Filing summary
Entity and period: The filing is for DSW Inc. (the historical name in this 10-Q), not Designer Brands Inc. It covers the unaudited quarter ended May 3, 2014, compared with the quarter ended May 4, 2013. The filing corresponds to fiscal 2014 Q1; this differs from the “2013 Q1” period in the request metadata.
Business context and results
DSW operated 408 stores and dsw.com; its Affiliated Business Group (ABG) supplied footwear to partner retailers. It opened 14 stores during the quarter. The filing reports two segments: DSW stores and online, and ABG.
| Metric | Quarter ended May 3, 2014 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $598.9 million | $601.4 million | Down 0.4% |
| Gross profit / margin | $188.0 million / 31.4% | $183.0 million / 30.4% | Margin up 100 bps reported |
| Operating profit / margin | $61.3 million / 10.2% | $54.3 million / 9.0% | Profit up 12.8% |
| Net income | $38.6 million | $34.5 million | Up 12.0% |
| Diluted EPS | $0.42 | $0.38 | Up $0.04 |
| Operating cash flow | $14.5 million | $42.3 million | Down $27.8 million |
DSW segment sales were $558.9 million, down from $562.9 million; ABG sales were $40.1 million, up from $38.4 million. Company comparable sales fell 3.7% (DSW segment down 4.0%; ABG up 0.9%). DSW cited lower customer traffic, partly offset by improved conversion. Women’s footwear was down 7%; men’s and accessories were up 1.9% and 4.5%, respectively.
Financial position and liquidity
- At May 3, 2014, cash and equivalents were $132.9 million and short-term investments were $179.9 million. Current assets were $821.3 million and current liabilities $270.6 million; working capital was $550.7 million and the current ratio was 3.0.
- Total assets were $1.431 billion; shareholders’ equity was $1.023 billion. Inventory was $420.0 million, up from $395.3 million a year earlier.
- No borrowings were outstanding. Revolver availability was $49.5 million; outstanding letters of credit were approximately $0.5 million under the credit facilities. The secured facility requires at least $125 million of cash and short-term investments, as defined in the agreement.
- Capital expenditures were $25.4 million. Cash from operations declined, primarily due to working-capital movements and the use of net operating losses in the prior-year period. Investing activities provided $23.1 million, versus $42.2 million used in the prior year, including net investment sales to fund the planned Town Shoes investment. Financing activities used $16.8 million, mainly for dividends.
Changes, outlook, and notable items
- Reported gross margin rose 100 basis points, but comparison was affected by the prior-year luxury test, which reduced prior-year gross profit by $16.5 million. Excluding that test, company gross margin was 31.4% versus 33.5%; management attributed the decline primarily to markdown activity. Operating expenses fell to 21.2% of sales from 21.4%, reflecting lower marketing and home-office overhead partly offset by store expense deleverage.
- Management expected approximately $120 million of fiscal 2014 capital expenditures and planned 35 new store openings for the year. It said existing cash, investments, operating cash generation, and credit availability should support operations, seasonal needs, growth investment, and dividends. No earnings or comparable-sales guidance was provided in the supplied filing text.
- On May 9, after quarter-end, DSW acquired a 49.2% interest in Town Shoes for CAD $75.5 million (about $68.7 million), with 50% voting control and equal board representation. The investment was to be accounted for under the equity method. DSW also held a shareholder note earning 12% payment-in-kind interest and had future purchase/put rights concerning the remaining ownership. The acquisition introduces Canadian business and foreign-exchange risks; DSW said it did not use currency hedges.
- ABG announced plans to develop and operate Yellow Box retail stores, initially targeting three to five openings in 2014. DSW began issuing co-branded credit cards on April 30 under a seven-year agreement; related revenue is recorded in net sales.
- A legacy guarantee lawsuit involving a former Filene’s Basement lease had an estimated recorded liability of $3.3 million and a stated possible loss range of zero to $7.0 million. Management said other pending legal proceedings were not expected to be material. The filing reported no off-balance-sheet arrangements.
- The board declared a $0.1875-per-share quarterly dividend on May 28, payable June 30, 2014. The filing also notes a $100 million share-repurchase authorization; $1.6 million had been repurchased cumulatively, with $98.4 million remaining.
Important facts for investors to verify
- Confirm the reporting period: the filing is fiscal 2014 Q1, ended May 3, 2014, despite the request metadata stating 2013 Q1.
- Assess comparable-sales weakness, traffic trends, markdowns, and gross margin excluding the prior-year luxury test.
- Track inventory and operating cash flow, which declined materially year over year, and the planned $120 million capital-spending program.
- Review the Town Shoes investment terms, post-quarter accounting and performance, future ownership rights, and foreign-currency exposure.
- Monitor the Union Square lease-guarantee litigation and the stated $0–$7 million potential loss range.
- Check compliance with the credit facility’s minimum liquidity covenant and the sustainability of dividends amid expansion and investment needs.