DSW Inc. (now Designer Brands Inc.) — Form 10-Q Summary
Reporting period: The filing covers the three months ended May 2, 2015, compared with the three months ended May 3, 2014. This is fiscal 2015 Q1, although the request metadata identifies 2014 Q1. The filing is unaudited.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $655.5 million | $598.9 million |
| Operating profit | $73.6 million | $61.3 million |
| Net income | $47.4 million | $38.6 million |
| Diluted EPS | $0.53 | $0.42 |
| Operating cash flow | $49.4 million | $14.5 million |
- Sales grew 9.4%, including 5.1% comparable-sales growth; management attributed the increase to comparable sales and 41 new stores opened over the prior year. DSW opened 18 stores during the quarter.
- Gross margin rose to 32.5% from 31.4%; operating margin increased to 11.2% from 10.2%; net margin increased to 7.2% from 6.5%.
- DSW segment comparable sales increased 5.1%, versus a 4.0% decline a year earlier. ABG comparable sales increased 5.0%, versus 0.9% growth.
- Cash and equivalents were $206.9 million; short- and long-term investments totaled $249.4 million. Current assets were $940.5 million and current liabilities $331.8 million, yielding working capital of $608.7 million and a 2.8 current ratio.
- No borrowings were outstanding on the $50 million revolving credit facility. The company reported no long-term debt. It had $50 million of facility availability and $4.4 million of letters of credit under a separate letter-of-credit agreement.
- Capital expenditures were $27.3 million. Investing cash flow was $109.7 million, substantially reflecting net sales of investments; financing cash flow used $14.7 million, primarily for dividends. Cash increased by $144.4 million during the quarter.
Changes, outlook, and notable items
- Gross-margin improvement primarily reflected fewer markdowns from stronger spring sell-through, partly offset by lower initial markups and higher shipping expense. ABG gross margin declined to 20.8% from 24.3%, primarily due to a store impairment.
- The quarter included a $3.3 million foreign-exchange gain related to purchasing CAD, a $1.3 million equity-method loss from Town Shoes, and a $0.4 million impairment of one ABG store. A $2.0 million benefit from the final distribution related to the Filene’s Basement bankruptcy was also recorded.
- DSW held approximately CAD $100 million in Canadian bank accounts while planning to invest the funds in Canadian securities, potentially to support a future purchase of the remaining Town Shoes interest or other opportunities. Management warned that a 10% currency-rate change could materially affect earnings while the funds remain in cash; the company did not use currency hedges.
- Management expected approximately $115 million of fiscal 2015 capital expenditures and planned to open 35–40 stores during the year. It said cash, investments, operating cash flow, and credit availability were expected to support operations, seasonal working capital, growth investment, and dividends.
- Management cited risks including execution of its omnichannel strategy, store openings, fashion trends, vendors and affiliated partners, economic conditions, inventory and markdown exposure, leases, information systems, and foreign currency. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- A $0.20-per-share quarterly dividend was declared after quarter-end. The company had $63.1 million remaining under its share repurchase authorization.
Investor verification priorities
- Confirm the intended period: the source filing is fiscal 2015 Q1, not 2014 Q1.
- Assess the sustainability of comparable-sales and margin gains, including markdown trends and the weaker ABG margin.
- Review inventory growth and seasonal working-capital needs against operating cash flow; inventory was $512.1 million at quarter-end.
- Verify the CAD investment plan, Town Shoes performance and funding arrangements, and the potential earnings impact of currency movements.
- Track planned store openings and capital spending, and any changes in liquidity, facility availability, or dividend and repurchase plans.
- Review the remaining Filene’s Basement-related obligations and other litigation or lease contingencies; management stated that other pending legal liabilities were not expected to be material.