Designer Brands Inc. - Quarter Report: 2022 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended April 30, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| For the transition period from | to | ||||||||||
Commission file number 1-32545
| DESIGNER BRANDS INC. | ||
| (Exact name of registrant as specified in its charter) | ||
| Ohio | 31-0746639 | ||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| 810 DSW Drive, | Columbus, | Ohio | 43219 | ||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
Registrant's telephone number, including area code: (614) 237-7100
| Not Applicable | ||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Class A Common Shares, without par value | DBI | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares outstanding of each of the registrant's classes of common stock, as of May 27, 2022: 62,620,533 Class A common shares and 7,732,743 Class B common shares.
DESIGNER BRANDS INC.
TABLE OF CONTENTS
| PART I | ||||||||
| Item 1 | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| PART II | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| Item 5 | ||||||||
| Item 6 | ||||||||
All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q for the three months ended April 30, 2022 (this "Form 10-Q") mean Designer Brands Inc. and its subsidiaries.
We have included our website addresses throughout this report as inactive textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-Q.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Form 10-Q may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "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 Form 10-Q are based upon current plans, estimates, expectations, and assumptions relating to our operations, results of operations, financial condition, and liquidity. The inclusion of these forward-looking statements 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 other factors discussed elsewhere in this report, under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the "2021 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 21, 2022, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements that include, but are not limited to, the following:
•risks and uncertainty related to the ongoing coronavirus ("COVID-19") pandemic, any future COVID-19 resurgence, and any other adverse public health developments;
•risks that recent inflationary pressures, including higher freight costs, could have on our results of operations and customer demand based on pricing actions and operating measures taken to mitigate the impact of inflation;
•uncertain general economic conditions, including inflation and supply chain pressures, domestic and global political and social conditions and the potential impact of geopolitical turmoil or conflict, and the related impacts to consumer discretionary spending;
•our ability to execute on our long-term strategic plans;
•our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
•our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•risks related to losses or disruptions associated with our distribution systems, including our distribution centers and fulfillment center and stores, whether as a result of the COVID-19 pandemic, reliance on third-party providers, or otherwise;
•our reliance on our loyalty programs and marketing to drive traffic, sales, and customer loyalty;
•risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems;
•our ability to protect our reputation and to maintain the brands we license;
•our competitiveness with respect to style, price, brand availability, and customer service;
•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to political, economic, operational, compliance and other risks, and fluctuations in foreign currency exchange rates;
•our ability to comply with privacy laws and regulations, as well as other legal obligations;
•risks associated with climate change and other corporate responsibility issues; and
•uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
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.
PART I
| ITEM 1. FINANCIAL STATEMENTS | ||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three months ended | |||||||||||
| (unaudited and in thousands, except per share amounts) | April 30, 2022 | May 1, 2021 | |||||||||
| Net sales | $ | 830,543 | $ | 703,155 | |||||||
| Cost of sales | (554,798) | (487,044) | |||||||||
| Gross profit | 275,745 | 216,111 | |||||||||
| Operating expenses | (223,426) | (200,814) | |||||||||
| Income from equity investment | 1,945 | 1,708 | |||||||||
| Impairment charges | (1,072) | — | |||||||||
| Operating profit | 53,192 | 17,005 | |||||||||
| Interest expense, net | (2,952) | (8,814) | |||||||||
| Loss on extinguishment of debt and write-off of debt issuance costs | (12,862) | — | |||||||||
| Non-operating income, net | 6 | 806 | |||||||||
| Income before income taxes | 37,384 | 8,997 | |||||||||
| Income tax benefit (provision) | (11,202) | 8,029 | |||||||||
| Net income | $ | 26,182 | $ | 17,026 | |||||||
| Basic and diluted earnings per share: | |||||||||||
| Basic earnings per share | $ | 0.36 | $ | 0.23 | |||||||
| Diluted earnings per share | $ | 0.34 | $ | 0.22 | |||||||
| Weighted average shares used in per share calculations: | |||||||||||
| Basic shares | 72,923 | 72,613 | |||||||||
| Diluted shares | 76,924 | 76,976 | |||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three months ended | |||||||||||
| (unaudited and in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
| Net income | $ | 26,182 | $ | 17,026 | |||||||
| Other comprehensive income (loss), net- | |||||||||||
| Foreign currency translation gain (loss) | (81) | 543 | |||||||||
| Total comprehensive income | $ | 26,101 | $ | 17,569 | |||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
| (unaudited and in thousands) | April 30, 2022 | January 29, 2022 | May 1, 2021 | ||||||||||||||
ASSETS | |||||||||||||||||
| Current Assets: | |||||||||||||||||
Cash and cash equivalents | $ | 54,802 | $ | 72,691 | $ | 49,301 | |||||||||||
Receivables, net | 222,297 | 199,826 | 213,447 | ||||||||||||||
Inventories | 672,490 | 586,429 | 540,088 | ||||||||||||||
Prepaid expenses and other current assets | 49,836 | 55,270 | 60,461 | ||||||||||||||
Total current assets | 999,425 | 914,216 | 863,297 | ||||||||||||||
Property and equipment, net | 250,123 | 256,786 | 284,823 | ||||||||||||||
Operating lease assets | 635,334 | 647,221 | 686,704 | ||||||||||||||
Goodwill | 93,655 | 93,655 | 93,655 | ||||||||||||||
Intangible assets, net | 20,355 | 15,527 | 16,131 | ||||||||||||||
Equity investment | 55,118 | 55,578 | 57,012 | ||||||||||||||
Other assets | 33,734 | 31,651 | 30,843 | ||||||||||||||
Total assets | $ | 2,087,744 | $ | 2,014,634 | $ | 2,032,465 | |||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||
| Current Liabilities: | |||||||||||||||||
Accounts payable | $ | 369,147 | $ | 340,877 | $ | 341,819 | |||||||||||
Accrued expenses | 208,282 | 215,812 | 195,237 | ||||||||||||||
| Current maturities of long-term debt | — | — | 62,500 | ||||||||||||||
Current operating lease liabilities | 179,870 | 202,228 | 200,666 | ||||||||||||||
Total current liabilities | 757,299 | 758,917 | 800,222 | ||||||||||||||
Long-term debt | 306,861 | 225,536 | 274,887 | ||||||||||||||
Non-current operating lease liabilities | 579,839 | 593,429 | 663,018 | ||||||||||||||
Other non-current liabilities | 26,952 | 24,356 | 31,526 | ||||||||||||||
Total liabilities | 1,670,951 | 1,602,238 | 1,769,653 | ||||||||||||||
Commitments and contingencies | |||||||||||||||||
Shareholders' equity: | |||||||||||||||||
Common shares paid-in capital, no par value | 1,006,384 | 1,005,382 | 992,379 | ||||||||||||||
Treasury shares, at cost | (537,771) | (515,065) | (515,065) | ||||||||||||||
Retained deficit | (48,122) | (74,304) | (211,759) | ||||||||||||||
Accumulated other comprehensive loss | (3,698) | (3,617) | (2,743) | ||||||||||||||
Total shareholders' equity | 416,793 | 412,396 | 262,812 | ||||||||||||||
Total liabilities and shareholders' equity | $ | 2,087,744 | $ | 2,014,634 | $ | 2,032,465 | |||||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| Number of shares | Amounts | ||||||||||||||||||||||||||||||||||||||||||||||
| (unaudited and in thousands, except per share amounts) | Class A Common Shares | Class B Common Shares | Treasury Shares | Common Shares Paid in Capital | Treasury Shares | Retained Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||
| Three months ended April 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 29, 2022 | 65,624 | 7,733 | 22,169 | $ | 1,005,382 | $ | (515,065) | $ | (74,304) | $ | (3,617) | $ | 412,396 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 26,182 | — | 26,182 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 482 | — | — | 4,594 | — | — | — | 4,594 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common shares | (1,656) | — | 1,656 | — | (22,706) | — | — | (22,706) | |||||||||||||||||||||||||||||||||||||||
Dividends (0.05 per share) | — | — | — | (3,592) | — | — | — | (3,592) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | (81) | (81) | |||||||||||||||||||||||||||||||||||||||
| Balance, April 30, 2022 | 64,450 | 7,733 | 23,825 | $ | 1,006,384 | $ | (537,771) | $ | (48,122) | $ | (3,698) | $ | 416,793 | ||||||||||||||||||||||||||||||||||
| Three months ended May 1, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 30, 2021 | 64,666 | 7,733 | 22,169 | $ | 990,153 | $ | (515,065) | $ | (228,785) | $ | (3,286) | $ | 243,017 | ||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | — | 17,026 | — | 17,026 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 468 | — | — | 2,226 | — | — | — | 2,226 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 543 | 543 | |||||||||||||||||||||||||||||||||||||||
| Balance, May 1, 2021 | 65,134 | 7,733 | 22,169 | $ | 992,379 | $ | (515,065) | $ | (211,759) | $ | (2,743) | $ | 262,812 | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three months ended | |||||||||||
| (unaudited and in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 26,182 | $ | 17,026 | |||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 21,384 | 20,575 | |||||||||
| Stock-based compensation expense | 8,594 | 7,457 | |||||||||
| Deferred income taxes | (87) | 320 | |||||||||
| Income from equity investment | (1,945) | (1,708) | |||||||||
| Distributions received from equity investment | 2,405 | 3,294 | |||||||||
| Impairment charges | 1,072 | — | |||||||||
| Loss on extinguishment of debt and write-off of debt issuance costs | 12,862 | — | |||||||||
| Other | 3,485 | (341) | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (21,941) | (8,160) | |||||||||
| Income tax receivable | (548) | (9,066) | |||||||||
| Inventories | (86,240) | (65,215) | |||||||||
| Prepaid expenses and other current assets | 4,784 | (8,524) | |||||||||
| Accounts payable | 25,713 | 94,469 | |||||||||
| Accrued expenses | (11,406) | (5,439) | |||||||||
| Operating lease assets and liabilities, net | (24,986) | (46,044) | |||||||||
| Net cash used in operating activities | (40,672) | (1,356) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Cash paid for property and equipment | (12,248) | (5,641) | |||||||||
| Other | (4,853) | — | |||||||||
| Net cash used in investing activities | (17,101) | (5,641) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowing on revolving lines of credit | 757,640 | 250,513 | |||||||||
| Payments on revolving lines of credit | (450,779) | (245,670) | |||||||||
| Payments for borrowings and prepayment premium under Term Loan | (238,196) | (3,125) | |||||||||
| Payments of debt issuance costs | (2,316) | — | |||||||||
| Cash paid for treasury shares | (22,706) | — | |||||||||
| Other | (3,875) | (5,307) | |||||||||
| Net cash provided by (used in) financing activities | 39,768 | (3,589) | |||||||||
| Effect of exchange rate changes on cash balances | 115 | 306 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (17,890) | (10,280) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 74,459 | 59,581 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 56,569 | $ | 49,301 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid (received) for income taxes | $ | 62 | $ | (3,926) | |||||||
| Cash paid for interest on debt | $ | 4,097 | $ | 7,042 | |||||||
| Cash paid for operating lease liabilities | $ | 73,621 | $ | 95,079 | |||||||
| Non-cash investing and financing activities: | |||||||||||
| Property and equipment purchases not yet paid | $ | 7,069 | $ | 2,875 | |||||||
| Operating lease liabilities arising from lease asset additions | $ | 4,143 | $ | 7,588 | |||||||
| Net increase to operating lease assets and lease liabilities for modifications | $ | 27,621 | $ | 16,760 | |||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Segment Reporting | ||||||||
6
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Business Operations- Designer Brands Inc. ("we," "us," "our," and the "Company") is one of the world's largest designers, producers, and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its direct-to-consumer U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company and DSW banners through its direct-to-consumer Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40% stake in ABG-Camuto, a joint venture that holds several intellectual property rights, including, among others, Vince Camuto and Louise et Cie, and focuses on licensing and developing new category extensions to support the global growth of these brands. Camuto Group has a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands managed by ABG-Camuto, subject to guaranteed minimums. Camuto Group also holds footwear and certain handbag licensing rights of Jessica Simpson, Lucky Brand and, through a joint venture, JLO Jennifer Lopez.
Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("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 January 29, 2022 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2021 Form 10-K.
Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year (e.g., "2022") refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year (including 2022 and 2021), but occasionally will contain an additional week resulting in a 53-week fiscal year (including 2023).
SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2021 Form 10-K.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. dollars.
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 dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, income taxes, and self-insurance reserves. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
7
Severance- During the three months ended April 30, 2022 and May 1, 2021, we incurred severance costs of $0.7 million and $1.4 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of April 30, 2022, January 29, 2022, and May 1, 2021, we had accrued severance of $1.1 million, $1.9 million, and $5.1 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.
Income Taxes- For the three months ended April 30, 2022 and May 1, 2021, our effective tax rate was 30.0% and negative 89.2%, respectively. The rate for three months ended April 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The negative rate for the three months ended May 1, 2021 was the result of maintaining a full valuation allowance on deferred tax assets along with net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.
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 consists of a mandatory cash deposit maintained for certain insurance policies and letters of credit.
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:
| (in thousands) | April 30, 2022 | January 29, 2022 | May 1, 2021 | ||||||||||||||
| Cash and cash equivalents | $ | 54,802 | $ | 72,691 | $ | 49,301 | |||||||||||
| Restricted cash, included in prepaid expenses and other current assets | 1,767 | 1,768 | — | ||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 56,569 | $ | 74,459 | $ | 49,301 | |||||||||||
Intangible Assets- During the three months ended April 30, 2022, we acquired the rights to the shoes.com tradename for $4.9 million, which was recorded as a definite-lived tradename intangible asset with a useful life of 15 years.
Fair Value- Fair value is defined as the price that would be received in the sale of 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:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
•Level 3 - Unobservable inputs in which little or no market activity exists.
The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowings under our revolving lines of credit approximated fair value based on its term and variable interest rate.
Impairment of Long-Lived Assets- During the three months ended April 30, 2022, we recorded an impairment charge of $1.1 million in the Brand Portfolio segment for the sublease of an abandoned leased space.
8
2. REVENUE
DISAGGREGATION OF NET SALES
Net Sales by Brand Categories- The following table presents net sales disaggregated by brand categories for each segment:
| (in thousands) | U.S. Retail | Canada Retail | Brand Portfolio | Eliminations | Consolidated | ||||||||||||||||||||||||
| Three months ended April 30, 2022 | |||||||||||||||||||||||||||||
Owned Brands:(1) | |||||||||||||||||||||||||||||
| Direct-to-consumer | $ | 139,155 | $ | — | $ | 6,527 | $ | — | $ | 145,682 | |||||||||||||||||||
| External customer wholesale and commission income | — | — | 64,956 | — | 64,956 | ||||||||||||||||||||||||
| Intersegment wholesale and commission income | — | — | 25,973 | (25,973) | — | ||||||||||||||||||||||||
| Total Owned Brands | 139,155 | — | 97,456 | (25,973) | 210,638 | ||||||||||||||||||||||||
| National Brands | 563,590 | — | — | — | 563,590 | ||||||||||||||||||||||||
Canada Retail(2) | — | 56,315 | — | — | 56,315 | ||||||||||||||||||||||||
| Total Net Sales | $ | 702,745 | $ | 56,315 | $ | 97,456 | $ | (25,973) | $ | 830,543 | |||||||||||||||||||
| Three months ended May 1, 2021 | |||||||||||||||||||||||||||||
Owned Brands:(1) | |||||||||||||||||||||||||||||
| Direct-to-consumer | $ | 83,266 | $ | — | $ | 5,453 | $ | — | $ | 88,719 | |||||||||||||||||||
| External customer wholesale and commission income | — | — | 36,440 | — | 36,440 | ||||||||||||||||||||||||
| Intersegment wholesale and commission income | — | — | 15,534 | (15,534) | — | ||||||||||||||||||||||||
| Total Owned Brands | 83,266 | — | 57,427 | (15,534) | 125,159 | ||||||||||||||||||||||||
| National Brands | 537,392 | — | — | — | 537,392 | ||||||||||||||||||||||||
Canada Retail(2) | — | 40,604 | — | — | 40,604 | ||||||||||||||||||||||||
| Total Net Sales | $ | 620,658 | $ | 40,604 | $ | 57,427 | $ | (15,534) | $ | 703,155 | |||||||||||||||||||
(1) Owned Brands include those brands we have rights to sell through ownership or license arrangements.
(2) We currently do not report the Canada Retail segment net sales by brand categories.
9
Net Sales by Product and Service Categories- The following table presents net sales disaggregated by product and service category for each segment:
| Three months ended | |||||||||||
| (in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
| Net sales: | |||||||||||
| U.S. Retail segment: | |||||||||||
| Women's footwear | $ | 469,131 | $ | 405,300 | |||||||
| Men's footwear | 145,807 | 131,947 | |||||||||
| Kids' footwear | 52,918 | 54,732 | |||||||||
| Accessories and other | 34,889 | 28,679 | |||||||||
| 702,745 | 620,658 | ||||||||||
| Canada Retail segment: | |||||||||||
| Women's footwear | 30,004 | 20,431 | |||||||||
| Men's footwear | 14,428 | 9,528 | |||||||||
| Kids' footwear | 9,817 | 9,513 | |||||||||
| Accessories and other | 2,066 | 1,132 | |||||||||
| 56,315 | 40,604 | ||||||||||
| Brand Portfolio segment: | |||||||||||
| Wholesale | 87,775 | 48,643 | |||||||||
| First Cost commission income | 3,154 | 3,331 | |||||||||
| Direct-to-consumer | 6,527 | 5,453 | |||||||||
| 97,456 | 57,427 | ||||||||||
| Total segment net sales | 856,516 | 718,689 | |||||||||
| Elimination of intersegment sales | (25,973) | (15,534) | |||||||||
| Total net sales | $ | 830,543 | $ | 703,155 | |||||||
DEFERRED REVENUE LIABILITIES
We record deferred revenue liabilities, included in accrued expenses on the condensed 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 programs:
| Three months ended | |||||||||||
| (in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
| Gift cards: | |||||||||||
| Beginning of period | $ | 36,783 | $ | 34,442 | |||||||
| Gift cards redeemed and breakage recognized to net sales | (18,260) | (17,170) | |||||||||
| Gift cards issued | 14,321 | 13,537 | |||||||||
| End of period | $ | 32,844 | $ | 30,809 | |||||||
| Loyalty programs: | |||||||||||
| Beginning of period | $ | 15,736 | $ | 11,379 | |||||||
| Loyalty certificates redeemed and expired and other adjustments recognized to net sales | (7,881) | (4,896) | |||||||||
| Deferred revenue for loyalty points issued | 8,388 | 6,472 | |||||||||
| End of period | $ | 16,243 | $ | 12,955 | |||||||
10
3. RELATED PARTY TRANSACTIONS
Schottenstein Affiliates
We have transactions with entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family (the "Schottenstein Affiliates"). As of April 30, 2022, the Schottenstein Affiliates beneficially owned approximately 20% of the Company's outstanding common shares, representing approximately 54% of the combined voting power of the Company, consisting of, in the aggregate, 6.7 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates. During the three months ended April 30, 2022 and May 1, 2021, we recorded rent expense from leases with Schottenstein Affiliates of $2.5 million and $2.7 million, respectively. As of April 30, 2022, January 29, 2022, and May 1, 2021, we had related party current operating lease liabilities of $5.7 million, $6.3 million, and $6.8 million, respectively, and non-current operating lease liabilities of $10.6 million, $18.3 million, and $22.9 million, respectively.
Other Purchases and Services- During the three months ended April 30, 2022 and May 1, 2021, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.1 million and $1.4 million, respectively.
Due to Related Parties- Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
ABG-Camuto
We have a 40% interest in our equity investment in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands managed by ABG-Camuto, subject to guaranteed minimums. For both the three months ended April 30, 2022 and May 1, 2021, we recorded royalty expense for amounts paid to ABG-Camuto of $4.6 million. Amounts due to ABG-Camuto were immaterial for all periods presented.
4. 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 and restricted stock units ("RSUs") calculated using the treasury stock method.
The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings per share:
| Three months ended | |||||||||||
(in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
Weighted average basic shares outstanding | 72,923 | 72,613 | |||||||||
Dilutive effect of stock-based compensation awards | 4,001 | 4,363 | |||||||||
Weighted average diluted shares outstanding | 76,924 | 76,976 | |||||||||
For the three months ended April 30, 2022 and May 1, 2021, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was 3.0 million and 3.6 million, respectively.
11
5. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:
| Three months ended | |||||||||||
| (in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
| Stock options | $ | 101 | $ | 253 | |||||||
| Restricted and director stock units | 8,493 | 7,204 | |||||||||
| $ | 8,594 | $ | 7,457 | ||||||||
The following table summarizes the stock-based compensation award share activity for RSUs for the three months ended April 30, 2022:
| (in thousands) | Shares of Time-Based RSUs | Shares of Performance-Based RSUs | |||||||||
| Outstanding - beginning of period | 6,058 | 744 | |||||||||
| Granted | 1,344 | 533 | |||||||||
| Vested | (575) | (174) | |||||||||
| Forfeited | (74) | — | |||||||||
| Outstanding - end of period | 6,753 | 1,103 | |||||||||
6. SHAREHOLDERS' EQUITY
Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" 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:
| (in thousands) | April 30, 2022 | January 29, 2022 | May 1, 2021 | ||||||||||||||||||||||||||||||||
| Class A | Class B | Class A | Class B | Class A | Class B | ||||||||||||||||||||||||||||||
| Authorized shares | 250,000 | 100,000 | 250,000 | 100,000 | 250,000 | 100,000 | |||||||||||||||||||||||||||||
| Issued shares | 88,275 | 7,733 | 87,793 | 7,733 | 87,303 | 7,733 | |||||||||||||||||||||||||||||
| Outstanding shares | 64,450 | 7,733 | 65,624 | 7,733 | 65,134 | 7,733 | |||||||||||||||||||||||||||||
| Treasury shares | 23,825 | — | 22,169 | — | 22,169 | — | |||||||||||||||||||||||||||||
We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.
Dividends- On April 4, 2022, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend was paid on May 6, 2022 to shareholders of record at the close of business on April 22, 2022. As of April 30, 2022, the dividend was accrued and recorded against common shares paid in capital on the condensed consolidated balance sheets and as shown on the condensed consolidated statements of shareholders' equity due to the Company being in a retained deficit position, as required under the Ohio General Corporation Law.
On May 19, 2022, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on July 6, 2022 to shareholders of record at the close of business on June 22, 2022. The dividend is expected to be recorded against common shares paid in capital due to the Company being in a retained deficit position, as required under the Ohio General Corporation Law.
12
Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A 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 April 30, 2022, we repurchased 1.7 million Class A common shares at an aggregate cost of $22.7 million, with $312.2 million of Class A common shares that remain authorized under the program as of April 30, 2022. During the three months ended May 1, 2021, we did not repurchase any Class A common shares. 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.
7. RECEIVABLES
Receivables, net, consisted of the following:
| (in thousands) | April 30, 2022 | January 29, 2022 | May 1, 2021 | ||||||||||||||
| Customer accounts receivables: | |||||||||||||||||
| Serviced by third-party provider with guaranteed payment | $ | 50,591 | $ | 27,827 | $ | 38,572 | |||||||||||
| Serviced by third-party provider without guaranteed payment | 232 | 82 | 323 | ||||||||||||||
| Serviced in-house | 3,246 | 2,783 | 3,558 | ||||||||||||||
| Income tax receivable | 162,788 | 162,240 | 158,890 | ||||||||||||||
| Other receivables | 6,573 | 8,026 | 13,305 | ||||||||||||||
| Total receivables | 223,430 | 200,958 | 214,648 | ||||||||||||||
| Allowance for doubtful accounts | (1,133) | (1,132) | (1,201) | ||||||||||||||
| $ | 222,297 | $ | 199,826 | $ | 213,447 | ||||||||||||
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
| (in thousands) | April 30, 2022 | January 29, 2022 | May 1, 2021 | ||||||||||||||
| Gift cards | $ | 32,844 | $ | 36,783 | $ | 30,809 | |||||||||||
| Accrued compensation and related expenses | 26,693 | 41,603 | 29,945 | ||||||||||||||
| Accrued taxes | 32,526 | 28,327 | 32,093 | ||||||||||||||
| Loyalty programs deferred revenue | 16,243 | 15,736 | 12,955 | ||||||||||||||
| Sales returns, customer allowances and discounts | 23,030 | 20,671 | 25,698 | ||||||||||||||
| Other | 76,946 | 72,692 | 63,737 | ||||||||||||||
| $ | 208,282 | $ | 215,812 | $ | 195,237 | ||||||||||||
9. DEBT
Debt consisted of the following:
| (in thousands) | April 30, 2022 | January 29, 2022 | May 1, 2021 | ||||||||||||||
| 2020 ABL Revolver | $ | — | $ | — | $ | 104,843 | |||||||||||
| 2022 ABL Revolver | 306,861 | — | — | ||||||||||||||
| Term Loan | — | 231,250 | 240,625 | ||||||||||||||
| Total debt | 306,861 | 231,250 | 345,468 | ||||||||||||||
| Less unamortized Term Loan debt issuance costs | — | (5,714) | (8,081) | ||||||||||||||
| Less current maturities of long-term debt | — | — | (62,500) | ||||||||||||||
| Long-term debt | $ | 306,861 | $ | 225,536 | $ | 274,887 | |||||||||||
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2022 ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility ("2020 ABL Revolver") with our current senior secured asset-based revolving credit facility ("2022 ABL Revolver"), which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing loan advances for U.S. borrowings, and a $5.5 million sub-limit for swing loan advances for Canadian borrowings. Our 2022 ABL Revolver matures in March 2027 and is secured by a first priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The 2022 ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of April 30, 2022, the 2022 ABL Revolver had a borrowing base of $550.0 million, with $306.9 million outstanding borrowings and $4.9 million in letters of credit issued, resulting in $238.2 million available for borrowings.
Borrowings and letters of credit issued under the 2022 ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate (as defined and subject to a floor of 0%) plus 0.5%, and (iii) the one-month Adjusted Term SOFR (as defined) plus 1.0%; or (B) a one-month, three-month or six-month Adjusted Term SOFR per annum (subject to a floor of 0%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 2.4% as of April 30, 2022. Commitment fees are based on the unused portion of the 2022 ABL Revolver. Interest expense related to the 2022 ABL Revolver includes interest on borrowings and letters of credit, commitment fees, and the amortization of debt issuance costs.
Debt Covenants- The 2022 ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million and 10.0% of the maximum borrowing amount. The 2022 ABL Revolver also contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. The 2022 ABL Revolver contains customary events of default, including failure to comply with certain financial and other covenants. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of April 30, 2022, we were in compliance with all financial covenants.
Termination of Term Loan- On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our senior secured term loan agreement ("Term Loan"). In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
10. COMMITMENTS AND CONTINGENCIES
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- We provide guarantees for lease obligations that are scheduled to expire in fiscal 2023 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of April 30, 2022, the total future minimum lease payment requirements under these guarantees were approximately $12.9 million.
14
11. SEGMENT REPORTING
The following provides certain key financial data by segment reconciled to the condensed consolidated financial statements:
| (in thousands) | U.S. Retail | Canada Retail | Brand Portfolio | Eliminations | Consolidated | ||||||||||||||||||||||||
| Three months ended April 30, 2022 | |||||||||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||||||||
| External customer sales | $ | 702,745 | $ | 56,315 | $ | 71,483 | $ | — | $ | 830,543 | |||||||||||||||||||
| Intersegment sales | — | — | 25,973 | (25,973) | — | ||||||||||||||||||||||||
| Total net sales | $ | 702,745 | $ | 56,315 | $ | 97,456 | $ | (25,973) | $ | 830,543 | |||||||||||||||||||
| Gross profit | $ | 233,067 | $ | 18,873 | $ | 23,842 | $ | (37) | $ | 275,745 | |||||||||||||||||||
| Income from equity investment | $ | — | $ | — | $ | 1,945 | $ | — | $ | 1,945 | |||||||||||||||||||
| Three months ended May 1, 2021 | |||||||||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||||||||
| External customer sales | $ | 620,658 | $ | 40,604 | $ | 41,893 | $ | — | $ | 703,155 | |||||||||||||||||||
| Intersegment sales | — | — | 15,534 | (15,534) | — | ||||||||||||||||||||||||
| Total net sales | $ | 620,658 | $ | 40,604 | $ | 57,427 | $ | (15,534) | $ | 703,155 | |||||||||||||||||||
| Gross profit | $ | 193,113 | $ | 10,835 | $ | 11,926 | $ | 237 | $ | 216,111 | |||||||||||||||||||
| Income from equity investment | $ | — | $ | — | $ | 1,708 | $ | — | $ | 1,708 | |||||||||||||||||||
15
| ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS
For the first quarter of 2022, consolidated net sales increased 18.1% and comparable sales increased 15.3% over the same period last year with each of our three segments contributing to these increases. Net sales during the first quarter of 2022 from our Owned Brands increased 68.3% over the same period last year and Owned Brands representing 25.4% of consolidated net sales as compared to 17.8% for the same period last year. This growth came despite volatile market conditions, including increased freight costs and supply chain disruptions. We continue to make progress on our initiatives centered on our three pillars - Customer, Brand, and Speed - as we work towards our long-term strategic plans.
IMPACT OF THE COVID-19 PANDEMIC ON OUR RESULTS OF OPERATIONS
The COVID-19 pandemic continues to impact the global economy and has created supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. While we experienced continued improvement in our performance during the first quarter of 2022, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends in our business will continue.
FINANCIAL SUMMARY AND OTHER KEY METRICS
For the three months ended April 30, 2022:
•Net sales increased to $830.5 million from $703.2 million for the three months ended May 1, 2021.
•Gross profit as a percentage of net sales was 33.2% compared to 30.7% for the same period last year.
•Net income was $26.2 million, or $0.34 per diluted share, which included net after-tax charge of $10.5 million, or $0.14 per diluted share, primarily related to the loss on extinguishment of debt and write-off of debt issuance costs. Net income for the three months ended May 1, 2021 was $17.0 million, or $0.22 per diluted share, which included net after-tax benefits of $7.6 million, or $0.10 per diluted share, primarily related to the change in the valuation allowance on deferred tax assets.
Comparable Sales Performance Metric- The following table presents the change in comparable sales for each segment and in total:
| Three months ended | |||||||||||
| April 30, 2022 | May 1, 2021 | ||||||||||
| Change in comparable sales: | |||||||||||
| U.S. Retail segment | 13.6 | % | 56.3 | % | |||||||
| Canada Retail segment | 41.4 | % | 10.0 | % | |||||||
| Brand Portfolio segment - direct-to-consumer channel | 19.7 | % | 6.8 | % | |||||||
| Total | 15.3 | % | 52.2 | % | |||||||
We consider the change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses. We include in our comparable sales metric stores in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include stores temporarily closed as a result of the COVID-19 pandemic as management continues to believe that this metric is meaningful to monitor our performance. Comparable sales also include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site www.vincecamuto.com. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.
16
Number of Stores- As of April 30, 2022 and May 1, 2021, we had the following number of stores:
| April 30, 2022 | May 1, 2021 | ||||||||||
| U.S. Retail segment - DSW stores | 510 | 516 | |||||||||
| Canada Retail segment: | |||||||||||
| The Shoe Company stores | 115 | 118 | |||||||||
| DSW stores | 25 | 27 | |||||||||
| 140 | 145 | ||||||||||
| Total number of stores | 650 | 661 | |||||||||
RESULTS OF OPERATIONS
FIRST QUARTER OF 2022 COMPARED WITH FIRST QUARTER OF 2021
| Three months ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands, except per share amounts) | April 30, 2022 | May 1, 2021 | Change | ||||||||||||||||||||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | Amount | % | ||||||||||||||||||||||||||||||
| Net sales | $ | 830,543 | 100.0 | % | $ | 703,155 | 100.0 | % | $ | 127,388 | 18.1 | % | |||||||||||||||||||||||
| Cost of sales | (554,798) | (66.8) | (487,044) | (69.3) | (67,754) | 13.9 | % | ||||||||||||||||||||||||||||
| Gross profit | 275,745 | 33.2 | 216,111 | 30.7 | 59,634 | 27.6 | % | ||||||||||||||||||||||||||||
| Operating expenses | (223,426) | (26.9) | (200,814) | (28.5) | (22,612) | 11.3 | % | ||||||||||||||||||||||||||||
| Income from equity investment | 1,945 | 0.2 | 1,708 | 0.2 | 237 | 13.9 | % | ||||||||||||||||||||||||||||
| Impairment charges | (1,072) | (0.1) | — | — | (1,072) | NM | |||||||||||||||||||||||||||||
| Operating profit | 53,192 | 6.4 | 17,005 | 2.4 | 36,187 | 212.8% | |||||||||||||||||||||||||||||
| Interest expense, net | (2,952) | (0.4) | (8,814) | (1.2) | 5,862 | (66.5) | % | ||||||||||||||||||||||||||||
| Loss on extinguishment of debt and write-off of debt issuance costs | (12,862) | (1.5) | — | — | (12,862) | NM | |||||||||||||||||||||||||||||
| Non-operating income, net | 6 | 0.0 | 806 | 0.1 | (800) | (99.3) | % | ||||||||||||||||||||||||||||
| Income before income taxes | 37,384 | 4.5 | 8,997 | 1.3 | 28,387 | 315.5% | |||||||||||||||||||||||||||||
| Income tax benefit (provision) | (11,202) | (1.3) | 8,029 | 1.1 | (19,231) | NM | |||||||||||||||||||||||||||||
| Net income | $ | 26,182 | 3.2 | % | $ | 17,026 | 2.4 | % | $ | 9,156 | 53.8% | ||||||||||||||||||||||||
| Basic and diluted earnings per share: | |||||||||||||||||||||||||||||||||||
| Basic earnings per share | $ | 0.36 | $ | 0.23 | $ | 0.13 | 56.5% | ||||||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.34 | $ | 0.22 | $ | 0.12 | 54.5% | ||||||||||||||||||||||||||||
| Weighted average shares used in per share calculations: | |||||||||||||||||||||||||||||||||||
| Basic shares | 72,923 | 72,613 | 310 | 0.4 | % | ||||||||||||||||||||||||||||||
| Diluted shares | 76,924 | 76,976 | (52) | (0.1) | % | ||||||||||||||||||||||||||||||
NM - Not meaningful
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Net Sales- The following summarizes net sales by segment:
| Three months ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | April 30, 2022 | May 1, 2021 | Change | ||||||||||||||||||||||||||||||||
| Amount | % of Segment Net Sale | Amount | % of Segment Net Sale | Amount | % | ||||||||||||||||||||||||||||||
| Segment net sales: | |||||||||||||||||||||||||||||||||||
| U.S. Retail | $ | 702,745 | 82.0 | % | $ | 620,658 | 86.4 | % | $ | 82,087 | 13.2 | % | |||||||||||||||||||||||
| Canada Retail | 56,315 | 6.6 | % | 40,604 | 5.6 | % | 15,711 | 38.7 | % | ||||||||||||||||||||||||||
| Brand Portfolio | 97,456 | 11.4 | % | 57,427 | 8.0 | % | 40,029 | 69.7 | % | ||||||||||||||||||||||||||
| Total segment net sales | 856,516 | 100.0 | % | 718,689 | 100.0 | % | 137,827 | 19.2 | % | ||||||||||||||||||||||||||
| Elimination of intersegment net sales | (25,973) | (15,534) | (10,439) | 67.2 | % | ||||||||||||||||||||||||||||||
| Consolidated net sales | $ | 830,543 | $ | 703,155 | $ | 127,388 | 18.1 | % | |||||||||||||||||||||||||||
The improvement in sales during the three months ended April 30, 2022 over the same period last year was primarily due to the increase in comparable sales across all segments, primarily driven by the fact that during the three months ended May 1, 2021, the prolonged COVID-19 pandemic resulted in significantly reduced customer traffic in the U.S. Retail and Canada Retail segments, with the Canada Retail segment also impacted by continued mandated closures and restrictions in certain key markets. In addition, wholesale sales in the Brand Portfolio segment were higher in the first quarter of 2022 as compared to the same period last year due to increased orders as our retailer customers continue to recover.
Gross Profit- The following summarizes gross profit by segment:
| Three months ended | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | April 30, 2022 | May 1, 2021 | Change | ||||||||||||||||||||||||||||||||||||||
| Amount | % of Segment Net Sales | Amount | % of Segment Net Sales | Amount | % | Basis Points | |||||||||||||||||||||||||||||||||||
| Segment gross profit: | |||||||||||||||||||||||||||||||||||||||||
| U.S. Retail | $ | 233,067 | 33.2 | % | $ | 193,113 | 31.1 | % | $ | 39,954 | 20.7 | % | 210 | ||||||||||||||||||||||||||||
| Canada Retail | 18,873 | 33.5 | % | 10,835 | 26.7 | % | 8,038 | 74.2 | % | 680 | |||||||||||||||||||||||||||||||
| Brand Portfolio | 23,842 | 24.5 | % | 11,926 | 20.8 | % | 11,916 | 99.9 | % | 370 | |||||||||||||||||||||||||||||||
| Total segment gross profit | 275,782 | 32.2 | % | 215,874 | 30.0 | % | 59,908 | 27.8 | % | 220 | |||||||||||||||||||||||||||||||
| Net recognition (elimination) of intersegment gross profit | (37) | 237 | (274) | ||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 275,745 | 33.2 | % | $ | 216,111 | 30.7 | % | $ | 59,634 | 27.6 | % | 250 | ||||||||||||||||||||||||||||
The improvement in gross profit was primarily driven by increased sales during the first quarter of 2022 over the same period last year and being less promotional, partially offset by higher freight costs. Gross profit as a percentage of net sales for the U.S. Retail and Canada Retail segments increased due to being less promotional and improved leverage on occupancy costs, partially offset by higher freight costs. The improvement in gross profit as a percentage of net sales for the Brand Portfolio segment was primarily driven by the leverage of royalty expenses on higher sales volume.
The net recognition (elimination) of intersegment gross profit consisted of the following:
| Three months ended | |||||||||||
| (in thousands) | April 30, 2022 | May 1, 2021 | |||||||||
| Recognition (elimination) of intersegment activity: | |||||||||||
| Net sales recognized by Brand Portfolio segment | $ | (25,973) | $ | (15,534) | |||||||
| Cost of sales: | |||||||||||
| Cost of sales recognized by Brand Portfolio segment | 18,169 | 10,935 | |||||||||
| Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 7,767 | 4,836 | |||||||||
| $ | (37) | $ | 237 | ||||||||
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Operating Expenses- For the three months ended April 30, 2022, operating expenses increased by $22.6 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses in line with the increase in net sales. Operating expenses as a percentage of sales improved to 26.9% compared to 28.5% in the same period last year due to the improvement in net sales year over year as we leveraged our fixed costs.
Loss on extinguishment of debt and write-off of deferred debt issuance costs- In connection with the settlement of our Term Loan on February 8, 2022, during the three months ended April 30, 2022 we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs. As a result of the replacement of the 2020 ABL Revolver during the three months ended April 30, 2022, we also wrote-off $0.2 million of debt issuance costs.
Income Taxes- For the three months ended April 30, 2022 and May 1, 2021, our effective tax rate was 30.0% and negative 89.2%, respectively. The rate for three months ended April 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The negative rate for the three months ended May 1, 2021 was the result of maintaining a full valuation allowance on deferred tax assets along with net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.
SEASONALITY
Our business consists of two principal selling seasons; the spring season, which includes the first and second fiscal quarters, and the fall season, which includes the third and fourth fiscal quarters. Generally, net sales in the fall season have been slightly higher than the spring season. Our seasonal results of operations may fluctuate based on the change in weather conditions and our customers' interest in new seasonal styles. Due to the COVID-19 pandemic, we did not experience the typical seasonal trends during 2021 given the changes in customer behavior.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, and capital expenditures. Our working capital and inventory levels fluctuate seasonally.
During the three months ended April 30, 2022, we repurchased 1.7 million Class A common shares at an aggregate cost of $22.7 million, with $312.2 million of Class A common shares that remain authorized under the program as of April 30, 2022. During the three months ended May 1, 2021, we did not repurchase any Class A common shares.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including any ongoing impacts of the COVID-19 pandemic. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our 2022 ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and repurchase common shares under our share repurchase program over the next 12 months and beyond.
The following table presents the key categories of our condensed consolidated statements of cash flows:
| Three months ended | |||||||||||||||||
| (in thousands) | April 30, 2022 | May 1, 2021 | Change | ||||||||||||||
| Net cash used in operating activities | $ | (40,672) | $ | (1,356) | $ | (39,316) | |||||||||||
| Net cash used in investing activities | (17,101) | (5,641) | (11,460) | ||||||||||||||
| Net cash provided by (used in) financing activities | 39,768 | (3,589) | 43,357 | ||||||||||||||
| Effect of exchange rate changes on cash balances | 115 | 306 | (191) | ||||||||||||||
| Net decrease in cash, cash equivalents, and restricted cash | $ | (17,890) | $ | (10,280) | $ | (7,610) | |||||||||||
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OPERATING CASH FLOWS
The increase in net cash used in operations was driven by higher spend on working capital as our business continues to recover from the impacts of the COVID-19 pandemic with increases in consolidated inventories, increases in receivables on wholesale sales, and timing of payments to vendors. This was partially offset by the increase in net income recognized in the three months ended April 30, 2022 over the same period last year, after adjusting for non-cash activity including the loss from extinguishment of debt and write-off of debt issuance costs and the changes in deferred income taxes.
INVESTING CASH FLOWS
For the three months ended April 30, 2022, net cash used in investing activities was primarily due to capital expenditures relating to infrastructure and information technology ("IT") projects and store improvements. During the three months ended May 1, 2021, the net cash used in investing activities was due to capital expenditures relating to IT projects and store improvements.
FINANCING CASH FLOWS
For the three months ended April 30, 2022, net cash provided by financing activities was due to net receipts of $306.9 million from our revolving lines of credit offset by the payments of $238.2 million due to the settlement of the Term Loan and the repurchase of 1.7 million Class A common shares at an aggregate cost of $22.7 million. During the three months ended May 1, 2021, we had net borrowings of $4.8 million from our revolving lines of credit with payments on the Term Loan of $3.1 million.
DEBT
2022 ABL Revolver- On March 30, 2022, we replaced our 2020 ABL Revolver with our current 2022 ABL Revolver, which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing loan advances for U.S. borrowings, and a $5.5 million sub-limit for swing loan advances for Canadian borrowings. Our 2022 ABL Revolver matures in March 2027 and is secured by a first priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The 2022 ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of April 30, 2022, the 2022 ABL Revolver had a borrowing base of $550.0 million, with $306.9 million outstanding borrowings and $4.9 million in letters of credit issued, resulting in $238.2 million available for borrowings.
Debt Covenants- The 2022 ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million and 10.0% of the maximum borrowing amount. The 2022 ABL Revolver also contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. As of April 30, 2022, we were in compliance with all financial covenants.
Termination of Term Loan - On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Term Loan. In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
Refer to Note 9, Debt, of the Condensed Consolidated Financial Statements of this Form 10-Q for further information about our debt arrangements.
CAPITAL EXPENDITURE PLANS
We expect to spend approximately $70.0 million to $80.0 million for capital expenditures in 2022, of which we invested $12.2 million during the three months ended April 30, 2022. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.
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RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies and estimates disclosed in our 2021 Form 10-K.
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||
We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2021 Form 10-K.
| ITEM 4. CONTROLS AND PROCEDURES | ||
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Form 10-Q, that such disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
| ITEM 1. LEGAL PROCEEDINGS | ||
The information set forth in Note 10, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements in this Form 10-Q is incorporated herein by reference.
| ITEM 1A. RISK FACTORS | ||
As of the date of this filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 2021 Form 10-K.
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| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | ||
SHARE REPURCHASE PROGRAM
On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. 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.
The following table sets forth the Class A common shares repurchased during the three months ended April 30, 2022:
| (in thousands, except per share amounts) | (a) Total Number of Shares Purchased(1) | (b) Average Price Paid Per Share(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | |||||||||||||||||||
| January 30, 2022 to February 26, 2022 | — | $ | — | — | $ | 334,935 | |||||||||||||||||
| February 27, 2022 to April 2, 2022 | 1,275 | $ | 13.71 | 1,004 | $ | 321,137 | |||||||||||||||||
| April 3, 2022 to April 30, 2022 | 652 | $ | 13.65 | 652 | $ | 312,229 | |||||||||||||||||
| Total | 1,927 | $ | 13.69 | 1,656 | |||||||||||||||||||
(1) The total number of shares repurchased includes the shares repurchased as part of publicly announced programs and 271,236 shares withheld in connection with tax payments due upon vesting of employee restricted stock awards.
(2) The average price paid per share includes broker commissions paid.
DIVIDENDS
The payment of any future dividends is at the discretion of our Board of Directors and is based on our future earnings, cash flow, financial condition, capital requirements, changes in taxation laws, general economic condition and any other relevant factors. It is anticipated that dividends will be declared on a quarterly basis.
On April 4, 2022, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend was paid on May 6, 2022 to shareholders of record at the close of business on April 22, 2022. The dividend was recorded against common shares paid in capital on the condensed consolidated balance sheets and as shown on the condensed consolidated statements of shareholders' equity due to the Company being in a retained deficit position, as required under the Ohio General Corporation Law.
On May 19, 2022, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on July 6, 2022 to shareholders of record at the close of business on June 22, 2022. The dividend is expected to be recorded against common shares paid in capital due to the Company being in a retained deficit position, as required under the Ohio General Corporation Law.
RESTRICTIONS
The 2022 ABL Revolver contains customary covenants restricting our activities, including limitations on the ability to pay dividends or repurchase stock. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability.
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES | ||
None.
| ITEM 4. MINE SAFETY DISCLOSURES | ||
Not Applicable.
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| ITEM 5. OTHER INFORMATION | ||
None.
| ITEM 6. EXHIBITS | ||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Date of Filing | Exhibit Number | |||||||||||||||||||||||||||
| 8-K | 001-32545 | 4/5/2022 | 10.1 | |||||||||||||||||||||||||||||
| Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer. | - | - | - | - | ||||||||||||||||||||||||||||
| Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer. | - | - | - | - | ||||||||||||||||||||||||||||
| Section 1350 Certification - Principal Executive Officer. | - | - | - | - | ||||||||||||||||||||||||||||
| Section 1350 Certification - Principal Financial Officer. | - | - | - | - | ||||||||||||||||||||||||||||
| 101* | The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended April 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements. | - | - | - | - | |||||||||||||||||||||||||||
| 104* | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. | - | - | - | - | |||||||||||||||||||||||||||
* Filed herewith
** Furnished herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DESIGNER BRANDS INC.
| Date: | June 2, 2022 | By: | /s/ Jared Poff | |||||||||||
| Jared Poff | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer and duly authorized officer) | ||||||||||||||
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