Designer Brands(DBI) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the company's financial information, including statements, notes, and management's discussion and analysis Item 1. Financial Statements Presents Designer Brands Inc.'s unaudited condensed consolidated financial statements, including operations, balance sheets, cash flows, and detailed accounting notes Condensed Consolidated Statements of Operations Provides a detailed overview of the company's net sales, gross profit, operating profit, and net income for the three months ended May 1, 2021 Condensed Consolidated Statements of Operations (Three Months Ended) | Metric | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :---------------------------------- | :--------------------------- | :--------------------------- | | Net sales | 703,155 | 482,783 | | Gross profit (loss) | 216,111 | (26,460) | | Operating profit (loss) | 17,005 | (323,958) | | Net income (loss) | 17,026 | (215,858) | | Basic earnings (loss) per share | 0.23 | (3.00) | | Diluted earnings (loss) per share | 0.22 | (3.00) | Condensed Consolidated Statements of Comprehensive Income (Loss) Details the company's net income and other comprehensive income components, including foreign currency translation, for the three months ended May 1, 2021 Condensed Consolidated Statements of Comprehensive Income (Loss) (Three Months Ended) | Metric | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Net income (loss) | 17,026 | (215,858) | | Foreign currency translation gain (loss) | 543 | (3,541) | | Total comprehensive income (loss) | 17,569 | (219,572) | Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and shareholders' equity, as of May 1, 2021, and comparative periods Condensed Consolidated Balance Sheets (As of) | Metric | May 1, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :-------------------------------- | :--------------------------- | :-------------------------------- | :--------------------------- | | Cash and cash equivalents | 49,301 | 59,581 | 250,874 | | Total current assets | 863,297 | 780,585 | 949,207 | | Total assets | 2,032,465 | 1,976,595 | 2,437,841 | | Total current liabilities | 800,222 | 752,683 | 732,726 | | Total liabilities | 1,769,653 | 1,733,578 | 1,939,735 | | Total shareholders' equity | 262,812 | 243,017 | 498,106 | Condensed Consolidated Statements of Shareholders' Equity Outlines changes in shareholders' equity, including net income, stock-based compensation, and other comprehensive income, for the three months ended May 1, 2021 Condensed Consolidated Statements of Shareholders' Equity (Three Months Ended) | Metric | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Balance, January 30, 2021 / February 1, 2020 | 243,017 | 720,914 | | Net income (loss) | 17,026 | (215,858) | | Stock-based compensation activity | 2,226 | 3,924 | | Other comprehensive income (loss) | 543 | (3,714) | | Balance, May 1, 2021 / May 2, 2020 | 262,812 | 498,106 | Condensed Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities, showing the net change in cash for the three months ended May 1, 2021 Condensed Consolidated Statements of Cash Flows (Three Months Ended) | Metric | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Net cash used in operating activities | (1,356) | (39,469) | | Net cash provided by (used in) investing activities | (5,641) | 9,987 | | Net cash provided by (used in) financing activities | (3,589) | 193,900 | | Net increase (decrease) in cash and cash equivalents | (10,280) | 164,310 | | Cash and cash equivalents, end of period | 49,301 | 250,874 | Notes to the Condensed Consolidated Financial Statements Provides detailed explanations of significant accounting policies, revenue disaggregation, related party transactions, and other financial disclosures 1. Significant Accounting Policies Details the company's operational segments, the impact of COVID-19, and key accounting policies for impairment charges and tax rates - Designer Brands Inc. operates in three reportable segments: U.S. Retail (DSW), Canada Retail (The Shoe Company, Shoe Warehouse, DSW), and Brand Portfolio (wholesale, First Cost, direct-to-consumer via vincecamuto.com)[25] - The COVID-19 pandemic led to temporary store closures, workforce reductions (approximately 1,000 positions), and significantly reduced customer traffic and net sales in fiscal 2020[28][29][31] - In Q1 2020, the company recorded impairment charges of $84.9 million for retail segments, $6.5 million for Brand Portfolio customer relationship intangible, and $20.0 million for First Cost reporting unit goodwill, along with $84.0 million in additional inventory reserves[32][33][34] Government Credits Reducing Operating Expenses | Period | Amount ($ in millions) | | :-------------------- | :--------------------- | | Three months ended May 1, 2021 | 2.7 | | Three months ended May 2, 2020 | 4.5 | Effective Tax Rate Change | Period | Effective Tax Rate | | :-------------------- | :----------------- | | Three months ended May 1, 2021 | -89.2% | | Three months ended May 2, 2020 | 33.8% | 2. Revenue Disaggregates net sales by segment and details deferred revenue liabilities from gift cards and loyalty programs Disaggregation of Net Sales by Segment (Three Months Ended) | Segment | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :-------------------- | :--------------------------- | :--------------------------- | | U.S. Retail segment | 620,658 | 377,073 | | Canada Retail segment | 40,604 | 29,329 | | Brand Portfolio segment | 57,427 | 82,113 | | Other | — | 13,623 | | Total net sales | 703,155 | 482,783 | Deferred Revenue Liabilities (End of Period) | Metric | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Gift cards | 30,809 | 30,908 | | Loyalty programs deferred revenue | 12,955 | 14,568 | 3. Related Party Transactions Outlines transactions with related parties, including rent expense to Schottenstein Affiliates and royalty expense to ABG-Camuto - Schottenstein Affiliates beneficially owned approximately 17% of the Company's outstanding common shares and approximately 52% of the combined voting power as of May 1, 2021[48] Related Party Rent Expense (Three Months Ended) | Related Party | May 1, 2021 ($ in millions) | May 2, 2020 ($ in millions) | | :-------------------- | :-------------------------- | :-------------------------- | | Schottenstein Affiliates | 2.7 | 2.8 | Royalty Expense to ABG-Camuto (Three Months Ended) | Related Party | May 1, 2021 ($ in millions) | May 2, 2020 ($ in millions) | | :-------------------- | :-------------------------- | :-------------------------- | | ABG-Camuto | 4.6 | 4.4 | 4. Earnings (Loss) Per Share Presents basic and diluted earnings per share, along with weighted average shares outstanding, for the three months ended May 1, 2021 Earnings (Loss) Per Share (Three Months Ended) | Metric | May 1, 2021 | May 2, 2020 | | :------------------------------------------ | :---------- | :---------- | | Basic earnings (loss) per share | $0.23 | $(3.00) | | Diluted earnings (loss) per share | $0.22 | $(3.00) | | Weighted average diluted shares outstanding | 76,976 | 71,914 | 5. Stock-Based Compensation Details stock-based compensation expense, including stock options and restricted/director stock units, for the three months ended May 1, 2021 Stock-Based Compensation Expense (Three Months Ended) | Type | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Stock options | 253 | 463 | | Restricted and director stock units | 7,204 | 4,454 | | Total | 7,457 | 4,917 | 6. Shareholders' Equity Provides information on common shares issued and outstanding, and accumulated other comprehensive loss, as of May 1, 2021 Common Shares Information (As of) | Metric | May 1, 2021 (thousands) | January 30, 2021 (thousands) | May 2, 2020 (thousands) | | :-------------------- | :---------------------- | :--------------------------- | :-------------------- | | Class A Issued shares | 87,303 | 86,835 | 86,471 | | Class B Issued shares | 7,733 | 7,733 | 7,733 | | Class A Outstanding shares | 65,134 | 64,666 | 64,302 | | Class B Outstanding shares | 7,733 | 7,733 | 7,733 | Accumulated Other Comprehensive Loss (Net of Tax) | Metric | May 1, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :-------------------------------- | :--------------------------- | | Accumulated other comprehensive loss - end of period | (2,743) | (3,286) | (6,209) | 7. Receivables Details the composition of net receivables, including income tax receivable, as of May 1, 2021, and comparative periods Receivables, Net (As of) | Metric | May 1, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :-------------------------------- | :--------------------------- | | Income tax receivable | 158,890 | 149,824 | — | | Total receivables, net | 213,447 | 196,049 | 81,953 | 8. Goodwill and Intangible Assets Presents net goodwill by segment and details intangible assets, including trademarks and customer relationships, as of May 1, 2021 Net Goodwill by Segment (End of Period) | Segment | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :-------------------- | :--------------------------- | :--------------------------- | | U.S. Retail | 93,655 | 93,655 | | Canada Retail | — | — | | Brand Portfolio | — | — | | Total Net Goodwill | 93,655 | 93,655 | Intangible Assets, Net (As of) | Metric | May 1, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :-------------------------------- | :--------------------------- | | Definite-lived customer relationships | — | 118 | 427 | | Indefinite-lived trademarks and tradenames | 16,131 | 15,517 | 13,481 | | Total Intangible Assets, Net | 16,131 | 15,635 | 13,908 | 9. Accrued Expenses Lists various accrued expenses, such as gift cards, compensation, taxes, and loyalty programs, as of May 1, 2021 Accrued Expenses (As of) | Metric | May 1, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :-------------------------------- | :--------------------------- | | Gift cards | 30,809 | 34,442 | 30,908 | | Accrued compensation and related expenses | 29,945 | 49,864 | 13,700 | | Accrued taxes | 32,093 | 24,206 | 21,628 | | Loyalty programs deferred revenue | 12,955 | 11,379 | 14,568 | | Sales returns | 20,422 | 17,333 | 47,625 | | Customer allowances and discounts | 5,276 | 4,579 | 5,600 | | Other | 63,737 | 58,523 | 97,330 | | Total Accrued Expenses | 195,237 | 200,326 | 231,359 | 10. Debt Details the company's debt composition, including the ABL Revolver and Term Loan, and compliance with financial covenants Debt Composition (As of) | Metric | May 1, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :------------------------------------------ | :--------------------------- | :-------------------------------- | :--------------------------- | | ABL Revolver | 104,843 | 100,000 | — | | Term Loan | 240,625 | 243,750 | — | | Credit Facility | — | — | 393,000 | | Total debt | 345,468 | 343,750 | 393,000 | | Long-term debt | 274,887 | 272,319 | 393,000 | - The ABL Revolver provides a revolving line of credit of up to $400.0 million, maturing in August 2025, with $289.9 million available for borrowings as of May 1, 2021[64][108] - The Term Loan is a $250.0 million facility entered into on August 7, 2020, maturing in August 2025, with an interest rate of 9.8% (effective 11.8%) as of May 1, 2021[66][68][110][111] - As of May 1, 2021, the company was in compliance with all financial covenants under both the ABL Revolver and Term Loan[69][113] 11. Commitments and Contingencies Outlines insurance recovery receivables and guarantees for lease obligations, highlighting potential future financial impacts - The company recognized an insurance recovery receivable of $3.0 million in fiscal 2020 for losses from a third-party vendor service shutdown[71] - The company provides guarantees for lease obligations totaling approximately $14.4 million, scheduled to expire in fiscal 2023[72] 12. Segment Reporting Provides disaggregated net sales and gross profit (loss) by U.S. Retail, Canada Retail, and Brand Portfolio segments Segment Net Sales (Three Months Ended) | Segment | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :-------------------- | :--------------------------- | :--------------------------- | | U.S. Retail | 620,658 | 377,073 | | Canada Retail | 40,604 | 29,329 | | Brand Portfolio | 57,427 | 82,113 | | Other | — | 13,623 | | Total segment net sales | 718,689 | 502,138 | Segment Gross Profit (Loss) (Three Months Ended) | Segment | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | | :-------------------- | :--------------------------- | :--------------------------- | | U.S. Retail | 193,113 | (32,970) | | Canada Retail | 10,835 | (2,311) | | Brand Portfolio | 11,926 | 13,904 | | Other | — | (5,428) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, focusing on Q1 2021 profitability, strategic responses to COVID-19, and liquidity Executive Overview and Trends in our Business Highlights the company's return to profitability, inventory management, shift to athleisure, and strong digital demand in Q1 2021 - The company returned to profitability in the first quarter of fiscal 2021 for the first time since the onset of COVID-19[76] - Implemented inventory management actions to reduce markdowns in Q1 2021, allowing for increased investment in direct marketing[76] - Modified receipts to match a clear shift in consumer preferences towards athleisure (athletic and casual products) and away from dress and seasonal categories[76] - Generated strong digital demand in Q1 2021, well above the prior year, supported by Buy Online Pick Up in Store, Buy Online Ship to Store, and Curbside Pickup options[76] Impact of COVID-19 on our Results of Operations Discusses the effects of store closures, workforce reductions, reduced traffic, and ongoing uncertainties due to the COVID-19 pandemic - All U.S. and Canada stores were temporarily closed starting March 18, 2020, leading to significant reductions in net sales and cash flows[78][80] - An internal reorganization and workforce reduction eliminated approximately 1,000 associate positions from July 2020 into Q1 2021[79] - Customer traffic and net sales remained significantly reduced from pre-COVID-19 levels, particularly in Canada due to government-imposed restrictions[80] - The ultimate impacts of the COVID-19 outbreak remain highly uncertain and may lead to future write-downs or adjustments to assets[81][83] Financial Summary and Other Key Metrics Presents key financial metrics, including net sales, comparable sales, gross profit, and net income, for the three months ended May 1, 2021 Key Financial Metrics (Three Months Ended) | Metric | May 1, 2021 | May 2, 2020 | Change (%) | | :------------------------------------------ | :---------- | :---------- | :--------- | | Net sales ($ in millions) | 703.2 | 482.8 | 45.6% | | Comparable sales (%) | 52.2% | (42.3)% | - | | Gross profit as % of net sales | 30.7% | (5.5)% | - | | Net income (loss) ($ in millions) | 17.0 | (215.9) | - | | Diluted earnings (loss) per share | $0.22 | $(3.00) | - | - Gross profit as a percentage of net sales for Q1 2021 (30.7%) tracked higher than the pre-COVID-19 rate of 29.7% for Q1 2019, driven by tight inventory management and less promotional activity[85] Comparable Sales Performance Metric Details comparable sales increases and decreases across U.S. Retail, Canada Retail, and Brand Portfolio segments Comparable Sales Increase (Decrease) by Segment (Three Months Ended) | Segment | May 1, 2021 | May 2, 2020 | | :------------------------------------------ | :---------- | :---------- | | U.S. Retail segment | 56.3% | (42.4)% | | Canada Retail segment | 10.0% | (32.4)% | | Brand Portfolio segment - direct-to-consumer channel | 6.8% | 92.8% | | Total comparable sales | 52.2% | (42.3)% | Number of Stores Provides the total number of DSW and Canada Retail stores at the end of the first quarter for current and prior periods Number of Stores (End of First Quarter) | Segment | May 1, 2021 | May 2, 2020 | | :------------------------------------------ | :---------- | :---------- | | U.S. Retail segment - DSW stores | 516 | 521 | | Canada Retail segment | 145 | 145 | | Total number of stores | 661 | 666 | Results of Operations Analyzes consolidated net sales, gross profit, operating expenses, and net income, highlighting changes and tax rate impacts Consolidated Results of Operations (Three Months Ended) | Metric | May 1, 2021 ($ in thousands) | May 2, 2020 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------ | :--------------------------- | :--------------------------- | :---------------------- | :--------- | | Net sales | 703,155 | 482,783 | 220,372 | 45.6% | | Gross profit (loss) | 216,111 | (26,460) | 242,571 | NM | | Operating expenses | (200,814) | (187,221) | (13,593) | 7.3% | | Impairment charges | — | (112,547) | 112,547 | NM | | Operating profit (loss) | 17,005 | (323,958) | 340,963 | NM | | Net income (loss) | 17,026 | (215,858) | 232,884 | NM | - Operating expenses as a percentage of sales improved to 28.5% in Q1 2021 from 38.8% in Q1 2020, but remained elevated compared to the pre-COVID-19 rate of 24.9% for Q1 2019[99] - The effective tax rate changed from 33.8% in Q1 2020 to negative 89.2% in Q1 2021, primarily due to maintaining a full valuation allowance on deferred tax assets and recording net discrete tax benefits[101] Seasonality Explains the seasonal trends of the business, noting disruptions caused by the COVID-19 pandemic - The business is generally subject to seasonal trends, with new spring styles introduced in Q1 and new fall styles in Q3, but these trends have been disrupted since the COVID-19 outbreak[102] Liquidity and Capital Resources Assesses the company's ability to meet financial obligations, fund operations, and manage debt, including ABL Revolver and Term Loan details - The company believes cash generated from operations, current cash levels, and the ABL Revolver are sufficient to maintain ongoing operations, fund capital expenditures, and meet debt service obligations over the next 12 months[103] Cash Flows Summary (Three Months Ended) | Metric | May 1, 2021 ($ in millions) | May 2, 2020 ($ in millions) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash used in operating activities | (1.4) | (39.5) | | Net cash used in investing activities | (5.6) | 10.0 (provided) | | Net cash used in financing activities | (3.6) | 193.9 (provided) | - The company replaced its Credit Facility with a $400.0 million ABL Revolver and a $250.0 million Term Loan on August 7, 2020, both maturing in August 2025[108][110] - As of May 1, 2021, $104.8 million was outstanding on the ABL Revolver (with $289.9 million available) and $240.6 million on the Term Loan, and the company was in compliance with all debt covenants[108][110][113] - Expected capital expenditures for fiscal 2021 are $35.0 million to $45.0 million, with $5.6 million invested during Q1 2021[114] Critical Accounting Policies and Estimates Discusses significant estimates and assumptions in financial reporting, such as sales returns, inventory, impairments, and income taxes - The preparation of financial statements involves significant estimates and assumptions for areas such as sales returns, inventory valuation, impairments, lease accounting, and income taxes[115] - There have been no material changes to the application of critical accounting policies disclosed in the 2020 Form 10-K[115] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details market risk exposures related to interest rates and foreign currency exchange rates, noting no material changes from the prior fiscal year - Primary market risk exposures are related to interest rates and foreign currency exchange rates[116] - No material changes in risk exposures or management have occurred since the 2020 Form 10-K[116] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting during the last quarter - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of May 1, 2021[117] - No material changes were made in internal control over financial reporting during the last fiscal quarter[118] PART II. OTHER INFORMATION Presents additional information including legal proceedings, risk factors, equity security sales, debt defaults, and exhibits Item 1. Legal Proceedings The company is involved in various legal proceedings, but potential liabilities are not expected to be material to operations or financial condition - The company is involved in various legal proceedings, but the amount of any potential liability is not expected to be material[120] Item 1A. Risk Factors No material changes to the previously disclosed risk factors from the 2020 Form 10-K have occurred as of the filing date - No material changes to the risk factors as set forth in Part I, Item 1A of the 2020 Form 10-K have occurred as of the filing date[121] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has a share repurchase program but is restricted from dividends or repurchases until Q3 2021 due to debt covenants - The Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under its share repurchase program[122] - The company is restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, due to covenants in the ABL Revolver and Term Loan[123] - The company currently does not anticipate paying dividends or repurchasing additional shares under its share repurchase program[123] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported[124] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[125] Item 5. Other Information No other information is reported under this item - No other information was reported[126] Item 6. Exhibits Lists all exhibits filed with Form 10-Q, including certifications from executive officers and iXBRL financial statements - Exhibits include 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)[128]