Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 2, 2009, for DSW Inc. (trading as DSW), a leading U.S. branded footwear specialty retailer. As of the period end, the company operated 303 DSW stores across 38 states, an e-commerce platform (dsw.com), and 365 leased shoe departments for partners including Stein Mart, Gordmans, and Filene's Basement. DSW is a controlled subsidiary of Retail Ventures, Inc. (RVI), which owned approximately 62.9% of DSW's outstanding common shares.
Key Financial Metrics
| Metric | Q1 2009 (Three Months Ended May 2) | Q1 2008 (Three Months Ended May 3) |
|---|---|---|
| Net Sales | $385.8 million | $366.3 million |
| Gross Profit | $105.0 million (27.2% margin) | $97.0 million (26.5% margin) |
| Operating Profit | $12.1 million (3.1% margin) | $16.0 million (4.4% margin) |
| Net Income | $7.1 million | $10.3 million |
| Diluted EPS | $0.16 | $0.23 |
| Cash and Equivalents | $82.1 million | $61.8 million (Beginning of period) |
| Short-term Investments | $81.4 million | $101.4 million (Beginning of period) |
| Long-term Debt | $0 | $0 |
| Operating Cash Flow | $14.8 million | $10.2 million |
Material Changes vs. Prior Period
- Sales Growth: Net sales increased 5.3% year-over-year, driven by new store openings and dsw.com growth, despite a 4.7% decline in comparable store sales due to lower units per transaction in a challenging economic environment.
- Profitability: While gross profit margin improved to 27.2% (from 26.5%) due to reduced markdowns, operating profit margin contracted to 3.1% (from 4.4%) as operating expenses rose to 24.1% of sales. This increase was driven by higher marketing spend and depreciation from capital investments.
- Investment Impairments: The company recorded an other-than-temporary impairment charge of $0.4 million related to preferred shares received as distributions-in-kind on auction rate securities.
- Inventory Build: Inventories increased by $34.2 million compared to the prior year quarter, reflecting seasonal buildup and strategic stock levels.
Outlook, Risks, and Unusual Items
- Filene's Basement Bankruptcy: On May 4, 2009, Filene's Basement filed for bankruptcy protection. DSW has reserved $0.5 million of the $1.0 million receivable owed by Filene's Basement. The company faces risks regarding the collectability of the remaining balance and the inability to allocate shared service expenses after a 90-day transition period ends.
- Value City Receivables: DSW is owed approximately $6.7 million by Value City (which filed for bankruptcy in October 2008) for pre-bankruptcy services. DSW has reserved $0.8 million but has submitted a proof of claim for the full amount with no assurance of collection.
- Liquidity: The company maintains a strong balance sheet with no long-term debt and $139.9 million available under a $150 million secured revolving credit facility expiring in July 2010. Management is seeking a new facility, noting that terms may be less favorable due to current credit market conditions.
- Capital Expenditures: The company plans to spend approximately $35 million on capital expenditures in fiscal 2009, including opening approximately 10 new stores.
Investor Verification Checklist
- Verify the collectability of the remaining $0.5 million receivable from Filene's Basement and the potential impact of lost expense allocation on future operating margins.
- Monitor the status of the $6.7 million claim against Value City and the likelihood of recovery.
- Assess the impact of the 4.7% comparable store sales decline on future inventory levels and potential markdowns.
- Review the terms of the new credit facility being negotiated to replace the one expiring in July 2010.
- Track the performance of the dsw.com segment, which contributed to the overall sales increase despite comparable store declines.