Business context and reporting period
This filing is DSW Inc.’s unaudited Form 10-Q for the three months ended April 28, 2012 (fiscal 2012 first quarter), compared with the three months ended April 30, 2011. The request metadata’s “2011 Q1” does not match the filing period. The registrant is DSW Inc.; the filing does not identify it as Designer Brands Inc. DSW operated 335 stores and dsw.com, plus 341 leased departments. The comparison is affected by the May 2011 reverse merger with Retail Ventures, Inc. (RVI): pre-merger comparative figures reflect RVI, with share data and certain expense classifications recast.
Key financial metrics
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Net sales | $558.6 million | $503.6 million |
| Comparable sales growth | 7.6% | 10.8% |
| Gross profit / margin | $192.6 million / 34.5% | $172.2 million / 34.2% |
| Operating profit | $65.3 million | $4.7 million |
| Income from continuing operations | $38.6 million | Loss of $23.4 million |
| Net income (loss), consolidated | $39.9 million | Loss of $23.4 million |
| Net income (loss) attributable to DSW shareholders | $39.9 million; diluted EPS $0.89 | Loss of $38.1 million; diluted EPS loss of $1.74 |
| Operating cash flow from continuing operations | $35.5 million | $17.3 million |
Cash and equivalents were $76.5 million, short-term investments $294.7 million, and long-term investments $77.2 million at April 28, 2012. The company reported no borrowings under its $100 million revolving credit facility; availability was $89.6 million, with $10.4 million of letters of credit outstanding. Inventory was $373.3 million, up from $334.4 million at January 28, 2012. Total assets were $1.264 billion and shareholders’ equity $854.7 million.
Material changes versus the prior comparable period
- Sales rose 10.9%; comparable sales increased 7.6%, following 10.8% growth in the prior-year quarter. Management attributed the increase to more customer transactions and larger average baskets. DSW-segment comparable sales rose 8.0%; leased-business comparable sales rose 2.3%.
- Gross margin increased 30 basis points to 34.5%. DSW merchandise margin, a non-GAAP measure, edged down to 47.0% from 47.2%; lower occupancy costs as a share of sales were partly offset by higher warehousing costs.
- Operating profit and earnings improved substantially, but the prior-year quarter included $54.9 million of noncash derivative fair-value charges, including $44.1 million related to the PIES conversion feature. The PIES were settled in September 2011. The prior period also included $14.7 million attributable to noncontrolling interests; those interests were eliminated following the merger.
- Operating cash flow increased to $35.5 million, primarily reflecting cash tax savings from use of RVI tax attributes, partly offset by seasonal inventory investment. Cash used in investing activities was $45.6 million, including $23.6 million of capital expenditures.
- Operating expenses were 21.8% of sales versus 22.4% reported in the prior period; excluding $5.2 million of prior-year merger and other RVI-related costs, the prior-year ratio was 21.3%.
Outlook, risks and unusual items
- Management expected fiscal 2012 capital expenditures of approximately $120 million and planned to open approximately 35–40 stores. No earnings or sales guidance was provided in the filing.
- Management said cash, investments, operating cash flow and revolver availability should support operations, seasonal working capital, planned investment and dividends. It expected RVI tax attributes to continue generating cash tax savings in fiscal 2012 and 2013.
- DSW paid a $0.15-per-share dividend during the quarter. After quarter-end, the board approved a $0.18-per-share quarterly dividend, payable June 29, 2012.
- After quarter-end, on May 31, 2012, 341,222 remaining warrants were exercised for $3.5 million in cash; the company reported that no warrants remained outstanding. At quarter-end, the warrant liability was $16.1 million and the related fair-value charge was $5.3 million.
- Filene’s Basement lease guarantees remain a contingency. DSW recorded a $7.0 million liability; disclosed potential loss ranges were zero to $8 million for the Union Square location and zero to $3 million for Bergen, New Jersey. A landlord’s Union Square guarantee lawsuit was pending. Management had not recorded a possible $6.8 million insurance recovery in a separate credit-card data-theft coverage dispute, with appeal argument scheduled for July 2012.
- Other risks cited include consumer and economic weakness, fashion and inventory/markdown exposure, store-opening execution, distribution and fulfillment disruption, leased-business partner and vendor dependencies, and liabilities assumed in the RVI merger. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Confirm the intended period: the filing covers Q1 fiscal 2012, not Q1 2011, and is for DSW Inc., not a filing identified as Designer Brands Inc.
- Assess earnings comparability after separating derivative fair-value charges, PIES-related prior-year items, merger accounting and the elimination of noncontrolling interests.
- Review the sustainability of comparable-sales growth and margin trends, particularly occupancy leverage, merchandise margin and increased distribution costs.
- Monitor inventory growth, seasonal cash requirements, the planned $120 million capital program, store expansion and dividend capacity.
- Track the resolution and potential range of the Filene’s Basement lease guarantees and the insurance coverage appeal.