Filing summary
Filing-period mismatch: The request metadata says Designer Brands Inc. and 2014 Q2, but the supplied filing is DSW Inc.’s unaudited Form 10-Q for the quarter ended August 1, 2015 (fiscal 2015 second quarter). The figures below summarize the supplied filing.
Business context and reporting period
DSW operated 449 stores and dsw.com. Its Affiliated Business Group (ABG) supplied footwear to partner retailers and operated four Yellow Box stores. DSW also held a 46.3% equity interest in Canadian retailer Town Shoes. The filing reports the three and six months ended August 1, 2015, compared with the periods ended August 2, 2014.
Financial results
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $627.2 million, up 6.8% | $1,282.7 million, up 8.1% |
| Comparable sales | Up 1.8% overall; DSW up 1.9% | Up 3.5% overall; DSW up 3.5% |
| Gross margin | 30.5%, versus 29.3% | 31.5%, versus 30.3% |
| Operating profit | $59.6 million, versus $53.3 million | $133.2 million, versus $114.6 million |
| Net income | $37.6 million, versus $34.3 million | $85.0 million, versus $73.0 million |
| Diluted EPS | $0.42, versus $0.38 | $0.95, versus $0.80 |
| Cash from continuing operations | Not stated for the quarter | $114.6 million, versus $97.7 million |
For the six-month period, DSW segment sales were $1,204.8 million and ABG sales were $77.9 million. DSW gross margin improved to 32.3% from 30.9%; ABG gross margin declined to 20.0% from 21.2%, primarily due to impairment expense.
Liquidity, debt, and cash flows
At August 1, 2015, cash and equivalents were $151.0 million and short- and long-term investments totaled $320.1 million. Working capital was $566.0 million and the current ratio was 2.9. Total liabilities were $448.4 million; the filing reports no outstanding borrowings under the $50 million revolving credit facility and no long-term debt. The company had $50 million of facility availability, subject to terms and covenants.
Six-month investing cash flow was a $4.9 million inflow, including $53.8 million of capital expenditures; financing cash flow was a $30.9 million outflow, primarily reflecting $35.3 million of dividends. Inventory rose to $505.2 million from $415.0 million a year earlier. The company reported $8.5 million of letters of credit and $9.1 million of related restricted cash.
Changes, outlook, and risks
- Sales growth reflected 3.5% comparable-sales growth for the first half and new-store expansion; the filing says 39 more stores had opened than in the comparable prior-year period. DSW cited higher average unit retail and digital traffic growth, while store traffic declined in the quarter.
- Gross margin increased 120 basis points in both the quarter and first half, mainly from lower markdown activity. Operating expenses as a share of sales rose, reflecting higher equity and incentive compensation.
- Management expected approximately $115 million of fiscal 2015 capital expenditures and planned to open 35–40 stores that year. It stated that operating cash, cash and investments, and credit availability should support operations, growth investment, seasonal working capital, and dividends.
- Risks highlighted include consumer and comparable-sales weakness, inventory and markdown exposure, fashion trends, vendor and partner relationships, store-opening execution, information systems and data, leases, and foreign-currency exposure. DSW did not hedge its Town Shoes-related currency exposure.
- Foreign-exchange activity was notable: a $3.3 million gain was recorded in first-quarter non-operating income on Canadian-dollar purchases; subsequent unrealized currency effects on the Canadian investments were recorded in other comprehensive income. Town Shoes generated a $1.6 million loss for the first half. One ABG store impairment was $0.4 million.
- Pending legal proceedings were described as not expected to be material. The company also disclosed $5.7 million of construction commitments and signed leases for 34 stores with $9.2 million in total annual rent. A quarterly dividend of $0.20 per share was declared after quarter-end.
Important facts to verify
- Confirm the intended issuer and period: the supplied filing is DSW Inc., quarter ended August 1, 2015, not Designer Brands Inc. or 2014 Q2.
- Review comparable-sales trends, inventory growth, and the extent to which margin gains depend on markdown levels.
- Assess planned store openings and capital spending against cash generation and lease commitments.
- Review Town Shoes’ performance, the related note and investment, and Canadian-dollar exposure.
- Check credit-facility covenant compliance and the company’s continuing capacity to fund dividends and growth.