Designer Brands Inc. (formerly DSW Inc.) — Form 10-K summary
Period covered: Fiscal year ended February 2, 2019 (fiscal 2018, 52 weeks). The request metadata says “2017 Q4,” but the supplied filing is a fiscal 2018 annual report, not a 2017 quarterly filing. Fiscal 2017 had 53 weeks, which affects year-over-year comparisons.
Business context
The company operated 655 retail stores in the U.S. and Canada and related e-commerce sites, alongside its Brand Portfolio wholesale and design business. It acquired the remaining interest in Town Shoes Limited (TSL) in May 2018 and Camuto Group in November 2018, and acquired a 40% interest in the ABG-Camuto joint venture. The Town Shoes banner was exited during the year. On March 19, 2019, DSW Inc. changed its name to Designer Brands Inc.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Total revenue | $3.184 billion | $2.811 billion |
| Net sales | $3.174 billion | $2.806 billion |
| Gross profit / margin on net sales | $935.2 million / 29.5% | $799.1 million / 28.5% |
| Operating profit / margin on revenue | $59.0 million / 1.9% | $125.1 million / 4.5% |
| Net income (loss) | ($20.5 million) | $67.5 million |
| Diluted earnings (loss) per share | ($0.26) | $0.84 |
| Cash from operating activities | $175.3 million | $191.0 million |
| Capital expenditures | $65.4 million | $56.3 million |
- Revenue rose 13.3%, reflecting acquired businesses, 6.1% comparable-sales growth and non-comparable store sales. Growth was partly offset by exits of Gordmans and Ebuys and the additional week in fiscal 2017.
- Comparable sales improved from a 0.4% decline in fiscal 2017 to 6.1% growth. U.S. Retail comparable sales rose 6.0%; management attributed growth primarily to higher transactions and traffic.
- Gross margin increased 100 basis points, led by improved U.S. Retail merchandise margins and lower markdowns; acquired businesses had lower margins. Operating expenses increased to 25.9% of revenue from 22.1%, reflecting marketing, incentive compensation, acquisition costs, lease exits and restructuring.
- The reported net loss included $155.3 million of net after-tax charges, or $1.92 per diluted share, primarily for impairments, acquisition-related activity, the Town Shoes exit, restructuring and tax items.
- Operating cash flow declined to $175.3 million. Investing cash outflow was $282.0 million, including acquisitions and the $56.8 million ABG-Camuto investment. Financing cash inflow was $30.0 million, including $160.0 million of revolver borrowings, offset by dividends and share repurchases.
- At year-end, cash and cash equivalents were $99.4 million, investments were $69.7 million, and debt was $160.0 million. The $400 million revolving facility had $235.5 million available after outstanding borrowings and letters of credit; the company reported compliance with its financial covenants.
- Inventory was $645.3 million, versus $501.9 million a year earlier. Total assets were $1.621 billion and shareholders’ equity was $832.4 million.
Outlook, risks and unusual items
- Management planned 11–16 new stores and $70–$80 million of capital expenditures in fiscal 2019; the broader store strategy also describes net expansion of approximately 3–8 stores after closures. The filing provides no numeric earnings or revenue guidance.
- Management cited continued digital-demand growth, investment in digital marketing and technology, expanded private-brand sourcing through Camuto Group, and tests of nail bars and shoe repair. It said the acquired Canadian go-forward banners were accretive to earnings per share in their first year of ownership.
- Fiscal 2018 included $60.8 million of impairment charges, including $41.8 million for Canada Retail goodwill and $13.9 million for abandoned internal-use software. The TSL step acquisition also generated a $34.0 million loss on remeasurement of previously held assets and a $12.2 million foreign-currency translation loss reclassified into earnings.
- Camuto Group contributed $89.6 million of revenue and a $16.2 million net loss during its partial-year consolidation. Its purchase-price allocation remained preliminary. The filing also reports $5.3 million of inventory step-up cost recognized in fourth-quarter cost of sales.
- Identified Camuto Group foreign payroll and other tax exposures were estimated at $13.4–$30.0 million; a $13.4 million liability was recorded, with an indemnification asset, but recovery from sellers is not assured. The company reported a 318.5% effective tax rate, reflecting foreign losses without recognized tax benefits and other discrete tax items.
- Key risks include integration and realization of acquisition benefits; fashion and consumer-demand shifts; intense retail and online competition; foreign sourcing and tariffs; cyber and fulfillment disruptions; and reliance on vendors, licensors and wholesale customers. Three vendors supplied about 20% of retail merchandise, and four Brand Portfolio customers represented about 60% of that segment’s revenue.
- ABG’s supply agreement with Stein Mart was scheduled to terminate in January 2020. Other exposures include $1.307 billion of operating lease commitments and $305.6 million of minimum license commitments. The company also identified a $17.0 million guaranteed lease commitment and unoccupied or exited locations it was seeking to sublease or assign.
- The company stated that its financial statements and internal controls were effective; however, management and the auditor excluded the acquired TSL and Camuto Group businesses from the year-end internal-control assessment.
Most important facts for investors to verify
- Whether acquired businesses can be integrated successfully and deliver the expected earnings, cost and private-brand benefits.
- Whether operating profitability and cash generation improve after the unusually large acquisition, impairment, exit and tax charges.
- The final Camuto Group purchase-price allocation and the outcome of its foreign tax contingencies and related seller indemnification.
- Whether Canada Retail goodwill impairment, customer concentration in Brand Portfolio, and vendor and Stein Mart dependencies create further downside.
- How the planned store investment, lease commitments, licensing payments and revolver borrowing affect liquidity and returns to shareholders.