Designer Brands(DBI) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Unaudited condensed consolidated financial statements are presented, including statements of operations, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes on business, accounting policies, revenue, related party transactions, earnings per share, stock-based compensation, shareholders' equity, receivables, accrued expenses, debt, commitments, and segment reporting Condensed Consolidated Statements of Operations This statement details the company's net sales, cost of sales, gross profit, operating expenses, operating profit, net income, and earnings per share for the specified periods | Metric | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | Change (%) | | :-------------------------------- | :----------------------------------------------- | :-------------------------------------------- | :--------- | | Net sales | $830,543 | $703,155 | 18.1% | | Cost of sales | $(554,798) | $(487,044) | 13.9% | | Gross profit | $275,745 | $216,111 | 27.6% | | Operating expenses | $(223,426) | $(200,814) | 11.3% | | Operating profit | $53,192 | $17,005 | 212.8% | | Net income | $26,182 | $17,026 | 53.8% | | Basic earnings per share | $0.36 | $0.23 | 56.5% | | Diluted earnings per share | $0.34 | $0.22 | 54.5% | Condensed Consolidated Statements of Comprehensive Income This statement presents the company's net income and other comprehensive income or loss, primarily from foreign currency translation adjustments, to arrive at total comprehensive income | Metric | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :-------------------------------------------- | | 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 | Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, including total current assets, total assets, total current liabilities, total liabilities, and total shareholders' equity at various reporting dates | Metric | April 30, 2022 (in thousands) | January 29, 2022 (in thousands) | May 1, 2021 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------ | :------------------------- | | Total current assets | $999,425 | $914,216 | $863,297 | | Total assets | $2,087,744 | $2,014,634 | $2,032,465 | | Total current liabilities | $757,299 | $758,917 | $800,222 | | Total liabilities | $1,670,951 | $1,602,238 | $1,769,653 | | Total shareholders' equity | $416,793 | $412,396 | $262,812 | Condensed Consolidated Statements of Shareholders' Equity This statement outlines changes in total shareholders' equity, reflecting net income, share repurchases, and dividend payments over the reporting period | Metric | Balance, January 29, 2022 (in thousands) | Net Income (in thousands) | Repurchase of Class A common shares (in thousands) | Dividends (in thousands) | Balance, April 30, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :------------------------ | :------------------------------------------------- | :----------------------- | :--------------------------------------- | | Total Shareholders' Equity | $412,396 | $26,182 | $(22,706) | $(3,592) | $416,793 | Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities, showing the net change in cash and cash equivalents | Metric | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------------------------- | :-------------------------------------------- | :-------------------- | | 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 | | Net decrease in cash, cash equivalents and restricted cash | $(17,890) | $(10,280) | $(7,610) | Notes to the Condensed Consolidated Financial Statements Detailed explanations and disclosures supporting the condensed consolidated financial statements are provided, covering business operations, accounting policies, and specific financial line items Note 1. Description of Business and Significant Accounting Policies This note describes the company's business segments and outlines the significant accounting policies used in preparing the financial statements - Designer Brands Inc. operates in three reportable segments: U.S. Retail (DSW), Canada Retail (The Shoe Company and DSW), and Brand Portfolio (wholesale, design/buying agent, and direct-to-consumer e-commerce)[25] - During the three months ended April 30, 2022, the company acquired the rights to the shoes.com tradename for $4.9 million, recorded as a definite-lived intangible asset with a 15-year useful life[34] - An impairment charge of $1.1 million was recorded in the Brand Portfolio segment for the sublease of an abandoned leased space during the three months ended April 30, 2022[36] Note 2. Revenue This note disaggregates the company's net sales by segment and provides details on deferred revenue from gift cards and loyalty programs | Segment | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | | :---------------- | :----------------------------------------------- | :-------------------------------------------- | | U.S. Retail | $702,745 | $620,658 | | Canada Retail | $56,315 | $40,604 | | Brand Portfolio | $97,456 | $57,427 | | Total Net Sales | $830,543 | $703,155 | | Category | April 30, 2022 (in thousands) | May 1, 2021 (in thousands) | | :-------------------- | :---------------------------- | :------------------------- | | Gift cards (End of period) | $32,844 | $30,809 | | Loyalty programs (End of period) | $16,243 | $12,955 | Note 3. Related Party Transactions This note discloses transactions with related parties, including rent expense and royalty payments - Rent expense from leases with Schottenstein Affiliates was $2.5 million for the three months ended April 30, 2022, and other purchases and services amounted to $1.1 million[46][47] - Royalty expense paid to ABG-Camuto was $4.6 million for both the three months ended April 30, 2022, and May 1, 2021[48] Note 4. Earnings Per Share This note details the calculation of basic and diluted earnings per share, including the weighted average shares outstanding and potentially dilutive awards | Metric | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :-------------------------------------------- | | Weighted average basic shares outstanding | 72,923 | 72,613 | | Weighted average diluted shares outstanding | 76,924 | 76,976 | - 3.0 million potentially dilutive stock-based compensation awards were excluded from the computation of diluted earnings per share for the three months ended April 30, 2022, due to their anti-dilutive effect[50] Note 5. Stock-Based Compensation This note provides a breakdown of stock-based compensation expense by type of award for the reported periods | Type | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | | :-------------------------- | :----------------------------------------------- | :-------------------------------------------- | | Stock options | $101 | $253 | | Restricted and director stock units | $8,493 | $7,204 | | Total | $8,594 | $7,457 | Note 6. Shareholders' Equity This note details changes in shareholders' equity, including dividend declarations and share repurchase activities - The Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares on April 4, 2022, paid on May 6, 2022, with another $0.05 dividend declared on May 19, 2022, to be paid on July 6, 2022[57][58] - During the three months ended April 30, 2022, the company repurchased 1.7 million Class A common shares at an aggregate cost of $22.7 million, with $312.2 million remaining authorized under the program[60] Note 7. Receivables This note presents a breakdown of the company's receivables, including customer accounts, income tax, and other receivables | Category | April 30, 2022 (in thousands) | January 29, 2022 (in thousands) | May 1, 2021 (in thousands) | | :------------------------------------------ | :---------------------------- | :------------------------------ | :------------------------- | | Customer accounts receivables (total) | $54,069 | $30,692 | $42,953 | | Income tax receivable | $162,788 | $162,240 | $158,890 | | Other receivables | $6,573 | $8,026 | $13,305 | | Total receivables, net | $222,297 | $199,826 | $213,447 | Note 8. Accrued Expenses This note itemizes the company's accrued expenses, such as gift cards, compensation, taxes, loyalty programs, and sales returns | Category | April 30, 2022 (in thousands) | January 29, 2022 (in thousands) | May 1, 2021 (in thousands) | | :------------------------------------------ | :---------------------------- | :------------------------------ | :------------------------- | | 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 | | Total Accrued Expenses | $208,282 | $215,812 | $195,237 | Note 9. Debt This note describes the company's debt arrangements, including the new ABL Revolver and the settlement of the Term Loan - On March 30, 2022, the company replaced its previous revolving credit facility with the 2022 ABL Revolver, providing up to $550.0 million in credit and maturing in March 2027[65] - As of April 30, 2022, the 2022 ABL Revolver had $306.9 million in outstanding borrowings and $238.2 million available for borrowings[65] - On February 8, 2022, the company fully settled its $231.3 million Term Loan, incurring a $12.7 million loss on extinguishment of debt, including a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs[68] Note 10. Commitments and Contingencies This note outlines the company's legal proceedings and guarantees for lease obligations, assessing their potential financial impact - The company is involved in various legal proceedings, but the amount of any potential liability is not expected to be material to the results of operations or financial condition[69] - Guarantees for lease obligations, scheduled to expire in fiscal 2023, totaled approximately $12.9 million as of April 30, 2022[70] Note 11. Segment Reporting This note provides financial information disaggregated by the company's operating segments, including net sales and gross profit | Segment | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | | :---------------- | :----------------------------------------------- | :-------------------------------------------- | | U.S. Retail | $702,745 | $620,658 | | Canada Retail | $56,315 | $40,604 | | Brand Portfolio | $97,456 | $57,427 | | Total segment net sales | $856,516 | $718,689 | | Segment | Three months ended April 30, 2022 (in thousands) | Three months ended May 1, 2021 (in thousands) | | :---------------- | :----------------------------------------------- | :-------------------------------------------- | | U.S. Retail | $233,067 | $193,113 | | Canada Retail | $18,873 | $10,835 | | Brand Portfolio | $23,842 | $11,926 | | Total segment gross profit | $275,782 | $215,874 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's perspective on the company's financial performance and condition for the first quarter of 2022 is provided, discussing key trends, the impact of COVID-19, detailed results of operations, seasonality, liquidity, capital resources, and critical accounting policies Executive Overview and Trends in Our Business This section provides a high-level summary of the company's financial performance and key business trends for the quarter - 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 all three segments contributing to the growth[74] - Net sales from Owned Brands increased 68.3% year-over-year, representing 25.4% of consolidated net sales, up from 17.8% in the prior year[74] Impact of the COVID-19 Pandemic on Our Results of Operations This section discusses the ongoing effects of the COVID-19 pandemic on the company's operations, supply chain, and financial results - The COVID-19 pandemic continues to impact the global economy, causing supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages[75] - Despite continued improvement in performance during Q1 2022, the extent of future impacts from COVID-19 and the sustainability of recent trends remain uncertain[75] Financial Summary and Other Key Metrics This section presents a concise overview of key financial performance indicators and operational metrics for the reported periods | Metric | Three months ended April 30, 2022 (in millions) | Three months ended May 1, 2021 (in millions) | YoY Change | | :-------------------------------- | :---------------------------------------------- | :------------------------------------------- | :--------- | | Net sales | $830.5 million | $703.2 million | +18.1% | | Gross profit as % of net sales | 33.2% | 30.7% | +2.5 pp | | Net income | $26.2 million | $17.0 million | +54.1% | | Diluted EPS | $0.34 | $0.22 | +54.5% | | Segment | Three months ended April 30, 2022 | Three months ended May 1, 2021 | | :-------------------------------- | :-------------------------------- | :----------------------------- | | 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 comparable sales | 15.3% | 52.2% | | Segment | April 30, 2022 | May 1, 2021 | | :-------------------------------- | :------------- | :---------- | | U.S. Retail segment - DSW stores | 510 | 516 | | Canada Retail segment (Total) | 140 | 145 | | Total number of stores | 650 | 661 | Results of Operations (First Quarter of 2022 Compared with First Quarter of 2021) A detailed comparative analysis of the company's financial results for the first quarter of 2022 versus 2021 is provided Net Sales This section analyzes the drivers behind the change in consolidated net sales, including comparable sales and segment contributions | Metric | April 30, 2022 (in thousands) | May 1, 2021 (in thousands) | Change (Amount in thousands) | Change (%) | | :-------------------------- | :---------------------------- | :------------------------- | :--------------------------- | :--------- | | Consolidated net sales | $830,543 | $703,155 | $127,388 | 18.1% | - The improvement in sales was primarily due to increased comparable sales across all segments, driven by recovery from reduced customer traffic in U.S. and Canada Retail segments due to the COVID-19 pandemic, and higher wholesale sales in the Brand Portfolio segment[82] Gross Profit This section examines the factors influencing gross profit and its percentage of net sales, such as sales volume, promotional activity, and freight costs | Metric | April 30, 2022 (in thousands) | May 1, 2021 (in thousands) | Change (Amount in thousands) | Change (%) | Basis Points Change | | :-------------------------- | :---------------------------- | :------------------------- | :--------------------------- | :--------- | :------------------ | | Gross profit | $275,745 | $216,111 | $59,634 | 27.6% | 250 | | Gross profit as % of net sales | 33.2% | 30.7% | | | | - The improvement in gross profit was primarily driven by increased sales and being less promotional, partially offset by higher freight costs[83] Operating Expenses This section discusses the changes in operating expenses and their impact on profitability, including payroll and marketing costs - Operating expenses increased by $22.6 million year-over-year, primarily due to higher store payroll and marketing expenses in line with increased net sales[86] - Operating expenses as a percentage of sales improved to 26.9% from 28.5% in the prior year, reflecting leverage from increased net sales[86] Loss on extinguishment of debt and write-off of deferred debt issuance costs This section details the financial impact of debt settlement, including prepayment premiums and the write-off of associated costs - The company incurred a $12.7 million loss on extinguishment of debt related to the full settlement of its Term Loan on February 8, 2022, comprising a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs[87] - An additional $0.2 million of debt issuance costs were written off due to the replacement of the 2020 ABL Revolver[87] Income Taxes This section explains the effective tax rates for the reported periods and the factors influencing them, such as permanent tax adjustments and valuation allowances | Period | Effective Tax Rate | | :-------------------------------- | :----------------- | | Three months ended April 30, 2022 | 30.0% | | Three months ended May 1, 2021 | -89.2% | - The effective tax rate for Q1 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation, while the negative rate in Q1 2021 resulted from a full valuation allowance on deferred tax assets and net discrete tax benefits[88] Seasonality This section describes the seasonal nature of the company's business and how external factors like weather and market trends can affect results - The business has two principal selling seasons: spring (Q1 and Q2) and fall (Q3 and Q4), with fall typically generating slightly higher net sales[89] - Seasonal results can fluctuate based on weather conditions and customer interest in new styles, though typical seasonal trends were not experienced in 2021 due to the COVID-19 pandemic[89] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash flow, debt, and capital expenditure plans Overview This section outlines the company's primary cash flow requirements and its strategy for maintaining sufficient liquidity and capital resources - Primary ongoing operating cash flow requirements include inventory purchases, lease obligations, licensing royalty commitments, other working capital needs, and capital expenditures[90] - The company believes that cash generated from operations, current cash levels, and the 2022 ABL Revolver are sufficient to support ongoing operations, seasonal working capital, capital expenditures, and share repurchases for the next 12 months and beyond[92] Operating Cash Flows This section analyzes the changes in cash flows from operating activities, highlighting the impact of working capital and net income - Net cash used in operating activities increased to ($40.7 million) for the three months ended April 30, 2022, from ($1.4 million) in the prior year[93] - The increase in cash used was driven by higher working capital spend, including increases in consolidated inventories and receivables on wholesale sales, and the timing of payments to vendors, partially offset by increased net income[95] Investing Cash Flows This section details the cash flows used in investing activities, primarily focusing on capital expenditures for infrastructure and store improvements - Net cash used in investing activities increased to ($17.1 million) for the three months ended April 30, 2022, from ($5.6 million) in the prior year[93] - This was primarily due to capital expenditures related to infrastructure, information technology (IT) projects, and store improvements[96] Financing Cash Flows This section explains the cash flows generated from or used in financing activities, including debt, share repurchases, and dividends - Net cash provided by financing activities was $39.8 million for the three months ended April 30, 2022, a significant increase from ($3.6 million) used in the prior year[93] - This was due to net receipts of $306.9 million from revolving lines of credit, offset by $238.2 million in payments for the Term Loan settlement and $22.7 million for Class A common share repurchases[97] Debt This section provides an overview of the company's debt structure, including revolving credit facilities and term loan settlements, and compliance with covenants - The company replaced its 2020 ABL Revolver with the 2022 ABL Revolver, providing a revolving line of credit up to $550.0 million, with $306.9 million outstanding and $238.2 million available for borrowings as of April 30, 2022[98] - The Term Loan was fully settled on February 8, 2022, resulting in a $12.7 million loss on extinguishment of debt[100] - As of April 30, 2022, the company was in compliance with all financial covenants of the 2022 ABL Revolver[99] Capital Expenditure Plans This section outlines the company's planned capital investments for the current fiscal year and the primary areas of expenditure - The company expects to spend approximately $70.0 million to $80.0 million for capital expenditures in 2022, having invested $12.2 million during the three months ended April 30, 2022[101] - Future investments will primarily depend on store openings and remodels, as well as infrastructure and IT projects[101] Recent Accounting Pronouncements This section discusses the potential impact of recently issued accounting standards on the company's financial statements - There are no recent accounting pronouncements that are expected to have a material impact on the company's consolidated financial statements when adopted[103] Critical Accounting Policies and Estimates This section highlights the accounting policies that require significant management judgment and estimates, and any changes to their application - The preparation of financial statements requires management to make significant estimates and assumptions, which are based on current events and future actions, and are subject to re-evaluation[104] - There have been no material changes to the application of critical accounting policies and estimates disclosed in the 2021 Form 10-K[104] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's exposure to market risks, specifically related to interest rates and foreign currency exchange rates, is addressed, confirming no material changes from prior disclosures - The company has market risk exposure related to interest rates and foreign currency exchange rates[105] - There have been no material changes in primary risk exposures or management of market risks from those disclosed in the 2021 Form 10-K[105] ITEM 4. CONTROLS AND PROCEDURES This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's controls designed to ensure timely and accurate disclosure of financial information - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of April 30, 2022[106] Changes in Internal Control Over Financial Reporting This section addresses any material changes in the company's internal control over financial reporting during the last fiscal quarter - No change was made in the company's internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[107] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information on legal proceedings from Note 10 of the financial statements is incorporated by reference, indicating no material expected liability - Information on legal proceedings is incorporated by reference from Note 10, Commitments and Contingencies, of the Condensed Consolidated Financial Statements[109] ITEM 1A. RISK FACTORS This section states that there have been no material changes to the risk factors previously disclosed in the company's 2021 Form 10-K - As of the filing date, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in the company's Annual Report on Form 10-K for the fiscal year ended January 29, 2022[109] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the company's share repurchase program and dividend declarations, along with restrictions imposed by debt covenants Share Repurchase Program This section details the company's share repurchase activities, including the number of shares bought back and the remaining authorization - During the three months ended April 30, 2022, the company repurchased 1.7 million Class A common shares at an aggregate cost of $22.7 million[112] - $312.2 million of Class A common shares remain authorized under the share repurchase program as of April 30, 2022[112] Dividends This section provides information on the company's declared cash dividends for both Class A and Class B common shares - 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, paid on May 6, 2022[114] - On May 19, 2022, another quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares was declared, to be paid on July 6, 2022[115] Restrictions This section outlines the covenants within the company's debt agreements that may restrict its ability to pay dividends or repurchase stock - The 2022 ABL Revolver contains customary covenants restricting the company's ability to pay dividends or repurchase stock, with specific exceptions upon satisfying specified payment conditions based on availability[116] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there are no defaults upon senior securities - None[117] ITEM 4. MINE SAFETY DISCLOSURES This section indicates that mine safety disclosures are not applicable to the company - Not Applicable[118] ITEM 5. OTHER INFORMATION This section states that there is no other information to report - None[120] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including the Credit Agreement, various certifications, and iXBRL financial statements - Exhibits include the Credit Agreement (10.1), 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)[121] 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 behalf of Designer Brands Inc. on June 2, 2022[125]