Designer Brands(DBI) - 2021 Q4 - Annual Report

Part I Business The company designs, produces, and retails footwear and accessories across North America through three primary operating segments - The company operates through three main segments: U.S. Retail, Canada Retail, and the Brand Portfolio[17] - The company's loyalty programs are a significant driver of sales, with approximately 30 million members generating about 84% of the retail segments' net sales in fiscal 2020[25][90] - In fiscal 2020, a notable consumer shift from dress footwear to athleisure prompted the company to adjust its product assortment[21] - The Brand Portfolio segment sourced 73% of its merchandise from China in FY2020, a decrease from 83% in FY2019[33] - As of January 30, 2021, the company employed approximately 11,400 people and emphasized diversity, with over 80% of its U.S. associates being female[37][47] Risk Factors The company faces significant risks from the COVID-19 pandemic, supply chain disruptions, changing consumer trends, and substantial shareholder control - The COVID-19 pandemic is a primary risk, causing store closures, a sharp decline in net sales, and workforce reductions of approximately 1,000 positions[62][63][64] - The business is vulnerable to disruptions in its distribution systems, with COVID-19 related port delays creating significant risks[67][71] - A consumer preference shift towards athleisure requires successful product mix adaptation to avoid decreased sales and increased markdowns[79] - Restrictive covenants in the ABL Revolver and Term Loan could limit operational funding and restrict dividends or share repurchases until at least Q3 2021[83][84] - The Schottenstein Affiliates control approximately 52% of the company's voting power, enabling substantial influence over shareholder votes[127][128] Properties The company operates from owned corporate and distribution facilities and leases its retail stores and additional fulfillment centers Principal Properties as of January 30, 2021 | Facility | Location | Owned/Leased | Segment | Approx. Square Feet | | :--- | :--- | :--- | :--- | :--- | | Principal corporate office | Columbus, Ohio | Owned | Corporate, U.S. Retail and Other | 178,000 | | Distribution center | Columbus, Ohio | Owned | U.S. Retail and Other | 625,000 | | Fulfillment center | Columbus, Ohio | Leased | U.S. Retail | 854,000 | | Distribution center | Westampton, New Jersey | Leased | Brand Portfolio | 683,000 | | U.S. retail stores | 519 various U.S. locations | Leased | U.S. Retail | 10,547,000 | | Canada retail stores | 144 various Canadian locations | Leased | Canada Retail | 1,156,000 | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (DBI) underperformed market indices, while dividends and share repurchases were suspended due to COVID-19 and credit restrictions - Dividends were discontinued after Q1 2020, and payments are restricted by credit agreements until at least Q3 2021[140][142] - No Class A common shares were repurchased during fiscal 2020 under the existing share repurchase program[141] Cumulative Total Shareholder Return Comparison (2016-2021) | Company / Index | Jan 30, 2016 | Jan 28, 2017 | Feb 3, 2018 | Feb 2, 2019 | Feb 1, 2020 | Jan 30, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Designer Brands Inc. | $100.00 | $87.62 | $87.96 | $124.95 | $70.23 | $61.40 | | S&P MidCap 400 Index | $100.00 | $128.76 | $145.53 | $139.75 | $152.32 | $177.59 | | S&P MidCap 400 Retail Index | $100.00 | $101.22 | $101.46 | $102.09 | $99.88 | $173.05 | Management's Discussion and Analysis of Financial Condition and Results of Operations The COVID-19 pandemic drove a 36.0% decrease in net sales to $2.2 billion and a net loss of $488.7 million in fiscal 2020 - Key business trends in fiscal 2020 included aggressive inventory management (down 25.2% YoY) and leveraging strong digital demand to mitigate store traffic declines[149] Fiscal 2020 vs. 2019 Financial Summary | Metric | Fiscal 2020 | Fiscal 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $2.23B | $3.49B | -36.0% | | Comparable Sales | -34.2% | +0.8% | -35.0 p.p. | | Gross Profit | $311.2M | $999.7M | -68.9% | | Gross Profit % | 13.9% | 28.6% | -14.7 p.p. | | Operating (Loss) Profit | ($586.3M) | $127.3M | NM | | Net (Loss) Income | ($488.7M) | $94.5M | NM | | Diluted (Loss) EPS | ($6.77) | $1.27 | NM | Net Sales by Segment (Fiscal 2020 vs. 2019) | Segment | 2020 Net Sales (in thousands) | 2019 Net Sales (in thousands) | % Change | | :--- | :--- | :--- | :--- | | U.S. Retail | $1,800,323 | $2,745,395 | -34.4% | | Canada Retail | $182,659 | $249,017 | -26.6% | | Brand Portfolio | $248,646 | $448,285 | -44.5% | | Other | $62,909 | $122,090 | -48.5% | - The company recorded significant impairment charges of $153.6 million in fiscal 2020, primarily related to store-level long-lived assets and goodwill[168] - To enhance liquidity, the company secured a new $400M ABL Revolver and a $250M Term Loan in August 2020[178][181][195] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from variable-rate debt and foreign currency fluctuations from its Canadian operations - The company has interest rate risk due to variable rates on its $100.0M ABL Revolver and $243.8M Term Loan outstanding as of January 30, 2021[195] - Foreign currency exchange risk from Canadian operations could result in a $2.2 million equity translation fluctuation from a hypothetical 10% rate movement[196] Financial Statements and Supplementary Data This section incorporates the company's consolidated financial statements and the independent auditor's report into the filing - This item formally incorporates the company's audited consolidated financial statements into the Form 10-K[197] Controls and Procedures Management concluded that both disclosure controls and internal control over financial reporting were effective as of January 30, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[200] - Management concluded that the company's internal control over financial reporting was effective as of January 30, 2021[201] Part III Directors, Executive Compensation, and Corporate Governance Information on directors, executive compensation, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, and Security Ownership is incorporated by reference from the company's 2021 Proxy Statement[206][207][209] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This item lists all financial statements and exhibits filed with the Form 10-K, including the consolidated statements of operations, balance sheets, and cash flows[211] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on financial statements and internal controls, identifying asset impairment and inventory valuation as Critical Audit Matters - The auditor issued an unqualified (clean) opinion on both the financial statements and the effectiveness of internal control over financial reporting[232] - The report notes a change in accounting principle for leases (ASU 2016-02), adopted effective February 3, 2019[233] - Critical Audit Matters identified were the impairment of long-lived assets and the valuation of inventories due to significant management estimates[241][249] Consolidated Financial Statements The company reported a net loss of $488.7 million on sales of $2.23 billion in fiscal 2020, with a significant decline in operating cash flow Consolidated Statement of Operations Highlights (in thousands) | Account | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Net sales | $2,234,719 | $3,492,687 | | Gross profit | $311,241 | $999,670 | | Operating (loss) | ($586,314) | $127,299 | | Net (loss) income | ($488,719) | $94,497 | | Diluted (loss) EPS | ($6.77) | $1.27 | Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 30, 2021 | Feb 1, 2020 | | :--- | :--- | :--- | | Total current assets | $780,585 | $900,810 | | Total assets | $1,976,595 | $2,465,070 | | Total current liabilities | $752,683 | $680,031 | | Total liabilities | $1,733,578 | $1,744,156 | | Total shareholders' equity | $243,017 | $720,914 | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($153,793) | $196,707 | | Net cash provided by (used in) investing activities | $2,631 | ($27,439) | | Net cash provided by (used in) financing activities | $122,954 | ($183,353) | Notes to Consolidated Financial Statements Notes detail significant COVID-19 impacts, including $153.6 million in impairments, new debt facilities, and a large deferred tax asset valuation allowance - Due to COVID-19 impacts, the company recorded impairment charges of $127.1 million for retail store assets and $20.0 million for goodwill[280][281] - A valuation allowance of $101.2 million was recorded against its deferred tax assets due to uncertainty of realization following significant losses in fiscal 2020[193][413] Net Sales by Product Category (in thousands) | Category | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | U.S. Retail | | | | Women's footwear | $1,161,836 | $1,853,265 | | Men's footwear | $386,338 | $539,917 | | Canada Retail | | | | Women's footwear | $92,623 | $133,762 | | Brand Portfolio | | | | Wholesale | $197,940 | $379,698 | - As of January 30, 2021, total debt was $343.8 million, consisting of $100.0 million on the ABL Revolver and $243.8 million on the Term Loan[389] - Total operating lease liabilities as of January 30, 2021, were $922.5 million, with a weighted-average remaining lease term of 5.3 years[401]