately $100 million and planned one additional store opening in the fourth quarter. It stated that operating cash flow, existing cash and investments, and credit availability should fund operations, seasonal working capital, growth investment and dividends.
- Management cited falling store traffic, macroeconomic uncertainty, inventory and markdown exposure, fashion-trend execution, competition, vendor and affiliated-partner relationships, and distribution, technology and data-security risks. It also noted possible pressure on profitability and future store openings if sales weaken.
- DSW had a $3.7 million estimated liability for a remaining Filene’s Basement lease guarantee. The related Union Square litigation had a stated possible loss range of zero to $7 million; the landlord’s summary-judgment motion had been denied and was under appeal.
- Other commitments included $1.5 million of construction obligations and leases for 18 planned stores, with stated total annual rent of $10.3 million. Management said other pending legal proceedings were not expected to be material.
Important facts for investors to verify
- Confirm the filing period: this is a 2013 third-quarter report, not a 2012 Q3 report.
- Assess the underlying sales trend: quarterly comparable sales declined, despite higher total sales from new stores and luxury-test sales.
- Review the luxury-test inventory charges and pension settlement’s effect on reported margins and expenses.
- Verify liquidity covenant headroom, seasonal inventory needs, and planned capital spending against the $125 million minimum liquidity covenant.
- Monitor the Union Square lease-guarantee appeal and the potential exposure up to $7 million.