Designer Brands(DBI) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion for Designer Brands Inc Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and accompanying notes Condensed Consolidated Statements of Operations For the third quarter of 2022, net sales slightly increased to $865.0 million from $853.5 million year-over-year, but net income decreased significantly to $45.2 million from $80.2 million, while nine-month net sales grew to $2.55 billion from $2.37 billion, and net income fell to $117.6 million from $140.1 million Condensed Consolidated Statements of Operations (Q3 & Nine Months, in thousands) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $865,020 | $853,467 | $2,554,882 | $2,373,957 | | Gross profit | $285,819 | $313,617 | $857,234 | $814,409 | | Operating profit | $64,528 | $104,308 | $185,319 | $182,725 | | Net income | $45,171 | $80,184 | $117,566 | $140,070 | | Diluted EPS | $0.65 | $1.04 | $1.60 | $1.81 | Condensed Consolidated Balance Sheets As of October 29, 2022, total assets increased to $2.17 billion from $2.01 billion at the start of the fiscal year, driven by higher inventories and receivables, while total liabilities also rose to $1.79 billion from $1.60 billion, primarily due to a significant increase in long-term debt, resulting in a decrease in total shareholders' equity to $383.5 million from $412.4 million Key Balance Sheet Items (in thousands) | Account | Oct 29, 2022 | Jan 29, 2022 | Oct 30, 2021 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $62,507 | $72,691 | $83,069 | | Inventories | $681,843 | $586,429 | $602,101 | | Total assets | $2,171,378 | $2,014,634 | $2,093,944 | | Long-term debt | $415,467 | $225,536 | $165,422 | | Total liabilities | $1,787,866 | $1,602,238 | $1,700,283 | | Total shareholders' equity | $383,512 | $412,396 | $393,661 | Condensed Consolidated Statements of Cash Flows For the nine months ended October 29, 2022, net cash from operating activities decreased sharply to $37.9 million from $164.3 million in the prior year, mainly due to changes in working capital, while net cash used in investing activities increased to $56.0 million, and financing activities provided a net cash inflow of $9.2 million, a reversal from a $117.9 million outflow in the prior year Cash Flow Summary (Nine Months Ended, in thousands) | Cash Flow Category | Oct 29, 2022 | Oct 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,940 | $164,294 | | Net cash used in investing activities | ($56,009) | ($22,061) | | Net cash provided by (used in) financing activities | $9,246 | ($117,863) | | Net (decrease) in cash | ($10,184) | $25,034 | Notes to the Condensed Consolidated Financial Statements The notes provide details on the company's business structure, revenue recognition, debt facilities, and segment performance, including its operation across three segments, a new $550.0 million ABL Revolver, and the full settlement of its Term Loan - The company operates in three reportable segments: U.S. Retail (DSW), Canada Retail (The Shoe Company, DSW), and Brand Portfolio (wholesale, First Cost commissions, Vince Camuto e-commerce)[25] - A valuation allowance is maintained on substantially all U.S. net deferred tax assets due to a three-year cumulative loss position, but continued profitability may allow for a release of this allowance within the next twelve months[32] - On March 30, 2022, the company replaced its credit facility with a new senior secured asset-based revolving credit facility (ABL Revolver) of up to $550.0 million, maturing in March 2027[67] - On February 8, 2022, the company fully settled its $231.3 million Term Loan, incurring a $12.7 million loss on extinguishment of debt[70] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the third quarter of 2022, highlighting a 1.4% increase in net sales and a 3.0% increase in comparable sales, despite profitability declining due to a more promotional retail environment and increased freight costs, while also covering segment results, liquidity, and capital resources Executive Overview and Trends In Q3 2022, net sales rose 1.4% and comparable sales grew 3.0% year-over-year, with a key strategic success being the 25.0% increase in sales from Owned Brands, which now represent 26.5% of total net sales, despite lower profits due to a highly promotional retail environment and increased clearance inventory Q3 2022 Performance vs. Q3 2021 | Metric | Change | | :--- | :--- | | Net Sales | +1.4% | | Comparable Sales | +3.0% | | Owned Brands Net Sales | +25.0% | - Profitability was negatively impacted by a more promotional retail environment as the industry shifted from tight to excess inventory[76] Results of Operations For Q3 2022, consolidated net sales increased 1.4% to $865.0 million, but gross profit margin fell 370 basis points to 33.0% due to increased promotions and freight costs, leading to a 43.7% drop in net income, while for the nine-month period, net sales grew 7.6% to $2.55 billion, but net income decreased by 16.1% to $117.6 million Q3 2022 vs Q3 2021 Performance (in millions) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $865.0 | $853.5 | +1.4% | | Gross Profit | $285.8 | $313.6 | -8.9% | | Gross Margin | 33.0% | 36.7% | -370 bps | | Net Income | $45.2 | $80.2 | -43.7% | Nine Months 2022 vs Nine Months 2021 Performance (in millions) | Metric | Nine Months 2022 | Nine Months 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,554.9 | $2,374.0 | +7.6% | | Gross Profit | $857.2 | $814.4 | +5.3% | | Gross Margin | 33.6% | 34.3% | -70 bps | | Net Income | $117.6 | $140.1 | -16.1% | - The decrease in Q3 gross profit was driven by promotions in the U.S. Retail and Brand Portfolio segments, higher freight costs, and approximately $6.0 million in additional distribution costs related to moving digital fulfillment activities[89] Liquidity and Capital Resources The company's liquidity is supported by cash from operations and its ABL Revolver, with operating cash flow decreasing significantly to $37.9 million for the first nine months of 2022, while the company repurchased $147.5 million of shares, settled its Term Loan, and had $130.9 million available under its ABL Revolver as of October 29, 2022 - Net cash from operating activities decreased by $126.4 million for the nine months ended Oct 29, 2022, compared to the prior year, primarily due to higher spend on working capital[108][109] - During the first nine months of 2022, the company repurchased 10.7 million Class A common shares for $147.5 million[105][112] - As of October 29, 2022, the company had $415.5 million in outstanding borrowings and $130.9 million available under its $550.0 million ABL Revolver[113] - Capital expenditure guidance for fiscal 2022 is projected to be between $55.0 million and $65.0 million[116] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its primary market risk exposures, which relate to interest rates and foreign currency exchange rates, from those disclosed in its 2021 Form 10-K - There have been no material changes in the company's market risk exposure related to interest rates and foreign currency exchange rates since the 2021 Form 10-K[120] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of the end of the quarter, with no material changes to the 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 October 29, 2022[121] - No material changes were made to the internal control over financial reporting during the last fiscal quarter[122] PART II - OTHER INFORMATION This section provides information on legal proceedings, risk factors, unregistered sales of equity securities, and required exhibits Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 of the Condensed Consolidated Financial Statements, which states that the company is involved in various incidental legal proceedings that are not expected to have a material impact on its financial condition - The company is involved in various legal proceedings incidental to its business, which are not expected to have a material impact on its financial results or condition[71][124] Risk Factors The company reports that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended January 29, 2022 - There have been no material changes to the risk factors as set forth in the company's 2021 Form 10-K[124] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity and dividend declarations, noting that during the third quarter of 2022, the company repurchased 1.288 million Class A common shares, and subsequently declared a quarterly cash dividend of $0.05 per share Share Repurchases in Q3 2022 (Publicly Announced Program) | Period | Shares Purchased (thousands) | Average Price Paid Per Share | | :--- | :--- | :--- | | Jul 31 - Aug 27, 2022 | 306 | $14.41 | | Aug 28 - Oct 1, 2022 | 224 | $15.84 | | Oct 2 - Oct 29, 2022 | 758 | $14.89 | | Total | 1,288 | $14.79 (approx.) | - On November 17, 2022, the Board declared a quarterly cash dividend of $0.05 per share, payable on December 28, 2022[129] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and the interactive data files (iXBRL) - Exhibits filed include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and the Cover Page Interactive Data File in iXBRL format (Exhibit 104)[134][135]