Designer Brands(DBI) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Designer Brands Inc., including statements of operations, comprehensive income (loss), balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, acquisitions, revenue disaggregation, related party transactions, and other financial details for the periods ended August 3, 2019, and August 4, 2018 Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Three Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------------- | :---------------------------- | :---------------------------- | | Total Revenue | $860,198 | $795,268 | | Cost of Sales | $(594,779) | $(539,240) | | Operating Profit | $41,267 | $24,469 | | Net Income (Loss) | $27,407 | $(38,356) | | Basic EPS | $0.37 | $(0.48) | | Diluted EPS | $0.37 | $(0.48) | Condensed Consolidated Statements of Operations (Six Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------------- | :---------------------------- | :---------------------------- | | Total Revenue | $1,738,713 | $1,507,370 | | Cost of Sales | $(1,208,735) | $(1,044,452) | | Operating Profit | $85,248 | $62,939 | | Net Income (Loss) | $58,601 | $(14,059) | | Basic EPS | $0.78 | $(0.18) | | Diluted EPS | $0.77 | $(0.18) | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss, in thousands) | Metric | Three Months Ended August 3, 2019 (in thousands) | Three Months Ended August 4, 2018 (in thousands) | Six Months Ended August 3, 2019 (in thousands) | Six Months Ended August 4, 2018 (in thousands) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :--------------------------------------------- | :----------------------------------------------- | | Net income (loss) | $27,407 | $(38,356) | $58,601 | $(14,059) | | Total other comprehensive income | $680 | $10,922 | $120 | $7,798 | | Total comprehensive income (loss) | $28,087 | $(27,434) | $58,721 | $(6,261) | Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :-------------------------- | :------------- | :--------------- | :------------- | | Total Current Assets | $924,157 | $955,219 | $977,093 | | Total Assets | $2,557,246 | $1,620,584 | $1,445,016 | | Total Current Liabilities | $648,863 | $463,160 | $375,216 | | Total Liabilities | $1,827,999 | $788,207 | $525,532 | | Total Shareholders' Equity | $729,247 | $832,377 | $919,484 | Condensed Consolidated Statements of Shareholders' Equity Shareholders' Equity Changes (Three Months Ended August 3, 2019, in thousands) | Item | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Balance, May 4, 2019 | $762,851 | | Net income | $27,407 | | Stock-based compensation activity | $6,212 | | Repurchase of Class A common shares | $(50,000) | | Dividends ($0.25 per share) | $(17,903) | | Other comprehensive income | $680 | | Balance, August 3, 2019 | $729,247 | Shareholders' Equity Changes (Six Months Ended August 3, 2019, in thousands) | Item | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Balance, February 2, 2019 | $832,377 | | Cumulative effect of accounting change | $(9,556) | | Net income | $58,601 | | Stock-based compensation activity | $9,511 | | Repurchase of Class A common shares | $(125,000) | | Dividends ($0.50 per share) | $(36,806) | | Other comprehensive income | $120 | | Balance, August 3, 2019 | $729,247 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Six Months Ended, in thousands) | Cash Flow Activity | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :------------------------------ | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | $34,192 | $106,572 | | Net cash provided by (used in) investing activities | $4,491 | $(25,699) | | Net cash used in financing activities | $(87,203) | $(41,109) | | Net increase (decrease) in cash | $(48,806) | $40,064 | | Cash and cash equivalents, end of period | $51,762 | $215,996 | Notes to the Condensed Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES * Designer Brands Inc. is a leading North American footwear and accessories designer, producer, and retailer, operating three reportable segments: U.S. Retail, Canada Retail (acquired TSL), and Brand Portfolio (acquired Camuto Group)[22][28] * The company adopted ASU 2016-02, Leases, in Q1 fiscal 2019, recognizing $1.0 billion in lease assets and $1.1 billion in lease liabilities, with a $9.6 million decrease in retained earnings due to transition impairments[44] * The effective tax rate decreased significantly from 203.3% for the six months ended August 4, 2018, to 27.9% for the six months ended August 3, 2019, primarily due to valuation allowances and goodwill impairment related to the TSL acquisition in the prior year[37] 2. ACQUISITIONS AND EQUITY METHOD INVESTMENT * On May 10, 2018, the company acquired the remaining interest in Town Shoes Limited (TSL) for $28.2 million USD, leading to a $34.0 million loss from remeasurement of previously held assets and a goodwill impairment charge for the Canada Retail segment in fiscal 2018[49][51] * On November 5, 2018, the company acquired Camuto Group for $171.3 million, enhancing its global production, sourcing, and design infrastructure, and forming a joint venture, ABG-Camuto, in which it holds a 40% interest[24][54][61] Equity Investment in ABG-Camuto Activity (Six Months Ended August 3, 2019, in thousands) | Metric | Amount (in thousands) | | :------------------------- | :-------------------- | | Balance at beginning of period | $58,125 | | Share of net earnings | $4,692 | | Distributions received | $(7,784) | | Balance at end of period | $55,033 | 3. REVENUE Total Revenue Disaggregated by Segment (Three Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :------------------------ | :---------------------------- | :---------------------------- | | U.S. Retail | $677,920 | $691,757 | | Canada Retail | $63,306 | $72,532 | | Brand Portfolio | $95,422 | — | | Other | $29,480 | $29,446 | | Elimination of intersegment revenue | $(17,701) | — | | Total Revenue | $860,198 | $795,268 | Total Revenue Disaggregated by Segment (Six Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :------------------------ | :---------------------------- | :---------------------------- | | U.S. Retail | $1,369,760 | $1,361,541 | | Canada Retail | $115,122 | $72,532 | | Brand Portfolio | $196,289 | — | | Other | $65,087 | $70,099 | | Elimination of intersegment revenue | $(28,221) | — | | Total Revenue | $1,738,713 | $1,507,370 | * The Brand Portfolio segment, resulting from the Camuto Group acquisition, generated $95.4 million in net sales for the three months ended August 3, 2019, and $196.3 million for the six months ended August 3, 2019, primarily from wholesale and direct-to-consumer channels[65] 4. RELATED PARTY TRANSACTIONS * Schottenstein Affiliates, controlled by the executive chairman's family, beneficially owned approximately 15% of outstanding common shares and 51% of combined voting power as of August 3, 2019[68] Related Party Transactions (in thousands) | Item | Three Months Ended August 3, 2019 | Three Months Ended August 4, 2018 | Six Months Ended August 3, 2019 | Six Months Ended August 4, 2018 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Other purchases and services from Schottenstein Affiliates | $1,500 | $1,700 | $3,400 | $3,300 | | Royalty expense payable to ABG-Camuto | $3,600 | — | $9,300 | — | 5. EARNINGS (LOSS) PER SHARE Weighted Average Shares Used in EPS Calculation (in thousands) | Metric | Three Months Ended August 3, 2019 | Three Months Ended August 4, 2018 | Six Months Ended August 3, 2019 | Six Months Ended August 4, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Weighted average basic shares outstanding | 73,529 | 80,265 | 75,267 | 80,187 | | Dilutive effect of stock-based compensation awards | 787 | — | 1,014 | — | | Weighted average diluted shares outstanding | 74,316 | 80,265 | 76,281 | 80,187 | * Potential shares not included in diluted EPS due to anti-dilutive effect were 4.6 million for the three months ended August 3, 2019, and 2.9 million for the six months ended August 3, 2019[74] 6. STOCK-BASED COMPENSATION Stock-Based Compensation Expense (in thousands) | Type of Award | Three Months Ended August 3, 2019 | Three Months Ended August 4, 2018 | Six Months Ended August 3, 2019 | Six Months Ended August 4, 2018 | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Stock options | $563 | $1,343 | $1,386 | $3,138 | | Restricted and director stock units | $4,798 | $3,841 | $8,345 | $6,560 | | Total | $5,361 | $5,184 | $9,731 | $9,698 | * As of August 3, 2019, 2.7 million Class A common shares remained available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan[75] 7. SHAREHOLDERS' EQUITY * The Board of Directors declared a quarterly cash dividend of $0.25 per share for both Class A and Class B common shares on August 29, 2019, payable October 4, 2019[79] * During the six months ended August 3, 2019, the company repurchased 6.1 million Class A common shares at a cost of $125.0 million, with $351.6 million remaining authorized under the share repurchase program[80] Accumulated Other Comprehensive Loss (Three Months Ended August 3, 2019, in thousands) | Component | Beginning of Period (in thousands) | Other Comprehensive Income (Loss) before Reclassifications (in thousands) | Amounts Reclassified to Non-operating Income (Expenses), net (in thousands) | Other Comprehensive Income (in thousands) | End of Period (in thousands) | | :-------------------------------------- | :--------------------------------- | :------------------------------------------------------------------------ | :-------------------------------------------------------------------------- | :---------------------------------------- | :--------------------------- | | Foreign Currency Translation | $(3,042) | $461 | — | $461 | $(2,581) | | Available-for-Sale Securities | $(224) | $196 | $23 | $219 | $(5) | | Total | $(3,266) | $657 | $23 | $680 | $(2,586) | 8. ACCOUNTS RECEIVABLE Accounts Receivable, Net (in thousands) | Metric | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :------------------------------------ | :------------- | :--------------- | :------------- | | Customer accounts receivables | $72,134 | $57,771 | $3,090 | | Other receivables | $14,460 | $8,004 | $8,968 | | Accounts receivable | $86,594 | $69,809 | $17,259 | | Allowance for doubtful accounts | $(1,432) | $(939) | — | | Accounts receivable, net | $85,162 | $68,870 | $17,259 | * Upon transition to ASU 2016-02 at the beginning of fiscal 2019, construction and tenant allowance receivables due from landlords were netted against operating lease liabilities[84] 9. INVESTMENTS Investments in Available-for-Sale Securities (in thousands) | Metric | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :------------------------------------ | :------------- | :--------------- | :------------- | | Carrying value of investments | $25,510 | $70,195 | $73,978 | | Unrealized gains included in accumulated other comprehensive loss | $18 | $44 | $10 | | Unrealized losses included in accumulated other comprehensive loss | $(24) | $(521) | $(869) | | Fair value | $25,504 | $69,718 | $73,119 | 10. PROPERTY AND EQUIPMENT Property and Equipment, Net (in thousands) | Asset Category | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :---------------------------------- | :------------- | :--------------- | :------------- | | Total property and equipment | $1,169,465 | $1,138,077 | $1,082,040 | | Accumulated depreciation and amortization | $(766,686) | $(728,501) | $(694,419) | | Property and equipment, net | $402,779 | $409,576 | $387,621 | * Construction in progress primarily includes leasehold improvements, furniture and fixtures for new stores, and internal-use software under development[87] 11. GOODWILL AND INTANGIBLE ASSETS Goodwill by Segment (in thousands) | Segment | Beginning of Period (February 2, 2019) | Activity (Six Months Ended August 3, 2019) | End of Period (August 3, 2019) | | :---------------- | :------------------------------------- | :----------------------------------------- | :----------------------------- | | U.S. Retail | $25,899 | — | $25,899 | | Canada Retail | $42,048 (net of impairment) | $(416) (currency adjustment) | $41,632 (net of impairment) | | Brand Portfolio | $63,614 | $26,767 (purchase price adjustments) | $90,381 | | Total Net Goodwill | $89,513 | $26,767 | $116,280 | Intangible Assets (in thousands) | Asset Category | Cost (August 3, 2019) | Accumulated Amortization (August 3, 2019) | Net (August 3, 2019) | | :---------------------------------- | :-------------------- | :---------------------------------------- | :------------------- | | Definite-lived customer relationships | $6,661 | $(1,064) | $5,597 | | Indefinite-lived trademarks and tradenames | $15,515 | — | $15,515 | | Total | $22,176 | $(1,064) | $21,112 | * Customer relationships are amortized over three years for the Canada loyalty program and eight years for Brand Portfolio customer relationships. Favorable leasehold interests were netted against operating lease assets upon ASU 2016-02 transition[90] 12. ACCRUED EXPENSES Accrued Expenses (in thousands) | Accrued Expense Category | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :---------------------------------- | :------------- | :--------------- | :------------- | | Gift cards and merchandise credits | $28,277 | $34,998 | $26,791 | | Accrued compensation and related expenses | $38,532 | $53,577 | $30,224 | | Accrued taxes | $18,330 | $16,491 | $21,029 | | Loyalty programs deferred revenue | $16,034 | $16,151 | $16,786 | | Sales returns | $19,332 | $17,743 | $14,426 | | Customer allowances and discounts | $9,306 | $13,094 | — | | Other | $43,626 | $49,481 | $36,520 | | Total | $173,437 | $201,535 | $145,776 | 13. OTHER NON-CURRENT LIABILITIES Other Non-Current Liabilities (in thousands) | Liability Category | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :---------------------------------- | :------------- | :--------------- | :------------- | | Foreign tax contingent liabilities | $14,807 | $13,429 | — | | Deferred tax liabilities | $3,393 | $3,260 | — | | Other | $20,390 | $18,528 | $22,672 | | Total | $38,590 | $165,047 | $150,316 | * Upon transition to ASU 2016-02, deferred rent, construction and tenant allowances, accrual for lease obligations, and unfavorable leasehold interests were netted against operating lease assets[93] 14. DEBT * The company's Credit Facility provides a revolving line of credit up to $400 million, with $235.0 million outstanding and $163.7 million available for borrowings as of August 3, 2019[96] * The Credit Facility's interest rate on borrowings was 4.1% as of August 3, 2019, and 1.7% on letters of credit. The facility allows dividend payments provided no event of default occurs[96][95] * The company was in compliance with all financial covenants as of August 3, 2019, including a leverage ratio not to exceed 3.50:1 (temporarily increased due to Camuto Group acquisition) and a fixed charge coverage ratio not less than 1.75:1[98] 15. LEASES Operating Lease Expense (in thousands) | Lease Expense Category | Three Months Ended August 3, 2019 | Six Months Ended August 3, 2019 | | :-------------------------------- | :-------------------------------- | :------------------------------ | | Lease expense to unrelated parties | $52,707 | $106,061 | | Lease expense to related parties | $2,371 | $4,713 | | Variable lease expense to unrelated parties | $12,981 | $26,003 | | Variable lease expense to related parties | $348 | $650 | | Total | $68,407 | $137,427 | * As of August 3, 2019, the weighted-average remaining lease term was 6.3 years, and the weighted-average discount rate was 3.9%[100] Future Fixed Minimum Lease Payments (in thousands) | Fiscal Year | Unrelated Parties | Related Parties | Total | | :-------------------------- | :---------------- | :-------------- | :---- | | Remainder of fiscal 2019 | $96,844 | $3,937 | $100,781 | | Fiscal 2020 | $233,961 | $9,364 | $243,325 | | Fiscal 2021 | $216,107 | $8,697 | $224,804 | | Fiscal 2022 | $182,432 | $7,418 | $189,850 | | Fiscal 2023 | $142,408 | $4,573 | $146,981 | | Future fiscal years thereafter | $314,601 | $15,493 | $330,094 | | Total operating lease liabilities (undiscounted) | $1,186,353 | $49,482 | $1,235,835 | | Less discounting impact | $(138,305) | $(6,015) | $(144,320) | | Total operating lease liabilities | $1,048,048 | $43,467 | $1,091,515 | | Less current operating lease liabilities | $(178,091) | $(7,878) | $(185,969) | | Non-current operating lease liabilities | $869,957 | $35,589 | $905,546 | 16. COMMITMENTS AND CONTINGENCIES * The company is involved in various legal proceedings, but believes potential liability will not be material to financial condition[105] * Identified probable contingent liabilities for unpaid foreign payroll and other taxes from the Camuto Group acquisition range from $14.8 million to $30.0 million. A liability of $14.8 million and an indemnification asset of $12.7 million were recorded[106] * The company has a guarantee for a lease commitment expiring in 2024, with total future minimum lease payment requirements of approximately $15.0 million as of August 3, 2019[108] 17. SEGMENT REPORTING Segment Gross Profit (Three Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------- | :---------------------------- | :---------------------------- | | U.S. Retail | $208,056 | $229,601 | | Canada Retail | $21,939 | $18,218 | | Brand Portfolio | $19,261 | — | | Other | $6,041 | $6,676 | | Intercompany eliminations | $(436) | — | | Consolidated Gross Profit | $254,861 | $254,495 | Segment Gross Profit (Six Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------- | :---------------------------- | :---------------------------- | | U.S. Retail | $417,947 | $427,945 | | Canada Retail | $37,686 | $18,218 | | Brand Portfolio | $41,255 | — | | Other | $15,352 | $13,557 | | Intercompany eliminations | $(1,343) | — | | Consolidated Gross Profit | $510,897 | $459,720 | * The Brand Portfolio segment contributed $78.9 million in net sales for the three months and $169.7 million for the six months ended August 3, 2019, with a gross profit of $19.3 million and $41.3 million, respectively[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers, the impact of recent acquisitions (TSL and Camuto Group), and factors affecting comparability. It also discusses the company's liquidity, capital resources, and critical accounting policies Cautionary Statement Regarding Forward-Looking Information * The report contains forward-looking statements regarding future events and financial performance, subject to risks and uncertainties that could cause actual results to differ materially[112] * Key risk factors include success in store growth and digital demand, integration of acquired businesses, reputation protection, vendor relationships, ability to respond to fashion trends, and risks related to distribution, information systems, and tariffs[112] Executive Overview * The company made continued progress on strategies in Q2 fiscal 2019, reaffirming annual guidance due to strong performance from newly acquired businesses[114] * Canada Retail segment showed increased comparable sales and margin growth, benefiting from digital platform migration and new loyalty programs. The Brand Portfolio segment is on track to convert DSW private label production by fiscal 2020, aiming for greater exclusivity and higher margins[114] * U.S. Retail segment saw positive results in seasonal product categories (sandals) and Kids line, attributing success to product differentiation, strong loyalty base, and omni-channel capabilities[115] Comparability * Comparability of results is significantly affected by the acquisition of TSL (May 2018) and Camuto Group (November 2018), which are included as wholly-owned subsidiaries in current period results but not fully in prior periods[116] * Integration and restructuring costs related to prior year acquisitions, totaling $3.6 million in severance, $6.1 million in JV termination fees, and $2.4 million in professional fees, impacted the six months ended August 3, 2019[116] * Prior period results (six months ended August 4, 2018) included a $34.0 million loss from TSL asset remeasurement, a $12.2 million foreign currency translation loss reclassification, and a goodwill impairment charge for TSL[116] Financial Summary Financial Summary (Three Months Ended, in millions) | Metric | August 3, 2019 (in millions) | August 4, 2018 (in millions) | Change (%) | | :---------------------- | :--------------------------- | :--------------------------- | :--------- | | Total Revenue | $860.2 | $795.3 | 8.2% | | Gross Profit % of Net Sales | 30.0% | 32.1% | (210 bps) | | Net Income (Loss) | $27.4 | $(38.4) | NM | | Diluted EPS | $0.37 | $(0.48) | NM | * The decrease in gross profit rate was primarily due to a prior-year benefit from loyalty program adjustments, the inclusion of Camuto Group (lower gross profit rate), and higher shipping costs from increased digital penetration[118] * Capital expenditures for the six months ended August 3, 2019, were $40.3 million, up from $32.1 million in the prior year, focused on new store openings, remodels, and business infrastructure[121] Results of Operations Comparison of the Three Months Ended August 3, 2019 with the Three Months Ended August 4, 2018 Consolidated Financial Performance (Three Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | Change (Amount) | Change (%) | | :---------------------- | :---------------------------- | :---------------------------- | :-------------- | :--------- | | Net Sales | $849,640 | $793,735 | $55,905 | 7.0% | | Commission, franchise and other revenue | $10,558 | $1,533 | $9,025 | 588.7% | | Total Revenue | $860,198 | $795,268 | $64,930 | 8.2% | | Operating Profit | $41,267 | $24,469 | $16,798 | 68.7% | | Net Income (Loss) | $27,407 | $(38,356) | $65,763 | NM | | Diluted EPS | $0.37 | $(0.48) | $0.85 | NM | Segment Net Sales and Comparable Sales (Three Months Ended August 3, 2019, in thousands) | Segment | Net Sales (in thousands) | Change (%) | Comparable Sales (%) | | :---------------- | :----------------------- | :--------- | :------------------- | | U.S. Retail | $677,920 | (2.0)% | (1.5)% | | Canada Retail | $63,306 | (12.7)% | 8.1% | | Brand Portfolio | $95,422 | NM | NA | | Other | $29,480 | 0.1% | 1.6% | | Consolidated Net Sales | $849,640 | 7.0% | (0.6)% | * Consolidated net sales increased by 7.0%, primarily driven by incremental revenue from Camuto Group, partially offset by a 0.6% decrease in comparable sales and store closures[124] * Canada Retail segment's comparable sales increased by 8.1% due to improvements in its digital platform and lower clearance inventory, while U.S. Retail comparable sales decreased by 1.5% due to lower transactions and average dollar sales in women's and men's categories[125] Comparison of the Six Months Ended August 3, 2019 with the Six Months Ended August 4, 2018 Consolidated Financial Performance (Six Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | Change (Amount) | Change (%) | | :---------------------- | :---------------------------- | :---------------------------- | :-------------- | :--------- | | Net Sales | $1,719,632 | $1,504,172 | $215,460 | 14.3% | | Total Revenue | $1,738,713 | $1,507,370 | $231,343 | 15.3% | | Operating Profit | $85,248 | $62,939 | $22,309 | 35.4% | | Net Income (Loss) | $58,601 | $(14,059) | $72,660 | NM | | Diluted EPS | $0.77 | $(0.18) | $0.95 | NM | Segment Net Sales and Comparable Sales (Six Months Ended August 3, 2019, in thousands) | Segment | Net Sales (in thousands) | Change (%) | Comparable Sales (%) | | :---------------- | :----------------------- | :--------- | :------------------- | | U.S. Retail | $1,369,760 | 0.6% | 0.7% | | Canada Retail | $115,122 | 58.7% | 8.1% | | Brand Portfolio | $196,289 | NM | NA | | Other | $65,087 | (7.1)% | 2.5% | | Consolidated Net Sales | $1,719,632 | 14.3% | 1.1% | * Consolidated net sales increased by 14.3%, driven by incremental sales from 2018 acquired businesses, with comparable sales increasing by 1.1%[138] * The consolidated gross profit margin decreased by 90 basis points to 29.7% for the six months ended August 3, 2019, primarily due to higher shipping costs and the inclusion of Camuto Group, partially offset by improved initial markups and lower markdowns in U.S. Retail[139][142] Seasonality * The company's business is subject to seasonal merchandise trends, with new spring styles introduced in the first quarter and new fall styles in the third quarter[148] Liquidity and Capital Resources Overview * Primary operating cash flow requirements include inventory purchases, capital expenditures for new stores, and IT system improvements. Working capital and inventory levels fluctuate seasonally[149] * The company repurchased 6.1 million Class A common shares for $125.0 million during the six months ended August 3, 2019, partially funded by borrowings on the revolving line of credit[150] * Management believes current cash, investments, and Credit Facility availability are sufficient to support operations, working capital, capital expenditures, and share repurchases for the foreseeable future[151] Operating Cash Flows * Net cash provided by operations decreased to $34.2 million for the six months ended August 3, 2019, from $106.6 million in the prior year, primarily due to decreased net income (after non-cash adjustments) and increased working capital use from acquired businesses[153] Investing Cash Flows * Net cash provided by investing activities was $4.5 million for the six months ended August 3, 2019, driven by proceeds from available-for-sale securities exceeding $40.3 million in capital expenditures[154] * In the prior year, net cash used in investing activities was $25.7 million, primarily due to the TSL acquisition, $32.1 million in capital expenditures, and TSL borrowings, partially offset by liquidation of available-for-sale securities[154] Financing Cash Flows * Net cash used in financing activities increased to $87.2 million for the six months ended August 3, 2019, from $41.1 million in the prior year, mainly due to dividend payments and share repurchases partially financed by the revolving line of credit[155] Debt * The Credit Facility provides a revolving line of credit up to $400 million, with $235.0 million outstanding and $163.7 million available as of August 3, 2019. Interest rates are variable, at 4.1% for borrowings and 1.7% for letters of credit[156][157] * The company was in compliance with all debt covenants as of August 3, 2019, including a leverage ratio not exceeding 3.50:1 and a fixed charge coverage ratio not less than 1.75:1[158] Capital Expenditure Plans * Expected capital expenditures for fiscal 2019 are $75.0 million to $85.0 million, primarily for opening 17 to 21 new stores, remodels, and IT projects[160] Off-Balance Sheet Liabilities and Other Contractual Obligations * The company has no material off-balance sheet arrangements and no material changes to contractual obligations since February 2, 2019[161] Critical Accounting Policies and Estimates * The preparation of financial statements requires significant estimates and assumptions, including sales returns, loyalty programs, inventory valuation, depreciation, impairments, and lease accounting. Actual results may differ from these estimates[162][163] * No material changes to critical accounting policies have occurred since the Annual Report on Form 10-K for fiscal year ended February 2, 2019[163] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, specifically interest rate risk and foreign currency exchange rate risk, and notes that hedging instruments are not currently utilized to mitigate these risks Interest Rate Risk * The company is exposed to interest rate risk due to $235.0 million outstanding on its variable-rate revolving line of credit. A hypothetical 100 basis point increase in interest rates would not result in a material additional expense over 12 months[165] Foreign Currency Exchange Risk * The company is exposed to foreign currency exchange rate risk primarily through its Canadian operations (functional currency: CAD) and foreign-denominated cash accounts[166] * A hypothetical 10% movement in exchange rates could result in a $3.0 million foreign currency translation fluctuation (recorded in accumulated other comprehensive loss) and $2.1 million foreign currency revaluation (recorded in non-operating income/expenses, net)[166] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the last fiscal quarter Evaluation of Disclosure Controls and Procedures * Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the reporting period[168] Changes in Internal Control Over Financial Reporting * No material changes were made in internal control over financial reporting during the last fiscal quarter[169] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the legal proceedings information detailed in Note 16 of the condensed consolidated financial statements, indicating that the company is involved in various legal matters incidental to its business * Information on legal proceedings is incorporated by reference from Note 16, Commitments and Contingencies, of the financial statements[170] Item 1A. Risk Factors This section supplements and updates the risk factors previously disclosed, focusing on new or evolving risks such as the impact of tariffs on products and foreign tax contingencies arising from the Camuto Group acquisition * New tariffs on imported products, particularly from China, could materially adversely affect business and financial performance by requiring price increases or lowering gross margins. Shifting production outside China could also incur significant costs[172][173] * The company is exposed to foreign tax contingencies from the Camuto Group acquisition, with estimated obligations ranging from $14.8 million to $30.0 million. While indemnification is expected from sellers, collection is not assured[174] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase program and dividend declarations, including the number of shares repurchased and the remaining authorization, as well as the latest quarterly cash dividend Share Repurchase Program * The Board authorized an additional $500 million for Class A common share repurchases on August 17, 2017, with $33.5 million remaining from previous authorization[176] Class A Common Share Repurchases (Most Recent Quarter, in thousands) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (in thousands) | | :-------------------------- | :------------------------------- | :--------------------------- | :-------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | May 5, 2019 to June 1, 2019 | — | $— | — | $401,564 | | June 2, 2019 to July 6, 2019 | 2,669 | $18.74 | 2,668 | $351,564 | | July 7, 2019 to August 3, 2019 | — | $— | — | $351,564 | | Total | 2,669 | $18.74 | 2,668 | | Dividends * On August 29, 2019, the Board declared a quarterly cash dividend of $0.25 per share for both Class A and Class B common shares, payable October 4, 2019[178] * Future dividend payments are at the discretion of the Board and subject to financial conditions and compliance with the Credit Facility covenants[178] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities * No defaults upon senior securities were reported[179] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company * Mine safety disclosures are not applicable[180] Item 5. Other Information This section states that there is no other information to report * No other information was reported[181] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, articles of incorporation, code of regulations, specimen share certificates, and iXBRL formatted financial statements * Exhibits include Rule 13a-14(a)/15d-14(a) Certifications (31.1, 31.2), Section 1350 Certifications (32.1, 32.2), and iXBRL formatted financial statements (101, 104)[183] Signature This section contains the signature of the authorized officer, Jared Poff, Executive Vice President and Chief Financial Officer, confirming the filing of the report * The report was signed by Jared Poff, Executive Vice President and Chief Financial Officer, on August 30, 2019[188]