Filing summary
Period and issuer: The filing identifies the registrant as DSW Inc. and covers the three months ended May 5, 2018, compared with the three months ended April 29, 2017. This conflicts with the request metadata, which says Designer Brands Inc. and 2017 Q1; the filing itself is for DSW’s fiscal 2018 first quarter.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Total revenue | $712.1 million | $692.0 million |
| Operating profit | $38.5 million; 5.4% of revenue | $40.7 million; 5.9% |
| Net income | $24.3 million | $22.8 million |
| Diluted EPS | $0.30 | $0.28 |
| Gross margin | 28.9% of net sales | 28.5% |
| Operating cash flow | $25.3 million | $7.3 million |
Revenue rose 2.9%; net sales increased 2.8%. Comparable sales grew 2.2% company-wide and 2.0% in the DSW segment, versus declines of 3.0% and 3.1%, respectively, a year earlier. DSW segment sales increased, while Other sales fell, in part because of the Gordmans transition and Ebuys exit. Gross margin improved 39 basis points, but DSW merchandise margin declined 60 basis points, primarily due to higher e-commerce shipping costs. Operating expenses increased to 23.6% of revenue from 22.6%, including higher marketing and Ebuys exit costs.
Q1 net income included $7.2 million of after-tax charges, or $0.09 per diluted share, related to Ebuys exit costs, Town Shoes acquisition costs, and foreign-exchange losses. The filing does not provide a comparable adjusted earnings measure that removes these items.
Cash, liquidity, debt, and capital allocation
At May 5, 2018, cash and cash equivalents were $197.2 million and investments were $71.7 million. Current assets were $879.0 million and current liabilities were $325.4 million. The company had no borrowings under its $300 million unsecured revolving credit facility, $1.9 million of letters of credit, and $298.1 million available to borrow; it reported compliance with financial covenants. Operating cash flow increased year over year, which management attributed primarily to working-capital timing. Investing cash flow was positive $17.6 million, including proceeds from sales of investments; capital expenditures were $18.2 million. Financing cash outflow was $21.7 million, principally dividends of $19.9 million.
The quarterly dividend was raised to $0.25 per share. No shares were repurchased under the public program during the quarter; the reported 53,000 shares purchased were withheld for employee award tax payments. The company reported $524.1 million remaining under its repurchase authorization.
Developments, outlook, and risks
- On May 10, 2018, after quarter-end, DSW acquired the remaining Town Shoes interest for $28.2 million net of acquired cash. Town Shoes is to become a consolidated subsidiary beginning in Q2. The company planned a review of its real estate portfolio and a long-term growth and cost-synergy strategy. DSW expected to reclassify a $12.2 million accumulated foreign-currency translation loss to non-operating expense in Q2.
- Management cited low-single-digit comparable-sales growth despite unseasonal conditions and an earlier Easter. It highlighted digital demand, the DSW VIP loyalty-program launch, expanded DSW Kids placement, and pilots of a new labor model and store design.
- Fiscal 2018 capital expenditures were expected to be approximately $76 million, excluding additional spending after the Town Shoes acquisition. DSW planned seven to nine new U.S. stores; additional Canadian openings were possible. No earnings or revenue guidance is stated in the provided filing text.
- Risks highlighted include fashion and consumer-demand shifts, competition, vendor relationships, distribution and information-system disruptions, cybersecurity, reliance on Stein Mart arrangements, leases, foreign exchange, and execution and integration of the Town Shoes acquisition. Management said cash, investments, operating cash flow, and credit availability should support operations and planned needs for the foreseeable future.
- Ebuys operations ended in Q1; the exit generated lease-exit charges and added a lease-obligation accrual. The company also noted that U.S. tax-reform accounting amounts remained provisional and could be adjusted. Adoption of the new revenue-recognition standard was retrospective; the prior-year comparative figures are presented as adjusted.
Important facts for investors to verify
- Confirm the issuer and period: the source is a DSW Inc. 10-Q for Q1 FY2018, not a 2017 Q1 filing.
- Track comparable-sales trends, margins, and the impact of higher shipping and marketing costs.
- Review Town Shoes’ post-acquisition valuation, integration results, and the Q2 foreign-currency loss reclassification.
- Monitor Ebuys lease-exit costs, the provisional tax-reform accounting, and DSW’s planned capital spending and store openings.