DSW Inc (DSW) SEC Quarterly Report (10-Q) for Q2 2018

Washington, D.C. 20549

(Mark One)

For the quarterly period ended May 5, 2018

or

Commission file number 1-32545

Registrant's telephone number, including area code: (614) 237-7100

Number of shares outstanding of each of the registrant's classes of common stock, as of May 25, 2018 : 72,470,639 Class A Common Shares and 7,732,786 Class B Common Shares.

DSW INC.

TABLE OF CONTENTS

All references to "we," "us," "our," "DSW Inc.," or the "Company" in this Quarterly Report on Form 10-Q mean DSW Inc. and its wholly-owned subsidiaries. DSW refers to the DSW segment, which includes DSW stores and dsw.com. We own many trademarks and service marks. This Quarterly Report on Form 10-Q may contain trademarks, trade dress, and tradenames of other companies. Use or display of other parties' trademarks, trade dress or tradenames is not intended to and does not imply a relationship with the trademark, trade dress or tradename owner.

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DSW INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

1 .    SIGNIFICANT ACCOUNTING POLICIES

Business Operations- DSW Inc., an Ohio corporation, together with its wholly-owned subsidiaries, is the destination for on-trend footwear and accessories brands at a great value every single day. We offer a wide assortment of brand name dress, casual and athletic footwear and accessories for women, men and kids in DSW stores nationwide and on dsw.com. Our Affiliated Business Group ("ABG") partners with other retailers to help build and optimize their in-store and online footwear businesses by leveraging our sourcing network to produce a merchandise assortment that meets their needs. ABG currently provides service to Stein Mart stores and Steinmart.com and a single Frugal Fannie's store through ongoing supply arrangements. On March 13, 2017 , Gordmans (a previous ABG partner) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and announced a plan to close its stores. Stage Stores, Inc. acquired 58 Gordmans' stores and we provided services for these stores through the end of fiscal 2017 to support their transition.

As of May 5, 2018 , we had an equity investment in Town Shoes Limited ("Town Shoes"). On May 10, 2018 , we acquired the remaining interest in Town Shoes and we will include Town Shoes as a consolidated wholly-owned subsidiary beginning with our second quarter of fiscal 2018. Town Shoes is the market leader in branded footwear in Canada, primarily under The Shoe Company, Shoe Warehouse, Town Shoes and DSW Designer Shoe Warehouse banners, as well as an e-commerce site. The DSW Designer Shoe Warehouse stores in Canada operate under a licensing agreement.

On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"), an off price footwear and accessories retailer operating in digital marketplaces. Due to recurring operating losses incurred by Ebuys since its acquisition, as well as increased competitive pressures in the digital marketplaces, during the fourth quarter of fiscal 2017, we decided to exit the business and ended all operations in the first quarter of fiscal 2018.

On August 2, 2016, we signed an agreement with the Apparel Group as an exclusive franchise partner in the Gulf Coast region of the Middle East. Under this franchise agreement, the first three franchise stores in this region are now open.

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at February 3, 2018 has been derived from the audited financial statements at that date, as restated for the adoption of the new accounting standard for revenue recognition (refer to Note 3 , Revenue ). The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018 , filed with the U.S. Securities and Exchange Commission on March 23, 2018.

Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year refer to the calendar year in which the fiscal year begins.

Accounting Policies - The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018 .

Principles of Consolidation- The consolidated financial statements include the accounts of DSW Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in United States dollars ("USD"), unless otherwise noted.

Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Significant estimates are required as a part of sales returns, depreciation, amortization, inventory valuation, gift card breakage income, loyalty program reserve, impairments of long-lived assets and goodwill, legal reserves, accrual for lease obligations, income taxes, and self-insurance reserves. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results could differ from these estimates.

Revenue Recognition- Sales are recognized upon customer receipt of merchandise, net of estimated returns and excludes sales tax. Customers can purchase products from us at one of our stores, online or from our mobile application. For products shipped directly to our customers, we recognize the sale upon the estimated customer receipt date based on historical delivery transit times. Revenue from shipping and handling is recorded in net sales while the related costs are included in cost of sales. For products shipped directly to our customers from our suppliers (referred to as "drop ship"), we record gross sales upon delivery based on the price paid by the customers as we have determined that we are the principal party responsible for the sale transaction.

ABG supplies footwear, under supply arrangements, to other retailers. We maintain ownership of the merchandise we supply under these arrangements, including risk of loss, returns, shrink up to a certain percentage and loss of inventory value, until customer receipt. Furthermore, we are responsible for the footwear assortment, inventory fulfillment, and pricing at all locations and online. As a result, sales are recognized upon receipt by the end customer, net of estimated returns and exclude sales tax. The affiliated retailers provide the sales associates and retail space. We pay a percentage of net sales as rent, which is included in cost of sales as occupancy expense.

Gift Cards- Amounts received from the sale of gift cards are recorded as a liability and are recognized as sales when the cards are redeemed for merchandise. Based on historical information, the likelihood of a gift card remaining unredeemed (referred to as "breakage") can be reasonably estimated at the time of gift card issuance. Breakage income is recognized over the estimated average redemption period of redeemed gift cards.

Loyalty Program- We offer a loyalty program to our customers where members earn points based on their level of spending, as well as for various other activities. Upon reaching a specified point threshold, members receive reward certificates that may be redeemed for DSW purchases made within the stated expiration date. We record a reduction of net sales when points are awarded based on an allocation of the initial customer purchase and the stand alone value of the points earned. We maintain a deferred liability for the outstanding points and certificates based on historical conversion and redemption rates. The deferred liability is reduced and sales are recognized when certificates are redeemed or when points and certificates expire.

Franchise Revenue and Costs- Franchise revenue consists of royalties and other fees paid by franchisees, as well as merchandise sales to franchisees, and is included in franchise and other revenue in the consolidated statements of operations. Royalties are earned based upon a percentage of reported franchise sales and are recognized on a monthly basis when earned. Merchandise sales and any relating shipping charges are recognized as franchise revenue upon receipt of goods by the franchisee. The cost of goods sold to franchisees and related shipping costs are recognized as franchise costs at the same time franchise revenue is recognized.

Other Revenue- Other revenue consists of rental income on owned properties and is included in franchise and other revenue in the consolidated statements of operations.

Income Taxes- On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Reform") was enacted in the U.S., which significantly changes how the U.S. taxes corporations. The U.S. Tax Reform included the reduction in the federal statutory tax rate from 35% to 21% and requires complex computations to be performed that were not previously required in U.S. tax law. The U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the U.S. Tax Reform will be applied or otherwise administered that is different from our interpretation. We have not completed our determination of the accounting implications of the U.S. Tax Reform and no changes were recorded during the three months ended May 5, 2018 to the provisional amounts recorded as of February 3, 2018 . However, we have reasonably estimated the effects and recorded provisional amounts in our consolidated financial statements as of May 5, 2018 . As we complete our analysis of the U.S. Tax Reform, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. Primarily due to the U.S. Tax Reform, our effective tax rate decreased from  40.6%  for the three months ended April 29, 2017 to  31.9%  for the three months ended May 5, 2018 .

Cash, Cash Equivalents, and Restricted Cash - Cash and cash equivalents represent cash, money market funds and credit card receivables that generally settle within three days. Restricted cash represents cash that is restricted as to withdrawal or usage and consisted of a mandatory cash deposit for outstanding letters of credit under our previous credit facility.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:

Fair Value- Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:

We measure investments at fair value on a recurring basis. Investments are measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2), except for an immaterial amount of investments measured based on quoted market prices in active markets (categorized as Level 1) as of April 29, 2017 .

The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature. As of  May 5, 2018 , February 3, 2018 and April 29, 2017 , the fair value of the notes receivable from Town Shoes was  $124.4 million , $117.8 million and $46.1 million , respectively, compared to the carrying value of  $123.7 million , $115.9 million and $52.9 million , respectively. We estimated the fair value of the notes receivable based upon current interest rates offered on similar instruments. The change in fair value is based on the change in comparable rates on similar instruments.

Prior Period Reclassification- Certain prior period reclassifications were made to conform to the current period presentation. Prepaid rent to related parties was reclassified to prepaid expenses and other current assets and long-term prepaid rent to related parties were reclassified to other assets in our consolidated balance sheets.

Recent Accounting Pronouncements- In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2016-02, Leases , which will change how we account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to current accounting for capital leases. Upon transition, we will recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The standard is effective for us in the first quarter of fiscal 2019 with early adoption permitted. We will not early adopt ASU 2016-02 and we expect that the standard will have a material impact to our consolidated balance sheets. We are currently evaluating the full impact of the standard, including optional practical expedients that we may elect upon adoption, and we are progressing with our implementation plan. Our implementation plan includes identifying our lease population, updating our lease database, assessing the lease system utilized by our third-party lease administrator, and identifying changes to processes and controls.

2.    ACQUISITION

Equity Investment in Town Shoes- In fiscal 2014, we acquired a 49.2% interest in Town Shoes for $75.1 million Canadian dollars ("CAD") ( $68.9 million USD), which included an unsecured subordinated note from Town Shoes that earns payment-in-kind interest at 12% and matures on February 14, 2022. As of May 5, 2018 , our ownership percentage was 46.3% . The dilution of our ownership was due to Town Shoes' employees exercises of stock options. Our ownership stake provided 50% voting control and board representation equal to the co-investor. The co-investor held a put option to sell the remaining interest in Town Shoes to us and we held a call option to purchase the remaining interest in Town Shoes.

Step Acquisition of Town Shoes- On May 10, 2018 , we acquired the remaining interest in Town Shoes for $36.2 million CAD ( $28.2 million USD), net of acquired cash of $8.5 million CAD ( $6.6 million USD), by exercising our call option. This will be accounted for in the second quarter of fiscal 2018 as a step acquisition whereby we will remeasure to fair value our pre-existing assets, which will include our equity investment in Town Shoes and notes and accounts receivable from Town Shoes, and include these assets in the determination of the purchase price. Also during the second quarter of fiscal 2018, we will reclassify a net loss of $12.2 million of foreign currency translation related to the pre-existing balances from accumulated other comprehensive loss to non-operating expense.

We will include Town Shoes as a consolidated wholly-owned subsidiary beginning with our second quarter of fiscal 2018. Given the acquisition date, we are in the process of developing our fair value assumptions for the pre-existing assets and the assets and liabilities acquired.

3 .    REVENUE

Adoption of ASU 2014-09, Revenue from Contracts with Customers - During the first quarter of fiscal 2018, we adopted the new accounting standard for revenue recognition, ASU 2014-09 and the related amendments, using the full retrospective method where each prior period presented is restated. We recorded an increase to retained earnings as of January 31, 2016 (opening balance) of $4.9 million . The adoption of ASU 2014-09 had the following impacts:

As a result of adopting ASU 2014-09, we adjusted our condensed consolidated statements of operations (including total comprehensive income) on a retrospective basis as follows:

As a result of adopting ASU 2014-09, we adjusted our condensed consolidated balance sheets on a retrospective basis as follows:

As a result of adopting ASU 2014-09, we adjusted our condensed consolidated statements of cash flows on a retrospective basis as follows:

Disaggregation of Revenue- The following table presents our revenue disaggregated by operating and reporting segments:

Net sales recognized are primarily based on sales to customers in the U.S. Net sales realized from geographic markets outside of the U.S. have collectively been immaterial.

For the DSW segment, we separate our merchandise into three primary categories: women's footwear, men's footwear, and accessories and other (which includes kids' footwear). The following table presents the DSW segment sales by category:

Deferred Revenue Liabilities- We record deferred revenue liabilities, included in accrued expenses on the consolidated balance sheets, for remaining obligations we have to our customers. The following table presents the changes and total balances for gift cards and our loyalty program:

Sales Returns- We reduce net sales by the amount of expected returns and cost of sales by the amount of merchandise we expect to recover, which are estimated based on historical experience. The following table presents the changes and total balances for the returns liability:

As of May 5, 2018 , February 3, 2018 , and April 29, 2017 , the asset for recovery of merchandise returns was $8.5 million , $7.9 million , and $8.2 million , respectively.

4.    RELATED PARTY TRANSACTIONS

Accounts receivable and accounts payable associated with related parties are separately presented on the consolidated balance sheets. Accounts receivable from and payables to related parties normally settle in the form of cash in 30 to 60 days.

Schottenstein Affiliates

As of May 5, 2018 , the Schottenstein Affiliates, entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family, beneficially owned approximately 14% of the Company's outstanding common shares, representing approximately 49% of the combined voting power. As of May 5, 2018 , the Schottenstein Affiliates beneficially owned 4.0 million Class A common shares and 7.7 million Class B common shares.

Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates. During the three months ended May 5, 2018 and April 29, 2017 , we recorded rent expense from leases with Schottenstein Affiliates of $2.3 million and $2.3 million , respectively.

Other Purchases and Services- During the three months ended May 5, 2018 and April 29, 2017 , we had other purchases and services from Schottenstein Affiliates of $1.5 million and $0.3 million , respectively.

Town Shoes

As of May 5, 2018 , our ownership percentage in Town Shoes was 46.3% , which provides us a 50% voting control and board representation equal to the co-investor, and is treated as an equity investment.

Management Agreement- We have a management agreement with Town Shoes under which we provide certain information technology and management services. During the three months ended May 5, 2018 and April 29, 2017 , we recognized income of $0.3 million and $0.3 million , respectively.

License Agreement- We license the use of our tradename and trademark, DSW Designer Shoe Warehouse, to Town Shoes for a royalty fee based on a percentage of net sales from its Canadian DSW stores, which are included in net sales. The license is exclusive and non-transferable for use in Canada. During the three months ended May 5, 2018 and April 29, 2017 , we recognized royalty income of $0.1 million and $0.1 million , respectively.

Other Purchases and Services- During the three months ended May 5, 2018 and April 29, 2017 , Town Shoes had other purchases and services from us of $0.4 million and $0.9 million , respectively. During the three months ended May 5, 2018 , we purchased inventory from Town Shoes for $1.3 million .

5.    EARNINGS PER SHARE

Basic earnings per share is based on net income and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options, restricted stock units ("RSUs"), and performance-based restricted stock units ("PSUs") calculated using the treasury stock method.

The following is a reconciliation of the number of shares used in the calculation of earnings per share:

For the three months ended May 5, 2018 and April 29, 2017 , the number of potential shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive was 3.9 million and 3.9 million , respectively.

6.    STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation award activity for the three months ended May 5, 2018 :

As of May 5, 2018 , 4.1 million shares of Class A common shares remain available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan.

7.    SHAREHOLDERS' EQUITY

Shares- Our Class A common shares are listed for trading under the ticker symbol "DSW" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be exchanged for the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to one vote per share and holders of Class B common shares are entitled to eight votes per share on matters submitted to shareholders for approval.

The following table provides additional information for our common shares:

We have authorized 100.0 million shares of no par value preferred shares with no shares issued for any of the periods presented.

Dividends- On May 30, 2018 , the Board of Directors declared a quarterly cash dividend payment of $0.25 per share for both Class A and Class B common shares. The dividend will be paid on July 5, 2018 to shareholders of record at the close of business on June 21, 2018 .

Share Repurchases- On August 17, 2017 , the Board of Directors authorized the repurchase of an additional $500.0 million of DSW common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the three months ended May 5, 2018 and April 29, 2017 , we did not repurchase any Class A common shares, with $524.1 million of Class A common shares that remain authorized under the program as of May 5, 2018 . The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

8.    INVESTMENTS

Investments in available-for-sale securities consisted of the following:

9.    PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

10.    GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:

Intangible Assets- As of May 5, 2018 , intangible assets consisted of only indefinite-lived trademarks and tradenames as we wrote off the definite-lived intangible assets as a result of our decision to exit the Ebuys business.

Intangible assets consisted of the following as of February 3, 2018 and April 29, 2017 :

11.    ACCRUED EXPENSES

Accrued expenses consisted of the following:

We offer our vendors a payment program where a payment processing intermediary makes regularly-scheduled payments to participating vendors and we, in turn, settle monthly with the intermediary. The net change in the outstanding balance is reflected as a financing activity in the consolidated statements of cash flows.

12.    NON-CURRENT LIABILITIES

Non-current liabilities consisted of the following:

The accrual for lease obligations includes an office space we lease that expires in 2024 , which we sublease the entire space to an unrelated third party at an annual rent that is lower than our total annual lease obligation. The sublease was renewed for a two -year term in June 2017 , which can be terminated by the tenant at any time with 60 days ' notice. As a result of our decision to exit the Ebuys business, during the three months ended May 5, 2018 we exited a leased office space that expires in 2020 and a leased fulfillment center that expires in 2023 . As a result, we had an addition to the accrual for lease obligations that included the reserves for these leases based on the remaining lease payments and estimated sublease income. We are marketing these locations to third parties to assume or sublease.

The following table presents the changes and total balances for the accrual for lease obligations:

13.    DEBT

Credit Facility - On August 25, 2017 , we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. The Credit Facility provides a revolving line of credit up to $300 million , with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million , and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be further increased by up to $100 million subject to agreed-upon terms and conditions. The Credit Facility may be used to provide funds for working capital, capital expenditures, dividends and share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with any loans issued in CAD bearing interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of May 5, 2018 , we had no outstanding borrowings under the Credit Facility and $1.9 million in letters of credit issued, resulting in $298.1 million available for borrowings. Interest expense related to the Credit Facility includes letters of credit interest, commitment fees and the amortization of debt issuance costs.

Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25 :1 and a fixed charge coverage ratio not to be less than 1.75 :1. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of May 5, 2018 , we were in compliance with all financial covenants.

14 .    COMMITMENTS AND CONTINGENCIES

Contingent Consideration Liability- The contingent consideration liability resulted from the acquisition of Ebuys and was based on a defined earnings performance measure. The contingent consideration liability was measured at fair value with any differences between the final acquisition-date fair value and revised estimated fair value, as remeasured each reporting period, being recognized as an adjustment to income from operations. Fair value was determined using an income valuation approach, primarily based on discounted cash flows related to the projected earnings performance measure with a discount rate of approximately 13.0% . The categorization of the fair value framework used to price the liability is considered Level 3 due to the subjective nature of the unobservable inputs used to determine fair value.

Activity for the contingent consideration liability for the three months ended April 29, 2017 was as follows:

During the fourth quarter of fiscal 2017, as a result of recurring operating losses incurred by Ebuys since its acquisition, which led to our decision to exit the business, we eliminated the contingent consideration liability.

Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to the results of operations or financial condition. As additional information becomes available, we will assess any potential liability related to pending litigation and revise the estimates as needed.

Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in 2024 for a location that has been leased to a third party. If the third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord.

Contractual Obligations- As of May 5, 2018 , we have entered into various construction commitments, including capital items to be purchased for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments were $0.9 million as of May 5, 2018 . In addition, we have entered into various noncancelable purchase and service agreements. The obligations under these agreements were approximately $19.1 million as of May 5, 2018 .

15.    SEGMENT REPORTING

The DSW segment, which includes DSW stores and dsw.com, is our only reportable segment. Our other operating segments, ABG and Ebuys, are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes. ABG was previously shown as a separate reportable segment that has now been included in Other due to us no longer providing services to Gordmans after fiscal 2017. Prior periods presented have been restated to include ABG in Other for comparative purposes.

The performance of each segment is based on net sales and gross profit, which is defined as net sales less cost of sales, as follows:

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

Some of the statements in this Quarterly Report on Form 10-Q contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K filed on March 23, 2018, some important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements include, but are not limited to, the following:

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time and it is not possible for management to predict all such factors, nor can management assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Executive Overview

We started the fiscal year with a significant tax benefit resulting from corporate tax reform, which we are reinvesting towards our growth initiative by driving higher market share through positive comparable sales growth. Accordingly, we are investing in several customer facing areas that focuses on product, marketing, people, and innovation that will expand DSW's category leadership, differentiate our brand and ultimately strengthen our competitive position.

Our merchandising strategy focuses on increasing key item sourcing, strategic category distortions and the expansion of kids, which delivered a low single digit comparable sales increase in the first quarter, despite unseasonal conditions and an earlier Easter holiday. Effective marketing sustained the strong increase in digital demand post-holiday and accelerated new customer transactions, contributing to our third positive comparable sales growth in the last nine quarters. DSW Kids, now an important vehicle for market share growth, was added to 109 locations during the first quarter and we will complete its roll-out by the back-to-school season.

We also launched our new loyalty program, DSW VIP, at the end of the quarter. DSW VIP customers will enjoy a simpler points structure, enhanced shipping options and new benefits for engaging with the DSW brand, such as shoe donations. These changes mark a significant milestone in DSW Rewards and are expected to drive purchase frequency and activate new customers.

As part of our focus on improving customer engagement, we have piloted a new labor model that better allocates labor between task-specific and customer-facing functions while adding more hours to provide better customer coverage during peak hours.

We expanded the pilot of our new store design to additional locations this spring. This format enables us to increase physical capacity to showcase more product choices and carry more depth in our size offering. Furthermore, we continue to develop related service offerings, such as shoe repair, that provide our customers new opportunities to come into our stores. We will monitor results over the next few quarters.

With our other businesses, we turned over the remaining 58 Gordmans locations to Stage Stores, Inc. after transitioning the business in 2017, and, following our decision to exit Ebuys, we undertook the final liquidation of its assets and recorded charges as a result of exiting leased office space and fulfillment center.

On May 10, 2018 , we completed the acquisition of the remaining interest in Town Shoes. We plan to conduct a comprehensive review of Town Shoes' real estate portfolio and develop a long-term strategy for revenue growth and cost synergies.

Financial Summary

Total revenue increased to $712.1 million for the three months ended May 5, 2018 from $692.0 million for the three months ended April 29, 2017 . The 2.9% increase in total revenue was primarily driven by a 2.2% increase in comparable sales and an increase from non-comparable store sales, partially offset by the loss of sales of Gordmans stores and the exit of Ebuys.

During the three months ended May 5, 2018 , gross profit as a percentage of net sales was 28.9% , an increase of 39 basis points from 28.5% in the previous year. The increase in the gross profit rate was primarily driven by a business mix shift with the loss of sales of Gordmans stores and the exit of Ebuys, partially offset by higher shipping costs with an increase in ecommerce activity.

Net income for the three months ended May 5, 2018 was $24.3 million , or $0.30 per diluted share, which included net after-tax charges of $7.2 million , or $0.09 per diluted share, related to exit costs associated with Ebuys, acquisition costs related to Town Shoes, and foreign exchange net losses. Net income for the three months ended April 29, 2017 was $22.8 million , or $0.28 per diluted share, which included net after-tax charges of $2.7 million , or $0.04 per share, related to the amortization of intangibles and the change in fair value of the contingent consideration liability associated with the acquisition of Ebuys, restructuring costs and foreign exchange net losses.

In addition to the acquisition of Town Shoes, we have continued making investments in our business that support our long-term growth objectives. During the three months ended May 5, 2018 , we invested $18.2 million in capital expenditures compared to $18.3 million during the three months ended April 29, 2017 . Our capital expenditures during the first quarter of fiscal 2018 primarily related to five new store openings, store remodels and business infrastructure. We plan to open approximately seven to nine new DSW stores in the U.S. in fiscal 2018.

Results of Operations

The following represents components of our consolidated results of operations, with associated percentages of total revenue: