Designer Brands(DBI) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's financials reflect a significant negative impact from the COVID-19 pandemic, showing a sharp sales drop, a net loss, and increased debt Condensed Consolidated Statements of Operations The company reported a significant net loss of $98.2 million in Q2 2020, a reversal from a net income in Q2 2019, due to a 42.8% sales decline Condensed Consolidated Statements of Operations (Three Months Ended) | Metric | Three Months Ended Aug 1, 2020 (in thousands) | Three Months Ended Aug 3, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $489,714 | $855,952 | -42.8% | | Operating profit (loss) | $(135,964) | $41,267 | NM | | Net income (loss) | $(98,214) | $27,407 | NM | | Diluted earnings (loss) per share | $(1.36) | $0.37 | NM | Condensed Consolidated Statements of Operations (Six Months Ended) | Metric | Six Months Ended Aug 1, 2020 (in thousands) | Six Months Ended Aug 3, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $972,497 | $1,729,241 | -43.8% | | Operating profit (loss) | $(459,922) | $85,248 | NM | | Net income (loss) | $(314,072) | $58,601 | NM | | Diluted earnings (loss) per share | $(4.36) | $0.77 | NM | Condensed Consolidated Balance Sheets The balance sheet shows decreased total assets, a significant increase in cash and debt, and a decline in both inventory and shareholders' equity Key Balance Sheet Items (in thousands) | Account | August 1, 2020 | February 1, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $206,720 | $86,564 | | Inventories | $445,044 | $632,587 | | Total assets | $2,273,257 | $2,465,070 | | Debt | $393,000 | $190,000 | | Total liabilities | $1,866,630 | $1,744,156 | | Total shareholders' equity | $406,627 | $720,914 | Condensed Consolidated Statements of Cash Flows Cash flow from operations turned negative, offset by significant cash inflows from financing activities due to increased borrowings Cash Flow Summary (Six Months Ended, in thousands) | Cash Flow Category | August 1, 2020 | August 3, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(79,619) | $34,192 | | Net cash provided by (used in) investing activities | $6,780 | $4,491 | | Net cash provided by (used in) financing activities | $193,194 | $(87,203) | - The company's financing activities were driven by $251.0 million in borrowings on its revolving line of credit, partially offset by $48.0 million in payments[22] Notes to the Condensed Consolidated Financial Statements Notes detail pandemic impacts including store closures, impairment charges, segment declines, debt changes, and subsequent events - The company operates in three reportable segments: U.S. Retail, Canada Retail, and Brand Portfolio[25] - Due to COVID-19, the company temporarily closed all stores on March 18, 2020, furloughed employees, and reduced pay; in July 2020, it eliminated over 1,000 associate positions[28][29] - For the six months ended August 1, 2020, the company recorded total impairment charges of $119.3 million, including $92.8 million for retail store assets, $6.5 million for an intangible asset, and $20.0 million for goodwill[32][33] - The company qualified for payroll tax credits under the CARES Act, which reduced operating expenses by $7.9 million in the first half of 2020[35] - Subsequent to the quarter's end, on August 7, 2020, the company replaced its credit facility with a new $400 million ABL Revolver and a $250 million Secured Term Loan[91] - On August 12, 2020, retail partner Stein Mart filed for Chapter 11 bankruptcy; Designer Brands had $15.2 million in inventory at Stein Mart locations and a $2.1 million receivable[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes poor performance to COVID-19, highlighting a drastic gross margin decline and actions taken to preserve liquidity Executive Overview The company's performance was severely impacted by COVID-19, prompting workforce reductions, inventory management, and a focus on digital sales - All stores in the U.S. and Canada were temporarily closed starting March 18, 2020, to control the spread of COVID-19[99] - The company implemented inventory control actions, resulting in a 37% decrease in total inventory at the end of Q2 2020 compared to the prior year[102] - A clear shift in consumer behavior towards athleisure and casual products and away from dress and seasonal categories was observed due to customers staying home[102] - Strong digital sales were generated across all segments during the first half of 2020, supported by investments in digital infrastructure and services[103] Results of Operations Q2 2020 net sales fell 42.8% and gross margin collapsed to 7.6% due to store closures and aggressive promotional activity Q2 2020 vs Q2 2019 Performance | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Net Sales | $489.7M | $856.0M | | Comparable Sales Change | -42.7% | N/A | | Gross Profit % | 7.6% | 30.5% | | Net Income (Loss) | ($98.2M) | $27.4M | Q2 2020 Net Sales by Segment (in thousands) | Segment | Q2 2020 Net Sales | Q2 2019 Net Sales | Change (%) | | :--- | :--- | :--- | :--- | | U.S. Retail | $393,977 | $677,920 | -41.9% | | Canada Retail | $49,582 | $63,306 | -21.7% | | Brand Portfolio | $30,458 | $102,947 | -70.4% | - For the six months ended August 1, 2020, the company recorded total impairment charges of $119.3 million, including $92.8 million for long-lived assets, $6.5 million for an intangible asset, and $20.0 million for goodwill[131][132] Liquidity and Capital Resources The company managed liquidity through increased borrowings and new credit facilities while reducing its 2020 capital expenditure plans - Net cash used in operations was $79.6 million for the six months ended August 1, 2020, compared to net cash provided by operations of $34.2 million in the prior year period[137] - The company had net borrowings of $203.0 million from its Credit Facility during the first six months of 2020 as a precautionary measure[139] - On August 7, 2020, the company secured new financing, including a five-year $400.0 million ABL Revolver and a five-year, $250.0 million Secured Term Loan[144] - Capital expenditures for fiscal 2020 are expected to be approximately $30.0 million to $35.0 million[150] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its primary market risk exposures related to interest and foreign currency rates - The company's primary market risk exposures are related to interest rates and foreign currency exchange rates, with no material changes reported since the 2019 Form 10-K[155] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of August 1, 2020[156] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[157] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company believes the outcome of pending legal matters will not materially affect its financial condition or operations - The company does not expect any current legal proceedings to have a material impact on its financial condition or results of operations[158] Item 1A. Risk Factors The company identifies the COVID-19 outbreak as a material risk, citing impacts on operations, consumer behavior, and supply chains - The COVID-19 outbreak is identified as a primary risk factor with potential for continued material adverse impact on business, operations, and financial results[160] - A shift in consumer preference to athleisure and casual products poses a risk if the company cannot anticipate and respond to these trends[172] - The business is exposed to supply chain disruptions, particularly as 83% of its Brand Portfolio segment's products were sourced from China in fiscal 2019[167] - The bankruptcy of retail partner Stein Mart, announced on August 12, 2020, poses a risk to the recovery of inventory and receivables[179][180] - The business relies on consumer discretionary spending, which may be adversely affected by economic downturns, high unemployment, and social unrest[176][177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No share repurchases were made in Q2 2020, and credit facilities restrict future repurchases and dividend payments - No share repurchases were made during the second quarter of fiscal 2020[181] - The company's credit facilities restrict the payment of dividends and share repurchases, and none are currently anticipated[182] Item 5. Other Information The company entered into an agreement for a $100 million 'at the market offering' of its Class A common shares - On September 4, 2020, the company entered into an agreement for an "at the market offering" (ATM) to sell up to $100.0 million of Class A common shares[185] - Net proceeds from the ATM Offering are intended for general corporate purposes, which may include debt repayment and working capital[186]