Designer Brands Inc. (reported as DSW Inc.) — Form 10-K summary
Period clarification: The supplied filing is DSW Inc.’s Form 10-K for fiscal 2015, the 52 weeks ended January 30, 2016—not a 2014 Q4 filing. The company’s name in this filing is DSW Inc.
Business context
DSW operated 468 U.S. stores and dsw.com; its Affiliated Business Group (ABG) supplied footwear to 379 partner-store locations and related e-commerce channels. The company also held an equity investment in Canadian retailer Town Shoes. Fiscal 2015 sales were predominantly from the DSW segment.
Financial results and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net sales | $2.620 billion | $2.496 billion |
| Comparable-sales change | +0.8% | +1.8% |
| Gross profit / gross margin | $768.4 million / 29.3% | $755.0 million / 30.2% |
| Operating profit / margin | $213.6 million / 8.1% | $242.5 million / 9.7% |
| Net income | $136.0 million | $153.3 million |
| Diluted EPS | $1.54 | $1.69 |
| Cash from operations | $242.7 million | $197.0 million |
| Capital expenditures | $111.7 million | $93.3 million |
| Free cash flow (company-defined, non-GAAP) | $131.0 million | $103.7 million |
Gross margin contracted as markdowns rose; DSW merchandise margin, a non-GAAP measure, declined to 42.8% from 43.7%. Operating expenses increased to 21.2% of sales from 20.5%. Management attributed weaker earnings principally to fall-season sales challenges from unseasonably warm weather.
At year-end, cash and investments totaled $330.5 million, working capital was $472.2 million, and the current ratio was 2.5. The company had no borrowings under its revolving credit facility and $100 million of availability; outstanding letters of credit were $7.1 million. It reported no long-term debt. Minimum operating-lease commitments totaled $1.207 billion, including $188.6 million due within one year.
DSW repurchased 7.2 million Class A shares for $179.6 million during fiscal 2015 and paid $69.7 million in dividends. The quarterly dividend increased to $0.20 per share. At year-end, $83.5 million remained under the repurchase authorization.
Changes versus the prior year
- Sales increased 5.0%, with comparable sales growth slowing to 0.8% from 1.8%; store expansion contributed materially to sales growth.
- Digital demand increased 22% within DSW comparable sales, while women’s footwear—the largest category—declined 2%; athletic footwear increased 13%.
- Net income fell about 11% and diluted EPS declined about 9%. Gross margin fell 0.9 percentage point and operating margin fell 1.6 points.
- Operating cash flow rose to $242.7 million from $197.0 million, primarily reflecting working-capital changes. Inventory increased to $484.2 million from $450.8 million.
- Year-end cash and investments declined to $330.5 million from $447.1 million, alongside substantial share repurchases and dividends.
Outlook, commentary, and notable items
- Management planned approximately 30–35 DSW store openings and about $95 million of capital expenditures in fiscal 2016; the company cited potential to operate more than 550 U.S. stores.
- On March 4, 2016, after year-end, DSW completed its acquisition of online retailer Ebuys for $62.5 million, subject to working-capital adjustments. Additional performance-contingent consideration had a provisional fair value of $55 million and was to be remeasured through 2020.
- The company’s Town Shoes investment generated a $5.3 million share of operating losses in fiscal 2015; DSW also had a $44.2 million note receivable from Town Shoes. Currency movements affected comprehensive income, and the company reported no hedging of its foreign-currency exposure.
- Key risks include fashion and weather-related demand volatility, competitive pricing and markdown pressure, dependence on vendors and foreign sourcing, distribution and technology disruptions, customer-data security, and the performance of ABG partners. Stein Mart represented a partner-agreement renewal/termination consideration in December 2016; ABG contributed about 5.7% of company sales.
- Operating leases and related-party arrangements are significant. Schottenstein Affiliates held about 51% of combined voting power; DSW also leased 17 stores and its fulfillment center from affiliates.
- Management and the auditor reported effective internal control over financial reporting. Management said pending legal proceedings were not expected to materially affect results or financial condition.
Important facts for investors to verify
- Whether sales and margins recovered after fiscal 2015, particularly against the weather-related markdown pressure and weakness in women’s footwear.
- Whether planned store openings and capital spending generated adequate returns, and whether inventory levels and markdowns remained controlled.
- Ebuys’ post-acquisition performance, final purchase-price allocation, and actual contingent payments compared with the provisional $55 million fair value.
- Town Shoes’ operating performance, the recoverability of DSW’s investment and note receivable, and the effects of Canadian-dollar movements.
- Liquidity after repurchases, dividends, acquisition spending, and lease commitments; review credit-facility covenants and the $125 million minimum cash-and-investments requirement.
- Developments in partner agreements, vendor concentration, related-party leases, and the contingent liabilities assumed from Retail Ventures.