Filing summary
Period and entity: The supplied filing is DSW Inc.’s Form 10-K for the fiscal year ended January 31, 2015 (fiscal 2014, 52 weeks), not a 2013 Q4 filing. It does not identify the registrant as Designer Brands Inc.; investors should verify the entity and period before relying on this summary.
Business context
DSW operated 431 stores and dsw.com, alongside its Affiliated Business Group (ABG), which supplies footwear departments for partner retailers and operates Yellow Box stores. DSW also held a 49% equity interest in Canadian footwear retailer Town Shoes. DSW segment sales were approximately 94% of consolidated revenue.
Key financial metrics
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net sales | $2,496.1 million | $2,368.7 million |
| Comparable sales change | +1.8% | +0.2% |
| Gross profit / margin | $755.0 million / 30.2% | $739.3 million / 31.2% |
| Operating profit / margin | $242.1 million / 9.7% | $241.4 million / 10.2% |
| Net income | $153.3 million | $151.3 million |
| Diluted EPS | $1.69 | $1.65 |
| Cash from operations | $197.0 million | $301.4 million |
| Capital expenditures | $93.3 million | $83.8 million |
| Cash and investments | $447.1 million | $579.3 million |
| Working capital / current ratio | $484.7 million / 2.7 | $528.4 million / 2.9 |
| Long-term debt | None | None |
DSW had $59.2 million of cash and equivalents, $171.2 million of short-term investments and $216.8 million of long-term investments at year-end. Its $50 million secured revolving facility was undrawn, with $50 million available. Outstanding letters of credit were $9.3 million, supported by $11.5 million of restricted cash. Future minimum operating lease payments totaled approximately $1.129 billion.
Material changes versus the prior year
- Sales increased 5.4%, supported by comparable-sales growth, customer traffic and new stores. DSW segment comparable sales rose 1.8%; ABG comparable sales rose 1.6%.
- Gross margin fell 100 basis points. Management cited spring markdowns, higher shipping costs and lower initial markups; DSW merchandise margin declined to 43.7% from 45.3%.
- Operating profit was nearly flat despite higher sales. Operating margin fell 50 basis points to 9.7%.
- Operating cash flow decreased $104.3 million, primarily reflecting working-capital changes, higher inventory from store growth and opportunistic pre-buys, and prior-year tax and pension-related effects.
- Cash and investments declined by $132.2 million, primarily reflecting the Town Shoes investment, share repurchases and dividends. Inventory rose to $450.8 million from $397.8 million.
- DSW repurchased approximately 3.0 million Class A shares for $85.3 million during the year and paid $66.9 million in dividends. The quarterly dividend was raised to $0.20 per share in February 2015.
Outlook, commentary, risks and unusual items
- Management planned approximately 35 new stores and about $115 million of capital expenditures in fiscal 2015; it described longer-term annual openings of 15–20 stores and potential capacity for 500–550 standard-format stores.
- Management expected benefits from its new assortment-planning system beginning in fiscal 2016. Fiscal 2014 initiatives included expanded ship-from-store and drop-ship capabilities, a mobile app, easier free shipping and a co-branded credit card. Buy online, pick up in store was planned for fiscal 2015.
- Management said liquidity, operating cash generation and facility availability were expected to support operations, seasonal working capital, planned capital spending and dividends. The credit facility requires at least $125 million of qualifying cash and short-term investments and limits annual capital expenditures to $200 million.
- Key risks include execution and cost of the omni-channel strategy and store expansion; fashion, markdown and inventory risk; reliance on vendors and foreign sourcing; disruption or security breaches involving systems and fulfillment; economic and seasonal sales volatility; and reliance on ABG partners. Three vendors supplied about 18% of net sales, and loyalty-program members generated about 90% of DSW segment sales.
- Town Shoes exposure includes foreign-exchange risk, a CAD-denominated shareholder note and put/call arrangements concerning the remaining ownership interest. DSW reported no use of hedging instruments for currency risk.
- Unusual items included a $2.6 million Visa/Mastercard swipe-fee settlement recorded in other operating income and a $5.1 million long-lived-asset impairment charge. The prior year included a $14.7 million pension-plan settlement charge and a $16.5 million gross-profit impact from the luxury test; management stated prior-year diluted EPS included $0.23 of charges related to RVI and the luxury test.
- The Union Square lease-guarantee litigation was settled on February 27, 2015; the guarantee remains in effect through lease expiration in 2024. Management stated other pending litigation was not expected to be material.
Most important facts for investors to verify
- Confirm the filing’s issuer and fiscal period: this is DSW Inc. fiscal 2014, despite the request metadata naming Designer Brands Inc. and 2013 Q4.
- Assess whether sales growth can be sustained while gross and merchandise margins recover from higher markdowns, shipping costs and lower initial markups.
- Review inventory growth, pre-buys, and the decline in operating cash flow for implications for future markdowns and liquidity.
- Validate the economics and accounting of the Town Shoes investment, shareholder note, currency exposure and ownership options.
- Consider lease commitments, expansion spending, and dependence on key vendors, ABG partners, loyalty members and technology execution.
- Check the complete financial statements and notes for the final settlement amounts and any subsequent developments in legacy guarantees or other contingencies.