Business context and reporting period
The supplied filing is DSW Inc.’s Form 10-K for the fiscal year ended February 2, 2013—not a filing for Designer Brands Inc. or fiscal 2011 Q4. Fiscal 2012 comprised 53 weeks; fiscal 2011 comprised 52 weeks. Comparisons therefore include a different period length, and pre-merger financial information reflects Retail Ventures, Inc. as accounting acquirer in the May 2011 merger.
DSW operated 364 footwear stores, dsw.com, and 344 shoe departments through its Affiliated Business Group. Its principal business is branded footwear and accessories retailing.
Financial performance and condition
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $2,257.8 million | $2,024.3 million |
| Gross profit / margin | $724.7 million / 32.1% | $653.9 million / 32.3% |
| Operating profit | $236.8 million | $151.5 million |
| Income from continuing operations | $145.2 million | $200.3 million |
| Net income attributable to DSW shareholders | $146.4 million | $174.8 million |
| Diluted EPS attributable to DSW shareholders | $3.23 | $4.54 |
| Cash from continuing operations | $258.6 million | $214.2 million |
- Sales increased 11.5%; comparable sales increased 5.5% on a 52-week basis. The extra week contributed $32.3 million of sales. DSW-segment comparable sales rose 5.7%; Affiliated Business Group comparable sales rose 1.4%.
- Gross margin declined 20 basis points. DSW merchandise margin fell 70 basis points to 44.8%, primarily from increased clearance markdowns; lower occupancy expense partly offset the decline.
- Reported operating profit rose substantially, in part because the derivative fair-value charge fell to $6.1 million from $53.9 million. The prior-year charge included $41.7 million related to the PIES conversion feature.
- Fiscal 2012’s 39.7% effective tax rate compared with a 40.8% tax benefit in fiscal 2011, which was favorably affected by merger-related tax items. This contributed to lower reported net income despite higher operating profit.
- At year-end, cash and investments totaled approximately $410 million; working capital was $546.5 million and the current ratio was 3.0. Cash and equivalents were $81.1 million, with short- and long-term investments of $232.1 million and $96.7 million.
- No borrowings were outstanding under the $100 million secured revolving credit facility; availability was $86.0 million, with $14.0 million in letters of credit. The facility expires June 2014 and includes covenants, including a $125 million annual capital-expenditure limit.
- Capital expenditures were $99.8 million, excluding the $72 million related-party property acquisition. Operating lease commitments totaled $1.074 billion. Net cash used in investing and financing activities was $119.4 million and $137.1 million, respectively.
- Reported fourth-quarter sales were $594.3 million and net income was $27.1 million, versus $513.7 million and $19.4 million in the prior-year quarter. The current quarter contained 14 weeks versus 13 weeks previously.
Material changes, outlook, risks and unusual items
- DSW opened 39 stores in fiscal 2012. Management planned 25–30 openings in fiscal 2013 and 15–20 annually over the following three to five years, with a long-term potential store base of 450–500. Fiscal 2013 capital expenditures were expected to be approximately $125 million.
- Management said cash from operations, cash and investments, and credit-facility availability were expected to fund operations, seasonal working capital, growth investment and dividends. It also expected to continue realizing cash tax savings from RVI tax attributes during the first half of fiscal 2013.
- Management planned to test a luxury online business in fiscal 2013 and expected a loss from it. The filing cautions that weak sales could require further markdowns or other inventory-disposal measures.
- Unusual fiscal 2012 items included a $6.0 million increase to an assumed lease impairment, reflecting lower expected sublease income and higher real-estate taxes, partly offset by a $5.3 million court-approved insurance award and $1.9 million interest income related to the award.
- DSW paid $72 million to acquire its headquarters, distribution center and trailer parking lot from entities affiliated with its executive chairman. The filing describes audit committee review and common-control accounting; related-party governance and valuation remain relevant investor considerations.
- Filene’s Basement lease guarantees carried a recorded liability of $6.6 million. Lawsuits relate to the Union Square and Bergen locations; the disclosed possible loss ranges were zero to $7 million and zero to $3 million, respectively. Management disputed enforceability or the extent of liability.
- The Filene’s Basement defined-benefit pension plan was underfunded by approximately $4.5 million at year-end. Termination awaited regulatory approval; settlement could result in reclassification of $8.8 million of accumulated other comprehensive loss to earnings.
- Key risks include fashion and markdown execution, vendor and foreign-sourcing dependence, consumer spending and seasonal variability, store-expansion execution, distribution and information-system disruptions, and reliance on the DSW Rewards program. Three vendors supplied approximately 18% of net sales; affiliated-business sales were approximately 5.9% of total sales.
- The Schottenstein Affiliates held approximately 66% of voting power. The filing also identifies risks from related-party relationships, including leases and the property transaction.
Important facts for investors to verify
- Confirm the intended issuer and period: this is DSW Inc.’s fiscal 2012 10-K, not a Designer Brands Inc. or fiscal 2011 Q4 filing.
- Assess sales and earnings on a comparable-week basis, including the 53rd week and the effect of the prior-year merger-related tax benefit and derivative charges.
- Review inventory growth, markdown trends, and margin performance; inventory rose to $393.8 million from $334.4 million.
- Verify progress on planned store openings, the approximately $125 million capital-spending plan, and fulfillment/distribution investments.
- Monitor settlement of the pension plan and resolution of the Filene’s Basement lease-guarantee lawsuits and related liabilities.
- Examine related-party property acquisition terms, ongoing affiliated leases and management arrangements, and the influence of the controlling shareholder group.