Filing summary
Period and issuer: This is DSW Inc.’s unaudited Form 10-Q for the three months ended April 30, 2016, compared with the three months ended May 2, 2015. The request metadata says “Designer Brands Inc.” and “2015 Q1”; those do not match the issuer and reporting period shown in the filing.
Business context and reporting period
DSW operated 478 U.S. stores and dsw.com. Its Affiliated Business Group (ABG) supplied footwear to partner retailers. DSW also held an equity investment in Town Shoes, a Canadian footwear retailer. On March 4, 2016, DSW acquired Ebuys, an online close-out footwear and accessories retailer; Ebuys contributed $15.1 million in revenue after acquisition.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $681.3 million | $655.5 million |
| Gross profit / gross margin | $204.4 million / 30.0% | $213.1 million / 32.5% |
| Operating profit / operating margin | $48.7 million / 7.2% | $73.6 million / 11.2% |
| Net income | $30.0 million | $47.4 million |
| Diluted EPS | $0.36 | $0.53 |
| Operating cash flow | $9.8 million | $49.4 million |
| Capital expenditures | $17.7 million | $27.3 million |
| Free cash flow, as defined by DSW | $(7.9) million | $22.0 million |
Sales increased 3.9%, but total comparable sales declined 1.6% (DSW segment down 1.4%; ABG down 3.4%). Cash and equivalents were $59.5 million at April 30, 2016; short- and long-term investments totaled $178.1 million. The company had no borrowings under its $100 million credit facility, with the full amount available. Current assets were $767.9 million and current liabilities $323.3 million; the current ratio was 2.4 and net working capital was $444.6 million. No long-term debt was outstanding.
Changes versus the prior comparable quarter
- Net sales rose $25.8 million, reflecting $15.1 million from Ebuys and $20.9 million net growth from non-comparable and closed stores, partly offset by a $10.2 million decline in comparable sales.
- Profitability weakened: gross margin fell 2.5 percentage points and operating margin fell 4.0 points. DSW cited higher markdowns, lower initial markup from category mix and sharper pricing; occupancy and fulfillment costs also deleveraged.
- Net income declined $17.4 million and diluted EPS fell $0.17. The prior-year quarter included $3.3 million of foreign-exchange gains and a $2.0 million benefit from a bankruptcy-estate distribution; the current quarter included Ebuys-related costs and accounting impacts.
- Operating cash flow fell $39.6 million, primarily due to working-capital movements. Management noted that prior-year accounts payable was unusually increased by the West Coast port strike.
- DSW’s share count used for diluted EPS declined to 82.7 million from 89.6 million.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $95 million and planned to open approximately 30–35 stores. It stated that cash, investments, operating cash generation and credit availability should support operations, seasonal working capital and planned investment.
- Management reported mid-teens comparable-sales growth in athletic footwear, while women’s footwear, men’s footwear and accessories each declined in the mid-single digits. It attributed lower average unit retail to increased markdowns.
- The Ebuys purchase price was approximately $116.4 million, including $62.5 million cash consideration before working-capital adjustments and contingent consideration. The contingent consideration liability was remeasured to $57.4 million at quarter-end, with a $1.4 million charge in the quarter. Purchase-price allocation remained preliminary.
- DSW reported $4.5 million of pretax charges related to Ebuys transaction costs, purchase-accounting impacts and contingent-consideration fair-value accounting; management said these reduced EPS by $0.04.
- DSW recorded a $0.3 million loss from Town Shoes, an improvement of $1.0 million year over year. Its ownership was 46.3%; a shareholder note and future put/call options create additional exposure. DSW disclosed foreign-currency exposure and stated it did not use hedging instruments.
- Risks identified include fashion and pricing competition, comparable-sales volatility, vendor and affiliated-partner relationships, store openings and leases, supply and fulfillment disruptions, information systems and data, acquisitions, foreign sourcing and currency exposure. Management said current legal proceedings were not expected to have a material effect; outcomes remain uncertain.
- The board declared a $0.20-per-share quarterly dividend payable June 30, 2016. Future dividends remain discretionary.
Most important facts for investors to verify
- Confirm the intended issuer and period: the supplied filing is DSW Inc., quarter ended April 30, 2016, not Designer Brands Inc. or 2015 Q1.
- Assess whether comparable-sales trends and markdown pressure continue to erode DSW’s gross margin and earnings.
- Track Ebuys integration, the preliminary purchase-price allocation, and the assumptions behind the $57.4 million contingent liability.
- Monitor seasonal inventory and working capital, free cash flow, and planned capital spending against management’s $95 million fiscal-year estimate.
- Review Town Shoes’ operating performance, the shareholder note and future ownership options, as well as the company’s foreign-currency exposure.