15 Mar DSW’s Q4 Profits Slide On Charge To Exit Ebuys
DSW Inc. reported earnings in the fourth quarter fell 37.8 percent to $11.7 million, or 15 cents a share, after absorbing charges to write down and exit its Ebuys business. Earnings before non-recurring charges nearly doubled and exceeded guidance.
Roger Rawlins, chief executive officer, stated, “Our fourth quarter performance capped our first year of adjusted earnings growth since 2013. Our initiatives drove comparable sales growth and strong margin improvement at the DSW Segment this quarter. The sales inflection at our Power 35 locations, including our Lab store where we have introduced an elevated warehouse experience, prove our initiatives are gaining traction and provide us a blueprint to drive sales. We are drawing on our strong cash flow and the benefit from U.S. Tax Reform to enhance shareholder returns by boosting our quarterly dividend and reinvesting in strategic initiatives that will advance DSW’s dominant position in the marketplace in the years to come,” stated Rawlins.
The company achieved several important milestones in fiscal 2017:
- Total company revenues hit a new high of $2.8 billion;
- Renewed momentum in the core business, with footwear posting positive comparable sales for three quarters in a row;
- The revitalization of DSW’s Power 35 locations;
- The successful expansion of DSW Kids, with plans to complete the chain-wide roll-out in 2018;
- The company’s strongest growth in digital demand in the last nine years;
- The first increase in operating profitability and EPS since 2013;
- The development of a new store design and the innovation of new services and technology that will define DSW’s future customer experience.
Fourth Quarter Operating Results
- Sales increased 6.7 percent to $720.0 million, including $35.6 million from the extra week.
- For the thirteen-week period, comparable sales increased 1.3 percent compared to last year’s 7.0 percent decrease.
- Reported gross profit increased by 150 bps, driven by favorable sourcing, lower markdowns and occupancy leverage.
- Reported operating expenses improved by 20 bps, driven by tighter expense management, partly offset by higher incentive compensation.
- Reported net income was $11.7 million, or $0.15 per diluted share, which included net after-tax charges of $18.8 million, or $0.23 per diluted share, excluding costs related to Ebuys, restructuring, acquisition expenses related to Town Shoes and the impact of U.S. Tax Reform.
- Adjusted net income was $30.5 million, or $0.38 per diluted share, an increase of 90 percent, excluding costs related to Ebuys, restructuring, acquisition expenses related to Town Shoes and the impact of U.S. Tax Reform. Excluding the impact of the 53rd week of $0.06 per diluted share, adjusted earnings per share increased by 60 percent.
DSW had guided adjusted EPS to a range of 26 to 31 cents. Wall Street’s consensus estimate had been 27 cents.
Impact of the Tax Cuts and Jobs Act (the “U.S. Tax Reform’):
As a result of the recent passage of the U.S. Tax Reform, the company recorded an additional $10.1 million net tax expense resulting from the re-measurement of its net federal deferred tax assets, partially offset by the benefit of applying the new rate on the last month of the fiscal year. This additional amount is excluded from the company’s adjusted results.
Based on its initial analysis of the U.S. Tax Reform, the company estimates an effective tax rate of approximately 29 percent for fiscal year 2018 compared to its historical rate of 39 percent, with the benefit from the reduction in federal tax rate partly offset by other provisions in the new law. The company’s effective tax rate will be subject to changes in its interpretation and application of the new tax legislation, future guidance and regulatory updates from governing bodies go forward.
Exit of Ebuys
Following a comprehensive evaluation of strategic alternatives for Ebuys, the company made the decision to exit the business. Consequently, the company revalued its remaining assets, including inventory, fixed and intangible assets at liquidation value and reduced its contingent consideration liability. The company expects to complete the liquidation process in early 2018 and may incur additional one-time exit charges, which will be excluded from adjusted results.
Full Year Operating Results
- Sales increased 3.3 percent to $2.8 billion, including $87.0 million from Ebuys.
- For the 52 week period, comparable sales decreased by 0.4 percent compared to last year’s 3.0 percent decrease.
- Reported net income was $67.3 million, or $0.83 per diluted share, which included net after-tax charges of $55.5 million, or $0.69 per diluted share, excluding costs related to Ebuys, restructuring costs, acquisition expenses related to Town Shoes and the impact of U.S. Tax Reform.
- Adjusted net income was $122.8 million, or $1.52 per diluted share, a 4.1 percent increase to last year.
When it reported third-quarter earrings on November 21, the company said it expected adjusted earnings in the range of $1.40 to $1.45 per diluted share. At the time, the guidance was lowered from $1.45 to $1.55 previously to reflect lower expectations for Ebuys and the impact of weather-related disruptions this quarter.
Balance Sheet Highlights
- Cash, short-term and long-term investments totaled $300.5 million compared to $287.1 million the previous year.
- Inventories were $501.9 million compared to $500.0 million last year. On a cost per square foot basis, DSW inventories increased by 6 percent, primarily due to higher in-transit goods as the company funds growth initiatives. On a two-year basis, inventories per square foot declined 2 percent.
- For the full year, the company repurchased a total of 0.5 million shares for a total of $9.4 million and has $524.1 million remaining under its share repurchase program. The company has returned $625 million in dividends and share repurchases since 2013.
DSW Inc.’s Board of Directors approved to increase its quarterly cash dividend by 25 percent to $0.25 per share. The dividend will be paid on April 6, 2018 to shareholders of record at the close of business on March 23, 2018.
Fiscal 2018 Annual Outlook
- For the fifty-two week period ending February 2, 2019, the company expects full year revenue growth to decrease by 1 percent to 3 percent, with the exit of non-core businesses and the impact of the 53rd week. Excluding the exit of non-core businesses and the 53rd week, total revenues are expected to increase in the 2 percent to 4 percent range. This assumes comparable sales increase in the low single digit range and the opening of three to six net new locations for the DSW Segment.
- Full year adjusted earnings per share are expected to range between $1.52 to $1.67 per diluted share, representing earnings growth of 4 percent to 14 percent excluding the income from the 53rd week. The company’s outlook assumes a tax rate of 29 percent and 81.0 million shares outstanding. Guidance excludes charges related to the exit of Ebuys and does not assume the consolidation of Town Shoes.