Designer Brands(DBI) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Designer Brands Inc.'s unaudited condensed consolidated financial statements, detailing operations, balance sheets, cash flows, and notes on accounting policies and key events Condensed Consolidated Statements of Operations The company reported increased total revenue and net income for both the third quarter and the nine-month period ended November 2, 2019, compared to the prior year Consolidated Statements of Operations Highlights ($ in thousands, except per share data) | Metric | Three Months Ended Nov 2, 2019 ($) | Three Months Ended Nov 3, 2018 ($) | Nine Months Ended Nov 2, 2019 ($) | Nine Months Ended Nov 3, 2018 ($) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 936,264 | 833,003 | 2,674,977 | 2,340,373 | | Operating Profit | 56,108 | 53,089 | 141,356 | 116,028 | | Net Income | 43,460 | 39,319 | 102,061 | 25,260 | | Diluted EPS | $0.60 | $0.48 | $1.36 | $0.31 | Condensed Consolidated Balance Sheets As of November 2, 2019, total assets and liabilities significantly increased due to the adoption of a new lease accounting standard, while cash and cash equivalents decreased Balance Sheet Highlights ($ in thousands) | Metric | Nov 2, 2019 ($) | Feb 2, 2019 ($) | Nov 3, 2018 ($) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 87,838 | 99,369 | 222,419 | | Inventories | 677,696 | 645,317 | 624,167 | | Operating lease assets | 950,514 | — | — | | Total assets | 2,536,978 | 1,620,584 | 1,474,629 | | Debt | 235,000 | 160,000 | — | | Total liabilities | 1,793,797 | 788,207 | 532,193 | | Total shareholders' equity | 743,181 | 832,377 | 942,436 | Condensed Consolidated Statements of Cash Flows For the nine months ended November 2, 2019, net cash from operations decreased, while cash used in investing and financing activities increased, primarily due to capital expenditures and share repurchases Cash Flow Summary ($ in thousands) | Activity | Nine Months Ended Nov 2, 2019 ($) | Nine Months Ended Nov 3, 2018 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | 118,073 | 147,335 | | Net cash used in investing activities | (10,265) | (40,953) | | Net cash used in financing activities | (120,629) | (60,645) | | Net (decrease) increase in cash | (12,730) | 46,487 | Notes to the Condensed Consolidated Financial Statements These notes detail the company's accounting policies, recent acquisitions, and the impact of new accounting standards, particularly regarding lease recognition and segment reporting - The company now operates under three reportable segments: U.S. Retail, Canada Retail (from the TSL acquisition), and Brand Portfolio (from the Camuto Group acquisition)[31] - In fiscal 2019, the company adopted ASU 2016-02 (Leases), recognizing $1.0 billion of lease assets and $1.1 billion of lease liabilities upon transition[48] - The acquisition of Camuto Group in November 2018 for $166.3 million was funded with cash and borrowings[58][59] Goodwill of $87.7 million was recorded, primarily allocated to the U.S. Retail and Brand Portfolio segments[60] - During the nine months ended November 2, 2019, the company repurchased 7.1 million Class A common shares for $141.6 million[85] - As a result of the Camuto Group acquisition, the company identified probable contingent liabilities for unpaid foreign taxes estimated between $15.5 million and $30.0 million, for which it expects to be indemnified by the sellers[114] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting revenue growth driven by acquisitions and comparable sales, while addressing challenges impacting gross margins and outlining liquidity and capital resources - Q3 results were impacted by several challenges including weather, tariff impacts, and system implementation issues[123] - The Canada Retail segment showed positive comparable sales and margin growth, benefiting from a new digital platform and loyalty programs[123] - The company remains on track to convert the production of the majority of its DSW private label to the Brand Portfolio segment in fiscal 2020, expecting higher margins and product exclusivity[123] - For the nine months ended Nov 2, 2019, the company repurchased 7.1 million Class A common shares for $141.6 million[160] Results of Operations Consolidated net sales increased in Q3 2019 and for the nine-month period, driven by acquisitions and comparable sales growth, though gross profit margins saw a decline due to various factors Q3 2019 Net Sales by Segment ($ in thousands) | Segment | Net Sales ($) | Change (%) | Comparable Sales (%) | | :--- | :--- | :--- | :--- | | U.S. Retail | 716,775 | (0.7)% | 0.0% | | Canada Retail | 76,299 | (4.7)% | 4.4% | | Brand Portfolio | 130,582 | NM | NA | | Total Segment Net Sales | 952,504 | 14.5% | 0.3% | Q3 2019 Gross Profit by Segment ($ in thousands) | Segment | Gross Profit ($) | Margin (%) | Basis Point Change | | :--- | :--- | :--- | :--- | | U.S. Retail | 201,409 | 28.1% | (510) bps | | Canada Retail | 27,485 | 36.0% | 430 bps | | Brand Portfolio | 33,936 | 26.0% | NM | | Consolidated Gross Profit | 268,090 | 28.9% | (370) bps | - The U.S. Retail gross margin decrease was driven by increased promotions and higher shipping costs from online orders[138] - The Canada Retail gross margin improvement was due to lower clearance activity and better leverage of occupancy costs following the exit of the Town Shoes banner[138] Liquidity and Capital Resources The company's cash requirements primarily fund inventory, capital expenditures, and growth, with sufficient liquidity from operations and its credit facility to support future strategies - The company believes cash from operations, current cash levels, and availability under its Credit Facility are sufficient to fund operations and growth strategies for the next 12 months[161] - As of November 2, 2019, the company had $235.0 million outstanding on its $400 million Credit Facility and was in compliance with all financial covenants[103][106] - Fiscal 2019 capital expenditures are planned to be approximately $80.0 million, with $59.6 million invested in the first nine months[170] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates on its variable-rate debt and foreign currency exchange rates, primarily impacting its Canadian operations - The company's primary market risks are related to interest rates on its variable-rate debt and foreign currency exchange rates from its Canadian operations[174] - A hypothetical 10% change in foreign exchange rates could lead to a $7.3 million fluctuation in accumulated other comprehensive loss and a $1.0 million impact on net non-operating income[176] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of November 2, 2019[178] - No material changes were made to the company's internal control over financial reporting during the third quarter[179] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, but management does not expect them to materially impact financial condition or results of operations - The company does not expect current legal proceedings to have a material impact on its financial results[113][180] Risk Factors This section updates key risk factors, including the potential adverse effects of new U.S. tariffs on Chinese imports and foreign tax contingencies from the Camuto Group acquisition - The imposition of new tariffs on products imported from China poses a material risk, potentially forcing price increases or reducing gross margins[182][183] - The company faces probable contingent liabilities for unpaid foreign taxes from the Camuto Group acquisition, estimated at $15.5 million to $30.0 million, with uncertainty regarding full recovery through indemnification[184] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities and dividend declarations, including the remaining authorization under the repurchase program Q3 2019 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Aug 4 - Aug 31, 2019 | 1 | $14.92 | | Sep 1 - Oct 5, 2019 | 1,004 (in thousands) | $16.63 | | Oct 6 - Nov 2, 2019 | 2 (in thousands) | $16.60 | | Total | 1,007 (in thousands) | $16.63 | - As of November 2, 2019, $334.9 million remained available for repurchase under the authorized program[85][187] - On December 10, 2019, the Board declared a quarterly cash dividend of $0.25 per share[188] Defaults Upon Senior Securities There were no defaults upon senior securities during the reported period - None[189] Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable[190] Other Information No other material information is reported in this section - None[191] Exhibits This section lists all exhibits filed with the Form 10-Q, including governance documents, executive agreements, officer certifications, and iXBRL formatted financial statements - Exhibits filed include officer certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) and financial data formatted in iXBRL[193]