UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 202130, 2022
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from | | to | |
Commission file number 001-325451-32545
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DESIGNER BRANDS INC. |
(Exact name of registrant as specified in its charter) |
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Ohio | | 31-0746639 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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810 DSW Drive, | Columbus, | Ohio | | | 43219 |
(Address of principal executive offices) | | | (Zip Code) |
Registrant's telephone number, including area code: (614) 237-7100
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Not Applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Shares, without par value | DBI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐☑ | Accelerated filer | ☑☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares outstanding of each of the registrant's classes of common stock, as of August 24, 2021: 65,266,90425, 2022: 56,500,918 Class A common shares and 7,732,743 Class B common shares.
DESIGNER BRANDS INC.
TABLE OF CONTENTS
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PART I | | |
Item 1 | | |
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Item 2 | | |
Item 3 | | |
Item 4 | | |
PART II | | |
Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 3 | | |
Item 4 | | |
Item 5 | | |
Item 6 | | |
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All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q for the six months ended July 30, 2022 (this "Form 10-Q") mean Designer Brands Inc. and its subsidiaries.
We have included website addresses throughout this report as inactive textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-Q.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which1995. Such statements reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations, and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of thisthese forward-looking informationstatements should not be regarded as a representation by us or any other person that the future plans, estimates, or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. In addition to thoseother factors describeddiscussed elsewhere in this report, under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 30, 202129, 2022 (the "2020"2021 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 22, 2021,21, 2022, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements including,that include, but are not limited to, the following:
•risks and uncertaintyuncertainties related to the continued outbreak of theongoing coronavirus ("COVID-19"), pandemic, any future COVID-19 resurgence, and any other adverse public health developments;
•risks relatedthat recent inflationary pressures, including higher freight costs, could have on our results of operations and customer demand based on pricing actions and operating measures taken to losses or disruptions associated with our distribution systems,mitigate the impact of inflation;
•uncertain general economic conditions, including our distributioninflation and fulfillment centers and our stores, whether as a result of COVID-19, supply chain disruptions, reliance on third-party providers, cyber-related attacks,pressures, domestic and global political and social conditions and the potential impact of geopolitical turmoil or otherwise;conflict, and the related impacts to consumer discretionary spending;
•our ability to protect the health and safety ofexecute on our associates and our customers, which may be affected by current or future government regulations related to stay-at-home orders and orders related to the operation of non-essential businesses;
•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise and related supply chain disruptions, exposure to political, economic, operational, compliance and other risks, and fluctuations in foreign currency exchange rates;
•maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers;long-term strategic plans;
•our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
•our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•risks related to restrictionslosses or disruptions associated with our distribution systems, including our distribution centers and fulfillment center and stores, whether as a result of the COVID-19 pandemic, reliance on our senior secured asset-based revolving credit facility ("ABL Revolver") and senior secured term loan ("Term Loan") that could limit our ability to fund operations;third-party providers, or otherwise;
•our reliance on our loyalty programs and marketing to drive traffic, sales, and customer loyalty;
•failurerisks related to retaincyber security threats and privacy or data security breaches or the potential loss or disruption of our key executives or attract qualified new personnel;information systems;
•our ability to protect our reputation and to maintain the brands we license;
•our competitiveness with respect to style, price, brand availability, and customer service;
•risks related to the loss or disruption of our information systemsinternational operations, including international trade, our reliance on foreign sources for merchandise, exposure to political, economic, operational, compliance and dataother risks, and our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;fluctuations in foreign currency exchange rates;
•our ability to comply with privacy laws and regulations, as well as other legal obligations;
•our ability to protect our reputationrisks associated with climate change and to maintain the brands we license;
•uncertain general economic, political and social conditions and the related impacts to consumer discretionary spending;
•our competitiveness with respect to style, price, brand availability and customer service;
•our ability to provide customers cost-effective shopping platforms;other corporate responsibility issues; and
•uncertaintyuncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance, or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time, and it is not possible for management to predict all such factors, nor can management assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
DESIGNER BRANDS INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | |
Item 1. Financial Statements | |
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PART II. OTHER INFORMATION | |
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All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Form 10-Q mean Designer Brands Inc. and its subsidiaries.
PART I. FINANCIAL INFORMATIONI
Item 1. Financial Statements | | |
ITEM 1. FINANCIAL STATEMENTS |
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
| | Three months ended | | Six months ended | |
| July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 | |
(unaudited and in thousands, except per share amounts) | | (unaudited and in thousands, except per share amounts) | Three months ended | | Six months ended | |
| July 30, 2022 | | July 31, 2021 | | July 30, 2022 | | July 31, 2021 | |
Net sales | Net sales | $ | 817,335 | | | $ | 489,714 | | | $ | 1,520,490 | | | $ | 972,497 | | Net sales | $ | 859,319 | | | $ | 817,335 | | | $ | 1,689,862 | | | $ | 1,520,490 | | |
Cost of sales | Cost of sales | (532,654) | | | (452,672) | | | (1,019,698) | | | (961,915) | | Cost of sales | (563,649) | | | (532,654) | | | (1,118,447) | | | (1,019,698) | | |
Gross profit | Gross profit | 284,681 | | | 37,042 | | | 500,792 | | | 10,582 | | Gross profit | 295,670 | | | 284,681 | | | 571,415 | | | 500,792 | | |
Operating expenses | Operating expenses | (224,385) | | | (168,424) | | | (425,199) | | | (355,645) | | Operating expenses | (228,690) | | | (224,385) | | | (452,116) | | | (425,199) | | |
Income from equity investment | 2,290 | | | 2,153 | | | 3,998 | | | 4,423 | | |
Income from equity investments | | Income from equity investments | 2,435 | | | 2,290 | | | 4,380 | | | 3,998 | | |
Impairment charges | Impairment charges | (1,174) | | | (6,735) | | | (1,174) | | | (119,282) | | Impairment charges | (1,816) | | | (1,174) | | | (2,888) | | | (1,174) | | |
Operating profit (loss) | 61,412 | | | (135,964) | | | 78,417 | | | (459,922) | | |
Operating profit | | Operating profit | 67,599 | | | 61,412 | | | 120,791 | | | 78,417 | | |
Interest expense, net | Interest expense, net | (8,072) | | | (3,788) | | | (16,886) | | | (5,946) | | Interest expense, net | (2,752) | | | (8,072) | | | (5,704) | | | (16,886) | | |
Loss on extinguishment of debt and write-off of debt issuance costs | | Loss on extinguishment of debt and write-off of debt issuance costs | — | | | — | | | (12,862) | | | — | | |
Non-operating income (expenses), net | Non-operating income (expenses), net | (244) | | | 743 | | | 562 | | | 656 | | Non-operating income (expenses), net | 37 | | | (244) | | | 43 | | | 562 | | |
Income (loss) before income taxes | 53,096 | | | (139,009) | | | 62,093 | | | (465,212) | | |
Income tax benefit (provision) | (10,236) | | | 40,795 | | | (2,207) | | | 151,140 | | |
Net income (loss) | $ | 42,860 | | | $ | (98,214) | | | $ | 59,886 | | | $ | (314,072) | | |
Basic and diluted earnings (loss) per share: | | | | | | | | |
Basic earnings (loss) per share | $ | 0.59 | | | $ | (1.36) | | | $ | 0.82 | | | $ | (4.36) | | |
Diluted earnings (loss) per share | $ | 0.55 | | | $ | (1.36) | | | $ | 0.78 | | | $ | (4.36) | | |
Income before income taxes | | Income before income taxes | 64,884 | | | 53,096 | | | 102,268 | | | 62,093 | | |
Income tax provision | | Income tax provision | (18,671) | | | (10,236) | | | (29,873) | | | (2,207) | | |
Net income | | Net income | $ | 46,213 | | | $ | 42,860 | | | $ | 72,395 | | | $ | 59,886 | | |
Basic and diluted earnings per share: | | Basic and diluted earnings per share: | | |
Basic earnings per share | | Basic earnings per share | $ | 0.66 | | | $ | 0.59 | | | $ | 1.02 | | | $ | 0.82 | | |
Diluted earnings per share | | Diluted earnings per share | $ | 0.62 | | | $ | 0.55 | | | $ | 0.96 | | | $ | 0.78 | | |
Weighted average shares used in per share calculations: | Weighted average shares used in per share calculations: | | Weighted average shares used in per share calculations: | | |
Basic shares | Basic shares | 72,932 | | | 72,142 | | | 72,773 | | | 72,028 | | Basic shares | 69,604 | | | 72,932 | | | 71,263 | | | 72,773 | | |
Diluted shares | Diluted shares | 77,619 | | | 72,142 | | | 77,271 | | | 72,028 | | Diluted shares | 73,942 | | | 77,619 | | | 75,369 | | | 77,271 | | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
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| Three months ended | | Six months ended |
| July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Net income (loss) | $ | 42,860 | | | $ | (98,214) | | | $ | 59,886 | | | $ | (314,072) | |
Other comprehensive income (loss), net of income taxes: | | | | | | | |
Foreign currency translation gain (loss) | (298) | | | 1,290 | | | 245 | | | (2,251) | |
Unrealized net gain on debt securities | — | | | — | | | — | | | 195 | |
Reclassification adjustment for net gains realized in net loss | — | | | — | | | — | | | (368) | |
Total other comprehensive income (loss), net of income taxes | (298) | | | 1,290 | | | 245 | | | (2,424) | |
Total comprehensive income (loss) | $ | 42,562 | | | $ | (96,924) | | | $ | 60,131 | | | $ | (316,496) | |
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| Three months ended | | Six months ended | | |
(unaudited and in thousands) | July 30, 2022 | | July 31, 2021 | | July 30, 2022 | | July 31, 2021 | | | | |
Net income | $ | 46,213 | | | $ | 42,860 | | | $ | 72,395 | | | $ | 59,886 | | | | | |
Other comprehensive income (loss), net- | | | | | | | | | | | |
Foreign currency translation gain (loss) | (63) | | | (298) | | | (144) | | | 245 | | | | | |
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Total comprehensive income | $ | 46,150 | | | $ | 42,562 | | | $ | 72,251 | | | $ | 60,131 | | | | | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
| | July 31, 2021 | | January 30, 2021 | | August 1, 2020 | |
(unaudited and in thousands) | | (unaudited and in thousands) | July 30, 2022 | | January 29, 2022 | | July 31, 2021 |
ASSETS | ASSETS | | | | | | ASSETS | |
Current Assets: | | Current Assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 46,458 | | | $ | 59,581 | | | $ | 206,720 | | Cash and cash equivalents | $ | 50,799 | | | $ | 72,691 | | | $ | 46,458 | |
| Receivables, net | Receivables, net | 199,371 | | | 196,049 | | | 49,240 | | Receivables, net | 204,880 | | | 199,826 | | | 199,371 | |
Inventories | Inventories | 504,316 | | | 473,183 | | | 445,044 | | Inventories | 694,010 | | | 586,429 | | | 504,316 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 53,616 | | | 51,772 | | | 69,456 | | Prepaid expenses and other current assets | 51,558 | | | 55,270 | | | 53,616 | |
Total current assets | Total current assets | 803,761 | | | 780,585 | | | 770,460 | | Total current assets | 1,001,247 | | | 914,216 | | | 803,761 | |
Property and equipment, net | Property and equipment, net | 271,401 | | | 296,469 | | | 332,730 | | Property and equipment, net | 242,147 | | | 256,786 | | | 271,401 | |
Operating lease assets | Operating lease assets | 676,665 | | | 700,481 | | | 797,413 | | Operating lease assets | 646,062 | | | 647,221 | | | 676,665 | |
Goodwill | Goodwill | 93,655 | | | 93,655 | | | 93,655 | | Goodwill | 93,655 | | | 93,655 | | | 93,655 | |
Intangible assets, net | Intangible assets, net | 15,905 | | | 15,635 | | | 15,663 | | Intangible assets, net | 20,237 | | | 15,527 | | | 15,905 | |
Deferred tax assets | — | | | — | | | 182,866 | | |
Equity investment | 55,149 | | | 58,598 | | | 56,690 | | |
| Equity investments | | Equity investments | 61,957 | | | 55,578 | | | 55,149 | |
Other assets | Other assets | 29,513 | | | 31,172 | | | 23,780 | | Other assets | 37,134 | | | 31,651 | | | 29,513 | |
Total assets | Total assets | $ | 1,946,049 | | | $ | 1,976,595 | | | $ | 2,273,257 | | Total assets | $ | 2,102,439 | | | $ | 2,014,634 | | | $ | 1,946,049 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | |
Current Liabilities: | | Current Liabilities: | |
Accounts payable | Accounts payable | $ | 299,322 | | | $ | 245,071 | | | $ | 224,693 | | Accounts payable | $ | 337,543 | | | $ | 340,877 | | | $ | 299,322 | |
Accrued expenses | Accrued expenses | 222,055 | | | 200,326 | | | 202,831 | | Accrued expenses | 210,469 | | | 215,812 | | | 222,055 | |
Current maturities of long-term debt | Current maturities of long-term debt | 62,500 | | | 62,500 | | | — | | Current maturities of long-term debt | — | | | — | | | 62,500 | |
Current operating lease liabilities | Current operating lease liabilities | 190,853 | | | 244,786 | | | 241,694 | | Current operating lease liabilities | 192,130 | | | 202,228 | | | 190,853 | |
Total current liabilities | Total current liabilities | 774,730 | | | 752,683 | | | 669,218 | | Total current liabilities | 740,142 | | | 758,917 | | | 774,730 | |
Long-term debt | Long-term debt | 184,569 | | | 272,319 | | | 393,000 | | Long-term debt | 387,441 | | | 225,536 | | | 184,569 | |
Non-current operating lease liabilities | Non-current operating lease liabilities | 645,136 | | | 677,735 | | | 778,826 | | Non-current operating lease liabilities | 588,064 | | | 593,429 | | | 645,136 | |
Other non-current liabilities | Other non-current liabilities | 30,502 | | | 30,841 | | | 25,586 | | Other non-current liabilities | 25,844 | | | 24,356 | | | 30,502 | |
Total liabilities | Total liabilities | 1,634,937 | | | 1,733,578 | | | 1,866,630 | | Total liabilities | 1,741,491 | | | 1,602,238 | | | 1,634,937 | |
Commitments and contingencies | Commitments and contingencies |
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0Shareholders' equity: | | |
Shareholders' equity: | | Shareholders' equity: | |
Common shares paid-in capital, no par value | Common shares paid-in capital, no par value | 998,117 | | | 990,153 | | | 980,749 | | Common shares paid-in capital, no par value | 1,010,181 | | | 1,005,382 | | | 998,117 | |
Treasury shares, at cost | Treasury shares, at cost | (515,065) | | | (515,065) | | | (515,065) | | Treasury shares, at cost | (643,563) | | | (515,065) | | | (515,065) | |
Retained deficit | Retained deficit | (168,899) | | | (228,785) | | | (54,138) | | Retained deficit | (1,909) | | | (74,304) | | | (168,899) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (3,041) | | | (3,286) | | | (4,919) | | Accumulated other comprehensive loss | (3,761) | | | (3,617) | | | (3,041) | |
Total shareholders' equity | Total shareholders' equity | 311,112 | | | 243,017 | | | 406,627 | | Total shareholders' equity | 360,948 | | | 412,396 | | | 311,112 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | $ | 1,946,049 | | | $ | 1,976,595 | | | $ | 2,273,257 | | Total liabilities and shareholders' equity | $ | 2,102,439 | | | $ | 2,014,634 | | | $ | 1,946,049 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited and in thousands, except per share data)
| | | Number of shares | | Amounts | | Number of shares | | Amounts |
| Class A common shares | | Class B common shares | | Treasury shares | | Common shares paid in capital | | Treasury shares | | Retained earnings (deficit) | | Accumulated other comprehensive loss | | Total | |
(unaudited and in thousands, except per share amounts) | | (unaudited and in thousands, except per share amounts) | Class A Common Shares | | Class B Common Shares | | Treasury Shares | | Common Shares Paid in Capital | | Treasury Shares | | Retained Deficit | | Accumulated Other Comprehensive Loss | | Total |
Three months ended July 30, 2022 | | Three months ended July 30, 2022 | | | |
Balance, April 30, 2022 | | Balance, April 30, 2022 | 64,450 | | | 7,733 | | | 23,825 | | | $ | 1,006,384 | | | $ | (537,771) | | | $ | (48,122) | | | $ | (3,698) | | | $ | 416,793 | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 46,213 | | | — | | | 46,213 | |
Stock-based compensation activity | | Stock-based compensation activity | 122 | | | — | | | — | | | 7,302 | | | — | | | — | | | — | | | 7,302 | |
Repurchase of Class A common shares | | Repurchase of Class A common shares | (7,769) | | | — | | | 7,769 | | | — | | | (105,792) | | | — | | | — | | | (105,792) | |
Dividends ($0.05 per share) | | Dividends ($0.05 per share) | — | | | — | | | (3,505) | | | — | | | — | | | — | | | (3,505) | |
Foreign currency translation adjustment | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (63) | | | (63) | |
Balance, July 30, 2022 | | Balance, July 30, 2022 | 56,803 | | | 7,733 | | | 31,594 | | | $ | 1,010,181 | | | $ | (643,563) | | | $ | (1,909) | | | $ | (3,761) | | | $ | 360,948 | |
Three months ended July 31, 2021 | Three months ended July 31, 2021 | Three months ended July 31, 2021 | | | |
Balance, May 1, 2021 | Balance, May 1, 2021 | 65,134 | | | 7,733 | | | 22,169 | | | $ | 992,379 | | | $ | (515,065) | | | $ | (211,759) | | | $ | (2,743) | | | $ | 262,812 | | Balance, May 1, 2021 | 65,134 | | | 7,733 | | | 22,169 | | | $ | 992,379 | | | $ | (515,065) | | | $ | (211,759) | | | $ | (2,743) | | | $ | 262,812 | |
Net income | — | | | — | | | — | | | — | | | — | | | 42,860 | | | — | | | 42,860 | | |
Stock-based compensation activity | 102 | | | — | | | — | | | 5,738 | | | — | | | — | | | — | | | 5,738 | | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (298) | | | (298) | | |
Balance, July 31, 2021 | 65,236 | | | 7,733 | | | 22,169 | | | $ | 998,117 | | | $ | (515,065) | | | $ | (168,899) | | | $ | (3,041) | | | $ | 311,112 | | |
Three months ended August 1, 2020 | |
Balance, May 2, 2020 | 64,302 | | | 7,733 | | | 22,169 | | | $ | 975,304 | | | $ | (515,065) | | | $ | 44,076 | | | $ | (6,209) | | | $ | 498,106 | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (98,214) | | | — | | | (98,214) | | |
Stock-based compensation activity | 276 | | | — | | | — | | | 5,445 | | | — | | | — | | | — | | | 5,445 | | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 1,290 | | | 1,290 | | |
Balance, August 1, 2020 | 64,578 | | | 7,733 | | | 22,169 | | | $ | 980,749 | | | $ | (515,065) | | | $ | (54,138) | | | $ | (4,919) | | | $ | 406,627 | | |
Six months ended July 31, 2021 | |
Balance, January 30, 2021 | 64,666 | | | 7,733 | | | 22,169 | | | $ | 990,153 | | | $ | (515,065) | | | $ | (228,785) | | | $ | (3,286) | | | $ | 243,017 | | |
Net income | — | | | — | | | — | | | — | | | — | | | 59,886 | | | — | | | 59,886 | | |
Net Income | | Net Income | — | | | — | | | — | | | — | | | — | | | 42,860 | | | — | | | 42,860 | |
Stock-based compensation activity | Stock-based compensation activity | 570 | | | — | | | — | | | 7,964 | | | — | | | — | | | — | | | 7,964 | | Stock-based compensation activity | 102 | | | — | | | — | | | 5,738 | | | — | | | — | | | — | | | 5,738 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 245 | | | 245 | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (298) | | | (298) | |
Balance, July 31, 2021 | Balance, July 31, 2021 | 65,236 | | | 7,733 | | | 22,169 | | | $ | 998,117 | | | $ | (515,065) | | | $ | (168,899) | | | $ | (3,041) | | | $ | 311,112 | | Balance, July 31, 2021 | 65,236 | | | 7,733 | | | 22,169 | | | $ | 998,117 | | | $ | (515,065) | | | $ | (168,899) | | | $ | (3,041) | | | $ | 311,112 | |
Six months ended August 1, 2020 | |
Balance, February 1, 2020 | 64,033 | | | 7,733 | | | 22,169 | | | $ | 971,380 | | | $ | (515,065) | | | $ | 267,094 | | | $ | (2,495) | | | $ | 720,914 | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (314,072) | | | — | | | (314,072) | | |
Six months ended July 30, 2022 | | Six months ended July 30, 2022 | | | |
Balance, January 29, 2022 | | Balance, January 29, 2022 | 65,624 | | | 7,733 | | | 22,169 | | | $ | 1,005,382 | | | $ | (515,065) | | | $ | (74,304) | | | $ | (3,617) | | | $ | 412,396 | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 72,395 | | | — | | | 72,395 | |
Stock-based compensation activity | | Stock-based compensation activity | 604 | | | — | | | — | | | 11,896 | | | — | | | — | | | — | | | 11,896 | |
Repurchase of Class A common shares | | Repurchase of Class A common shares | (9,425) | | | — | | | 9,425 | | | — | | | (128,498) | | | — | | | — | | | (128,498) | |
Dividends ($0.05 per share) | | Dividends ($0.05 per share) | — | | | — | | | — | | | (7,097) | | | — | | | — | | | — | | | (7,097) | |
Foreign currency translation adjustment | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (144) | | | (144) | |
Balance, July 30, 2022 | | Balance, July 30, 2022 | 56,803 | | | 7,733 | | | 31,594 | | | $ | 1,010,181 | | | $ | (643,563) | | | $ | (1,909) | | | $ | (3,761) | | | $ | 360,948 | |
Six months ended July 31, 2021 | | Six months ended July 31, 2021 | | | |
Balance, January 30, 2021 | | Balance, January 30, 2021 | 64,666 | | | 7,733 | | | 22,169 | | | $ | 990,153 | | | $ | (515,065) | | | $ | (228,785) | | | $ | (3,286) | | | $ | 243,017 | |
Net Income | | Net Income | — | | | — | | | — | | | — | | | — | | | 59,886 | | | — | | | 59,886 | |
Stock-based compensation activity | Stock-based compensation activity | 545 | | | — | | | — | | | 9,369 | | | — | | | — | | | — | | | 9,369 | | Stock-based compensation activity | 570 | | | — | | | — | | | 7,964 | | | — | | | — | | | — | | | 7,964 | |
| Dividends ($0.10 per share) | — | | | — | | | — | | | — | | | — | | | (7,160) | | | — | | | (7,160) | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (2,424) | | | (2,424) | | |
Balance, August 1, 2020 | 64,578 | | | 7,733 | | | 22,169 | | | $ | 980,749 | | | $ | (515,065) | | | $ | (54,138) | | | $ | (4,919) | | | $ | 406,627 | | |
| Foreign currency translation adjustment | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 245 | | | 245 | |
Balance, July 31, 2021 | | Balance, July 31, 2021 | 65,236 | | | 7,733 | | | 22,169 | | | $ | 998,117 | | | $ | (515,065) | | | $ | (168,899) | | | $ | (3,041) | | | $ | 311,112 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
| | | Six months ended | | Six months ended |
| July 31, 2021 | | August 1, 2020 | |
(unaudited and in thousands) | | (unaudited and in thousands) | July 30, 2022 | | July 31, 2021 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | |
Net income (loss) | $ | 59,886 | | | $ | (314,072) | | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | |
Net income | | Net income | $ | 72,395 | | | $ | 59,886 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 40,257 | | | 44,075 | | Depreciation and amortization | 44,146 | | | 40,257 | |
Stock-based compensation expense | Stock-based compensation expense | 13,365 | | | 10,596 | | Stock-based compensation expense | 15,963 | | | 13,365 | |
Deferred income taxes | Deferred income taxes | 100 | | | (152,988) | | Deferred income taxes | (157) | | | 100 | |
Income from equity investment | (3,998) | | | (4,423) | | |
Distributions received from equity investment | 7,447 | | | 5,493 | | |
Income from equity investments | | Income from equity investments | (4,380) | | | (3,998) | |
Distributions received from equity investments | | Distributions received from equity investments | 6,230 | | | 7,447 | |
Impairment charges | Impairment charges | 1,174 | | | 119,282 | | Impairment charges | 2,888 | | | 1,174 | |
Gain on settlement | — | | | (8,990) | | |
| Loss on extinguishment of debt and write-off of debt issuance costs | | Loss on extinguishment of debt and write-off of debt issuance costs | 12,862 | | | — | |
Other | Other | 800 | | | 403 | | Other | 3,523 | | | 800 | |
Change in operating assets and liabilities: | Change in operating assets and liabilities: | | Change in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | 5,859 | | | 30,699 | | Accounts receivable | (3,485) | | | 5,859 | |
Income tax receivable | Income tax receivable | (9,066) | | | — | | Income tax receivable | (1,585) | | | (9,066) | |
Inventories | Inventories | (30,114) | | | 186,965 | | Inventories | (107,873) | | | (30,114) | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | (612) | | | (847) | | Prepaid expenses and other current assets | (2,726) | | | (612) | |
Accounts payable | Accounts payable | 53,009 | | | (67,282) | | Accounts payable | (4,848) | | | 53,009 | |
Accrued expenses | Accrued expenses | 21,546 | | | 26,693 | | Accrued expenses | (5,448) | | | 21,546 | |
Operating lease assets and liabilities, net | Operating lease assets and liabilities, net | (63,424) | | | 44,777 | | Operating lease assets and liabilities, net | (16,641) | | | (63,424) | |
Net cash provided by (used in) operating activities | 96,229 | | | (79,619) | | |
Net cash provided by operating activities | | Net cash provided by operating activities | 10,864 | | | 96,229 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | |
Cash paid for property and equipment | Cash paid for property and equipment | (13,189) | | | (22,141) | | Cash paid for property and equipment | (27,151) | | | (13,189) | |
| Sales of available-for-sale investments | — | | | 24,755 | | |
Proceeds from settlement | — | | | 4,166 | | |
Net cash provided by (used in) investing activities | (13,189) | | | 6,780 | | |
| Equity investment in Le Tigre | | Equity investment in Le Tigre | (8,230) | | | — | |
Other | | Other | (4,853) | | | — | |
Net cash used in investing activities | | Net cash used in investing activities | (40,234) | | | (13,189) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | |
Borrowing on revolving line under Credit Facility | — | | | 251,000 | | |
Payments on revolving line under Credit Facility | — | | | (48,000) | | |
Borrowing under ABL Revolver | 342,053 | | | — | | |
Payments on borrowings under ABL Revolver | (425,243) | | | — | | |
| Payments on borrowings under Term Loan | (6,251) | | | — | | |
| Borrowing on revolving lines of credit | | Borrowing on revolving lines of credit | 1,112,794 | | | 342,053 | |
Payments on revolving lines of credit | | Payments on revolving lines of credit | (725,353) | | | (425,243) | |
| Payments for borrowings and prepayment premium under Term Loan | | Payments for borrowings and prepayment premium under Term Loan | (238,196) | | | (6,251) | |
Payments of debt issuance costs | | Payments of debt issuance costs | (2,316) | | | — | |
Cash paid for treasury shares | | Cash paid for treasury shares | (128,498) | | | — | |
Dividends paid | Dividends paid | — | | | (7,160) | | Dividends paid | (7,097) | | | — | |
| Other | Other | (5,514) | | | (2,646) | | Other | (3,936) | | | (5,514) | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | (94,955) | | | 193,194 | | Net cash provided by (used in) financing activities | 7,398 | | | (94,955) | |
Effect of exchange rate changes on cash balances | Effect of exchange rate changes on cash balances | 338 | | | (199) | | Effect of exchange rate changes on cash balances | 80 | | | 338 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (11,577) | | | 120,156 | | |
Net decrease in cash, cash equivalents and restricted cash | | Net decrease in cash, cash equivalents and restricted cash | (21,892) | | | (11,577) | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 59,581 | | | 86,564 | | Cash, cash equivalents and restricted cash, beginning of period | 74,459 | | | 59,581 | |
Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | $ | 48,004 | | | $ | 206,720 | | Cash, cash equivalents and restricted cash, end of period | $ | 52,567 | | | $ | 48,004 | |
Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | | | | Supplemental disclosures of cash flow information: | |
Cash paid (received) for income taxes | Cash paid (received) for income taxes | $ | (3,372) | | | $ | 165 | | Cash paid (received) for income taxes | $ | 27,971 | | | $ | (3,372) | |
Cash paid for interest on debt | Cash paid for interest on debt | $ | 13,437 | | | $ | 5,606 | | Cash paid for interest on debt | $ | 6,020 | | | $ | 13,437 | |
Cash paid for operating lease liabilities | Cash paid for operating lease liabilities | $ | 162,602 | | | $ | 62,262 | | Cash paid for operating lease liabilities | $ | 113,308 | | | $ | 162,602 | |
Non-cash investing and financing activities: | Non-cash investing and financing activities: | | Non-cash investing and financing activities: | |
Property and equipment purchases not yet paid | Property and equipment purchases not yet paid | $ | 2,320 | | | $ | 1,981 | | Property and equipment purchases not yet paid | $ | 6,158 | | | $ | 2,320 | |
Operating lease liabilities arising from lease asset additions | Operating lease liabilities arising from lease asset additions | $ | 11,109 | | | $ | 9,408 | | Operating lease liabilities arising from lease asset additions | $ | 7,903 | | | $ | 11,109 | |
Net increase to operating lease assets and lease liabilities for modifications | Net increase to operating lease assets and lease liabilities for modifications | $ | 45,723 | | | $ | 23,195 | | Net increase to operating lease assets and lease liabilities for modifications | $ | 77,820 | | | $ | 45,723 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Business Operations- Designer Brands Inc. ("we," "us," "our," and the "Company") is one of North America'sthe world's largest designers, producers, and retailers of footwear and accessories. We operate in 3three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its direct-to-consumer U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company Shoe Warehouse, and DSW banners through its direct-to-consumer Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40% stake in ABG-Camuto, a joint venture that ownsholds several intellectual property rights, including, among others, Vince Camuto and Louise et Cie, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. Camuto Group has a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands ownedmanaged by ABG-Camuto, subject to guaranteed minimums. Camuto Group also ownsholds footwear and certain handbag licensing rights of Jessica Simpson, Lucky Brand and, through a joint venture, JLO Jennifer Lopez. Our other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.
Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 30, 202129, 2022 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 20202021 Form 10-K.
Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year (e.g., "2022") refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year (including 2022 and 2021), but occasionally will contain an additional week resulting in a 53-week fiscal year (including 2023).
SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 20202021 Form 10-K.
Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as changes to our expense and capital expenditure plans.
During the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions. The severance charges recorded as a result of this reorganization are included in our severance discussion below.
Although operating results have improved throughout the first half of fiscal 2021, we continue to experience adverse impacts due to COVID-19, including temporary store closures, reduced hours and other requirements in certain areas where government-imposed restrictions were mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analyses for our U.S. Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the three months ended August 1, 2020, we recorded an impairment charge of $6.7 million for the U.S. Retail segment. During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million ($73.1 million and $19.7 million for the U.S. Retail segment and Canada Retail segment, respectively). Also during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).
As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of COVID-19 on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of fiscal 2020. We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories reflects reductions for merchandise marked down with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using moving average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our fiscal 2020 peak spring selling season and reduced traffic experienced since re-opening stores. During the six months ended August 1, 2020, we recorded $64.0 million of additional inventory reserves over the same period of the previous year.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which, among other things, provided employer payroll tax credits for wages paid to employees who were unable to work over a defined period and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualified for certain employer payroll tax credits, which were treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future. Similar credits were also available in Canada and continue to be provided. During the three months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $1.0 million and $3.5 million, respectively, on our condensed consolidated statements of operations. During the six months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $3.7 million and $7.9 million, respectively, on our condensed consolidated statements of operations. As of July 31, 2021, we had $10.0 million of deferred qualified payroll and other tax obligations, half of which is included in accrued expenses on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2021, with the remaining included in other non-current liabilities on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2022.
We recorded our income tax expense, income tax receivable, and deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. Our ability to recover these deferred tax assets depends on several factors, including our ability to project future taxable income. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in fiscal 2020 due to COVID-19, we are in a three-year cumulative loss position as of July 31, 2021, which is significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. A valuation allowance has been recognized as a reserve on the total deferred tax asset balance due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Our effective tax rate changed from 32.5% for the six months ended
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
August 1, 2020 to 3.6% for the six months ended July 31, 2021. The rate for the six months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
The impacts from the COVID-19 pandemic remain challenging and unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19, and the global availability and use of vaccines, which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.
Severance- During the three months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $1.2 million and $7.3 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $2.6 million and $9.0 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of July 31, 2021, January 30, 2021 and August 1, 2020, we had accrued severance of $4.9 million, $6.5 million and $8.4 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.
Gain on Settlement- During the three months ended August 1, 2020, we recognized a gain of $9.0 million, recorded to operating expenses in the condensed consolidated statements of operations, due to a settlement with a vendor for costs incurred on internal-use software that was capitalized and impaired in a previous fiscal year. During the three months ended August 1, 2020, we collected $4.2 million, net of legal costs incurred, and recorded a $4.8 million receivable included in receivables, net, on the condensed consolidated balance sheets, which has been subsequently received.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. dollars.
Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us, along with the estimated, but uncertain, future impacts of COVID-19.us. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, income taxes, and self-insurance reserves. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
Severance- During the three months ended July 30, 2022 and July 31, 2021, we incurred severance costs of $0.3 million and $1.2 million, respectively. During the six months ended July 30, 2022 and July 31, 2021, we incurred severance costs of $1.0 million and $2.6 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of July 30, 2022, January 29, 2022, and July 31, 2021, we had accrued severance of $0.9 million, $1.9 million, and $4.9 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.
Income Taxes- We continue to assess the likelihood of realizing the benefits of our deferred tax assets by evaluating historical and projected future operating results, the reversal of existing temporary differences, taxable income in permitted carry back years, and the availability of tax planning strategies. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in 2020 due to the impacts of the COVID-19 pandemic, we were in a three-year cumulative loss position as of July 30, 2022, which was significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. As of July 30, 2022, a valuation allowance has been maintained as a reserve on substantially all of our net deferred tax assets due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Given the continued realization of income since 2020 and projected future income, sufficient positive evidence may become available for the release of all or a portion of the valuation allowance within the next twelve months. Such a release would result in a material non-cash income tax benefit in our consolidated statement of operations in the period of release and the recording of additional deferred tax assets on our consolidated balance sheet. However, the exact timing and amount of the valuation allowance releases are subject to change based on the level of profitability achieved in future periods.
For the six months ended July 30, 2022 and July 31, 2021, our effective tax rate was 29.2% and 3.6%, respectively. The rate for the six months ended July 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the six months ended July 31, 2021 was the result of maintaining a full valuation allowance on deferred tax assets along with net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.
Cash, Cash Equivalents, and Restricted Cash- Cash and cash equivalents represent cash, money market funds, and credit card receivables that generally settle within three days. Restricted cash representedrepresents cash that is restricted as to withdrawal or usage and consists of a mandatory cash deposit maintained for certain insurance policies.policies and letters of credit.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
| (in thousands) | (in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 | (in thousands) | July 30, 2022 | | January 29, 2022 | | July 31, 2021 |
Cash and cash equivalents | Cash and cash equivalents | $ | 46,458 | | | $ | 59,581 | | | $ | 206,720 | | Cash and cash equivalents | $ | 50,799 | | | $ | 72,691 | | | $ | 46,458 | |
Restricted cash, included in prepaid expenses and other current assets | Restricted cash, included in prepaid expenses and other current assets | 1,546 | | | — | | | — | | Restricted cash, included in prepaid expenses and other current assets | 1,768 | | | 1,768 | | | 1,546 | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 48,004 | | | $ | 59,581 | | | $ | 206,720 | | Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 52,567 | | | $ | 74,459 | | | $ | 48,004 | |
Equity Investment in Le Tigre- On July 1, 2022, we acquired a 33.3% interest in Le Tigre 360 Global LLC ("Le Tigre"), which manages the Le Tigre brand, for $8.2 million. We account for our investment in Le Tigre, where we exercise significant influence but do not have control, using the equity method. The difference between the purchase price of Le Tigre and our interest in Le Tigre's underlying net equity is comprised of a definite lived tradename intangible asset and equity method goodwill. Our share of net income or loss of Le Tigre and amortization of the intangible asset is included in income from equity investments on the consolidated statements of operations.
Intangible Assets- During the first quarter of 2022, we acquired the rights to the shoes.com tradename for $4.9 million, which was recorded as a definite lived tradename intangible asset with a useful life of 15 years.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fair Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
•Level 3 - Unobservable inputs in which little or no market activity exists.
The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under our ABL Revolver and our previous senior unsecured revolving credit agreement ("Credit Facility") approximated the carrying value. As of July 31, 2021, the fair value of borrowings under our Term Loan was $250.2 million compared to the carrying valuerevolving lines of $237.5 million. Thecredit approximated fair value of debt borrowings was estimated based on currentits term and variable interest rates offered for similar instruments (categorized as Level 2 under the fair value hierarchy).rate.
Impairment of Long-Lived Assets- Refer to section above, Impact of COVID-19, regardingDuring the three and six months ended July 30, 2022, we recorded impairment charges of long-lived assets during fiscal 2020.$1.8 million and $2.9 million, respectively, in the Brand Portfolio segment resulting from subleases of abandoned leased spaces. During the threethree and six months ended July 31, 2021, we recorded an impairment charge of $1.2 million in the U.S. Retail segment for abandoned equipment we are replacing.replaced.
2. REVENUE
DISAGGREGATION OF NET SALES
Disaggregation of
Net Sales-Sales by Brand Categories- The following table presents net sales disaggregated by product and service categorybrand categories for each segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Net sales: | | | | | | | |
U.S. Retail segment: | | | | | | | |
Women's footwear | $ | 467,518 | | | $ | 253,539 | | | $ | 872,818 | | | $ | 513,102 | |
Men's footwear | 168,218 | | | 85,012 | | | 300,165 | | | 155,367 | |
Kids' footwear | 54,112 | | | 32,232 | | | 108,844 | | | 61,415 | |
Accessories and other | 33,245 | | | 23,194 | | | 61,924 | | | 41,166 | |
| 723,093 | | | 393,977 | | | 1,343,751 | | | 771,050 | |
Canada Retail segment: | | | | | | | |
Women's footwear | 30,230 | | | 25,329 | | | 50,661 | | | 41,301 | |
Men's footwear | 15,805 | | | 13,970 | | | 25,333 | | | 20,773 | |
Kids' footwear | 9,554 | | | 8,231 | | | 19,067 | | | 13,787 | |
Accessories and other | 1,996 | | | 2,052 | | | 3,128 | | | 3,050 | |
| 57,585 | | | 49,582 | | | 98,189 | | | 78,911 | |
Brand Portfolio segment: | | | | | | | |
Wholesale | 42,715 | | | 15,563 | | | 91,358 | | | 82,867 | |
Commission income | 2,377 | | | 5,018 | | | 5,708 | | | 10,141 | |
Direct-to-consumer | 5,437 | | | 9,877 | | | 10,890 | | | 19,563 | |
| 50,529 | | | 30,458 | | | 107,956 | | | 112,571 | |
Other | — | | | 22,266 | | | — | | | 35,889 | |
Total segment net sales | 831,207 | | | 496,283 | | | 1,549,896 | | | 998,421 | |
Elimination of intersegment sales | (13,872) | | | (6,569) | | | (29,406) | | | (25,924) | |
Total net sales | $ | 817,335 | | | $ | 489,714 | | | $ | 1,520,490 | | | $ | 972,497 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Eliminations | | Consolidated |
Three months ended July 30, 2022 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 147,877 | | | $ | — | | | $ | 7,793 | | | $ | — | | | $ | 155,670 | |
External customer wholesale and commission income | — | | | — | | | 39,179 | | | — | | | 39,179 | |
Intersegment wholesale and commission income | — | | | — | | | 19,379 | | | (19,379) | | | — | |
Total Owned Brands | 147,877 | | | — | | | 66,351 | | | (19,379) | | | 194,849 | |
National brands | 586,186 | | | — | | | — | | | — | | | 586,186 | |
Canada Retail(2) | — | | | 78,284 | | | — | | | — | | | 78,284 | |
Total net sales | $ | 734,063 | | | $ | 78,284 | | | $ | 66,351 | | | $ | (19,379) | | | $ | 859,319 | |
Three months ended July 31, 2021 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 102,152 | | | $ | — | | | $ | 5,437 | | | $ | — | | | $ | 107,589 | |
External customer wholesale and commission income | — | | | — | | | 31,220 | | | — | | | 31,220 | |
Intersegment wholesale and commission income | — | | | — | | | 13,872 | | | (13,872) | | | — | |
Total Owned Brands | 102,152 | | | — | | | 50,529 | | | (13,872) | | | 138,809 | |
National brands | 620,941 | | | — | | | — | | | — | | | 620,941 | |
Canada Retail(2) | — | | | 57,585 | | | — | | | — | | | 57,585 | |
Total net sales | $ | 723,093 | | | $ | 57,585 | | | $ | 50,529 | | | $ | (13,872) | | | $ | 817,335 | |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Eliminations | | Consolidated |
Six months ended July 30, 2022 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 287,032 | | | $ | — | | | $ | 14,320 | | | $ | — | | | $ | 301,352 | |
External customer wholesale and commission income | — | | | — | | | 104,135 | | | — | | | 104,135 | |
Intersegment wholesale and commission income | — | | | — | | | 45,352 | | | (45,352) | | | — | |
Total Owned Brands | 287,032 | | | — | | | 163,807 | | | (45,352) | | | 405,487 | |
National brands | 1,149,776 | | | — | | | — | | | — | | | 1,149,776 | |
Canada Retail(2) | — | | | 134,599 | | | — | | | — | | | 134,599 | |
Total net sales | $ | 1,436,808 | | | $ | 134,599 | | | $ | 163,807 | | | $ | (45,352) | | | $ | 1,689,862 | |
Six months ended July 31, 2021 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 185,418 | | | $ | — | | | $ | 10,890 | | | $ | — | | | $ | 196,308 | |
External customer wholesale and commission income | — | | | — | | | 67,660 | | | — | | | 67,660 | |
Intersegment wholesale and commission income | — | | | — | | | 29,406 | | | (29,406) | | | — | |
Total Owned Brands | 185,418 | | | — | | | 107,956 | | | (29,406) | | | 263,968 | |
National brands | 1,158,333 | | | — | | | — | | | — | | | 1,158,333 | |
Canada Retail(2) | — | | | 98,189 | | | — | | | — | | | 98,189 | |
Total net sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 107,956 | | | $ | (29,406) | | | $ | 1,520,490 | |
(1) Owned Brands refers to those brands we have rights to sell through ownership or license arrangements.
(2) We currently do not report the Canada Retail segment net sales by brand categories.
Deferred Revenue Liabilities-Net Sales by Product and Service Categories- The following table presents net sales disaggregated by product and service
category for each segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands) | July 30, 2022 | | July 31, 2021 | | July 30, 2022 | | July 31, 2021 |
Net sales: | | | | | | | |
U.S. Retail segment: | | | | | | | |
Women's footwear | $ | 475,079 | | | $ | 467,518 | | | $ | 944,210 | | | $ | 872,818 | |
Men's footwear | 164,122 | | | 168,218 | | | 309,929 | | | 300,165 | |
Kids' footwear | 53,185 | | | 54,112 | | | 106,103 | | | 108,844 | |
Accessories and other | 41,677 | | | 33,245 | | | 76,566 | | | 61,924 | |
| 734,063 | | | 723,093 | | | 1,436,808 | | | 1,343,751 | |
Canada Retail segment: | | | | | | | |
Women's footwear | 43,802 | | | 30,230 | | | 73,806 | | | 50,661 | |
Men's footwear | 21,462 | | | 15,805 | | | 35,890 | | | 25,333 | |
Kids' footwear | 9,592 | | | 9,554 | | | 19,409 | | | 19,067 | |
Accessories and other | 3,428 | | | 1,996 | | | 5,494 | | | 3,128 | |
| 78,284 | | | 57,585 | | | 134,599 | | | 98,189 | |
Brand Portfolio segment: | | | | | | | |
Wholesale | 54,136 | | | 42,715 | | | 141,911 | | | 91,358 | |
First Cost commission income | 4,422 | | | 2,377 | | | 7,576 | | | 5,708 | |
Direct-to-consumer | 7,793 | | | 5,437 | | | 14,320 | | | 10,890 | |
| 66,351 | | | 50,529 | | | 163,807 | | | 107,956 | |
| | | | | | | |
Total segment net sales | 878,698 | | | 831,207 | | | 1,735,214 | | | 1,549,896 | |
Elimination of intersegment sales | (19,379) | | | (13,872) | | | (45,352) | | | (29,406) | |
Total net sales | $ | 859,319 | | | $ | 817,335 | | | $ | 1,689,862 | | | $ | 1,520,490 | |
DEFERRED REVENUE LIABILITIES
We record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers. The following table presents the changes and total balances for gift cards and our loyalty programs:
| | | Three months ended | | Six months ended | | Three months ended | | Six months ended |
(in thousands) | (in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 | (in thousands) | July 30, 2022 | | July 31, 2021 | | July 30, 2022 | | July 31, 2021 |
Gift cards: | Gift cards: | | | | | | | | Gift cards: | |
Beginning of period | Beginning of period | $ | 30,809 | | | $ | 30,908 | | | $ | 34,442 | | | $ | 35,461 | | Beginning of period | $ | 32,844 | | | $ | 30,809 | | | $ | 36,783 | | | $ | 34,442 | |
Gift cards redeemed and breakage recognized to net sales | Gift cards redeemed and breakage recognized to net sales | (19,210) | | | (11,343) | | | (36,380) | | | (24,868) | | Gift cards redeemed and breakage recognized to net sales | (18,295) | | | (19,210) | | | (36,555) | | | (36,380) | |
Gift cards issued | Gift cards issued | 17,092 | | | 10,354 | | | 30,629 | | | 19,326 | | Gift cards issued | 15,569 | | | 17,092 | | | 29,890 | | | 30,629 | |
End of period | End of period | $ | 28,691 | | | $ | 29,919 | | | $ | 28,691 | | | $ | 29,919 | | End of period | $ | 30,118 | | | $ | 28,691 | | | $ | 30,118 | | | $ | 28,691 | |
Loyalty programs: | Loyalty programs: | | | | | | | | Loyalty programs: | |
Beginning of period | Beginning of period | $ | 12,955 | | | $ | 14,568 | | | $ | 11,379 | | | $ | 16,138 | | Beginning of period | $ | 16,243 | | | $ | 12,955 | | | $ | 15,736 | | | $ | 11,379 | |
Loyalty certificates redeemed and expired and other adjustments recognized to net sales | Loyalty certificates redeemed and expired and other adjustments recognized to net sales | (6,008) | | | (4,277) | | | (10,904) | | | (10,886) | | Loyalty certificates redeemed and expired and other adjustments recognized to net sales | (8,179) | | | (6,008) | | | (16,060) | | | (10,904) | |
Deferred revenue for loyalty points issued | Deferred revenue for loyalty points issued | 8,308 | | | 4,506 | | | 14,780 | | | 9,545 | | Deferred revenue for loyalty points issued | 8,724 | | | 8,308 | | | 17,112 | | | 14,780 | |
End of period | End of period | $ | 15,255 | | | $ | 14,797 | | | $ | 15,255 | | | $ | 14,797 | | End of period | $ | 16,788 | | | $ | 15,255 | | | $ | 16,788 | | | $ | 15,255 | |
3. RELATED PARTY TRANSACTIONS
Schottenstein Affiliates
As of July 31, 2021, the Schottenstein Affiliates consist ofWe have transactions with entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family.family ("Schottenstein Affiliates"). As of July 31, 2021,30, 2022, the Schottenstein Affiliates beneficially owned approximately 17%22% of the Company's outstanding common shares, representing approximately 52%58% of the combined voting power of the Company, consisting of, in the aggregate, 4.86.8 million Class A common shares and 7.7 million Class B commoncommon shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates. During the three months ended July 30, 2022 and July 31, 2021, and August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $2.5 million and $2.7 million, and $2.6 million, respectively. respectively. During the six months ended July 30, 2022 and July 31, 2021, and August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $5.0 million and $5.4 million, and $5.3 million, respectively. As of July 30, 2022, January 29, 2022, and July 31, 2021, January 30, 2021 and August 1, 2020, we had related party current operating lease liabilities of $6.4$5.3 million, $8.0$6.3 million, and $7.9$6.4 million, respectively, and non-current operating lease liabilities of $21.3$9.6 million, $24.6$18.3 million, and $28.5$21.3 million, respectively.
Other Purchases and Services- During the three months ended July 31, 202130, 2022 and August 1, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.1 million and $1.2 million, respectively. During both the six months ended July 31, 2021, and August 1, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $2.5$1.4 million and $1.1 million, respectively. For both the six months ended July 30, 2022 and July 31, 2021, we had other purchases and services we incurred from the Schottenstein Affiliates of $2.5 million.
Due to Related Parties- Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
ABG-CamutoEquity Method Investments
ABG-Camuto- We have a 40% interest in our equity investment in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands ownedmanaged by ABG-Camuto, subject to guaranteed minimums. DuringFor both the three months ended July 30, 2022 and July 31, 2021, and August 1, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $4.6$4.6 million. DuringFor both the six months ended July 30, 2022 and July 31, 2021, and August 1, 2020, we recorded royalty expense for amounts paid toto ABG-Camuto of $9.2 million and $9.0 million, respectively.$9.2 million. Amounts due to ABG-Camuto were immaterial for all periods presented.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Le Tigre-
We have a 33.3% interest in our equity investment in Le Tigre. On July 1, 2022, we entered into a license agreement with Le Tigre whereby we pay royalties on our net sales from the Le Tigre brand, subject to guaranteed minimums. The license agreement provides for the exclusive right to design and produce Le Tigre branded footwear to be sold primarily through our DSW and The Shoe Company direct-to-consumer stores and e-commerce sites. Activity with Le Tigre during the six months ended July 30, 2022 was immaterial.
4. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on net income (loss) and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options and restricted stock units ("RSUs") calculated using the treasury stock method.
The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share:
| | | Three months ended | | Six months ended | | Three months ended | | Six months ended |
(in thousands) | (in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 | (in thousands) | July 30, 2022 | | July 31, 2021 | | July 30, 2022 | | July 31, 2021 |
Weighted average basic shares outstanding | Weighted average basic shares outstanding | 72,932 | | | 72,142 | | | 72,773 | | | 72,028 | | Weighted average basic shares outstanding | 69,604 | | | 72,932 | | | 71,263 | | | 72,773 | |
Dilutive effect of stock-based compensation awards | Dilutive effect of stock-based compensation awards | 4,687 | | | — | | | 4,498 | | | — | | Dilutive effect of stock-based compensation awards | 4,338 | | | 4,687 | | | 4,106 | | | 4,498 | |
Weighted average diluted shares outstanding | Weighted average diluted shares outstanding | 77,619 | | | 72,142 | | | 77,271 | | | 72,028 | | Weighted average diluted shares outstanding | 73,942 | | | 77,619 | | | 75,369 | | | 77,271 | |
For the three months ended July 30, 2022 and July 31, 2021, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was 3.1 million and August 1, 2020,2.9 million, respectively. For both the six months ended July 30, 2022 and July 31, 2021, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 2.9 million and 5.9 million, respectively. For the six months ended July 31, 2021 and August 1, 2020, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 3.0 million and 5.5 million, respectively.million.
5. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:
| | | Three months ended | | Six months ended | | Three months ended | | Six months ended |
(in thousands) | (in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 | (in thousands) | July 30, 2022 | | July 31, 2021 | | July 30, 2022 | | July 31, 2021 |
Stock options | Stock options | $ | 132 | | | $ | 407 | | | $ | 385 | | | $ | 870 | | Stock options | $ | — | | | $ | 132 | | | $ | 101 | | | $ | 385 | |
Restricted and director stock units | Restricted and director stock units | 5,776 | | | 5,272 | | | 12,980 | | | 9,726 | | Restricted and director stock units | 7,369 | | | 5,776 | | | 15,862 | | | 12,980 | |
| | $ | 5,908 | | | $ | 5,679 | | | $ | 13,365 | | | $ | 10,596 | | | $ | 7,369 | | | $ | 5,908 | | | $ | 15,963 | | | $ | 13,365 | |
The following table summarizes the stock-based compensation award share activity for RSUs for the six months ended July 31, 2021:30, 2022:
| | | Number of shares | | | | | | | | | | |
(in thousands) | (in thousands) | Time-Based RSUs | | Performance-Based RSUs | (in thousands) | Shares of Time-Based RSUs | | Shares of Performance-Based RSUs |
Outstanding - beginning of period | Outstanding - beginning of period | 6,445 | | | 540 | | Outstanding - beginning of period | 6,058 | | | 744 | |
Granted | Granted | 1,033 | | | — | | Granted | 1,915 | | | 614 | |
Vested | Vested | (512) | | | (359) | | Vested | (641) | | | (174) | |
Forfeited | Forfeited | (225) | | | (17) | | Forfeited | (115) | | | — | |
Outstanding - end of period | Outstanding - end of period | 6,741 | | | 164 | | Outstanding - end of period | 7,217 | | | 1,184 | |
6. SHAREHOLDERS' EQUITY
Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be exchanged for the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to 1one vote per share and holders of Class B common shares are entitled to 8eight votes per share on matters submitted to shareholders for approval.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table provides additional information for our common shares:
| | | July 31, 2021 | | January 30, 2021 | | August 1, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | (in thousands) | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | (in thousands) | July 30, 2022 | | January 29, 2022 | | July 31, 2021 |
| | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
Authorized shares | Authorized shares | 250,000 | | | 100,000 | | | 250,000 | | | 100,000 | | | 250,000 | | | 100,000 | | Authorized shares | 250,000 | | | 100,000 | | | 250,000 | | | 100,000 | | | 250,000 | | | 100,000 | |
Issued shares | Issued shares | 87,405 | | | 7,733 | | | 86,835 | | | 7,733 | | | 86,747 | | | 7,733 | | Issued shares | 88,397 | | | 7,733 | | | 87,793 | | | 7,733 | | | 87,405 | | | 7,733 | |
Outstanding shares | Outstanding shares | 65,236 | | | 7,733 | | | 64,666 | | | 7,733 | | | 64,578 | | | 7,733 | | Outstanding shares | 56,803 | | | 7,733 | | | 65,624 | | | 7,733 | | | 65,236 | | | 7,733 | |
Treasury shares | Treasury shares | 22,169 | | | — | | | 22,169 | | | — | | | 22,169 | | | — | | Treasury shares | 31,594 | | | — | | | 22,169 | | | — | | | 22,169 | | | — | |
We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.
Accumulated Other Comprehensive Loss-Dividends- ForOn August 25, 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. The dividend will be paid on October 6, 2022 to shareholders of record at the close of business on September 22, 2022, and is expected to be recorded against retained earnings.
Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the six months ended August 1, 2020, changes forJuly 30, 2022, we repurchased 9.4 million Class A common shares at an aggregate cost of $128.5 million, with $206.4 million of Class A common shares that remain authorized under the balancesprogram as of each componentJuly 30, 2022. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of accumulated other comprehensive loss, net of tax, were as follows (for all other periods presented,our common shares under the change was due to foreign currency translation adjustments as shownprogram. Shares will be repurchased in the condensed consolidated statements of shareholders' equity):open market at times and in amounts considered appropriate based on price and market conditions.
| | | | | | | | | | | | | | | | | |
(in thousands) | Foreign Currency Translation | | Available-for-Sale Securities | | Total |
Accumulated other comprehensive income (loss) - beginning of period | $ | (2,668) | | | $ | 173 | | | $ | (2,495) | |
Other comprehensive income (loss) before reclassifications | (2,251) | | | 195 | | | (2,056) | |
Amounts reclassified to non-operating income, net | — | | | (368) | | | (368) | |
Other comprehensive loss | (2,251) | | | (173) | | | (2,424) | |
Accumulated other comprehensive loss - end of period | $ | (4,919) | | | $ | — | | | $ | (4,919) | |
7. RECEIVABLES
Receivables, net, consisted of the following:
| (in thousands) | (in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 | (in thousands) | July 30, 2022 | | January 29, 2022 | | July 31, 2021 |
Customer accounts receivables: | Customer accounts receivables: | | | | | | Customer accounts receivables: | |
Serviced by third-party provider with guaranteed payment | Serviced by third-party provider with guaranteed payment | $ | 27,638 | | | $ | 29,615 | | | $ | 20,268 | | Serviced by third-party provider with guaranteed payment | $ | 31,172 | | | $ | 27,827 | | | $ | 27,638 | |
Serviced by third-party provider without guaranteed payment | Serviced by third-party provider without guaranteed payment | 76 | | | 363 | | | 739 | | Serviced by third-party provider without guaranteed payment | 126 | | | 82 | | | 76 | |
Serviced in-house | Serviced in-house | 2,665 | | | 4,576 | | | 6,248 | | Serviced in-house | 2,768 | | | 2,783 | | | 2,665 | |
Income tax receivable | Income tax receivable | 158,890 | | | 149,824 | | | — | | Income tax receivable | 163,825 | | | 162,240 | | | 158,890 | |
Other receivables | Other receivables | 11,295 | | | 12,865 | | | 23,973 | | Other receivables | 8,076 | | | 8,026 | | | 11,295 | |
Total receivables | Total receivables | 200,564 | | | 197,243 | | | 51,228 | | Total receivables | 205,967 | | | 200,958 | | | 200,564 | |
Allowance for doubtful accounts | Allowance for doubtful accounts | (1,193) | | | (1,194) | | | (1,988) | | Allowance for doubtful accounts | (1,087) | | | (1,132) | | | (1,193) | |
| | $ | 199,371 | | | $ | 196,049 | | | $ | 49,240 | | | $ | 204,880 | | | $ | 199,826 | | | $ | 199,371 | |
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 30, 2022 | | January 29, 2022 | | July 31, 2021 |
Gift cards | $ | 30,118 | | | $ | 36,783 | | | $ | 28,691 | |
Accrued compensation and related expenses | 45,687 | | | 41,603 | | | 49,037 | |
Accrued taxes | 30,027 | | | 28,327 | | | 35,030 | |
Loyalty programs deferred revenue | 16,788 | | | 15,736 | | | 15,255 | |
Sales returns, customer allowances and discounts | 21,353 | | | 20,671 | | | 21,307 | |
Other | 66,496 | | | 72,692 | | | 72,735 | |
| $ | 210,469 | | | $ | 215,812 | | | $ | 222,055 | |
9. DEBT
Debt consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 30, 2022 | | January 29, 2022 | | July 31, 2021 |
2020 ABL Revolver | $ | — | | | $ | — | | | $ | 16,810 | |
2022 ABL Revolver | 387,441 | | | — | | | — | |
Term Loan | — | | | 231,250 | | | 237,500 | |
Total debt | 387,441 | | | 231,250 | | | 254,310 | |
Less unamortized Term Loan debt issuance costs | — | | | (5,714) | | | (7,241) | |
Less current maturities of long-term debt | — | | | — | | | (62,500) | |
Long-term debt | $ | 387,441 | | | $ | 225,536 | | | $ | 184,569 | |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill- The following table presents the changes to goodwill by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended |
| July 31, 2021 | | August 1, 2020 |
(in thousands) | Goodwill | | Accumulated Impairments | | Net | | Goodwill | | Accumulated Impairments | | Net |
Beginning of period by segment: | | | | | | | | | | | |
U.S. Retail | $ | 93,655 | | | $ | — | | | $ | 93,655 | | | $ | 93,655 | | | $ | — | | | $ | 93,655 | |
Canada Retail | 43,086 | | | (43,086) | | | — | | | 41,610 | | | (41,610) | | | — | |
Brand Portfolio | 19,989 | | | (19,989) | | | — | | | 19,989 | | | — | | | 19,989 | |
| 156,730 | | | (63,075) | | | 93,655 | | | 155,254 | | | (41,610) | | | 113,644 | |
Activity by segment: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Canada Retail- | | | | | | | | | | | |
Currency translation adjustment | 1,098 | | | (1,098) | | | — | | | (534) | | | 534 | | | — | |
Brand Portfolio- | | | | | | | | | | | |
Impairment charge | — | | | — | | | — | | | — | | | (19,989) | | | (19,989) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 1,098 | | | (1,098) | | | — | | | (534) | | | (19,455) | | | (19,989) | |
End of period by segment: | | | | | | | | | | | |
U.S. Retail | 93,655 | | | — | | | 93,655 | | | 93,655 | | | — | | | 93,655 | |
Canada Retail | 44,184 | | | (44,184) | | | — | | | 41,076 | | | (41,076) | | | — | |
Brand Portfolio | 19,989 | | | (19,989) | | | — | | | 19,989 | | | (19,989) | | | — | |
| $ | 157,828 | | | $ | (64,173) | | | $ | 93,655 | | | $ | 154,720 | | | $ | (61,065) | | | $ | 93,655 | |
Intangible Assets- Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | Cost | | Accumulated Amortization | | Net |
July 31, 2021 | | | | | |
Definite-lived customer relationships | $ | 1,444 | | | $ | (1,444) | | | $ | — | |
Indefinite-lived trademarks and tradenames | 15,905 | | | — | | | 15,905 | |
| $ | 17,349 | | | $ | (1,444) | | | $ | 15,905 | |
January 30, 2021 | | | | | |
Definite-lived customer relationships | $ | 2,909 | | | $ | (2,791) | | | $ | 118 | |
Indefinite-lived trademarks and tradenames | 15,517 | | | — | | | 15,517 | |
| $ | 18,426 | | | $ | (2,791) | | | $ | 15,635 | |
August 1, 2020 | | | | | |
Definite-lived customer relationships | $ | 2,843 | | | $ | (2,507) | | | $ | 336 | |
Indefinite-lived trademarks and tradenames | 15,327 | | | — | | | 15,327 | |
| $ | 18,170 | | | $ | (2,507) | | | $ | 15,663 | |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
Gift cards | $ | 28,691 | | | $ | 34,442 | | | $ | 29,919 | |
Accrued compensation and related expenses | 49,037 | | | 49,864 | | | 29,422 | |
Accrued taxes | 35,030 | | | 24,206 | | | 22,624 | |
Loyalty programs deferred revenue | 15,255 | | | 11,379 | | | 14,797 | |
Sales returns | 19,204 | | | 17,333 | | | 20,713 | |
Customer allowances and discounts | 2,103 | | | 4,579 | | | 8,644 | |
Other | 72,735 | | | 58,523 | | | 76,712 | |
| $ | 222,055 | | | $ | 200,326 | | | $ | 202,831 | |
10. DEBT
Debt consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
ABL Revolver | $ | 16,810 | | | $ | 100,000 | | | $ | — | |
Term Loan | 237,500 | | | 243,750 | | | — | |
Credit Facility | — | | | — | | | 393,000 | |
Total debt | 254,310 | | | 343,750 | | | 393,000 | |
Less unamortized Term Loan debt issuance costs | (7,241) | | | (8,931) | | | — | |
Less current maturities of long-term debt | (62,500) | | | (62,500) | | | — | |
Long-term debt | $ | 184,569 | | | $ | 272,319 | | | $ | 393,000 | |
2022 ABL Revolver- On August 7, 2020,March 30, 2022, we replaced our Credit Facilityprevious senior secured asset-based revolving credit facility ("2020 ABL Revolver") with theour current senior secured asset-based revolving credit facility ("2022 ABL Revolver,Revolver"), which provides a revolving line of credit of up to $400.0$550.0 million, including a Canadian sub-limit of up to $20.0$55.0 million, a $50.0$75.0 million sub-limit for the issuance of letters of credit, a $40.0$55.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0$5.5 million sub-limit for swing loan advances for Canadian borrowings. Our 2022 ABL Revolver matures in August 2025March 2027 and is secured by a first priority lien on substantially all of our personal property assets, including a first priority lien on credit card receivables and inventoryinventory. The 2022 ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and a second priority lien on personal property assets that constitute first priority collateral forpermitted acquisitions as defined by the Term Loan.credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of July 31, 2021,30, 2022, the 2022 ABL Revolver had a borrowing base of $386.1$550.0 million, with $16.8$387.4 million in outstanding borrowings and $5.3$4.9 million in letters of credit issued, resulting in $364.0$157.7 million available for borrowings.
Borrowings and letters of credit issued under the 2022 ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rateFed Funds Rate (as defined and subject to a floor of 0%) plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR")Adjusted Term SOFR (as defined) plus 1.0%; or (B) an adjusted LIBORa one-month, three-month or six-month Adjusted Term SOFR per annum (subject to a floor of 0.75%0%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0%3.9% as of July 31, 2021.30, 2022. Commitment fees are based on the unused portion of the 2022 ABL Revolver. Interest expense related to the 2022 ABL Revolver includes interest on borrowings and letters of credit, commitment fees, and the amortization of debt issuance costs.
Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of July 31, 2021.
Debt Covenants- The 2022 ABL Revolver containsrequires us to maintain a minimum availabilityfixed charge coverage ratio covenant where an event of default shall occur ifnot less than 1:1 when availability is less than the greater of $30.0$41.3 million orand 10.0% of the maximum creditborrowing amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million. In addition, the2022 ABL Revolver and the Term Loan each containalso contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both theconditions based on availability. The 2022 ABL Revolver and the Term Loan containcontains customary events of default, including failure to comply with cross-default provisions.certain financial and other covenants. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of July 31, 2021,30, 2022, we were in compliance with all financial covenants.
Termination of Term Loan- On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our senior secured term loan agreement ("Term Loan"). In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
11.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to theour results of operations or financial condition. As additional information becomes available, we will assess any potential liability related to pending litigation and revise the estimates as needed.
Insurance Recoveries- During fiscal 2020, a third-party vendor experienced a shutdown of services to us that impacted our ability to fulfill orders from customers for a limited period of time. This incident was covered under an insurance policy that provides for reimbursement of lost profits and recognized losses as a result of the outage. During the fourth quarter of fiscal 2020, we recognized an insurance recovery receivable of $3.0 million, recorded as an offset to cost of sales, for recognized losses that we believe are probable of being reimbursed through the insurance policy. Reimbursement for lost profits and any additional recoveries in excess of recognized losses are treated as gain contingencies and will be recognized when realized or realizable. We continue to work with the insurance carrier to reach an agreement on the total amount to be recovered.
Guarantee- We provide guarantees for lease obligations that are scheduled to expire in fiscal 2023 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of July 31, 2021,30, 2022, the total future minimum lease payment requirements forunder these guarantees were approximately $13.3$12.0 million.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12.11. SEGMENT REPORTING
The following provides certain key financial data by segment reconciled to the condensed consolidated financial statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Other | | Corporate/Eliminations | | Total |
Three months ended July 31, 2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 723,093 | | | $ | 57,585 | | | $ | 36,657 | | | $ | — | | | $ | — | | | $ | 817,335 | |
Intersegment sales | — | | | — | | | 13,872 | | | — | | | (13,872) | | | — | |
Total net sales | $ | 723,093 | | | $ | 57,585 | | | $ | 50,529 | | | $ | — | | | $ | (13,872) | | | $ | 817,335 | |
Gross profit | $ | 256,893 | | | $ | 18,768 | | | $ | 8,533 | | | $ | — | | | $ | 487 | | | $ | 284,681 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 2,290 | | | $ | — | | | $ | — | | | $ | 2,290 | |
Three months ended August 1, 2020 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 393,977 | | | $ | 49,582 | | | $ | 23,889 | | | $ | 22,266 | | | $ | — | | | $ | 489,714 | |
Intersegment sales | — | | | — | | | 6,569 | | | — | | | (6,569) | | | — | |
Total net sales | $ | 393,977 | | | $ | 49,582 | | | $ | 30,458 | | | $ | 22,266 | | | $ | (6,569) | | | $ | 489,714 | |
Gross profit (loss) | $ | 40,097 | | | $ | 5,650 | | | $ | (11,440) | | | $ | 118 | | | $ | 2,617 | | | $ | 37,042 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 2,153 | | | $ | — | | | $ | — | | | $ | 2,153 | |
Six months ended July 31, 2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 78,550 | | | $ | — | | | $ | — | | | $ | 1,520,490 | |
Intersegment sales | — | | | — | | | 29,406 | | | — | | | (29,406) | | | — | |
Total net sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 107,956 | | | $ | — | | | $ | (29,406) | | | $ | 1,520,490 | |
Gross profit | $ | 450,006 | | | $ | 29,603 | | | $ | 20,459 | | | $ | — | | | $ | 724 | | | $ | 500,792 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 3,998 | | | $ | — | | | $ | — | | | $ | 3,998 | |
Six months ended August 1, 2020 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 771,050 | | | $ | 78,911 | | | $ | 86,647 | | | $ | 35,889 | | | $ | — | | | $ | 972,497 | |
Intersegment sales | — | | | — | | | 25,924 | | | — | | | (25,924) | | | — | |
Total net sales | $ | 771,050 | | | $ | 78,911 | | | $ | 112,571 | | | $ | 35,889 | | | $ | (25,924) | | | $ | 972,497 | |
Gross profit (loss) | $ | 7,127 | | | $ | 3,339 | | | $ | 2,464 | | | $ | (5,310) | | | $ | 2,962 | | | $ | 10,582 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 4,423 | | | $ | — | | | $ | — | | | $ | 4,423 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | | | Eliminations | | Consolidated |
Three months ended July 30, 2022 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 734,063 | | | $ | 78,284 | | | $ | 46,972 | | | | | $ | — | | | $ | 859,319 | |
Intersegment sales | — | | | — | | | 19,379 | | | | | (19,379) | | | — | |
Total net sales | $ | 734,063 | | | $ | 78,284 | | | $ | 66,351 | | | | | $ | (19,379) | | | $ | 859,319 | |
Gross profit | $ | 251,143 | | | $ | 30,974 | | | $ | 12,294 | | | | | $ | 1,259 | | | $ | 295,670 | |
Income from equity investments | $ | — | | | $ | — | | | $ | 2,435 | | | | | $ | — | | | $ | 2,435 | |
Three months ended July 31, 2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 723,093 | | | $ | 57,585 | | | $ | 36,657 | | | | | $ | — | | | $ | 817,335 | |
Intersegment sales | — | | | — | | | 13,872 | | | | | (13,872) | | | — | |
Total net sales | $ | 723,093 | | | $ | 57,585 | | | $ | 50,529 | | | | | $ | (13,872) | | | $ | 817,335 | |
Gross profit | $ | 256,893 | | | $ | 18,768 | | | $ | 8,533 | | | | | $ | 487 | | | $ | 284,681 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 2,290 | | | | | $ | — | | | $ | 2,290 | |
Six months ended July 30, 2022 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 1,436,808 | | | $ | 134,599 | | | $ | 118,455 | | | | | $ | — | | | $ | 1,689,862 | |
Intersegment sales | — | | | — | | | 45,352 | | | | | (45,352) | | | — | |
Total net sales | $ | 1,436,808 | | | $ | 134,599 | | | $ | 163,807 | | | | | $ | (45,352) | | | $ | 1,689,862 | |
Gross profit | $ | 484,210 | | | $ | 49,847 | | | $ | 36,136 | | | | | $ | 1,222 | | | $ | 571,415 | |
Income from equity investments | $ | — | | | $ | — | | | $ | 4,380 | | | | | $ | — | | | $ | 4,380 | |
Six months ended July 31, 2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 78,550 | | | | | $ | — | | | $ | 1,520,490 | |
Intersegment sales | — | | | — | | | 29,406 | | | | | (29,406) | | | — | |
Total net sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 107,956 | | | | | $ | (29,406) | | | $ | 1,520,490 | |
Gross profit | $ | 450,006 | | | $ | 29,603 | | | $ | 20,459 | | | | | $ | 724 | | | $ | 500,792 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 3,998 | | | | | $ | — | | | $ | 3,998 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Executive Overview and Trends in our BusinessEXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS FOR THE SECOND QUARTER OF 2022
Operating profit inFor the second quarter of fiscal 2021 surpassed pre-COVID-19 levels2022, consolidated net sales increased 5.1% and comparable sales increased 6.2% over the same period last year with growtheach of 49% comparedour three segments contributing to these increases. Net sales during the second quarter of 2019.2022 from our Owned Brands increased 40.4% over the same period last year, with Owned Brands represented 22.7% of consolidated net sales as compared to 17.0% for the same period last year. This growth came despite the lingering effects of COVID-19,volatile market conditions, including global supply chain challenges. The volatile macro environmentincreased freight costs and supply chain disruptions have required usdisruptions. We continue to be nimble and quickly adaptmake progress on our business model.
As we look ahead toinitiatives centered on our strategic growth, we have organized our efforts around three pillars:pillars - Customer, Brand, and Speed:
•Customer- More than ever,Speed - as we work towards our customers have a great desire for products and experiences, and we are adding resources to our digital, IT and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience. Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in targeted and personalized ways that we have never deployed before. We are also developing new ideas for how we can provide more value to our VIP rewards members who continue to be the lifeblood of our business and our largest competitive differentiator.
•Brand- Controlling our own brand destiny is critical for our growth. As we continue to design some of the best brands in the industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we are combining that with our strong direct-to-consumer distribution through our physical footprint in North America and digital infrastructure. We are also partnering with some of the top brands in the industry to offer one of the largest and most broad assortments. We remain focused on investing in some of the top 50 brands in footwear and will continue to prioritize growing our own brands.
•Speed- Moving quickly is of the utmost importance to consumers. We are developing processes to deliver products more quickly. Fulfillment of digital customer orders takes 5 to 7 business days and we are working to improve that to 2 to 3 calendar days while simultaneously finding efficiencies to contain costs. We are optimizing our current infrastructure and expanding our delivery partnerships. We are also working to improve collaboration through technology and processes across our organization and to gain additional efficiencies in our overall development cycle.
We have a proven track record of staying ahead of trends to ensure our success, despite some of the challenges we face, including COVID-19 variants and supply chain disruptions.
Impact of COVID-19
In response to the sudden and significant impacts resulting from the COVID-19 pandemic, we took several actions during the first quarter of fiscal 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as changes to our expense and capital expenditurelong-term strategic plans.
Although operating results have improved throughoutIMPACT OF THE COVID-19 PANDEMIC ON OUR RESULTS OF OPERATIONS
The COVID-19 pandemic continues to impact the first half of fiscal 2021, we continue to experience adverse impacts due to COVID-19, including temporary store closures, reduced hoursglobal economy and other requirements in certain areas where government-imposed restrictions were mandated, and globalhas created supply chain challenges. Our retail customersdisruptions, inflationary pressures, higher freight and labor costs, and labor shortages. While we experienced continued improvement in the Brand Portfolio segment have had and are having similar experiences. The impacts from the COVID-19 pandemic remain challenging and unpredictable. While trends improvedour performance during the first halfsecond quarter of fiscal 2021,2022, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends in our business will continue. For instance, restrictions have recently been reinstated
We continue to assess the likelihood of realizing the benefits of our deferred tax assets by evaluating historical and projected future operating results, the reversal of existing temporary differences, taxable income in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19,permitted carry back years, and the global availability of tax planning strategies. In evaluating future taxable income, significant weight is given to positive and use of vaccines, which are highly uncertain and cannot be predicted.negative evidence that is objectively verifiable. As a result of the losses incurred in 2020 due to the impacts of the COVID-19 pandemic, we were in a three-year cumulative loss position as of July 30, 2022, which was significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. As of July 30, 2022, a valuation allowance has been maintained as a reserve on substantially all of our net deferred tax assets due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Given the continued realization of income since 2020 and projected future income, sufficient positive evidence may have future write-downsbecome available for the release of all or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, anda portion of the valuation allowance onwithin the next twelve months. Such a release would result in a material non-cash income tax benefit in our consolidated statement of operations in the period of release and the recording of additional deferred tax assets.assets on our consolidated balance sheet. However, the exact timing and amount of the valuation allowance releases are subject to change based on the level of profitability achieved in future periods.
Financial Summary and Other Key Metrics for the Second Quarter of Fiscal 2021FINANCIAL SUMMARY AND OTHER KEY METRICS
For the three months ended July 30, 2022:
•Net sales increased to $859.3 million from $817.3 million for the three months ended July 31, 2021 from $489.7 million for the three months ended August 1, 2020. The 66.9% increase in net sales was primarily driven by an 84.9% increase in comparable sales during the three months ended July 31, 2021, due to the fact that during the three months ended August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since reopening. The higher net sales due to the increase in total comparable sales were partially offset by store closures, including those serviced in the Other segment. Also, during the first quarter of fiscal 2020, we maintained higher sales returns reserves with stores not being available to accept returns, which resulted in significantly lower net sales. However, sales returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 as customer behavior has remained consistent. In addition, the Brand Portfolio segment net sales were higher in the quarter as compared to the second quarter of fiscal 2020 due to increased orders as our retailer customers recover, but still below pre-COVID-19 levels.2021.
During the three months ended July 31, 2021, gross•Gross profit as a percentage of net sales was 34.8% as34.4% compared to 7.6%34.8% for the same period last year. The improvement
•Net income was $46.2 million, or $0.62 per diluted share, which included after-tax charges of $2.0 million primarily related to impairment and restructuring charges, offset by the change in gross profit was primarily driven by increased sales as compared to the second quartervaluation allowance on deferred tax assets of fiscal 2020. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings, with aggressive promotional activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the second quarter of fiscal 2021, tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019.
$2.1 million
.
Net income for the three months ended July 31, 2021 was $42.9 million, or $0.55 earnings per diluted share, which included net after-tax charges of $0.6 $6.0 million or $0.01 per diluted share, primarily related to target acquisition costs, restructuring charges,charges, and impairment charges, and partially offset by the change in the valuation allowance on deferred tax assets. Net loss for the three months ended August 1, 2020 was $98.2assets of $5.4 million, or a loss of $1.36$0.01 per diluted share which includedon a net after-tax charges of $4.1 million, or $0.05 per diluted share, primarily related to impairment charges and integration and restructuring expenses, offset by a gain from a settlement with a vendor.basis.
Comparable Sales Performance Metric
Metric-
The following table presents the increase (decrease)change in comparable sales for each segment and in total:
| | | | | | | | | | | |
| Three months ended |
| July 31, 2021 | | August 1, 2020 |
Comparable sales: | | | |
U.S. Retail segment | 94.3 | % | | (44.9) | % |
Canada Retail segment | 14.6 | % | | (27.9) | % |
Brand Portfolio segment - direct-to-consumer channel | 10.6 | % | | 120.5 | % |
Other | NA | | (36.2) | % |
Total comparable sales | 84.9 | % | | (42.7) | % |
NA - Not applicable | | | | | | | | | | | |
| Three months ended |
| July 30, 2022 | | July 31, 2021 |
Change in comparable sales: | | | |
U.S. Retail segment | 2.7 | % | | 94.3 | % |
Canada Retail segment | 47.3 | % | | 14.6 | % |
Brand Portfolio segment - direct-to-consumer channel | 43.3 | % | | 10.6 | % |
Total | 6.2 | % | | 84.9 | % |
We consider the change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses. We include stores in our comparable sales metric for those stores in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include stores temporarily closed as a result of the COVID-19 pandemic as management continues to believe that this metric is meaningful to monitor our performance. Comparable sales also include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site www.vincecamuto.com. Beginning with the third quarter of fiscal 2020, comparable sales no longer include the Other segment due to no longer having activity in the Other segment. The calculation of comparable sales
varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.
Number of Stores
Stores-
At the endAs of the second quarter of fiscalJuly 30, 2022 and July 31, 2021, and 2020, we had the following number of stores:
| | | July 31, 2021 | | August 1, 2020 | | July 30, 2022 | | July 31, 2021 |
| U.S. Retail segment - DSW stores | U.S. Retail segment - DSW stores | 515 | | | | 522 | | | U.S. Retail segment - DSW stores | 506 | | | | 515 | | |
Canada Retail segment: | Canada Retail segment: | | | | | | Canada Retail segment: | | | | |
The Shoe Company / Shoe Warehouse stores | 116 | | | | 117 | | | |
The Shoe Company stores | | The Shoe Company stores | 113 | | | | 116 | | |
DSW stores | DSW stores | 27 | | | | 27 | | | DSW stores | 25 | | | | 27 | | |
| | 143 | | | | 144 | | | | 138 | | | | 143 | | |
Total number of stores | Total number of stores | 658 | | | | 666 | | | Total number of stores | 644 | | | | 658 | | |
|
Results of OperationsRESULTS OF OPERATIONS
Comparison of the Three Months Ended July 31,
SECOND QUARTER OF 2022 COMPARED WITH SECOND QUARTER OF 2021 with the Three Months Ended August 1, 2020
| (amounts in thousands, except per share amounts) | | (amounts in thousands, except per share amounts) | Three months ended | |
| July 30, 2022 | | July 31, 2021 | | Change |
| | Three months ended | | | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % |
| July 31, 2021 | | August 1, 2020 | | Change | |
(dollars in thousands, except per share amounts) | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % | |
Net sales | Net sales | $ | 817,335 | | | 100.0 | % | | $ | 489,714 | | | 100.0 | % | | $ | 327,621 | | | 66.9 | % | Net sales | $ | 859,319 | | | 100.0 | % | | $ | 817,335 | | | 100.0 | % | | $ | 41,984 | | | 5.1 | % |
Cost of sales | Cost of sales | (532,654) | | | (65.2) | | | (452,672) | | | (92.4) | | | (79,982) | | | 17.7 | % | Cost of sales | (563,649) | | | (65.6) | | | (532,654) | | | (65.2) | | | (30,995) | | | 5.8 | % |
Gross profit | Gross profit | 284,681 | | | 34.8 | | | 37,042 | | | 7.6 | | | 247,639 | | | 668.5% | Gross profit | 295,670 | | | 34.4 | | | 284,681 | | | 34.8 | | | 10,989 | | | 3.9 | % |
Operating expenses | Operating expenses | (224,385) | | | (27.5) | | | (168,424) | | | (34.4) | | | (55,961) | | | 33.2 | % | Operating expenses | (228,690) | | | (26.6) | | | (224,385) | | | (27.5) | | | (4,305) | | | 1.9 | % |
Income from equity investment | 2,290 | | | 0.3 | | | 2,153 | | | 0.4 | | | 137 | | | 6.4 | % | |
Income from equity investments | | Income from equity investments | 2,435 | | | 0.3 | | | 2,290 | | | 0.3 | | | 145 | | | 6.3 | % |
Impairment charges | Impairment charges | (1,174) | | | (0.1) | | | (6,735) | | | (1.4) | | | 5,561 | | | (82.6)% | Impairment charges | (1,816) | | | (0.2) | | | (1,174) | | | (0.1) | | | (642) | | | 54.7 | % |
Operating profit (loss) | 61,412 | | | 7.5 | | | (135,964) | | | (27.8) | | | 197,376 | | | NM | |
Operating profit | | Operating profit | 67,599 | | | 7.9 | | | 61,412 | | | 7.5 | | | 6,187 | | | 10.1 | % |
Interest expense, net | Interest expense, net | (8,072) | | | (1.0) | | | (3,788) | | | (0.8) | | | (4,284) | | | 113.1 | % | Interest expense, net | (2,752) | | | (0.3) | | | (8,072) | | | (1.0) | | | 5,320 | | | (65.9) | % |
Non-operating income (expenses), net | Non-operating income (expenses), net | (244) | | | (0.0) | | | 743 | | | 0.2 | | | (987) | | | NM | Non-operating income (expenses), net | 37 | | | — | | | (244) | | | — | | | 281 | | | NM |
Income (loss) before income taxes | 53,096 | | | 6.5 | | | (139,009) | | | (28.4) | | | 192,105 | | | NM | |
Income tax benefit (provision) | (10,236) | | | (1.3) | | | 40,795 | | | 8.3 | | | (51,031) | | | NM | |
Net income (loss) | $ | 42,860 | | | 5.2 | % | | $ | (98,214) | | | (20.1) | % | | $ | 141,074 | | | NM | |
Basic and diluted earnings (loss) per share: | | | | | | | | | | | |
Basic earnings (loss) per share | $ | 0.59 | | | $ | (1.36) | | | $ | 1.95 | | | NM | |
Diluted earnings (loss) per share | $ | 0.55 | | | $ | (1.36) | | | $ | 1.91 | | | NM | |
Income before income taxes | | Income before income taxes | 64,884 | | | 7.6 | | | 53,096 | | | 6.5 | | | 11,788 | | | 22.2 | % |
Income tax provision | | Income tax provision | (18,671) | | | (2.2) | | | (10,236) | | | (1.3) | | | (8,435) | | | 82.4 | % |
Net income | | Net income | $ | 46,213 | | | 5.4 | % | | $ | 42,860 | | | 5.2 | % | | $ | 3,353 | | | 7.8 | % |
Basic and diluted earnings per share: | | Basic and diluted earnings per share: | | | | |
Basic earnings per share | | Basic earnings per share | $ | 0.66 | | | $ | 0.59 | | | $ | 0.07 | | | 11.9 | % |
Diluted earnings per share | | Diluted earnings per share | $ | 0.62 | | | $ | 0.55 | | | $ | 0.07 | | | 12.7 | % |
Weighted average shares used in per share calculations: | Weighted average shares used in per share calculations: | | Weighted average shares used in per share calculations: | |
Basic shares | Basic shares | 72,932 | | | 72,142 | | | 790 | | | 1.1 | % | Basic shares | 69,604 | | | 72,932 | | | (3,328) | | | (4.6) | % |
Diluted shares | Diluted shares | 77,619 | | | 72,142 | | | 5,477 | | | 7.6 | % | Diluted shares | 73,942 | | | 77,619 | | | (3,677) | | | (4.7) | % |
NM - Not meaningful
Net Sales- The following summarizes net sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Change |
(dollars in thousands) | July 31, 2021 | | August 1, 2020 | | Amount | | % | | Comparable Sales % |
Segment net sales: | | | | | | | | | |
U.S. Retail | $ | 723,093 | | | $ | 393,977 | | | $ | 329,116 | | | 83.5 | % | | 94.3% |
Canada Retail | 57,585 | | | 49,582 | | | 8,003 | | | 16.1 | % | | 14.6% |
Brand Portfolio | 50,529 | | | 30,458 | | | 20,071 | | | 65.9 | % | | 10.6% |
Other | — | | | 22,266 | | | (22,266) | | | NM | | NA |
Total segment net sales | 831,207 | | | 496,283 | | | 334,924 | | | 67.5 | % | | 84.9% |
Elimination of intersegment net sales | (13,872) | | | (6,569) | | | (7,303) | | | 111.2 | % | | |
Consolidated net sales | $ | 817,335 | | | $ | 489,714 | | | $ | 327,621 | | | 66.9 | % | | |
NA - Not applicable
NM - Not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
(dollars in thousands) | July 30, 2022 | | July 31, 2021 | | Change |
| Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Amount | | % | | Comparable Sales |
Segment net sales: | | | | | | | | | | | | | |
U.S. Retail | $ | 734,063 | | | 83.5 | % | | $ | 723,093 | | | 87.0 | % | | $ | 10,970 | | | 1.5 | % | | 2.7 | % |
Canada Retail | 78,284 | | | 8.9 | % | | 57,585 | | | 6.9 | % | | 20,699 | | | 35.9 | % | | 47.3 | % |
Brand Portfolio | 66,351 | | | 7.6 | % | | 50,529 | | | 6.1 | % | | 15,822 | | | 31.3 | % | | 43.3 | % |
| | | | | | | | | | | | | |
Total segment net sales | 878,698 | | | 100.0 | % | | 831,207 | | | 100.0 | % | | 47,491 | | | 5.7 | % | | 6.2 | % |
Elimination of intersegment net sales | (19,379) | | | | | (13,872) | | | | | (5,507) | | | 39.7 | % | | |
Consolidated net sales | $ | 859,319 | | | | | $ | 817,335 | | | | | $ | 41,984 | | | 5.1 | % | | |
The improvement in sales including increasesduring the three months ended July 30, 2022 over the same period last year was primarily due to the increase in comparable sales and total consolidated net sales,across all segments, with a significant increase from the Canada Retail segment as it was impacted during the three months ended July 31, 2021 over the same period last year was due to the fact that during the three months ended August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since re-opening. During a portion of the second quarter of fiscal 2021, the Canada Retail segment was impacted by ongoing temporarycontinued mandated closures and restrictions in certain key markets. The higher net sales due to the increase in totalU.S. Retail segment's comparable sales was partially offset by store closures, including those servicedbenefited from higher comparable average unit retail prices. In addition, wholesale sales in the Other segment. Also, during the first quarter of fiscal 2020, we maintainedBrand Portfolio segment were higher sales returns reserves with stores not being available to accept returns, which resulted in significantly lower net sales. However, sales returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 as customer behavior has remained consistent. In addition, the Brand Portfolio segment net sales were higher in the quarter2022 as compared to the second quarter of fiscal 2020same period last year due to increased orders as our retailer customers recover, but still below pre-COVID-19 levels.continue to recover. These increases were partially offset by the impact of stores closed since the end of the second quarter of 2021.
Gross Profit- The following summarizes gross profit (loss) by segment:
| | | Three months ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 31, 2021 | | August 1, 2020 | | | Three months ended | | |
(dollars in thousands) | (dollars in thousands) | Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Change | | (dollars in thousands) | July 30, 2022 | | July 31, 2021 | | Change |
Segment gross profit (loss): | | | | | | | | | | | |
| | | Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Amount | | % | | Basis Points |
Segment gross profit: | | Segment gross profit: | | | |
U.S. Retail | U.S. Retail | $ | 256,893 | | | 35.5 | % | | $ | 40,097 | | | 10.2 | % | | $ | 216,796 | | | U.S. Retail | $ | 251,143 | | | 34.2 | % | | $ | 256,893 | | | 35.5 | % | | $ | (5,750) | | | (2.2) | % | | (130) | |
Canada Retail | Canada Retail | 18,768 | | | 32.6 | % | | 5,650 | | | 11.4 | % | | $ | 13,118 | | | Canada Retail | 30,974 | | | 39.6 | % | | 18,768 | | | 32.6 | % | | 12,206 | | | 65.0 | % | | 700 | |
Brand Portfolio | Brand Portfolio | 8,533 | | | 16.9 | % | | (11,440) | | | (37.6) | % | | $ | 19,973 | | | Brand Portfolio | 12,294 | | | 18.5 | % | | 8,533 | | | 16.9 | % | | 3,761 | | | 44.1 | % | | 160 | |
Other | — | | | — | % | | 118 | | | 0.5 | % | | $ | (118) | | | |
| | 284,194 | | | | 34,425 | | | | |
Elimination of intersegment gross profit | 487 | | | | 2,617 | | | | |
Gross profit | $ | 284,681 | | | 34.8 | % | | $ | 37,042 | | | 7.6 | % | | $ | 247,639 | | | |
Total segment gross profit | | Total segment gross profit | 294,411 | | | 33.5 | % | | 284,194 | | | 34.2 | % | | 10,217 | | | 3.6 | % | | (70) | |
Net recognition of intersegment gross profit | | Net recognition of intersegment gross profit | 1,259 | | | 487 | | | 772 | | |
Consolidated gross profit | | Consolidated gross profit | $ | 295,670 | | | 34.4 | % | | $ | 284,681 | | | 34.8 | % | | $ | 10,989 | | | 3.9 | % | | (40) | |
The improvementincrease in consolidated gross profit was primarily driven by increased sales during the quarter as compared to the three months ended August 1, 2020. In the second quarter of fiscal 2020,2022 over the same period last year, partially offset by higher freight costs. The decrease in responseU.S. Retail segment gross profit was also impacted by moving our digital fulfillment activities from our Columbus location to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings with aggressive promotional activity. These actionsNew Jersey location, which resulted in higher inventory reserves, increased shippingrecognizing approximately $6.0 million of additional distribution costs, associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the second quarter of fiscal 2021, tight inventory positions resulted in being less
promotional. Accordingly,including accelerated depreciation. Consolidated gross profit as a percentage of consolidated net sales forwas down slightly due to higher freight costs impacting all of our segments, as well as the second quarter of fiscal 2021 tracked higher thanU.S. Retail segment with an increase in clearance sales and distribution costs, whereas the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the quarter as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the second quarter of fiscal 2019increased due to the deleverage impactsbeing less promotional and improved leverage of lower net sales.occupancy costs and royalty expenses on higher sales volume.
The net recognition of intersegment gross profit consisted of the following:
| | | Three months ended | | | Three months ended | |
(in thousands) | (in thousands) | July 31, 2021 | | August 1, 2020 | | (in thousands) | July 30, 2022 | | July 31, 2021 | |
Elimination of intersegment activity: | | | | | |
Recognition (elimination) of intersegment activity: | | Recognition (elimination) of intersegment activity: | | |
Net sales recognized by Brand Portfolio segment | Net sales recognized by Brand Portfolio segment | $ | (13,872) | | | $ | (6,569) | | | Net sales recognized by Brand Portfolio segment | $ | (19,379) | | | $ | (13,872) | | |
Cost of sales: | Cost of sales: | | | Cost of sales: | | |
Cost of sales recognized by Brand Portfolio segment | Cost of sales recognized by Brand Portfolio segment | 9,707 | | | 4,827 | | | Cost of sales recognized by Brand Portfolio segment | 12,554 | | | 9,707 | | |
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 4,652 | | | 4,359 | | | Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 8,084 | | | 4,652 | | |
Gross profit | $ | 487 | | | $ | 2,617 | | | |
| | | $ | 1,259 | | | $ | 487 | | |
Operating Expenses- For the three months ended July 31, 2021,30, 2022, operating expenses increased by $56.0$4.3 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses in line with the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave for most of the second quarter of fiscal 2020. Operating expenses during the second quarter of fiscal 2020 wereincrease in net sales, partially offset by a gain from a settlement with a vendor of $9.0 million.target acquisition costs recognized last year. Operating expenses as a percentage of sales improved to 27.5%26.6% compared to 34.4%27.5% in the same period last year but were still elevated compareddue to the pre-COVID-19 rate for the second quarter of fiscal 2019, which was 26.0%improvement in net sales year over year as a percentage of sales, primarily due to higher direct marketing and incentive compensation expense and lower sales in the Brand Portfolio segment.we leveraged our fixed costs.
Impairment Charges- Interest Expense, netDuring- For the three months ended July 31, 2021 and August 1, 2020, we evaluated certain long-lived assets based on our intent30, 2022, interest expense, net, decreased by $5.3 million over the same period last year, primarily due to use such assets going forward and, asthe termination of the Term Loan in the first quarter of 2022, which had a result, we recorded impairment charges of $1.2 million and $6.7 million, respectively.higher interest rate than the 2022 ABL Revolver.
Income Taxes-Our effective tax rate changed from 29.3% for the three months ended August 1, 2020 to 19.3% forFor the three months ended July 30, 2022 and July 31, 2021.2021, our effective tax rate was 28.8% and 19.3%, respectively. The rate for three months ended July 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the three months ended July 31, 2021 iswas the result of maintaining a full valuation allowance on deferred tax assets. The rate for the three months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
Comparison of the Six Months Ended July 31,SIX MONTHS OF 2022 COMPARED WITH SIX MONTHS OF 2021 with the Six Months Ended August 1, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended | | | | |
| July 31, 2021 | | August 1, 2020 | | Change |
(dollars in thousands, except per share amounts) | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % |
Net sales | $ | 1,520,490 | | | 100.0 | % | | $ | 972,497 | | | 100.0 | % | | $ | 547,993 | | | 56.3 | % |
Cost of sales | (1,019,698) | | | (67.1) | | | (961,915) | | | (98.9) | | | (57,783) | | | 6.0 | % |
Gross profit | 500,792 | | | 32.9 | | | 10,582 | | | 1.1 | | | 490,210 | | | 4,632.5% |
Operating expenses | (425,199) | | | (28.0) | | | (355,645) | | | (36.6) | | | (69,554) | | | 19.6 | % |
Income from equity investment | 3,998 | | | 0.3 | | | 4,423 | | | 0.5 | | | (425) | | | (9.6) | % |
Impairment charges | (1,174) | | | (0.1) | | | (119,282) | | | (12.3) | | | 118,108 | | | (99.0)% |
Operating profit (loss) | 78,417 | | | 5.1 | | | (459,922) | | | (47.3) | | | 538,339 | | | NM |
Interest expense, net | (16,886) | | | (1.1) | | | (5,946) | | | (0.6) | | | (10,940) | | | 184.0 | % |
Non-operating income, net | 562 | | | 0.0 | | | 656 | | | 0.1 | | | (94) | | | (14.3)% |
Income (loss) before income taxes | 62,093 | | | 4.0 | | | (465,212) | | | (47.8) | | | 527,305 | | | NM |
Income tax benefit (provision) | (2,207) | | | (0.1) | | | 151,140 | | | 15.5 | | | (153,347) | | | NM |
Net income (loss) | $ | 59,886 | | | 3.9 | % | | $ | (314,072) | | | (32.3) | % | | $ | 373,958 | | | NM |
Basic and diluted earnings (loss) per share: | | | | | | | | | | | |
Basic earnings (loss) per share | $ | 0.82 | | | | | $ | (4.36) | | | | | $ | 5.18 | | | NM |
Diluted earnings (loss) per share | $ | 0.78 | | | | | $ | (4.36) | | | | | $ | 5.14 | | | NM |
Weighted average shares used in per share calculations: | | | | | | | | | | | |
Basic shares | 72,773 | | | | | 72,028 | | | | | 745 | | | 1.0 | % |
Diluted shares | 77,271 | | | | | 72,028 | | | | | 5,243 | | | 7.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(amounts in thousands, except per share amounts) | Six months ended | | | | |
July 30, 2022 | | July 31, 2021 | | Change |
| Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % |
Net sales | $ | 1,689,862 | | | 100.0 | % | | $ | 1,520,490 | | | 100.0 | % | | $ | 169,372 | | | 11.1 | % |
Cost of sales | (1,118,447) | | | (66.2) | | | (1,019,698) | | | (67.1) | | | (98,749) | | | 9.7 | % |
Gross profit | 571,415 | | | 33.8 | | | 500,792 | | | 32.9 | | | 70,623 | | | 14.1 | % |
Operating expenses | (452,116) | | | (26.8) | | | (425,199) | | | (28.0) | | | (26,917) | | | 6.3 | % |
Income from equity investments | 4,380 | | | 0.3 | | | 3,998 | | | 0.3 | | | 382 | | | 9.6 | % |
Impairment charges | (2,888) | | | (0.2) | | | (1,174) | | | (0.1) | | | (1,714) | | | 146.0 | % |
Operating profit | 120,791 | | | 7.1 | | | 78,417 | | | 5.1 | | | 42,374 | | | 54.0 | % |
Interest expense, net | (5,704) | | | (0.3) | | | (16,886) | | | (1.1) | | | 11,182 | | | (66.2) | % |
Loss on extinguishment of debt and write-off of debt issuance costs | (12,862) | | | (0.7) | | | — | | | — | | | (12,862) | | | NM |
Non-operating income, net | 43 | | | — | | | 562 | | | — | | | (519) | | | (92.3) | % |
Income before income taxes | 102,268 | | | 6.1 | | | 62,093 | | | 4.0 | | | 40,175 | | | 64.7 | % |
Income tax provision | (29,873) | | | (1.8) | | | (2,207) | | | (0.1) | | | (27,666) | | | 1,253.6 | % |
Net income | $ | 72,395 | | | 4.3 | % | | $ | 59,886 | | | 3.9 | % | | $ | 12,509 | | | 20.9 | % |
Basic and diluted earnings per share: | | | | | | | | | | | |
Basic earnings per share | $ | 1.02 | | | | | $ | 0.82 | | | | | $ | 0.20 | | | 24.4 | % |
Diluted earnings per share | $ | 0.96 | | | | | $ | 0.78 | | | | | $ | 0.18 | | | 23.1 | % |
Weighted average shares used in per share calculations: | | | | | | | | | | | |
Basic shares | 71,263 | | | | | 72,773 | | | | | (1,510) | | | (2.1) | % |
Diluted shares | 75,369 | | | | | 77,271 | | | | | (1,902) | | | (2.5) | % |
NM - Not meaningful
Net Sales- The following summarizes net sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended | | Change |
(dollars in thousands) | July 31, 2021 | | August 1, 2020 | | Amount | | % | | Comparable Sales % |
Segment net sales: | | | | | | | | | |
U.S. Retail | $ | 1,343,751 | | | $ | 771,050 | | | $ | 572,701 | | | 74.3 | % | | 74.5% |
Canada Retail | 98,189 | | | 78,911 | | | 19,278 | | | 24.4 | % | | 12.6% |
Brand Portfolio | 107,956 | | | 112,571 | | | (4,615) | | | (4.1) | % | | 8.6% |
Other | — | | | 35,889 | | | (35,889) | | | NM | | NA |
Total segment net sales | 1,549,896 | | | 998,421 | | | 551,475 | | | 55.2 | % | | 68.1% |
Elimination of intersegment net sales | (29,406) | | | (25,924) | | | (3,482) | | | 13.4 | % | | |
Consolidated net sales | $ | 1,520,490 | | | $ | 972,497 | | | $ | 547,993 | | | 56.3 | % | | |
NA - Not applicable
NM - Not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended | | | |
(dollars in thousands) | July 30, 2022 | | July 31, 2021 | | Change |
| Amount | | % of Segment Net Sales | | Amount | % of Segment Net Sales | | Amount | | % | | Comparable Sales |
Segment net sales: | | | | | | | | | | | | |
U.S. Retail | $ | 1,436,808 | | | 82.8% | | $ | 1,343,751 | | 86.7% | | $ | 93,057 | | | 6.9 | % | | 7.8 | % |
Canada Retail | 134,599 | | | 7.8% | | 98,189 | | 6.3% | | 36,410 | | | 37.1 | % | | 44.8 | % |
Brand Portfolio | 163,807 | | | 9.4% | | 107,956 | | 7.0% | | 55,851 | | | 51.7 | % | | 31.5 | % |
Total segment net sales | 1,735,214 | | | 100% | | 1,549,896 | | 100.0% | | 185,318 | | | 12.0 | % | | 10.4 | % |
Elimination of intersegment net sales | (45,352) | | | | | (29,406) | | | | (15,946) | | | 54.2 | % | | |
Consolidated net sales | $ | 1,689,862 | | | | | $ | 1,520,490 | | | | $ | 169,372 | | | 11.1 | % | | |
The increasesimprovement in sales during the six months ended July 30, 2022 over the same period last year was primarily due to the increase in comparable sales foracross all segments, andprimarily driven by the fact that during the six months ended July 31, 2021, the prolonged COVID-19 pandemic resulted in total consolidated net sales was a result of the temporary closure of all stores beginning in March 2020 through much of the second quarter of fiscal 2020 and, since re-opening, we experienced significantly reduced customerstore traffic in the U.S. Retail and net sales. During a portion of the first half of fiscal 2021,Canada Retail segments, with the Canada Retail segment wasalso impacted by ongoing temporarycontinued mandated closures and restrictions in certain key markets. TheIn addition, wholesale sales in the Brand Portfolio segment were higher net salesin the first half of 2022 as compared to the
same period last year due to the increase in total comparable sales wasincreased orders as our retailer customers continue to recover. These increases were partially offset by store closures, including those serviced in the Other segment.impact of stores closed since the end of the second quarter of 2021.
Gross Profit- The following summarizes gross profit (loss) by segment:
| | | Six months ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 31, 2021 | | August 1, 2020 | | | Six months ended | | |
(dollars in thousands) | (dollars in thousands) | Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Change | | (dollars in thousands) | July 30, 2022 | | July 31, 2021 | | Change |
Segment gross profit (loss): | | | | | | | | | | | |
| | | Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Amount | | % | | Basis Points | |
Segment gross profit: | | Segment gross profit: | | | | |
U.S. Retail | U.S. Retail | $ | 450,006 | | | 33.5 | % | | $ | 7,127 | | | 0.9 | % | | $ | 442,879 | | | U.S. Retail | $ | 484,210 | | | 33.7 | % | | $ | 450,006 | | | 33.5 | % | | $ | 34,204 | | | 7.6 | % | | 20 | | |
Canada Retail | Canada Retail | 29,603 | | | 30.1 | % | | 3,339 | | | 4.2 | % | | $ | 26,264 | | | Canada Retail | 49,847 | | | 37.0 | % | | 29,603 | | | 30.1 | % | | 20,244 | | | 68.4 | % | | 690 | | |
Brand Portfolio | Brand Portfolio | 20,459 | | | 19.0 | % | | 2,464 | | | 2.2 | % | | $ | 17,995 | | | Brand Portfolio | 36,136 | | | 22.1 | % | | 20,459 | | | 19.0 | % | | 15,677 | | | 76.6 | % | | 310 | | |
Other | — | | | — | % | | (5,310) | | | (14.8) | % | | $ | 5,310 | | | |
| 500,068 | | | 7,620 | | | | |
Elimination of intersegment gross profit | 724 | | | 2,962 | | | | |
Gross profit | $ | 500,792 | | | 32.9 | % | | $ | 10,582 | | | 1.1 | % | | $ | 490,210 | | | |
Total segment gross profit | | Total segment gross profit | 570,193 | | | 32.9 | % | | 500,068 | | | 32.3 | % | | 70,125 | | | 14.0 | % | | 60 | | |
Net recognition of intersegment gross profit | | Net recognition of intersegment gross profit | 1,222 | | | 724 | | | 498 | | |
Consolidated gross profit | | Consolidated gross profit | $ | 571,415 | | | 33.8 | % | | $ | 500,792 | | | 32.9 | % | | $ | 70,623 | | | 14.1 | % | | 90 | | |
The improvement in consolidated gross profit was primarily driven by increased sales during the six months ended July 31, 2021 as compared to30, 2022 over the same period last year. Inyear and being less promotional, partially offset by higher freight costs and distribution costs. Gross profit as a percentage of net sales for the second quarter of fiscal 2020,U.S. Retail and Canada Retail segments increased due to being less promotional and improved leverage on occupancy costs, partially offset by higher freight costs in responseboth segments and higher distribution costs in the U.S. Retail segment. The higher distribution costs within the U.S. Retail segment were primarily driven by moving digital fulfillment activities from our Columbus location to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reductionNew Jersey location. The improvement in customer traffic upon store re-openings with aggressive promotional activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the six months ended July 31, 2021, tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the six months ended July 31, 2021 tracked higher than the pre-COVID-19 rate, which was 30.1% for the same period in fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentagesegment was primarily driven by the leverage of netroyalty expenses on higher sales during the six months ended July 31, 2021 as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the same period in fiscal 2019 due to the deleverage impacts of lower net sales.volume.
EliminationThe net recognition of intersegment gross profit consisted of the following:
| | | Six months ended | | | Six months ended | |
(in thousands) | (in thousands) | July 31, 2021 | | August 1, 2020 | | (in thousands) | July 30, 2022 | | July 31, 2021 | |
Elimination of intersegment activity: | | | | | |
Recognition (elimination) of intersegment activity: | | Recognition (elimination) of intersegment activity: | | |
Net sales recognized by Brand Portfolio segment | Net sales recognized by Brand Portfolio segment | $ | (29,406) | | | $ | (25,924) | | | Net sales recognized by Brand Portfolio segment | $ | (45,352) | | | $ | (29,406) | | |
Cost of sales: | Cost of sales: | | | Cost of sales: | | |
Cost of sales recognized by Brand Portfolio segment | Cost of sales recognized by Brand Portfolio segment | 20,642 | | | 16,961 | | | Cost of sales recognized by Brand Portfolio segment | 30,723 | | | 20,642 | | |
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 9,488 | | | 11,925 | | | Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 15,851 | | | 9,488 | | |
Gross profit | $ | 724 | | | $ | 2,962 | | | |
| | | $ | 1,222 | | | $ | 724 | | |
Operating Expenses- For the six months ended July 31, 2021,30, 2022, operating expenses increased by $69.6$26.9 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses in line with the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leaveincrease in response to COVID-19 for most of the first half of fiscal 2020.net sales. Operating expenses as a percentage of sales improved to 28.0%26.8% compared to 36.6%28.0% in the same period last year, but were still elevated compareddue to the pre-COVID-19 rate, which was 25.4%improvement in net sales year over year as a percentage of sales forwe leveraged our fixed costs.
Interest Expense, net- For the six months ended July 30, 2022, interest expense, net, decreased by $11.2 million over the same period in fiscal 2019, last year, primarily due to the termination of the Term Loan in the first quarter of 2022, which had a higher direct marketing expenseinterest rate than the 2022 ABL Revolver.
Loss on extinguishment of debt and incentive compensationwrite-off of debt issuance costs- In connection with the settlement of our Term Loan on February 8, 2022, during the six months ended July 30, 2022 we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and lower salesa $5.7 million write-off of unamortized debt issuance costs. As a result of the replacement of the 2020 ABL Revolver during the .six months ended July 30, 2022, we also wrote-off $0.2 million of debt issuance costs.
Impairment Charges-Income Taxes- DuringFor the six months ended July 30, 2022 and July 31, 2021, we recorded an impairment charge of $1.2 million for abandoned equipment we are replacing. As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores during the six months ended August 1, 2020, we performed an impairment analysis at the store-level. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million for under-performing stores. Also during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life. Further, as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of COVID-19 on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
Income Taxes- Our effective tax rate changed from 32.5% for the six months ended August 1, 2020 to was 29.2% and 3.6%, respectively. The rate for the six months ended July 31, 2021.30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the six months ended July 31, 2021 iswas the result of maintaining a full valuation allowance on deferred tax assets while also recordingalong with net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
Seasonality
SEASONALITY
Our business is generally subject tobusiness consists of two principal selling seasons; the spring season, which includes the first and second fiscal quarters, and the fall season, which includes the third and fourth fiscal quarters. Generally, net sales in the fall season have been slightly higher than the spring season. Our seasonal trends driven byresults of operations may fluctuate based on the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter. SinceDue to the COVID-19 outbreak,pandemic, we havedid not experiencedexperience the typical seasonal trends during 2021 given the changes in customer behavior.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
OverviewOVERVIEW
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, and capital expenditures, and debt service.expenditures. Our working capital and inventory levels fluctuate seasonally. During the six months ended July 30, 2022, we repurchased 9.4 million Class A common shares at an aggregate cost of $128.5 million, with $206.4 million of Class A common shares that remain authorized under the program as of July 30, 2022. During the six months ended July 31, 2021, we did not repurchase any Class A common shares. We anticipate receiving approximately $160.0 million in the near future from the Internal Revenue Service as a result of the Coronavirus Aid, Relief, and Economic Security Act.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including any ongoing impacts of the impact of COVID-19.COVID-19 pandemic. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our 2022 ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and meetrepurchase common shares under our debt service obligationsshare repurchase program over the next 12 months.months and beyond.
Operating Cash FlowsThe following table presents the key categories of our condensed consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
| Six months ended | | |
(in thousands) | July 30, 2022 | | July 31, 2021 | | Change |
Net cash provided by operating activities | $ | 10,864 | | | $ | 96,229 | | | $ | (85,365) | |
Net cash used in investing activities | (40,234) | | | (13,189) | | | (27,045) | |
Net cash provided by (used in) financing activities | 7,398 | | | (94,955) | | | 102,353 | |
Effect of exchange rate changes on cash balances | 80 | | | 338 | | | (258) | |
Net decrease in cash, cash equivalents and restricted cash | $ | (21,892) | | | $ | (11,577) | | | $ | (10,315) | |
OPERATING CASH FLOWS
The decrease in net cash provided by operations was driven by higher spend on working capital as our business continues to recover from the impacts of the COVID-19 pandemic with increases in consolidated inventories, increases in receivables on wholesale sales, and timing of payments to vendors. This was partially offset by the increase in net income recognized in the six months ended July 30, 2022 over the same period last year, after adjusting for non-cash activity including the loss from extinguishment of debt and write-off of debt issuance costs, depreciation and amortization, and stock-based compensation expense.
INVESTING CASH FLOWS
For the six months ended July 31, 2021, net cash provided by operations was $96.2 million compared to30, 2022, net cash used in operations of $79.6 million for the six months ended August 1, 2020. The changeinvesting activities was driven by the net income recognizedprimarily due to capital expenditures relating to infrastructure and information technology ("IT") projects and store improvements as well as our investment in Le Tigre. During the six months ended July 31, 2021, versus athe net loss incurred during that same period last year as a resultcash used in investing activities was due to capital expenditures relating to IT projects and store improvements.
Investing Cash FlowsFINANCING CASH FLOWS
For the six months ended July 31, 2021, our net cash used in investing activities was $13.2 million, which was due to capital expenditures relating to infrastructure and IT projects and store improvements. During the six months ended August 1, 2020, our30, 2022, net cash provided by investingfinancing activities was $6.8 million, which was due to the liquidationnet receipts of $387.4 million from our available-for-sale securities and the proceeds from a settlement from a vendorrevolving lines of credit, partially offset by capital expendituresthe payments of $22.1$238.2 million due to the settlement of the Term Loan, the repurchase of 9.4 million Class A common shares at an aggregate cost of $128.5 million, and the payment of dividends of $7.1 million.
Financing Cash Flows
For During the six months ended July 31, 2021, our net cash used in financing activities was $95.0 million compareddue to net cash provided by financing activities of $193.2 million for the six months ended August 1, 2020. During the six months ended July 31, 2021, we had net payments of $83.2 million from the ABL Revolveron our revolving lines of credit and payments on the Term Loan of $6.3 million.During the six months ended August 1, 2020, we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering the uncertainty from COVID-19.
DebtDEBT
2022 ABL Revolver- On August 7, 2020,March 30, 2022, we replaced the Credit Facilityour 2020 ABL Revolver with theour current 2022 ABL Revolver, which provides a revolving line of credit of up to $400.0$550.0 million, including a Canadian sub-limit of up to $20.0$55.0 million, a $50.0$75.0 million sub-limit for the issuance of letters of credit, a $40.0$55.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0$5.5 million sub-limit for swing loan advances for Canadian borrowings. Our 2022 ABL Revolver matures in August 2025March 2027 and is secured by a first priority lien on substantially all of our personal property assets, including a first priority lien on credit card receivables and inventoryinventory. The 2022 ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and a second priority lien on personal property assets that constitute first priority collateral forpermitted acquisitions as defined by the Term Loan.credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of July 31, 2021,30, 2022, the 2022 ABL Revolver had a borrowing base of $386.1$550.0 million, with $16.8$387.4 million in outstanding borrowings and $5.3$4.9 million in letters of credit issued, resulting in $364.0$157.7 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of July 31, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.
Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of July 31, 2021.
Debt Covenants- The 2022 ABL Revolver containsrequires us to maintain a minimum availabilityfixed charge coverage ratio covenant where an event of default shall occur ifnot less than 1:1 when availability is less than the greater of $30.0$41.3 million orand 10.0% of the maximum creditborrowing amount. The Term Loan includes a springing covenant imposing a minimum EBITDA covenant, which arises when liquidity is less than $150.0 million. In addition, the2022 ABL Revolver and the Term Loan each containalso contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary covenants of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.conditions based on availability. As of July 31, 2021,30, 2022, we were in compliance with all financial covenants.
Termination of Term Loan -
Capital Expenditure PlansOn February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Term Loan. In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
Refer to Note 9, Debt, of the Condensed Consolidated Financial Statements of this Form 10-Q for further information about our debt arrangements.
CAPITAL EXPENDITURE PLANS
We expect to spend approximately $35.0 $65.0 million to $45.0$75.0 million for capital expenditures in fiscal 2021,2022, of which we invested $13.2$27.2 million during the six months ended July 31, 2021.30, 2022. Our capital expenditures for the remainder of the yearfuture investments will depend primarily on the number of store projects, as well asstores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.
Critical Accounting Policies and EstimatesRECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies and estimates disclosed in our 20202021 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk | | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 20202021 Form 10-K.
Item 4. Controls and Procedures | | |
ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and ProceduresEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Form 10-Q, that such disclosure controls and procedures were effective.
Changes in Internal Control Over Financial ReportingCHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATIONII
Item 1. Legal Proceedings | | |
ITEM 1. LEGAL PROCEEDINGS |
The information set forth in Note 11,10, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements ofin this Form 10-Q is incorporated herein by reference.
As of the date of thethis filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 20202021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
SHARE REPURCHASE PROGRAM
On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The
share repurchase program is subject to the ABL Revolver and Term Loan restrictions and may be suspended, modified or discontinued at any time, and we have no obligation to repurchase
any amount of our common shares under the program. Any share repurchasesShares will be completedrepurchased in the open market at times and in amounts
considered appropriate based on price and market conditions.
The following table sets forth the Class A common shares repurchased during the three months ended July 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | (a) Total Number of Shares Purchased(1) | | (b) Average Price Paid Per Share(2) | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
May 1, 2022 to May 28, 2022 | 1,829 | | $ | 13.56 | | | 1,829 | | $ | 287,386 | |
May 29, 2022 to July 2, 2022 | 1,558 | | $ | 13.92 | | | 1,543 | | $ | 265,894 | |
July 3, 2022 to July 30, 2022 | 4,405 | | $ | 13.50 | | | 4,397 | | $ | 206,437 | |
Total | 7,792 | | $ | 13.62 | | | 7,769 | | |
(1) The total number of shares repurchased includes the shares repurchased as part of publicly announced programs and 22,605 shares withheld in connection with tax payments due upon vesting of employee restricted stock awards.
(2) The average price paid per share includes broker commissions paid.
DIVIDENDS
The payment of any future dividends is at the discretion of our Board of Directors and is based on our future earnings, cash flow, financial condition, capital requirements, changes in taxation laws, general economic condition and any other relevant factors. It is anticipated that dividends will be declared on a quarterly basis.
On August 25, 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. The dividend will be paid on October 6, 2022 to shareholders of record at the close of business on September 22, 2022, and is expected to be recorded against retained earnings.
RESTRICTIONS
The 2022 ABL Revolver and the Term Loan each containcontains customary covenants restricting our activities, including limitations on the ability to pay dividends or repurchase stock. WeThere are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. We currently do not anticipate paying dividends or repurchasing additional shares under our share repurchase program.specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability.
Item 3. Defaults Upon Senior Securities | | |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. Mine Safety Disclosures | | |
ITEM 4. MINE SAFETY DISCLOSURES |
Not Applicable.
Item 5. Other Information | | |
ITEM 5. OTHER INFORMATION |
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | | Form | | File No. | | DescriptionDate of Filing | | Exhibit Number |
| | |
31.2* | | - | | - | | - | | - |
| | Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer. |
32.1** | | - | | - | | - | | - |
| | Section 1350 Certification - Principal Executive Officer. |
32.2** | | - | | - | | - | | - |
| | Section 1350 Certification - Principal Financial Officer. | | - | | - | | - | | - |
101* | | The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended July 31, 2021,30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss);Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed the Consolidated Financial Statements. | | - | | - | | - | | - |
104* | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. | | - | | - | | - | | - |
* Filed herewith
** Furnished herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DESIGNER BRANDS INC.
| | | | | | | | | | | | | | |
Date: | August 31, 20212022 | | By: | /s/ Jared Poff |
| | | | Jared Poff |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer and duly authorized officer) |