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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
|
| |
i ☑ | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
|
| |
i ☐ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| | | |
For the transition period from | | to | |
|
|
i DESIGNER BRANDS INC. |
(Exact name of registrant as specified in its charter) |
|
| | | | | |
i Ohio | | i 31-0746639 |
(State
or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | |
i 810
DSW Drive, | i Columbus, | i Ohio |
| | i 43219 |
(Address
of principal executive offices) | | | (Zip Code) |
Registrant's telephone number, including area code: ( i 614) i 237-7100
|
|
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:
|
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
i Class
A Common Shares, without par value | i DBI | i 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. ☑ i 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). ☑ i 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. |
| | | |
i Large
accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | i ☐ |
| | Emerging
growth company | i ☐ |
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). i ☐ Yes ☑ No
Number of shares outstanding of each of the registrant's classes of common stock, as of December 4, 2019:
i 64,015,734 Class A Common Shares and i 7,732,786
Class B Common Shares.
DESIGNER BRANDS INC.
|
| |
| Page |
PART I. FINANCIAL INFORMATION | |
Item 1. Financial Statements | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
PART
II. OTHER INFORMATION | |
| |
| |
| |
| |
| |
| |
| |
| |
All references to "we," "us," "our," "Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q mean Designer Brands Inc. and its subsidiaries. References to "DSW" refer to the DSW Designer Shoe Warehouse banner unless otherwise stated.
We
own many trademarks and service marks. This Quarterly Report on Form 10-Q may contain trademarks, trade dress, and tradenames of other companies. Use or display of other parties' trademarks, trade dress or tradenames is not intended to and does not imply a relationship with the trademark, trade dress or tradename owner.
| |
PART I. | FINANCIAL INFORMATION |
| |
Item
1. | Financial Statements |
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
| | | | | | | |
Revenue: | | | | | | | |
Net sales | $ | i 928,608 |
| | $ | i 831,669 |
| | $ | i 2,648,240 |
| | $ | i 2,335,841 |
|
Commission,
franchise and other revenue | i 7,656 |
| | i 1,334 |
| | i 26,737 |
| | i 4,532 |
|
Total
revenue | i 936,264 |
| | i 833,003 |
| | i 2,674,977 |
| | i 2,340,373 |
|
Cost
of sales | ( i 660,518 | ) | | ( i 560,586 | ) | | ( i 1,869,253 | ) | | ( i 1,605,038 | ) |
Operating
expenses | ( i 217,476 | ) | | ( i 226,491 | ) | | ( i 666,898 | ) | | ( i 590,230 | ) |
Income
from equity investment in ABG-Camuto | i 2,662 |
| | i — |
| | i 7,354 |
| | i — |
|
Impairment
adjustments (charges) | ( i 4,824 | ) | | i 7,163 |
| | ( i 4,824 | ) | | ( i 29,077 | ) |
Operating
profit | i 56,108 |
| | i 53,089 |
| | i 141,356 |
| | i 116,028 |
|
Interest
income (expense), net | ( i 2,174 | ) | | i 870 |
| | ( i 5,947 | ) | | i 2,339 |
|
Non-operating
income (expenses), net | i 15 |
| | ( i 108 | ) | | ( i 128 | ) | | ( i 49,594 | ) |
Income
before income taxes and loss from equity investment in TSL | i 53,949 |
| | i 53,851 |
| | i 135,281 |
| | i 68,773 |
|
Income
tax provision | ( i 10,489 | ) | | ( i 14,532 | ) | | ( i 33,220 | ) | | ( i 42,203 | ) |
Loss
from equity investment in TSL | i — |
| | i — |
| | i — |
| | ( i 1,310 | ) |
Net
income | $ | i 43,460 |
| | $ | i 39,319 |
| | $ | i 102,061 |
| | $ | i 25,260 |
|
Basic
and diluted earnings per share: | | | | | | | |
Basic earnings per share | $ | i 0.60 |
| | $ | i 0.49 |
| | $ | i 1.38 |
| | $ | i 0.31 |
|
Diluted
earnings per share | $ | i 0.60 |
| | $ | i 0.48 |
| | $ | i 1.36 |
| | $ | i 0.31 |
|
Weighted
average shares used in per share calculations: | | | | | | | |
Basic shares | i 72,123 |
| | i 80,321 |
| | i 74,219 |
| | i 80,231 |
|
Diluted
shares | i 72,947 |
| | i 82,287 |
| | i 75,149 |
| | i 81,686 |
|
The
accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
|
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
| | | | | | | |
Net income | $ | i 43,460 |
| | $ | i 39,319 |
| | $ | i 102,061 |
| | $ | i 25,260 |
|
Other
comprehensive income (loss), net of income taxes: | | | | | | | |
Foreign currency translation gain (loss) | i 236 |
| | ( i 271 | ) | | ( i 17 | ) | | ( i 6,321 | ) |
Unrealized
net gain (loss) on debt securities | i 37 |
| | ( i 133 | ) | | i 475 |
| | ( i 450 | ) |
Reclassification
adjustment for net losses (gains) realized in net income | ( i 24 | ) | | i 14 |
| | ( i 89 | ) | | i 14,179 |
|
Total
other comprehensive income (loss), net of income taxes | i 249 |
| | ( i 390 | ) | | i 369 |
| | i 7,408 |
|
Total
comprehensive income | $ | i 43,709 |
| | $ | i 38,929 |
| | $ | i 102,430 |
| | $ | i 32,668 |
|
The
accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
|
| | | | | | | | | | | |
| | | | | |
ASSETS | | | | | |
Cash and cash equivalents | $ | i 87,838 |
| | $ | i 99,369 |
| | $ | i 222,419 |
|
Investments | i 25,939 |
| | i 69,718 |
| | i 71,848 |
|
Accounts
receivable, net | i 87,313 |
| | i 68,870 |
| | i 14,902 |
|
Inventories | i 677,696 |
| | i 645,317 |
| | i 624,167 |
|
Prepaid
expenses and other current assets | i 48,077 |
| | i 71,945 |
| | i 49,924 |
|
Total
current assets | i 926,863 |
| | i 955,219 |
| | i 983,260 |
|
Property
and equipment, net | i 394,695 |
| | i 409,576 |
| | i 383,110 |
|
Operating
lease assets | i 950,514 |
| | i — |
| | i — |
|
Goodwill | i 113,644 |
| | i 89,513 |
| | i 25,899 |
|
Intangible
assets | i 23,297 |
| | i 46,129 |
| | i 20,000 |
|
Deferred
tax assets | i 39,452 |
| | i 30,283 |
| | i 42,966 |
|
Equity
investment in ABG-Camuto | i 54,964 |
| | i 58,125 |
| | i — |
|
Other
assets | i 33,549 |
| | i 31,739 |
| | i 19,394 |
|
Total
assets | $ | i 2,536,978 |
| | $ | i 1,620,584 |
| | $ | i 1,474,629 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY | | | | | |
Accounts payable | $ | i 266,335 |
| | $ | i 261,625 |
| | $ | i 198,499 |
|
Accrued
expenses | i 190,897 |
| | i 201,535 |
| | i 182,964 |
|
Current
operating lease liabilities | i 184,598 |
| | i — |
| | i — |
|
Total
current liabilities | i 641,830 |
| | i 463,160 |
| | i 381,463 |
|
Debt | i 235,000 |
| | i 160,000 |
| | i — |
|
Non-current
operating lease liabilities | i 880,883 |
| | i — |
| | i — |
|
Other
non-current liabilities | i 36,084 |
| | i 165,047 |
| | i 150,730 |
|
Total
liabilities | i 1,793,797 |
| | i 788,207 |
| | i 532,193 |
|
Commitments
and contingencies | i
|
| | i
|
| | i
|
|
Shareholders'
equity: | | | | | |
Common shares paid-in capital, no par value | i 993,086 |
| | i 978,794 |
| | i 975,658 |
|
Treasury
shares, at cost | ( i 515,065 | ) | | ( i 373,436 | ) | | ( i 325,906 | ) |
Retained
earnings | i 292,490 |
| | i 254,718 |
| | i 320,343 |
|
Basis
difference related to acquisition of commonly controlled entity | ( i 24,993 | ) | | ( i 24,993 | ) | | ( i 24,993 | ) |
Accumulated
other comprehensive loss | ( i 2,337 | ) | | ( i 2,706 | ) | | ( i 2,666 | ) |
Total
shareholders' equity | i 743,181 |
| | i 832,377 |
| | i 942,436 |
|
Total
liabilities and shareholders' equity | $ | i 2,536,978 |
| | $ | i 1,620,584 |
| | $ | i 1,474,629 |
|
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 |
| Class A common shares | | Class B common shares | | Treasury shares | | Common shares paid in capital | | Treasury shares | | Retained
earnings | | Basis difference related to acquisition of commonly controlled entity | | Accumulated other comprehensive loss | | Total |
|
| i 64,911 |
| | i 7,733 |
| | i 21,169 |
| | $ | i 988,305 |
| | $ | ( i 498,436 | ) | | $ | i 266,957 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,586 | ) | | $ | i 729,247 |
|
Net
income | — |
| | — |
| | — |
| | — |
| | — |
| | i 43,460 |
| | — |
| | — |
| | i 43,460 |
|
Stock-based
compensation activity | i 105 |
| | — |
| | — |
| | i 4,781 |
| | — |
| | — |
| | — |
| | — |
| | i 4,781 |
|
Repurchase
of Class A common shares | ( i 1,000 | ) | | — |
| | i 1,000 |
| | — |
| | ( i 16,629 | ) | | — |
| | — |
| | — |
| | ( i 16,629 | ) |
Dividends
($0.25 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | ( i 17,927 | ) | | — |
| | — |
| | ( i 17,927 | ) |
Other
comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | i 249 |
| | i 249 |
|
| i 64,016 |
| | i 7,733 |
| | i 22,169 |
| | $ | i 993,086 |
| | $ | ( i 515,065 | ) | | $ | i 292,490 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,337 | ) | | $ | i 743,181 |
|
|
| i 72,561 |
| | i 7,733 |
| | i 13,091 |
| | $ | i 971,653 |
| | $ | ( i 325,906 | ) | | $ | i 301,006 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,276 | ) | | $ | i 919,484 |
|
Net
income | — |
| | — |
| | — |
| | — |
| | — |
| | i 39,319 |
| | — |
| | — |
| | i 39,319 |
|
Stock-based
compensation activity | i 54 |
| | — |
| | — |
| | i 4,005 |
| | — |
| | — |
| | — |
| | — |
| | i 4,005 |
|
Dividends
($0.25 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | ( i 19,982 | ) | | — |
| | — |
| | ( i 19,982 | ) |
Other
comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | ( i 390 | ) | | ( i 390 | ) |
| i 72,615 |
| | i 7,733 |
| | i 13,091 |
| | $ | i 975,658 |
| | $ | ( i 325,906 | ) | | $ | i 320,343 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,666 | ) | | $ | i 942,436 |
|
|
| i 70,672 |
| | i 7,733 |
| | i 15,091 |
| | $ | i 978,794 |
| | $ | ( i 373,436 | ) | | $ | i 254,718 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,706 | ) | | $ | i 832,377 |
|
Cumulative
effect of accounting change | — |
| | — |
| | — |
| | — |
| | — |
| | ( i 9,556 | ) | | — |
| | — |
| | ( i 9,556 | ) |
Net
income | — |
| | — |
| | — |
| | — |
| | — |
| | i 102,061 |
| | — |
| | — |
| | i 102,061 |
|
Stock-based
compensation activity | i 422 |
| | — |
| | — |
| | i 14,292 |
| | — |
| | — |
| | — |
| | — |
| | i 14,292 |
|
Repurchase
of Class A common shares | ( i 7,078 | ) | | — |
| | i 7,078 |
| | — |
| | ( i 141,629 | ) | | — |
| | — |
| | — |
| | ( i 141,629 | ) |
Dividends
($0.75 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | ( i 54,733 | ) | | — |
| | — |
| | ( i 54,733 | ) |
Other
comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | i 369 |
| | i 369 |
|
| i 64,016 |
| | i 7,733 |
| | i 22,169 |
| | $ | i 993,086 |
| | $ | ( i 515,065 | ) | | $ | i 292,490 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,337 | ) | | $ | i 743,181 |
|
|
| i 72,294 |
| | i 7,733 |
| | i 13,091 |
| | $ | i 961,245 |
| | $ | ( i 325,906 | ) | | $ | i 354,979 |
| | $ | ( i 24,993 | ) | | $ | ( i 10,074 | ) | | $ | i 955,251 |
|
Net
income | — |
| | — |
| | — |
| | — |
| | — |
| | i 25,260 |
| | — |
| | — |
| | i 25,260 |
|
Stock-based
compensation activity | i 321 |
| | — |
| | — |
| | i 14,413 |
| | — |
| | — |
| | — |
| | — |
| | i 14,413 |
|
Dividends
($0.75 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | ( i 59,896 | ) | | — |
| | — |
| | ( i 59,896 | ) |
Other
comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | i 7,408 |
| | i 7,408 |
|
| i 72,615 |
| | i 7,733 |
| | i 13,091 |
| | $ | i 975,658 |
| | $ | ( i 325,906 | ) | | $ | i 320,343 |
| | $ | ( i 24,993 | ) | | $ | ( i 2,666 | ) | | $ | i 942,436 |
|
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)
|
| | | | | | | |
| Nine months
ended |
| | | |
Cash flows from operating activities: | | | |
Net income | $ | i 102,061 |
| | $ | i 25,260 |
|
Adjustments
to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | i 64,226 |
| | i 57,679 |
|
Stock-based
compensation expense | i 13,748 |
| | i 13,633 |
|
Deferred
income taxes | ( i 11,411 | ) | | ( i 15,205 | ) |
Loss
(income) from equity investments | ( i 7,354 | ) | | i 1,310 |
|
Loss
on previously held equity investment in TSL and notes receivable from TSL | i — |
| | i 33,988 |
|
Impairment
charges | i 4,824 |
| | i 29,077 |
|
Lease
exit non-cash charges | i — |
| | i 7,105 |
|
Loss
on foreign currency reclassified from accumulated other comprehensive loss | i — |
| | i 13,963 |
|
Other | ( i 561 | ) | | i 5,879 |
|
Change
in operating assets and liabilities, net of acquired amounts: | | | |
Accounts receivable | ( i 17,484 | ) | | i 6,171 |
|
Inventories | ( i 35,394 | ) | | ( i 57,679 | ) |
Prepaid
expenses and other current assets | i 4,403 |
| | i 951 |
|
Accounts
payable | i 8,853 |
| | ( i 3,646 | ) |
Accrued
expenses | ( i 7,838 | ) | | i 28,849 |
|
Net
cash provided by operating activities | i 118,073 |
| | i 147,335 |
|
Cash
flows from investing activities: | | | |
Cash paid for property and equipment | ( i 59,574 | ) | | ( i 48,545 | ) |
Purchases
of available-for-sale investments | ( i 19,889 | ) | | ( i 16,735 | ) |
Sales
of available-for-sale investments | i 64,233 |
| | i 68,468 |
|
Additional
borrowings by TSL | i — |
| | ( i 15,989 | ) |
Proceeds
from working capital settlement (cash paid) for business acquisitions, net of cash acquired | i 4,965 |
| | ( i 28,152 | ) |
Net
cash used in investing activities | ( i 10,265 | ) | | ( i 40,953 | ) |
Cash
flows from financing activities: | | | |
Borrowing on revolving line of credit | i 375,200 |
| | i — |
|
Payments
on revolving line of credit | ( i 300,200 | ) | | i — |
|
Cash
paid for treasury shares | ( i 141,629 | ) | | i — |
|
Dividends
paid | ( i 54,733 | ) | | ( i 59,894 | ) |
Other | i 733 |
| | ( i 751 | ) |
Net
cash used in financing activities | ( i 120,629 | ) | | ( i 60,645 | ) |
Effect
of exchange rate changes on cash balances | i 91 |
| | i 750 |
|
Net
increase (decrease) in cash, cash equivalents, and restricted cash | ( i 12,730 | ) | | i 46,487 |
|
Cash,
cash equivalents, and restricted cash, beginning of period | i 100,568 |
| | i 175,932 |
|
Cash
and cash equivalents, end of period | $ | i 87,838 |
| | $ | i 222,419 |
|
Supplemental
disclosures of cash flow information: | | | |
Cash paid for income taxes | $ | i 31,523 |
| | $ | i 40,366 |
|
Cash
paid for interest on debt | $ | i 6,577 |
| | $ | i — |
|
Cash
paid for operating lease liabilities | $ | i 178,225 |
| | $ | i — |
|
Non-cash
investing and financing activities: | | | |
Property and equipment purchases not yet paid | $ | i 7,442 |
| | $ | i 7,405 |
|
Operating
lease liabilities arising from lease asset additions (excluding ASU 2016-02 transition adjustments) | $ | i 17,729 |
| | $ | i — |
|
Adjustment
to operating lease assets and lease liabilities for modifications | $ | i 60,736 |
| | $ | i — |
|
The
accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. i SIGNIFICANT
ACCOUNTING POLICIES
Business Operations- Designer Brands Inc. is a leading North American footwear and accessories designer, producer and retailer.
On May 10, 2018, we acquired the remaining interest in Town Shoes Limited ("TSL") that we did not previously own. Beginning with our second quarter of fiscal 2018, TSL ceased being accounted for under the equity method of accounting and was accounted for as a consolidated wholly-owned subsidiary. As a result of this acquisition, we operate a Canadian business that is a retailer of branded footwear under The Shoe Company, Shoe Warehouse, and DSW Designer Shoe Warehouse banners, as well as related e-commerce sites.
Subsequent to the acquisition, and as a result of our strategic review, we exited the Town Shoes banner in Canada during fiscal 2018.
On November 5, 2018, we completed the acquisition of Camuto LLC, doing business as Camuto Group ("Camuto Group"), a footwear design and brand development organization, from Camuto Group LLC (the "Sellers"). The Camuto Group acquisition provides us a global production, sourcing and design infrastructure, including operations in Brazil and China, a new state-of-the-art distribution center in New Jersey, footwear licenses of brands, including Jessica Simpson and Lucky Brand, and branded e-commerce sites. Camuto Group 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 ("First Cost"), and the sale of branded products on direct-to-consumer e-commerce sites.
Also on November 5, 2018, in partnership with Authentic Brands Group LLC, a global brand management and marketing company, we formed ABG-Camuto, LLC ("ABG-Camuto"), a joint venture in which we have a i 40%
interest. This joint venture acquired several intellectual property rights from the Sellers, including Vince Camuto, Louise et Cie, Sole Society, CC Corso Como, Enzo Angiolini and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. We have entered into a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto.
On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"), an off-price footwear and accessories retailer operating in digital marketplaces. Due to recurring operating losses incurred by Ebuys since its acquisition, as well as increased competitive pressures in the digital marketplace, we decided to exit the business and ended all operations in the first
quarter of fiscal 2018.
On August 2, 2016, we signed an agreement with the Apparel Group as an exclusive franchise partner in the Gulf Coast region of the Middle East. During the fourth quarter of fiscal 2018, we provided our termination notice to the Apparel Group in accordance with the terms of the agreement and we are winding down the franchise operations during fiscal 2019.
We present i three
reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment includes stores operated in the U.S. under the DSW Designer Shoe Warehouse banner and its related e-commerce site. The Canada Retail segment, which is the result of the TSL acquisition, includes stores operated in Canada under The Shoe Company, Shoe Warehouse, DSW Designer Shoe Warehouse banners and related e-commerce sites. The Brand Portfolio segment, which is the result of the Camuto Group acquisition, includes sales from wholesale, First Cost, and direct-to-consumer branded e-commerce sites. Our other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.
i Basis
of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("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 February 2,
2019 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 our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 26, 2019.
i Fiscal
Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year refer to the calendar year in which the fiscal year begins.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accounting
Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
i Variable Interest Entities- We had certain joint ventures ("JVs") where each joint venture licensed brands and contracts
with Camuto Group to provide design, buying and sourcing services. Under the JVs, Camuto Group was responsible for managing all aspects of the brands and the JVs paid royalties, commissions, or consulting fees to the other parties. We were responsible for providing all funding to support the working capital needs of the JVs. As a result, we were considered the primary beneficiary of the JVs and consolidated the JVs within our financial statements. Assets and liabilities of the JVs in the aggregate were immaterial. During the nine months ended November 2, 2019, we terminated all of the JVs along with related licensing and design, buying and sourcing arrangements.
i Integration
and Restructuring Costs- During the nine months ended November 2, 2019, we incurred integration and restructuring costs related to our prior year acquisition activity, which consisted primarily of $ i 3.8 million in severance, $ i 6.3
million in termination fees for terminating the JVs, and $ i 3.5 million of professional fees and other integration costs. During the nine months ended November 3, 2018, we incurred restructuring costs of $ i 3.3
million in severance, primarily related to changes to our store staffing model. These costs are included in operating expenses in the condensed consolidated statements of operations. As of November 2, 2019 and November 3, 2018, we had $ i 3.0 million and $ i 1.5
million, respectively, of severance liability included in accrued expenses on the condensed consolidated balance sheets. /
i Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including
the JVs. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in United States dollars ("USD"), unless otherwise noted.
i 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 date of the financial statements and reported amounts of revenue and expenses during the reporting period. Significant estimates are required as a part of 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, legal reserves, foreign tax contingent liabilities, income taxes, self-insurance reserves, and valuations used to account for acquisitions. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results could differ from these estimates.
i Income
Taxes- Our effective tax rate changed from i 62.6% for the nine months ended November 3, 2018 to i 24.6% for
the nine months ended November 2, 2019 / . The decrease in the effective tax rate was primarily driven by valuation allowances and the goodwill impairment associated with the TSL acquisition during the nine months ended November 3, 2018.
i 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 represented cash that was restricted as to withdrawal or usage and consisted of a mandatory cash deposit for certain outstanding letters of credit.
i 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) | | | | | |
Cash and cash equivalents | $ | i 87,838 |
| | $ | i 99,369 |
| | $ | i 222,419 |
|
Restricted
cash, included in prepaid expenses and other current assets | i — |
| | i 1,199 |
| | i — |
|
Total
cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | i 87,838 |
| | $ | i 100,568 |
| | $ | i 222,419 |
|
/
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i Fair Value- Fair value is defined as the price that would be received to sell 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. |
We measure available-for-sale investments at fair value on a recurring basis. These investments are measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2). The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature.
i Impairment
of Long-Lived Assets- We periodically evaluate the carrying amount of our long-lived assets, primarily operating lease assets, property and equipment and definite-lived intangible assets, when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group (categorized as Level 3 under the fair value hierarchy). The reviews are conducted at the lowest identifiable level. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value.
During the three and nine months ended November 2, 2019,
we recorded impairment charges of $ i 4.8 million, including $ i 4.5
million for an operating lease asset and other property and equipment in the Brand Portfolio segment related to the planned consolidation of certain locations as part of our integration efforts and $ i 0.3 million primarily for operating lease assets related to under-performing stores in the Canada Retail segment.
i Prior
Period Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation. Franchise costs was reclassified to operating expenses, and accounts payable to related parties was reclassified to accounts payable.
i Adoption of ASU 2016-02, Leases- During the first quarter of fiscal 2019, we adopted the new accounting standard for leases,
Accounting Standards Update ("ASU") 2016-02 and the related amendments. We elected to initially apply ASU 2016-02 as of February 3, 2019, with the recognition of $ i 1.0 billion of lease assets and $ i 1.1
billion of lease liabilities and a cumulative-effect adjustment that decreased retained earnings by $ i 9.6 million for transition impairments related to previously impaired leased locations. Periods prior to February 3, 2019 were not restated. Upon transition to ASU 2016-02, we recognized lease liabilities based on the present value of the remaining future
fixed lease commitments, net of outstanding tenant allowance receivables, with corresponding lease assets. Amounts for prepaid expenses, deferred rent, deferred construction and tenant allowances, the accrual for lease obligations, and favorable and unfavorable leasehold interests were netted against the lease assets. At transition, we elected the package of practical expedients, which allows us to carry forward the historical lease classification and not reassess whether any expired or existing contracts are leases or contain leases. We did not elect the use of hindsight to determine the term of our leases at transition.
A lease liability for new leases is recorded based on the present value of future fixed lease commitments with a corresponding lease asset. For leases classified as
operating leases, we recognize a single lease cost on a straight-line basis based on the combined amortization of the lease liability and the lease asset. Other leases will be accounted for as finance arrangements. For real estate leases, we are generally required to pay base rent, real estate taxes, and insurance, which are considered lease components, and maintenance, which is a non-lease component. As provided for under ASU 2016-02, we have elected to not separate non-lease payment components from the associated lease component for all new real estate leases. We determine the discount rate for each lease by estimating the rate that we would be required to pay on a secured borrowing for an amount equal to the lease payments over the lease term.
Prior to the adoption of ASU 2016-02, we recognized rent expense on a straight-line basis over the noncancelable terms of the lease.
For leases with fixed increases of the minimum rentals during the noncancelable term, we recorded the difference between the amounts charged to expense and the rent paid as deferred rent and amortized such deferred rent upon the delivery of the lease location by the lessor. In addition, cash allowances received from landlords were deferred and amortized on a straight-line basis over the noncancelable terms of the lease as a reduction of rent expense. Deferred rent and construction and tenant allowances are included in other non-current liabilities on the condensed consolidated balance sheets for periods prior to February 3, 2019. Also, we recorded reserves for leased spaces that were abandoned due to closure. Using a credit-adjusted /
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
risk-free rate to calculate the present value of the liability, we estimated future lease obligations based on remaining fixed lease payments, estimated or actual sublease income, and any other relevant factors.
Adoption of ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software- Also during the first quarter of fiscal 2019,
we early adopted ASU 2018-15 on a prospective basis, which aligned the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or acquire internal-use software. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.
2. i ACQUISITIONS
AND EQUITY METHOD INVESTMENT
Step Acquisition of TSL- On May 10, 2018, we acquired the remaining interest in TSL for $ i 36.2 million Canadian dollars ("CAD") ($ i 28.2
million USD), net of acquired cash of $ i 8.5 million CAD ($ i 6.6
million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $ i 34.0
million to non-operating income (expenses), net, in the consolidated statements of operations. Also during the second quarter of fiscal 2018, we reclassified a net loss of $ i 12.2 million of foreign currency translation adjustments related to the previously held balances
from accumulated other comprehensive loss to non-operating income (expenses), net.
i The purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired was finalized as of February 2, 2019 and consisted of the following (in USD): |
| | | |
(in
thousands) | Final Purchase Price and Allocation |
Purchase price: | |
Cash consideration, net of cash acquired | $ | i 28,152 |
|
Replacement
stock-based awards attributable to pre-acquisition services | i 196 |
|
Fair value of previously held assets | i 92,242 |
|
| $ | i 120,590 |
|
Fair
value of assets and liabilities acquired: | |
Inventories | $ | i 66,072 |
|
Other
current assets | i 3,687 |
|
Property and equipment | i 41,008 |
|
Goodwill | i 43,022 |
|
Intangible
assets | i 20,689 |
|
Accounts payable and accrued expenses | ( i 33,196 | ) |
Non-current
liabilities | ( i 20,692 | ) |
| $ | i 120,590 |
|
The
fair value of previously held assets was determined immediately before the business combination, primarily by considering the income valuation approach (discounted cash flow) and the market valuation approach (precedent comparable transactions). Additionally, other information such as current market, industry and macroeconomic conditions were utilized to assist in developing these fair value measurements. The fair value of intangible assets includes $ i 15.7
million for tradenames, $ i 3.6 million for favorable leasehold interests, and $ i 1.4
million for customer relationships associated with the Canada loyalty program. The fair value of unfavorable leasehold interests, included in other non-current liabilities, was $ i 7.6 million. The fair value for tradenames was determined using the relief from royalty method of the income approach, the fair value for leasehold interests was determined based on the market valuation approach, and the
fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair value for property and equipment were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs.
The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. With this being a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during fiscal 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of the Canada Retail segment's goodwill. A portion of the goodwill is not expected to be deductible for income tax purposes.
During
the three months ended November 3, 2018, our condensed consolidated statements of operations included revenue and net losses for TSL of $ i 80.1 million and $ i 0.6
million, respectively, which included the goodwill impairment adjustment of $ i 7.2 million. During the nine months ended November 3, 2018, our condensed consolidated statements of operations included revenue and net losses for TSL of $ i 152.6
million and $ i 39.1 million, respectively, which included the goodwill impairment charge of $ i 29.1
million. Primarily in fiscal 2018, we incurred $ i 3.1 million of acquisition-related costs as a result of the step acquisition (not included in the TSL net loss disclosed in the previous sentence), which were included in operating expenses in the condensed consolidated statements of operations.
Acquisition
of Camuto Group- On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $ i 166.3 million, net of acquired cash of $ i 9.7
million and a working capital settlement of $ i 5.0 million received during the three months ended November 2, 2019. The purchase price of the acquisition, along with the acquired equity investment
in ABG-Camuto (discussed below), was funded with available cash and borrowings on the revolving line of credit of $ i 160.0 million.
i The
following table summarizes the preliminary and final purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired:
|
| | | | | | | | | | | |
(in thousands) | Preliminary Purchase Price and Allocation | | Measurement Period
Adjustments | | |
Purchase price - | | | | | |
Cash consideration, net of cash acquired | $ | i 171,251 |
| | $ | ( i 4,965 | ) | | $ | i 166,286 |
|
Fair
value of assets and liabilities acquired: | | | | | |
Accounts receivable | $ | i 83,939 |
| | $ | i 3,410 |
| | $ | i 87,349 |
|
Inventories | i 74,499 |
| | ( i 2,999 | ) | | i 71,500 |
|
Other
current assets | i 7,197 |
| | i 1,105 |
| | i 8,302 |
|
Property
and equipment | i 43,906 |
| | ( i 1,469 | ) | | i 42,437 |
|
Goodwill | i 63,614 |
| | i 24,131 |
| | i 87,745 |
|
Intangible
asset | i 27,000 |
| | ( i 19,000 | ) | | i 8,000 |
|
Other
assets | i 13,351 |
| | i — |
| | i 13,351 |
|
Accounts
payable and other liabilities | ( i 122,811 | ) | | ( i 2,030 | ) | | ( i 124,841 | ) |
Non-current
liabilities | ( i 19,444 | ) | | ( i 8,113 | ) | | ( i 27,557 | ) |
| $ | i 171,251 |
| | $ | ( i 4,965 | ) | | $ | i 166,286 |
|
The
fair value of the intangible asset relates to customer relationships and was based on the excess earnings method under the income approach. The fair value measurement is based on significant unobservable inputs, including the future cash flows and discount and customer attrition rates. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which consist of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. The inventory valuation step-up was recognized to cost of goods sold during the fourth quarter of fiscal 2018 based on assumed inventory turns.
The goodwill represents the excess of the purchase price over the fair value of the net assets acquired, and was primarily attributable to acquiring an established design and sourcing process, which
provides us the opportunity to expand our exclusive brand products offering at lower cost of goods in our retail segments, and an assembled workforce. We determined that goodwill should be allocated to reporting units within the U.S. Retail and Brand Portfolio segments based on each reporting unit's estimated benefit from the expected synergies from the Camuto Group acquisition. We allocated $ i 67.8 million of the goodwill
to the U.S. Retail segment based primarily on a discounted cash flow of the sourcing benefit. The remaining $ i 20.0 million of goodwill was allocated to the First Cost reporting unit within the Brand Portfolio segment based on the fair value of
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
the reporting unit over the fair value of the net assets allocated to the reporting unit. Goodwill is expected to be deductible for income tax purposes.
Other non-current liabilities include $ i 12.7
million of estimated unpaid foreign payroll and other taxes. We recorded an offsetting indemnification asset to other assets, which we expect to collect under the terms of the securities purchase agreement with the Sellers. See Note 16, Commitments and Contingencies, for additional information.
Measurement period adjustments were the result of refining cash flow assumptions relating to certain synergy assumptions, adjusting accruals and related indemnification receivables based on additional information, and other immaterial adjustments identified as we performed additional analysis of the assets and liabilities acquired. Adjustments to the purchase price were based on a working capital settlement with the Sellers as provided by the purchase agreement.
Measurement period adjustments are recognized on a prospective basis in the period of change.
During the nine months ended November 3, 2018, we incurred $ i 13.0 million of acquisition-related costs as
a result of the acquisition, which were included in operating expenses in the condensed consolidated statements of operations. We incurred a total of $ i 22.2 million of acquisition-related costs as a result of the acquisition during fiscal 2018.
Equity Investment in ABG-Camuto-
On November 5, 2018, we acquired a i 40% interest in the newly formed ABG-Camuto joint venture for $ i 56.8
million in partnership with Authentic Brands Group LLC. Also on November 5, 2018, ABG-Camuto acquired several intellectual property rights from the Sellers and entered into a licensing agreement with us, through which ABG-Camuto earns royalties from the net sales of Camuto Group under the brands acquired.
i Activity related to our equity investment in ABG-Camuto was as follows:
|
| | | |
(in
thousands) | |
Balance at beginning of period | $ | i 58,125 |
|
Share
of net earnings | i 7,354 |
|
Distributions received | ( i 10,515 | ) |
Balance
at end of period | $ | i 54,964 |
|
Combined
Results- i The following table provides the supplemental pro forma total revenue and net income of the combined entity had the acquisition dates of TSL and Camuto Group and the investment in ABG-Camuto been the first day of our fiscal 2017:
|
| | | | | | | |
(in
thousands) | | | |
Total revenue | $ | i 963,923 |
| | $ | i 2,719,133 |
|
Net
income | $ | i 48,047 |
| | $ | i 98,190 |
|
The
amounts in the supplemental pro forma results apply our accounting policies, eliminate intercompany transactions, assume the acquisition-related transaction costs were incurred in fiscal 2017, and reflect adjustments for additional expenses that would have been charged assuming borrowings on the revolving line of credit of $ i 160.0 million and the same fair value adjustments to inventory, property and equipment, and acquired intangibles had been applied on the first day
of our fiscal 2017. Related to the TSL acquisition, the supplemental pro forma results also exclude the loss related to the remeasurement of previously held assets, the net loss of foreign currency translation related to the previously held balances from accumulated other comprehensive loss, and the goodwill impairment charge. Because the ABG-Camuto investment was integral to the Camuto Group acquisition, the supplemental pro forma results include royalty expenses that would be due to ABG-Camuto using the guaranteed minimum royalties per the license agreement and the related earnings from our equity investment in ABG-Camuto had the transactions occurred on the first day of our fiscal 2017. Accordingly, these supplemental pro forma results have been prepared for comparative purposes only and are not intended to be indicative of results of operations that would have occurred had the acquisitions actually occurred in the prior year period or indicative of the results of
operations for any future period.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. i REVENUE
Disaggregation
of Revenue- i The following table presents our total revenue disaggregated by segments:
|
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
(in thousands) | | | | | | | |
Segment net sales: | | | | | | | |
U.S. Retail | $ | i 716,775 |
| | $ | i 721,746 |
| | $ | i 2,086,535 |
| | $ | i 2,083,287 |
|
Canada
Retail | i 76,299 |
| | i 80,072 |
| | i 191,421 |
| | i 152,604 |
|
Brand
Portfolio | i 130,582 |
| | i — |
| | i 326,871 |
| | i — |
|
Other | i 28,848 |
| | i 29,851 |
| | i 93,935 |
| | i 99,950 |
|
Total
segment net sales | i 952,504 |
| | i 831,669 |
| | i 2,698,762 |
| | i 2,335,841 |
|
Commission,
franchise and other revenue | i 9,352 |
| | i 1,334 |
| | i 30,028 |
| | i 4,532 |
|
| i 961,856 |
| | i 833,003 |
| | i 2,728,790 |
| | i 2,340,373 |
|
Elimination
of intersegment revenue | ( i 25,592 | ) | | i — |
| | ( i 53,813 | ) | | i — |
|
Total
revenue | $ | i 936,264 |
| | $ | i 833,003 |
| | $ | i 2,674,977 |
| | $ | i 2,340,373 |
|
The
U.S. Retail and Brand Portfolio segments and Other net sales recognized are primarily based on sales to customers in the U.S., and Canada Retail segment net sales recognized are based on sales to customers in Canada. Revenue realized from geographic markets outside of the U.S. and Canada have collectively been immaterial.
The following table presents total revenue by product and service category:
|
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
(in thousands) | | | | | | | |
Net sales: | | | | | | | |
U.S. Retail segment: | | | | | | |
|
Women's
footwear | $ | i 492,062 |
| | $ | i 496,531 |
| | $ | i 1,432,573 |
| | $ | i 1,433,152 |
|
Men's
footwear | i 132,158 |
| | i 136,503 |
| | i 402,042 |
| | i 421,235 |
|
Accessories,
kids and other | i 92,555 |
| | i 88,712 |
| | i 251,920 |
| | i 228,900 |
|
| i 716,775 |
| | i 721,746 |
| | i 2,086,535 |
| | i 2,083,287 |
|
Canada
Retail segment: | | | | | | | |
Women's footwear | i 38,887 |
| | i 42,595 |
| | i 103,046 |
| | i 84,662 |
|
Men's
footwear | i 17,282 |
| | i 18,835 |
| | i 46,722 |
| | i 38,290 |
|
Accessories,
kids and other | i 20,130 |
| | i 18,642 |
| | i 41,653 |
| | i 29,652 |
|
| i 76,299 |
| | i 80,072 |
| | i 191,421 |
| | i 152,604 |
|
Brand
Portfolio segment: | | | | | | | |
Wholesale | i 117,359 |
| | i — |
| | i 297,690 |
| | i — |
|
Direct-to-consumer | i 13,223 |
| | i — |
| | i 29,181 |
| | i — |
|
| i 130,582 |
| | i — |
| | i 326,871 |
| | i — |
|
Other | i 28,848 |
| | i 29,851 |
| | i 93,935 |
| | i 99,950 |
|
Total
segment net sales | i 952,504 |
| | i 831,669 |
| | i 2,698,762 |
| | i 2,335,841 |
|
Commission,
franchise and other revenue | i 9,352 |
| | i 1,334 |
| | i 30,028 |
| | i 4,532 |
|
| i 961,856 |
| | i 833,003 |
| | i 2,728,790 |
| | i 2,340,373 |
|
Elimination
of intersegment revenue | ( i 25,592 | ) | | i — |
| | ( i 53,813 | ) | | i — |
|
Total
revenue | $ | i 936,264 |
| | $ | i 833,003 |
| | $ | i 2,674,977 |
| | $ | i 2,340,373 |
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
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. i The following table presents the changes and total balances for gift cards and our loyalty programs:
|
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
(in thousands) | | | | | | | |
Gift cards: | | | | | | | |
Beginning of period | $ | i 28,277 |
| | $ | i 26,791 |
| | $ | i 34,998 |
| | $ | i 32,792 |
|
Gift
cards redeemed and breakage recognized to net sales | ( i 18,027 | ) | | ( i 17,390 | ) | | ( i 62,125 | ) | | ( i 61,424 | ) |
Gift
cards issued | i 15,848 |
| | i 15,507 |
| | i 53,225 |
| | i 53,540 |
|
End
of period | $ | i 26,098 |
| | $ | i 24,908 |
| | $ | i 26,098 |
| | $ | i 24,908 |
|
Loyalty
programs: | | | | | | | |
Beginning of period | $ | i 16,034 |
| | $ | i 16,786 |
| | $ | i 16,151 |
| | $ | i 21,282 |
|
Loyalty
certificates redeemed and expired and other adjustments recognized to net sales | ( i 9,008 | ) | | ( i 6,465 | ) | | ( i 27,836 | ) | | ( i 29,850 | ) |
Deferred
revenue for loyalty points issued | i 10,054 |
| | i 7,669 |
| | i 28,765 |
| | i 26,558 |
|
End
of period | $ | i 17,080 |
| | $ | i 17,990 |
| | $ | i 17,080 |
| | $ | i 17,990 |
|
4. i RELATED
PARTY TRANSACTIONS
Schottenstein Affiliates
As of November 2, 2019, the Schottenstein Affiliates, entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family, beneficially owned approximately i 16%
of the Company's outstanding common shares, representing approximately i 52% of the combined voting power. As of November 2, 2019, the Schottenstein Affiliates beneficially owned i 3.4
million Class A common shares and i 7.7 million Class B common shares. We had the following related party transactions with Schottenstein Affiliates:
Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates. See Note
15, Leases, for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.
Other Purchases and Services- During the three months ended November 2, 2019 and November 3, 2018, we had other purchases and services from Schottenstein Affiliates of $ i 1.2
million and $ i 1.3 million, respectively. During the nine months ended November 2, 2019 and November 3, 2018, we had other purchases and services from Schottenstein Affiliates of $ i 4.6
million and $ i 4.5 million, respectively.
Due to Related Parties- As of November 2, 2019, February 2,
2019 and November 3, 2018, we had amounts due to related parties of $ i 0.6 million, $ i 1.0
million and $ i 0.7 million, respectively, included in accounts payable on the condensed consolidated balance sheets.
ABG-Camuto
Beginning in the fourth quarter of fiscal 2018, we have a i 40%
interest in ABG-Camuto. ABG-Camuto entered into a licensing agreement with us whereby we pay royalties on the net sales of the brands owned by ABG-Camuto. During the three and nine months ended November 2, 2019, we recorded $ i 4.4 million and $ i 13.7
million of royalty expense payable to ABG-Camuto, respectively. As of February 2, 2019, we had $ i 2.4 million payable to ABG-Camuto, included in accrued expenses on the condensed consolidated balance sheets.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. i EARNINGS PER SHARE
i
Basic
earnings per share is based on net income 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.
i The following is a reconciliation of the number of shares used in the calculation of earnings per share:
|
| | | | | | | | | | | |
| Three
months ended | | Nine months ended |
(in thousands) | | | | | | | |
Weighted average basic shares outstanding | i 72,123 |
| | i 80,321 |
| | i 74,219 |
| | i 80,231 |
|
Dilutive
effect of stock-based compensation awards | i 824 |
| | i 1,966 |
| | i 930 |
| | i 1,455 |
|
Weighted
average diluted shares outstanding | i 72,947 |
| | i 82,287 |
| | i 75,149 |
| | i 81,686 |
|
For
the three months ended November 2, 2019 and November 3, 2018, the number of potential shares that were not included in the computation of diluted earnings per share due to the anti-dilutive effect was i 4.9 million and i 1.3
million, respectively. For the nine months ended November 2, 2019 and November 3, 2018, the number of potential shares that were not included in the computation of diluted earnings per share due to the anti-dilutive effect was i 3.2 million
and i 2.0 million, respectively.
6. i STOCK-BASED
COMPENSATION
i
Stock-based compensation expense consisted of the following: |
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
(in thousands) | | | | | | | |
Stock options | $ | i 428 |
| | $ | i 960 |
| | $ | i 1,814 |
| | $ | i 4,098 |
|
Restricted
and director stock units | i 3,589 |
| | i 2,975 |
| | i 11,934 |
| | i 9,535 |
|
| $ | i 4,017 |
| | $ | i 3,935 |
| | $ | i 13,748 |
| | $ | i 13,633 |
|
/
i The
following table summarizes the stock-based compensation award activity for the nine months ended November 2, 2019: |
| | | | | | | | |
| Number of shares |
(in thousands) | Stock Options | | Time-Based RSUs | | Performance-Based
RSUs |
Outstanding - beginning of period | i 4,001 |
| | i 989 |
| | i 596 |
|
Granted | i — |
| | i 943 |
| | i 493 |
|
Exercised
/ vested | ( i 169 | ) | | ( i 145 | ) | | ( i 97 | ) |
Forfeited
/ expired | ( i 48 | ) | | ( i 83 | ) | | i — |
|
Outstanding
- end of period | i 3,784 |
| | i 1,704 |
| | i 992 |
|
As
of November 2, 2019, i 2.6 million shares of Class A common shares remain available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan.
7. i SHAREHOLDERS'
EQUITY
i
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 i one vote per share and holders of Class B common shares are entitled to i eight
votes per share on matters submitted to shareholders for approval.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i The
following table provides additional information for our common shares:
|
| | | | | | | | | | | | | | | | | |
| | | | | |
(in thousands) | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
Authorized shares | i 250,000 |
| | i 100,000 |
| | i 250,000 |
| | i 100,000 |
| | i 250,000 |
| | i 100,000 |
|
Issued
shares | i 86,185 |
| | i 7,733 |
| | i 85,763 |
| | i 7,733 |
| | i 85,706 |
| | i 7,733 |
|
Outstanding
shares | i 64,016 |
| | i 7,733 |
| | i 70,672 |
| | i 7,733 |
| | i 72,615 |
| | i 7,733 |
|
Treasury
shares | i 22,169 |
| | — |
| | i 15,091 |
| | — |
| | i 13,091 |
| | — |
|
We
have authorized i 100 million shares of no par value preferred shares with i no
shares issued for any of the periods presented.
Dividends- On December 10, 2019, the Board of Directors declared a quarterly cash dividend payment of $ i 0.25 per share for both Class
A and Class B common shares. The dividend will be paid on January 3, 2020 to shareholders of record at the close of business on December 20, 2019.
i Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $ i 500
million of Class A common shares under our share repurchase program, which was added to the $ i 33.5 million remaining from the previous authorization. During the nine months ended November 2, 2019, we repurchased i 7.1
million Class A common shares at a cost of $ i 141.6 million, with $ i 334.9
million of Class A common shares that remain authorized under the program as of November 2, 2019. During the nine months ended November 3, 2018, we did not repurchase any Class A common shares. The share repurchase program 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. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions. /
Accumulated Other Comprehensive
Loss- i Changes for the balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three
months ended |
| | | |
(in thousands) | Foreign Currency Translation | | Available-for-Sale Securities | | Total | | Foreign
Currency Translation | | Available-for-Sale Securities | | Total |
Accumulated other comprehensive loss - beginning of period | $ | ( i 2,581 | ) | | $ | ( i 5 | ) | | $ | ( i 2,586 | ) | | $ | ( i 1,365 | ) | | $ | ( i 911 | ) | | $ | ( i 2,276 | ) |
Other
comprehensive income (loss) before reclassifications | i 236 |
| | i 37 |
| | i 273 |
| | ( i 271 | ) | | ( i 133 | ) | | ( i 404 | ) |
Amounts
reclassified to non-operating income (expenses), net | i — |
| | ( i 24 | ) | | ( i 24 | ) | | i — |
| | i 14 |
| | i 14 |
|
Other
comprehensive income (loss) | i 236 |
| | i 13 |
| | i 249 |
| | ( i 271 | ) | | ( i 119 | ) | | ( i 390 | ) |
Accumulated
other comprehensive loss - end of period | $ | ( i 2,345 | ) | | $ | i 8 |
| | $ | ( i 2,337 | ) | | $ | ( i 1,636 | ) | | $ | ( i 1,030 | ) | | $ | ( i 2,666 | ) |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine
months ended |
| | | |
(in thousands) | Foreign Currency Translation | | Available-for-Sale Securities | | Total | | Foreign
Currency Translation | | Available-for-Sale Securities | | Total |
Accumulated other comprehensive loss - beginning of period | $ | ( i 2,328 | ) | | $ | ( i 378 | ) | | $ | ( i 2,706 | ) | | $ | ( i 9,278 | ) | | $ | ( i 796 | ) | | $ | ( i 10,074 | ) |
Other
comprehensive income (loss) before reclassifications | ( i 17 | ) | | i 475 |
| | i 458 |
| | ( i 6,321 | ) | | ( i 450 | ) | | ( i 6,771 | ) |
Amounts
reclassified to non-operating expenses, net | i — |
| | ( i 89 | ) | | ( i 89 | ) | | i 13,963 |
| | i 216 |
| | i 14,179 |
|
Other
comprehensive income | ( i 17 | ) | | i 386 |
| | i 369 |
| | i 7,642 |
| | ( i 234 | ) | | i 7,408 |
|
Accumulated
other comprehensive loss - end of period | $ | ( i 2,345 | ) | | $ | i 8 |
| | $ | ( i 2,337 | ) | | $ | ( i 1,636 | ) | | $ | ( i 1,030 | ) | | $ | ( i 2,666 | ) |
8. i ACCOUNTS
RECEIVABLE
i
Accounts receivable, net, consisted of the following:
|
| | | | | | | | | | | |
(in
thousands) | | | | | |
Customer accounts receivables: | | | | | |
Serviced
by third-party provider with guaranteed payment | $ | i 70,301 |
| | $ | i 47,599 |
| | $ | i — |
|
Serviced
by third-party provider without guaranteed payment | i 699 |
| | i 280 |
| | i — |
|
Serviced
in-house | i 8,094 |
| | i 9,892 |
| | i 2,181 |
|
Construction
and tenant allowance receivables due from landlords(1) | i — |
| | i 4,034 |
| | i 5,043 |
|
Other
receivables | i 10,854 |
| | i 8,004 |
| | i 7,678 |
|
Accounts
receivable | i 89,948 |
| | i 69,809 |
| | i 14,902 |
|
Allowance
for doubtful accounts | ( i 2,635 | ) | | ( i 939 | ) | | i — |
|
Accounts
receivable, net | $ | i 87,313 |
| | $ | i 68,870 |
| | $ | i 14,902 |
|
| |
(1) | Upon
transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for construction and tenant allowance receivables due from landlords were netted against the operating lease liabilities. |
9. i INVESTMENTS
i
Investments
in available-for-sale securities consisted of the following:
|
| | | | | | | | | | | |
(in thousands) | | | | | |
Carrying value of investments | $ | i 25,903 |
| | $ | i 70,195 |
| | $ | i 72,827 |
|
Unrealized
gains included in accumulated other comprehensive loss | i 43 |
| | i 44 |
| | i 3 |
|
Unrealized
losses included in accumulated other comprehensive loss | ( i 7 | ) | | ( i 521 | ) | | ( i 982 | ) |
Fair
value | $ | i 25,939 |
| | $ | i 69,718 |
| | $ | i 71,848 |
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. i PROPERTY AND EQUIPMENT
i
Property
and equipment, net, consisted of the following:
|
| | | | | | | | | | | |
(in thousands) | | | | | |
Land | $ | i 1,110 |
| | $ | i 1,110 |
| | $ | i 1,110 |
|
Buildings | i 13,445 |
| | i 12,485 |
| | i 12,485 |
|
Building
and leasehold improvements | i 442,609 |
| | i 437,116 |
| | i 432,367 |
|
Furniture,
fixtures and equipment | i 478,463 |
| | i 487,494 |
| | i 455,263 |
|
Software | i 174,324 |
| | i 161,226 |
| | i 152,793 |
|
Construction
in progress(1) | i 36,489 |
| | i 38,646 |
| | i 41,908 |
|
Total
property and equipment | i 1,146,440 |
| | i 1,138,077 |
| | i 1,095,926 |
|
Accumulated
depreciation and amortization | ( i 751,745 | ) | | ( i 728,501 | ) | | ( i 712,816 | ) |
Property
and equipment, net | $ | i 394,695 |
| | $ | i 409,576 |
| | $ | i 383,110 |
|
| |
(1) | Construction
in progress is comprised primarily of the construction of leasehold improvements and furniture and fixtures related to unopened stores and internal-use software under development. |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. i GOODWILL
AND INTANGIBLE ASSETS
Goodwill- i Activity related to our goodwill was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine
months ended |
| | | |
(in thousands) | Goodwill | | Accumulated Impairments | | Net | | Goodwill | | Accumulated
Impairments | | Net |
Beginning of period by segment: | | | | | | | | | | | |
U.S.
Retail | $ | i 25,899 |
| | $ | i — |
| | $ | i 25,899 |
| | $ | i 25,899 |
| | $ | i — |
| | $ | i 25,899 |
|
Canada
Retail | i 42,048 |
| | ( i 42,048 | ) | | i — |
| | i — |
| | i — |
| | i — |
|
Brand
Portfolio | i 63,614 |
| | i — |
| | i 63,614 |
| | i — |
| | i — |
| | i — |
|
Other | i — |
| | i — |
| | i — |
| | i 53,790 |
| | ( i 53,790 | ) | | i — |
|
| i 131,561 |
| | ( i 42,048 | ) | | i 89,513 |
| | i 79,689 |
| | ( i 53,790 | ) | | i 25,899 |
|
Activity
by segment: | | | | | | | | | | | |
U.S. Retail - | | | | | | | | | | | |
Allocation
of goodwill from Brand Portfolio | i 67,756 |
| | — |
| | i 67,756 |
| | — |
| | — |
| | — |
|
Canada
Retail: | | | | | | | | | | | |
Acquired TSL goodwill | i — |
| | — |
| | i — |
| | i 29,807 |
| | — |
| | i 29,807 |
|
Impairment
charges | — |
| | i — |
| | i — |
| | — |
| | ( i 29,077 | ) | | ( i 29,077 | ) |
Currency
translation adjustment | ( i 195 | ) | | i 195 |
| | i — |
| | ( i 762 | ) | | i 32 |
| | ( i 730 | ) |
Brand
Portfolio: | | | | | | | | | | | |
Purchase price and allocation adjustments | i 24,131 |
| | i — |
| | i 24,131 |
| | i — |
| | i — |
| | i — |
|
Allocation
of goodwill to U.S. Retail | ( i 67,756 | ) | | — |
| | ( i 67,756 | ) | | — |
| | — |
| | — |
|
Other
- Eliminated goodwill from Ebuys exit | i — |
| | i — |
| | — |
| | ( i 53,790 | ) | | i 53,790 |
| | — |
|
| i 23,936 |
| | i 195 |
| | i 24,131 |
| | ( i 24,745 | ) | | i 24,745 |
| | i — |
|
End
of period by segment: | | | | | | | | | | | |
U.S. Retail | i 93,655 |
| | i — |
| | i 93,655 |
| | i 25,899 |
| | i — |
| | i 25,899 |
|
Canada
Retail | i 41,853 |
| | ( i 41,853 | ) | | i — |
| | i 29,045 |
| | ( i 29,045 | ) | | i — |
|
Brand
Portfolio | i 19,989 |
| | i — |
| | i 19,989 |
| | i — |
| | i — |
| | i — |
|
| $ | i 155,497 |
| | $ | ( i 41,853 | ) | | $ | i 113,644 |
| | $ | i 54,944 |
| | $ | ( i 29,045 | ) | | $ | i 25,899 |
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Intangible Assets- i i Intangible
assets consisted of the following: /
|
| | | | | | | | | | | |
(in thousands) | Cost | | Accumulated Amortization | | Net |
| | | | | |
Definite-lived customer relationships | $ | i 9,369 |
| | $ | ( i 1,684 | ) | | $ | i 7,685 |
|
Indefinite-lived
trademarks and tradenames | i 15,612 |
| | i — |
| | i 15,612 |
|
| $ | i 24,981 |
| | $ | ( i 1,684 | ) | | $ | i 23,297 |
|
| | | | | |
Definite-lived: | | | | | |
Customer relationships | $ | i 28,375 |
| | $ | ( i 1,010 | ) | | $ | i 27,365 |
|
Favorable
leasehold interests | i 3,513 |
| | ( i 295 | ) | | i 3,218 |
|
Indefinite-lived
trademarks and tradenames | i 15,546 |
| | i — |
| | i 15,546 |
|
| $ | i 47,434 |
| | $ | ( i 1,305 | ) | | $ | i 46,129 |
|
| | | | | |
Definite-lived: | | | | | |
Customer relationships | $ | i 1,373 |
| | $ | ( i 229 | ) | | $ | i 1,144 |
|
Favorable
leasehold interests | i 3,510 |
| | ( i 200 | ) | | i 3,310 |
|
Indefinite-lived
trademarks and tradenames | i 15,546 |
| | i — |
| | i 15,546 |
|
| $ | i 20,429 |
| | $ | ( i 429 | ) | | $ | i 20,000 |
|
The
customer relationships are amortized by the straight-line method over i three years associated with the Canada loyalty program and i eight
years for Brand Portfolio customer relationships. Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for favorable leasehold interests were netted against the operating lease assets.
12. i ACCRUED EXPENSES
i
Accrued
expenses consisted of the following:
|
| | | | | | | | | | | |
(in thousands) | | | | | |
Gift cards and merchandise credits | $ | i 26,098 |
| | $ | i 34,998 |
| | $ | i 24,908 |
|
Accrued
compensation and related expenses | i 26,023 |
| | i 53,577 |
| | i 37,317 |
|
Accrued
taxes | i 29,203 |
| | i 16,491 |
| | i 30,321 |
|
Loyalty
programs deferred revenue | i 17,080 |
| | i 16,151 |
| | i 17,990 |
|
Sales
returns | i 24,371 |
| | i 17,743 |
| | i 17,286 |
|
Customer
allowances and discounts | i 10,326 |
| | i 13,094 |
| | i — |
|
Other(1) | i 57,796 |
| | i 49,481 |
| | i 55,142 |
|
| $ | i 190,897 |
| | $ | i 201,535 |
| | $ | i 182,964 |
|
| |
(1) | Other
is comprised of various other accrued expenses that we expect will settle within one year of the applicable period. |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
13. i OTHER
NON-CURRENT LIABILITIES
i
Other non-current liabilities consisted of the following:
|
| | | | | | | | | | | |
(in
thousands) | | | | | |
Foreign tax contingent liabilities | $ | i 15,542 |
| | $ | i 13,429 |
| | $ | i — |
|
Deferred
tax liabilities | i 1,146 |
| | i 3,260 |
| | i — |
|
Construction
and tenant allowances(1) | i — |
| | i 71,634 |
| | i 73,531 |
|
Deferred
rent(1) | i — |
| | i 35,934 |
| | i 35,644 |
|
Accrual
for lease obligations(1) | i — |
| | i 16,483 |
| | i 12,348 |
|
Unfavorable
leasehold interests(1) | i — |
| | i 5,779 |
| | i 6,310 |
|
Other(2) | i 19,396 |
| | i 18,528 |
| | i 22,897 |
|
| $ | i 36,084 |
| | $ | i 165,047 |
| | $ | i 150,730 |
|
| |
(1) | Upon
transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for construction and tenant allowances, deferred rent, the accrual for lease obligations, and unfavorable leasehold interests were netted against the operating lease assets. |
/ | |
(2) | Other is comprised of various other accrued expenses that we expect will settle beyond one year from the end of the applicable period. |
i The
following table presents the changes and total balances for the accrual for lease obligations:
|
| | | | | | | |
| Nine months ended |
(in thousands) | | | |
Beginning
of period | $ | i 16,483 |
| | $ | i 6,511 |
|
Netted
against lease assets upon transition to ASU 2016-02 | ( i 16,483 | ) | | i — |
|
Additions | i — |
| | i 21,008 |
|
Lease
obligation payments, net of sublease income | i — |
| | ( i 15,244 | ) |
Adjustments | i — |
| | i 73 |
|
End
of period | $ | i — |
| | $ | i 12,348 |
|
14. i DEBT
Credit
Facility- On i August 25, 2017, we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of i August
25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased with no change to the sub-limits. As of November 2, 2019, the Credit Facility provided a revolving line of credit up to $ i 400
million, with sub-limits for the issuance of up to $ i 50 million in letters of credit, swing loan advances of up to $ i 15 million, and the
issuance of up to $ i 75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event
of default, as defined in our Credit Facility.
Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of i 3.7% as of November 2,
2019. Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of i 1.8% as of November 2, 2019. Commitment fees are based on
the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of November 2, 2019, we had $ i 235.0 million outstanding under the Credit Facility and $ i 3.0
million in letters of credit issued, resulting in $ i 162.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed i 3.25:1
and a fixed charge coverage ratio not to be less than i 1.75:1. As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed i 3.50:1
as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of November 2, 2019, we were in compliance with all financial covenants.
We
lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by Schottenstein Affiliates. The majority of our real estate leases provide for renewal options, which are typically not included in the lease term used for measuring the lease assets and lease liabilities as it is not reasonably certain we will exercise options. We pay variable amounts for certain lease and non-lease components as well as for contingent rentals based on sales for certain leases where the sales are in excess of specified levels and for leases that have certain contingent triggering events that are in effect. We also lease equipment under operating leases.
We receive operating lease income from unrelated third parties for leasing portions or all of certain owned and leased properties. Operating lease income is included in
commission, franchise and other revenue in our condensed consolidated statements of operations.
i Lease income and lease expense consisted of the following for the three and nine months ended November 2, 2019 (after the adoption of ASU 2016-02) and November 3, 2018 (prior to the adoption of ASU 2016-02): |
| | | | | | | | | | | | | | | |
| Three
months ended | | Nine months ended |
(in thousands) | | | | | | | |
Operating lease income | $ | i 2,462 |
| | $ | i 1,172 |
| | $ | i 6,910 |
| | $ | i 3,469 |
|
Operating
lease expense: | | | | | | | |
Lease expense to unrelated parties | $ | i 53,674 |
| | $ | i 50,838 |
| | $ | i 159,735 |
| | $ | i 147,586 |
|
Lease
expense to related parties | i 2,387 |
| | i 2,304 |
| | i 7,100 |
| | i 6,895 |
|
Variable
lease expense to unrelated parties | i 13,539 |
| | i 5,804 |
| | i 39,542 |
| | i 18,302 |
|
Variable
lease expense to related parties | i 325 |
| | i — |
| | i 975 |
| | i — |
|
| $ | i 69,925 |
| | $ | i 58,946 |
| | $ | i 207,352 |
| | $ | i 172,783 |
|
|
| | |
| |
Other operating lease information: | |
Weighted-average remaining lease term | i 6.1 years |
|
Weighted-average discount rate | i 4.0 | % |
/
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i |
| | | | | | | | | | | |
(in thousands) | Unrelated Parties | | Related Parties | | Total |
Remainder of fiscal 2019 | $ | i 38,662 |
| | $ | i 1,580 |
| | $ | i 40,242 |
|
Fiscal
2020 | i 234,020 |
| | i 9,364 |
| | i 243,384 |
|
Fiscal
2021 | i 219,997 |
| | i 8,697 |
| | i 228,694 |
|
Fiscal
2022 | i 186,327 |
| | i 7,418 |
| | i 193,745 |
|
Fiscal
2023 | i 146,263 |
| | i 4,573 |
| | i 150,836 |
|
Future
fiscal years thereafter | i 332,968 |
| | i 15,493 |
| | i 348,461 |
|
| i 1,158,237 |
| | i 47,125 |
| | i 1,205,362 |
|
Less
discounting impact on operating leases | ( i 134,290 | ) | | ( i 5,591 | ) | | ( i 139,881 | ) |
Total
operating lease liabilities | i 1,023,947 |
| | i 41,534 |
| | i 1,065,481 |
|
Less
current operating lease liabilities | ( i 177,414 | ) | | ( i 7,184 | ) | | ( i 184,598 | ) |
Non-current
operating lease liabilities | $ | i 846,533 |
| | $ | i 34,350 |
| | $ | i 880,883 |
|
As
of November 2, 2019, we have entered into lease commitments for i seven new store locations and i two
store relocations where the leases have not yet commenced, and therefore the lease liabilities have not yet been recorded. We expect the lease commencement to begin in the next fiscal quarter for these locations and we will record additional operating lease liabilities of approximately $ i 15.0 million.
i As
of February 2, 2019, future minimum lease payment requirements, excluding contingent rental payments, maintenance, insurance, real estate taxes, and the amortization of deferred rent and construction and tenant allowances, consisted of the following, as determined prior to the adoption of ASU 2016-02: |
| | | | | | | | | | | |
(in thousands) | Unrelated Parties | | Related
Parties | | Total |
Fiscal 2019 | $ | i 233,237 |
| | $ | i 9,425 |
| | $ | i 242,662 |
|
Fiscal
2020 | i 227,001 |
| | i 9,364 |
| | i 236,365 |
|
Fiscal
2021 | i 204,803 |
| | i 8,697 |
| | i 213,500 |
|
Fiscal
2022 | i 170,030 |
| | i 6,518 |
| | i 176,548 |
|
Fiscal
2023 | i 131,594 |
| | i 1,874 |
| | i 133,468 |
|
Future
fiscal years thereafter | i 298,437 |
| | i 5,596 |
| | i 304,033 |
|
| $ | i 1,265,102 |
| | $ | i 41,474 |
| | $ | i 1,306,576 |
|
16. i 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 the 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.
Foreign Tax Contingencies- During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll
and other taxes that could also result in assessed penalties and interest. We have developed an estimate of the range of outcomes related to these obligations of $ i 15.5 million to $ i 30.0
million for obligations we are aware of at this time. As of November 2, 2019, we recorded a contingent liability of $ i 15.5 million, representing the low end of the range, and an indemnification asset of $ i 12.7
million, representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the Sellers. We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in 2024 for a location that has been leased to a third party. If the 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 November 2, 2019, the total future minimum lease payment
requirements for this guarantee were approximately $ i 14.2 million.
17. i SEGMENT
REPORTING
i Our i three /
reportable segments, which are also operating segments, are the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. All other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes. i The following provides certain financial data by segment reconciled to the condensed consolidated financial statements: |
| | | | | | | | | | | | | | | | | | | | | | | |
(in
thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Other | | Corporate/Eliminations | | Total |
| | | | | | | | | | | |
External revenue: | | | | | | | | | | | |
Net
sales | $ | i 716,775 |
| | $ | i 76,299 |
| | $ | i 106,686 |
| | $ | i 28,848 |
| | $ | — |
| | $ | i 928,608 |
|
Commission,
franchise and other revenue | i — |
| | i — |
| | i 5,218 |
| | i — |
| | i 2,438 |
| | i 7,656 |
|
Total
revenue | $ | i 716,775 |
| | $ | i 76,299 |
| | $ | i 111,904 |
| | $ | i 28,848 |
| | $ | i 2,438 |
| | $ | i 936,264 |
|
Intersegment
revenue | $ | i — |
| | $ | i — |
| | $ | i 25,592 |
| | $ | i — |
| | $ | ( i 25,592 | ) | | $ | — |
|
Gross
profit(1) | $ | i 201,409 |
| | $ | i 27,485 |
| | $ | i 33,936 |
| | $ | i 6,291 |
| | $ | ( i 1,031 | ) | | $ | i 268,090 |
|
Income
from equity investment in ABG-Camuto | $ | i — |
| | $ | i — |
| | $ | i 2,662 |
| | $ | i — |
| | $ | i — |
| | $ | i 2,662 |
|
| | | | | | | | | | | |
Revenue: | | | | | | | | | | | |
Net
sales | $ | i 721,746 |
| | $ | i 80,072 |
| | $ | i — |
| | $ | i 29,851 |
| | $ | i — |
| | $ | i 831,669 |
|
Commission,
franchise and other revenue | i — |
| | i — |
| | i — |
| | i — |
| | i 1,334 |
| | i 1,334 |
|
Total
revenue | $ | i 721,746 |
| | $ | i 80,072 |
| | $ | i — |
| | $ | i 29,851 |
| | $ | i 1,334 |
| | $ | i 833,003 |
|
Gross
profit(1) | $ | i 239,650 |
| | $ | i 25,364 |
| | $ | i — |
| | $ | i 6,069 |
| | $ | i — |
| | $ | i 271,083 |
|
| | | | | | | | | | | |
External revenue: | | | | | | |
|
| | | |
|
|
Net
sales | $ | i 2,086,535 |
| | $ | i 191,421 |
| | $ | i 276,349 |
| | $ | i 93,935 |
| | $ | — |
| | $ | i 2,648,240 |
|
Commission,
franchise and other revenue | i — |
| | i — |
| | i 14,827 |
| | i — |
| | i 11,910 |
| | i 26,737 |
|
Total
revenue | $ | i 2,086,535 |
| | $ | i 191,421 |
| | $ | i 291,176 |
| | $ | i 93,935 |
| | $ | i 11,910 |
| | $ | i 2,674,977 |
|
Intersegment
revenue | $ | i — |
| | $ | i — |
| | $ | i 53,813 |
| | $ | i — |
| | $ | ( i 53,813 | ) | | $ | — |
|
Gross
profit(1) | $ | i 619,356 |
| | $ | i 65,171 |
| | $ | i 75,191 |
| | $ | i 21,643 |
| | $ | ( i 2,374 | ) | | $ | i 778,987 |
|
Income
from equity investment in ABG-Camuto | $ | i — |
| | $ | i — |
| | $ | i 7,354 |
| | $ | i — |
| | $ | i — |
| | $ | i 7,354 |
|
| | | | | | | | | | | |
Revenue: | | | | | | | | | | | |
Net
sales | $ | i 2,083,287 |
| | $ | i 152,604 |
| | $ | i — |
| | $ | i 99,950 |
| | $ | i — |
| | $ | i 2,335,841 |
|
Commission,
franchise and other revenue | i — |
| | i — |
| | i — |
| | i — |
| | i 4,532 |
| | i 4,532 |
|
Total
revenue | $ | i 2,083,287 |
| | $ | i 152,604 |
| | $ | i — |
| | $ | i 99,950 |
| | $ | i 4,532 |
| | $ | i 2,340,373 |
|
Gross
profit(1) | $ | i 667,595 |
| | $ | i 43,582 |
| | $ | i — |
| | $ | i 19,626 |
| | $ | i — |
| | $ | i 730,803 |
|
| |
(1) | Gross
profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 may constitute forward-looking statements which reflect our current
views with respect to, among other things, future events and financial performance. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "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 Quarterly Report on 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 this forward-looking information 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 those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed on March 26, 2019, and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, some important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements include, but are not limited to, the following: | |
• | our
success in growing our store base and digital demand; |
| |
• | our ability to successfully integrate recently acquired businesses or realize the anticipated benefits of the acquisitions after we complete our integration efforts; |
| |
• | our ability to protect our reputation and to maintain the brands we license; |
| |
• | maintaining
strong relationships with our vendors, manufacturers and wholesale customers; |
| |
• | our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations; |
| |
• | risks related to the loss or disruption of our distribution and/or fulfillment operations; |
| |
• | continuation
of agreements with and our reliance on the financial condition of Stein Mart; |
| |
• | our ability to execute our strategies; |
| |
• | fluctuation of our comparable sales and quarterly financial performance; |
| |
• | risks related to the loss or disruption
of our information systems and data; |
| |
• | our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data; |
| |
• | failure to retain our key executives or attract qualified new personnel; |
| |
• | our
reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty; |
| |
• | risks related to leases of our properties; |
| |
• | our competitiveness with respect to style, price, brand availability and customer service; |
| |
• | our
reliance on foreign sources for merchandise and risks inherent to international trade; |
| |
• | the imposition of new tariffs on our products; |
| |
• | exposure to foreign tax contingencies; |
| |
• | uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation;
|
| |
• | uncertain general economic conditions; |
| |
• | risks related to holdings of cash and investments and access to liquidity; and |
| |
• | fluctuations in foreign currency exchange rates. |
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.
Executive
Overview
Our long-term initiatives remain in place despite the recent headwinds. We continue to make meaningful progress against our strategic initiatives, and we are on our way to achieving our goals of growing market share, adding negotiating leverage through our scale and providing a unique offering of brands we produce. We are differentiated by our innovative services, our best-in-class loyalty programs, and our enhanced customer shopping experience, both in stores and online.
During the third quarter, we faced several challenges that impacted our results, including weather, tariff impacts and system implementation issues. However, we continue to be pleased with the performance of our Canada Retail segment with continued positive comparable sales and further margin growth, benefiting
from moving their digital offering to the platform we use in the U.S. and the launch of new loyalty programs for our Canadian customers. The Brand Portfolio segment gives us the capability to design, source and market differentiated product and better position us to grow private label brands at DSW in the U.S. We remain on track to convert the production of the majority of our DSW private label to the Brand Portfolio segment in fiscal 2020. At that time, we expect to realize the benefits of having greater exclusivity in product offerings at higher margins.
Comparability
There are a number of items that affect comparability when reviewing our results of operations for the periods presented in this Quarterly Report on Form 10-Q. Significant items to consider include:
| |
• | On
May 10, 2018, we acquired the remaining interest in TSL that we did not previously own. TSL results were included in the condensed consolidated results of operations as a wholly-owned subsidiary, beginning with the second quarter of fiscal 2018. The loss from our equity investment interest in TSL was included in our condensed consolidated results of operations for the first quarter of fiscal 2018. Due to the acquisition of the remaining interest in TSL, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating income (expenses), net. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2
million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating income (expenses), net. In addition, with the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during fiscal 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of TSL’s goodwill. |
| |
• | During
the three and nine months ended November 3, 2018, as a result of our decision to exit the Town Shoes banner, we closed certain Town Shoes banner stores with remaining lease terms and recorded a lease exit charge of $13.4 million and $13.8 million, respectively. |
| |
• | On November 5, 2018, we completed the acquisition of Camuto Group. Camuto Group's results were included in the condensed
consolidated results of operations as a wholly-owned subsidiary, beginning with the fourth quarter of fiscal 2018. |
| |
• | During the three and nine months ended November 3, 2018, we incurred acquisition-related costs and target acquisition costs of $13.0 million and $18.6 million, respectively. |
| |
• | During the three and nine
months ended November 2, 2019, we incurred integration and restructuring costs related to our prior year acquisition activity of $1.5 million and $13.6 million, respectively, which consisted primarily of severance, termination fees for terminating the JVs, and professional fees and other integration costs. During the nine months ended November 3, 2018, we incurred restructuring costs of $3.3 million in severance, primarily related to changes in our store staffing model. |
| |
• | During
the three and nine months ended November 2, 2019, we recorded impairment charges of $4.8 million related to the planned consolidation of certain Brand Portfolio segment locations as part of our integration efforts and under-performing stores in the Canada Retail segment. |
| |
• | The first quarter of fiscal 2018 included the wind-down operations of Ebuys, including incremental income tax expense of $2.3 million. In addition, during the three and nine months ended November 3, 2018,
we recorded lease exit and other termination costs of $2.7 million and $7.2 million, respectively. |
Financial Summary
Total revenue increased to $936.3 million for the three months ended November 2, 2019 from $833.0 million for the three months ended November 3, 2018.
The 12.4% increase in total revenue was primarily driven by incremental revenue from the acquired Camuto Group business and a 0.3% increase in comparable sales, partially offset by the impact of stores closed since the end of the third quarter of fiscal 2018, primarily the Town Shoes banner stores.
During the three months ended November 2, 2019, gross profit as a percentage of net sales was 28.9%, a decrease of 370 basis points from 32.6%
in the previous year. The decrease in the gross profit rate was primarily driven by lower margins in the U.S. Retail segment due to being more promotional and higher shipping costs in the current year associated with higher digital penetration, partially offset by higher margins in the Canada Retail segment due to lower clearance activity and improved leverage in occupancy costs.
Net income for the three months ended November 2, 2019 was $43.5 million, or $0.60 per diluted share, which included net after-tax charges of $5.1 million, or $0.07 per diluted share,
primarily related to impairment charges and integration and restructuring expenses associated with the businesses acquired in fiscal 2018. Net income for the three months ended November 3, 2018 was $39.3 million, or $0.48 per diluted share, which included net after-tax charges of $18.6 million, or $0.22 per diluted share, primarily related to acquisition activity and the exit of the Town Shoes banner.
We have continued making investments in our business that support our long-term growth objectives. During the nine months ended November
2, 2019, we invested $59.6 million in capital expenditures compared to $48.5 million during the nine months ended November 3, 2018. The increase in capital expenditures this year over last year was primarily driven by the investments in the acquired businesses and infrastructure necessary to integrate the businesses. Our capital expenditures during the nine months ended November 2, 2019 primarily related to 16 new store openings, multiple store remodels and investments in business infrastructure.
Results
of Operations
|
| | | | | | | | | | | | | | | | | | | | |
| Three
months ended | | | | |
| | | | | Change |
(dollars in thousands, except per share amounts) | Amount | | %
of Total Revenue | | Amount | | % of Total Revenue | | Amount | | % |
Revenue: | | | | | | | | | | | |
Net
sales | $ | 928,608 |
| | 99.2 | % | | $ | 831,669 |
| | 99.8 | % | | $ | 96,939 |
| | 11.7 | % |
Commission,
franchise and other revenue | 7,656 |
| | 0.8 |
| | 1,334 |
| | 0.2 |
| | 6,322 |
| | 473.9 | % |
Total
revenue | 936,264 |
| | 100.0 |
| | 833,003 |
| | 100.0 |
| | 103,261 |
| | 12.4 | % |
Cost
of sales | (660,518 | ) | | (70.5 | ) | | (560,586 | ) | | (67.3 | ) | | (99,932 | ) | | 17.8 | % |
Operating
expenses | (217,476 | ) | | (23.2 | ) | | (226,491 | ) | | (27.2 | ) | | 9,015 |
| | (4.0 | )% |
Income
from equity investment in ABG-Camuto | 2,662 |
| | 0.3 |
| | — |
| | — |
| | 2,662 |
| | NM |
Impairment
adjustments (charges) | (4,824 | ) | | (0.5 | ) | | 7,163 |
| | 0.9 |
| | (11,987 | ) | | NM |
Operating
profit | 56,108 |
| | 6.1 |
| | 53,089 |
| | 6.4 |
| | 3,019 |
| | 5.7 | % |
Interest
income (expense), net | (2,174 | ) | | (0.3 | ) | | 870 |
| | 0.1 |
| | (3,044 | ) | | NM |
Non-operating
income (expenses), net | 15 |
| | 0.0 |
| | (108 | ) | | (0.0 | ) | | 123 |
| | NM |
Income
before income taxes | 53,949 |
| | 5.8 |
| | 53,851 |
| | 6.5 |
| | 98 |
| | 0.2 | % |
Income
tax provision | (10,489 | ) | | (1.1 | ) | | (14,532 | ) | | (1.7 | ) | | 4,043 |
| | (27.8 | )% |
Net
income | $ | 43,460 |
| | 4.7 | % | | $ | 39,319 |
| | 4.8 | % | | $ | 4,141 |
| | 10.5 | % |
Basic
and diluted earnings per share: | | | | | | | | | | | |
Basic earnings per share | $ | 0.60 |
| | | | $ | 0.49 |
| | | | $ | 0.11 |
| | 22.4 | % |
Diluted
earnings per share | $ | 0.60 |
| | | | $ | 0.48 |
| | | | $ | 0.12 |
| | 25.0 | % |
Weighted
average shares used in per share calculations: | | | | | | | | | | | |
Basic shares | 72,123 |
| | | | 80,321 |
| | | | (8,198 | ) | | (10.2 | )% |
Diluted
shares | 72,947 |
| | | | 82,287 |
| | | | (9,340 | ) | | (11.4 | )% |
NM
- Not meaningful
Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:
|
| | | |
(in thousands) | |
Consolidated net sales for the same period last year | $ | 831,669 |
|
Increase
in comparable sales(1) | 2,041 |
|
Net increase from non-comparable sales and other changes | 1,956 |
|
Loss of net sales from closed stores | (13,744 | ) |
Incremental external net sales from Camuto Group | 106,686 |
|
Consolidated
net sales | $ | 928,608 |
|
| |
(1) | A store is considered comparable when 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 they are closed. Comparable sales include e-commerce sales. Stores in Canada from the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, were added to the comparable base beginning with the second quarter of
fiscal 2019. 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 in the prior year. 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. |
The following summarizes net sales by segment:
|
| | | | | | | | | | | | | | | | |
| Three
months ended | | Change |
(dollars in thousands) | | | | | Amount | | % | | Comparable
Sales % |
Segment net sales: | | | | | | | | | |
U.S. Retail | $ | 716,775 |
| | $ | 721,746 |
| | $ | (4,971 | ) | | (0.7 | )% | | —% |
Canada
Retail | 76,299 |
| | 80,072 |
| | (3,773 | ) | | (4.7 | )% | | 4.4% |
Brand
Portfolio | 130,582 |
| | — |
| | 130,582 |
| | NM |
| | NA |
Other | 28,848 |
| | 29,851 |
| | (1,003 | ) | | (3.4 | )% | | (2.4)% |
Total
segment net sales | 952,504 |
| | 831,669 |
| | 120,835 |
| | 14.5 | % | | 0.3% |
Elimination
of intersegment net sales | (23,896 | ) | | — |
| | (23,896 | ) | | NM |
| | |
Consolidated
net sales | $ | 928,608 |
| | $ | 831,669 |
| | $ | 96,939 |
| | 11.7 | % | | |
NM
- Not meaningful
NA - Not applicable
Within the U.S. Retail segment, comparable sales were flat due to higher comparable transactions with higher volume from digital orders offsetting lower store traffic, which was offset by a decline in comparable average dollar sales per transaction due to being more promotional. Within the Canada Retail segment, comparable sales increased due to higher comparable transactions, primarily as a result of the significant improvements to its digital platform.
Commission, Franchise and Other Revenue- Commission, franchise and other revenue includes commission income for First Cost design and buying services in the Brand Portfolio segment, royalties and other fees paid by franchisees, and rental
income on owned and leased properties, summarized as follows:
|
| | | | | | | | | | | | | | |
| Three months ended | | Change |
(dollars in thousands) | | | | | Amount | | % |
Commission income from Brand Portfolio segment | $ | 6,914 |
| | $ | — |
| | $ | 6,914 |
| | NM |
|
Franchise
and other revenue | 2,438 |
| | 1,334 |
| | 1,104 |
| | 82.8 | % |
| 9,352 |
| | 1,334 |
| | 8,018 |
| | 601.0 | % |
Elimination
of intersegment commission income | (1,696 | ) | | — |
| | (1,696 | ) | | NM |
|
Consolidated commission, franchise and other revenue | $ | 7,656 |
| | $ | 1,334 |
| | $ | 6,322 |
| | 473.9 | % |
Gross
Profit- Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales, calculated as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | |
| | | | | Change |
(dollars in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % | | Basis
Points |
Net sales | $ | 928,608 |
| | 100.0 | % | | $ | 831,669 |
| | 100.0 | % | | | | | | |
Cost
of sales | (660,518 | ) | | (71.1 | ) | | (560,586 | ) | | (67.4 | ) | | | | | | |
Gross
profit | $ | 268,090 |
| | 28.9 | % | | $ | 271,083 |
| | 32.6 | % | | $ | (2,993 | ) | | (1.1 | )% | | (370 | ) |
The
following summarizes gross profit by segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | |
| | | | | Change |
(dollars in thousands) | Amount | | % of Segment Net Sales | | Amount | | % of
Segment Net Sales | | Amount | | % | | Basis Points |
Segment gross profit: | | | | | | | | | | | | | |
U.S.
Retail | $ | 201,409 |
| | 28.1 | % | | $ | 239,650 |
| | 33.2 | % | | $ | (38,241 | ) | | (16.0 | )% | | (510 | ) |
Canada
Retail | 27,485 |
| | 36.0 | % | | 25,364 |
| | 31.7 | % | | $ | 2,121 |
| | 8.4 | % | | 430 |
|
Brand
Portfolio | 33,936 |
| | 26.0 | % | | — |
| | — | % | | $ | 33,936 |
| | NM |
| | NM |
|
Other | 6,291 |
| | 21.8 | % | | 6,069 |
| | 20.3 | % | | $ | 222 |
| | 3.7 | % | | 150 |
|
| 269,121 |
| | | | 271,083 |
| | | | | | | | |
Elimination
of intersegment gross profit | (1,031 | ) | | | | — |
| | | | | | | | |
Consolidated
gross profit | $ | 268,090 |
| | | | $ | 271,083 |
| | | | | | | | |
The U.S. Retail segment gross profit margin decreased primarily driven by being more promotional than the prior year and higher shipping costs in the current year associated with higher online orders, partially offset by an increase in initial markups. The Canada Retail segment gross profit margin improved primarily due to lower clearance activity with improvements in the inventory position and improved leverage in occupancy costs with the exit of the Town Shoes banner last year.
Elimination of intersegment gross profit consisted of the following:
|
| | | | | | | |
| Three
months ended |
(in thousands) | | | |
Elimination of intersegment activity: | | | |
Net sales recognized by Brand Portfolio segment | $ | (23,896 | ) | | $ | — |
|
Cost
of sales: | | | |
Cost of sales recognized by Brand Portfolio segment | 17,363 |
| | — |
|
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 5,502 |
| | — |
|
Gross
profit | $ | (1,031 | ) | | $ | — |
|
Operating Expenses- For the three months ended November 2, 2019, operating expenses as a percentage of total revenue decreased 400 basis points over the same period last year
primarily driven by lower incentive compensation, the impact of lease exit charges, acquisition-related costs and restructuring charges in the prior year, and lower marketing investments, partially offset by the impact of including Camuto Group in the consolidated results.
Income from Equity Investment in ABG-Camuto- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit. ABG-Camuto is an integral part of the Brand Portfolio segment, primarily due to our licensing with ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.
Impairment Adjustments (Charges)- For the three
months ended November 2, 2019, we recorded impairment charges primarily related to the planned consolidation of certain locations as part of our integration efforts for the Brand Portfolio segment. With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the three months ended November 3, 2018, we recorded a goodwill impairment adjustment, as a result of recording adjustments to the preliminary purchase allocations.
Income
Taxes- Our effective tax rate changed from 27.0% for the three months ended November 3, 2018 to 19.4% for the three months ended November 2, 2019. During the three months ended November 2, 2019, the effective tax rate was impacted by the release of valuation allowances as a result of the improved performance in Canada and other favorable discrete items.
|
| | | | | | | | | | | | | | | | | | | | |
| Nine months ended | | | | |
| | | | | Change |
(dollars in thousands, except per share amounts) | Amount | | % of Total Revenue | | Amount | | %
of Total Revenue | | Amount | | % |
Revenue: | | | | | | | | | | | |
Net
sales | $ | 2,648,240 |
| | 99.0 | % | | $ | 2,335,841 |
| | 99.8 | % | | $ | 312,399 |
| | 13.4 | % |
Commission,
franchise and other revenue | 26,737 |
| | 1.0 |
| | 4,532 |
| | 0.2 |
| | 22,205 |
| | 490.0 | % |
Total
revenue | 2,674,977 |
| | 100.0 |
| | 2,340,373 |
| | 100.0 |
| | 334,604 |
| | 14.3 | % |
Cost
of sales | (1,869,253 | ) | | (69.9 | ) | | (1,605,038 | ) | | (68.6 | ) | | (264,215 | ) | | 16.5 | % |
Operating
expenses | (666,898 | ) | | (24.9 | ) | | (590,230 | ) | | (25.2 | ) | | (76,668 | ) | | 13.0 | % |
Income
from equity investment in ABG-Camuto | 7,354 |
| | 0.3 |
| | — |
| | — |
| | 7,354 |
| | NM |
Impairment
charges | (4,824 | ) | | (0.2 | ) | | (29,077 | ) | | (1.2 | ) | | 24,253 |
| | (83.4 | )% |
Operating
profit | 141,356 |
| | 5.3 |
| | 116,028 |
| | 5.0 |
| | 25,328 |
| | 21.8 | % |
Interest
income (expense), net | (5,947 | ) | | (0.3 | ) | | 2,339 |
| | 0.1 |
| | (8,286 | ) | | NM |
Non-operating
expenses, net | (128 | ) | | (0.0 | ) | | (49,594 | ) | | (2.1 | ) | | 49,466 |
| | (99.7 | )% |
Income
before income taxes and loss from equity investment in TSL | 135,281 |
| | 5.0 |
| | 68,773 |
| | 3.0 |
| | 66,508 |
| | 96.7 | % |
Income
tax provision | (33,220 | ) | | (1.2 | ) | | (42,203 | ) | | (1.8 | ) | | 8,983 |
| | (21.3 | )% |
Loss
from equity investment in TSL | — |
| | — |
| | (1,310 | ) | | (0.1 | ) | | 1,310 |
| | NM |
Net
income | $ | 102,061 |
| | 3.8 | % | | $ | 25,260 |
| | 1.1 | % | | $ | 76,801 |
| | 304.0 | % |
Basic
and diluted earnings per share: | | | | | | | | | | | |
Basic earnings per share | $ | 1.38 |
| | | | $ | 0.31 |
| | | | $ | 1.07 |
| | 345.2 | % |
Diluted
earnings per share | $ | 1.36 |
| | | | $ | 0.31 |
| | | | $ | 1.05 |
| | 338.7 | % |
Weighted
average shares used in per share calculations: | | | | | | | | | | | |
Basic shares | 74,219 |
| | | | 80,231 |
| | | | (6,012 | ) | | (7.5 | )% |
Diluted
shares | 75,149 |
| | | | 81,686 |
| | | | (6,537 | ) | | (8.0 | )% |
NM
- Not meaningful
Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:
|
| | | |
(in thousands) | |
Consolidated net sales for the same period last year | $ | 2,335,841 |
|
Increase
in comparable sales | 18,199 |
|
Net increase from non-comparable sales and other changes | 5,098 |
|
Loss of net sales from closed stores | (33,431 | ) |
Incremental external net sales from 2018 acquired businesses | 328,165 |
|
Loss
of net sales from the exit of Ebuys | (5,632 | ) |
Consolidated net sales | $ | 2,648,240 |
|
The following summarizes net sales by segment:
|
| | | | | | | | | | | | | | | | |
| Nine
months ended | | Change |
(dollars in thousands) | | | | | Amount | | % | | Comparable
Sales % |
Segment net sales: | | | | | | | | | |
U.S. Retail | $ | 2,086,535 |
| | $ | 2,083,287 |
| | $ | 3,248 |
| | 0.2 | % | | 0.5% |
Canada
Retail | 191,421 |
| | 152,604 |
| | 38,817 |
| | 25.4 | % | | 6.1% |
Brand
Portfolio | 326,871 |
| | — |
| | 326,871 |
| | NM |
| | NA |
Other | 93,935 |
| | 99,950 |
| | (6,015 | ) | | (6.0 | )% | | 0.9% |
Total
segment net sales | 2,698,762 |
| | 2,335,841 |
| | 362,921 |
| | 15.5 | % | | 0.8% |
Elimination
of intersegment net sales | (50,522 | ) | | — |
| | (50,522 | ) | | NM |
| | |
Consolidated
net sales | $ | 2,648,240 |
| | $ | 2,335,841 |
| | $ | 312,399 |
| | 13.4 | % | | |
NM
- Not meaningful
NA - Not applicable
Within the U.S. Retail segment, comparable sales increased due to higher comparable transactions partially offset by a decline in comparable average dollar sales per transaction. Within the Canada Retail segment, comparable sales increased due to higher comparable average dollar sales per transaction, primarily as a result of the significant improvements to its digital platform and lower clearance inventory.
Commission, Franchise and Other Revenue- Commission, franchise and other revenue includes commission income for First Cost design and buying services in the Brand Portfolio segment, royalties and other fees paid by franchisees, and rental income on owned and leased properties, summarized
as follows:
|
| | | | | | | | | | | | | | |
| Nine months ended | | Change |
(dollars in thousands) | | | | | Amount | | % |
Commission income from Brand Portfolio segment | $ | 18,118 |
| | $ | — |
| | $ | 18,118 |
| | NM |
|
Franchise
and other revenue | 11,910 |
| | 4,532 |
| | 7,378 |
| | 162.8 | % |
| 30,028 |
| | 4,532 |
| | 25,496 |
| | 562.6 | % |
Elimination
of intersegment commission income | (3,291 | ) | | — |
| | (3,291 | ) | | NM |
|
Consolidated commission, franchise and other revenue | $ | 26,737 |
| | $ | 4,532 |
| | $ | 22,205 |
| | 490.0 | % |
Gross
Profit- Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales, calculated as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended | | |
| | | | | Change |
(dollars in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % | | Basis
Points |
Net sales | $ | 2,648,240 |
| | 100.0 | % | | $ | 2,335,841 |
| | 100.0 | % | | | | | | |
Cost
of sales | (1,869,253 | ) | | (70.6 | ) | | (1,605,038 | ) | | (68.7 | ) | | | | | | |
Gross
profit | $ | 778,987 |
| | 29.4 | % | | $ | 730,803 |
| | 31.3 | % | | $ | 48,184 |
| | 6.6 | % | | (190 | ) |
The
following summarizes gross profit by segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended | | |
| | | | | Change |
(dollars in thousands) | Amount | | % of Segment Net Sales | | Amount | | % of
Segment Net Sales | | Amount | | % | | Basis Points |
Segment gross profit: | | | | | | | | | | | | | |
U.S.
Retail | $ | 619,356 |
| | 29.7 | % | | $ | 667,595 |
| | 32.0 | % | | $ | (48,239 | ) | | (7.2 | )% | | (230 | ) |
Canada
Retail | 65,171 |
| | 34.0 | % | | 43,582 |
| | 28.6 | % | | $ | 21,589 |
| | 49.5 | % | | 540 |
|
Brand
Portfolio | 75,191 |
| | 23.0 | % | | — |
| | — | % | | $ | 75,191 |
| | NM |
| | NM |
|
Other | 21,643 |
| | 23.0 | % | | 19,626 |
| | 19.6 | % | | $ | 2,017 |
| | 10.3 | % | | 340 |
|
| 781,361 |
| | | | 730,803 |
| | | | | | | | |
Elimination
of intersegment gross profit | (2,374 | ) | | | | — |
| | | | | | | | |
Consolidated
gross profit | $ | 778,987 |
| | | | $ | 730,803 |
| | | | | | | | |
NM
- Not meaningful
The U.S. Retail segment gross profit margin declined primarily driven by higher shipping costs in the current year associated with higher digital penetration and a benefit recognized in the second quarter of fiscal 2018 as a result of adjusting our loyalty programs deferred revenue due to the relaunch of the DSW VIP rewards program. The Canada Retail segment gross profit margin improved primarily due to lower clearance activity with improvements in the inventory position and improved leverage in occupancy costs with the exit of the Town Shoes banner last year. The inclusion of Camuto Group, which operates at a lower gross profit rate, decreased the consolidated gross profit margin rate.
Elimination of intersegment gross profit consisted of the following:
|
| | | | | | | |
| Nine
months ended |
(in thousands) | | | |
Elimination of intersegment activity: | | | |
Net sales recognized by Brand Portfolio segment | $ | (50,522 | ) | | $ | — |
|
Cost
of sales: | | | |
Cost of sales recognized by Brand Portfolio segment | 39,281 |
| | — |
|
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 8,867 |
| | — |
|
Gross
profit | $ | (2,374 | ) | | $ | — |
|
Operating Expenses- For the nine months ended November 2, 2019, operating expenses as a percentage of total revenue decreased 30 basis points over the same period last year primarily
driven by lower incentive compensation, the impact of lease exit charges, acquisition-related costs and restructuring charges in the prior year, and lower marketing investments, partially offset by the impact of including Camuto Group in the consolidated results.
Income from Equity Investment in ABG-Camuto- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit. ABG-Camuto is an integral part of the Brand Portfolio segment, primarily due to our licensing with ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.
Impairment Charges- For the nine
months ended November 2, 2019, we recorded impairment charges primarily related to the planned consolidation of certain locations as part of our integration efforts for the Brand Portfolio segment. With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the nine months ended November 3, 2018, we recorded a goodwill impairment charge, net of adjustments, as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of TSL’s goodwill.
Non-operating
Expenses, net- Due to the acquisition of the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. As a result of the remeasurement, we recorded a loss of $34.0 million to non-operating income (expenses), net. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating income (expenses), net.
Income Taxes- Our effective tax rate changed from 62.6% for the nine
months ended November 3, 2018 to 24.6% for the nine months ended November 2, 2019. The decrease in the effective tax rate was primarily driven by valuation allowances and the goodwill impairment associated with the TSL acquisition during the nine months ended November 3, 2018.
Seasonality
Our business is subject to seasonal merchandise trends driven by 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.
Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels fluctuate seasonally.
During the nine months ended November
2, 2019, we repurchased 7.1 million Class A common shares at a cost of $141.6 million, which was partially funded with borrowings on the revolving line of credit, with $334.9 million of Class A common shares that remain authorized under the program as of November 2, 2019. During the nine months ended November 3, 2018, we did not repurchase any Class A common shares. The share repurchase program 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. Shares will be repurchased in the open market at times and in amounts considered
appropriate based on price and market conditions.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, to pursue our growth strategy and withstand unanticipated business volatility. We believe that cash generated from our operations, together with our current levels of cash and investments, as well as availability under our Credit Facility, are sufficient over the next 12 months and the foreseeable future to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and repurchase common shares under our share repurchase program.
Operating Cash Flows
For the nine
months ended November 2, 2019, net cash provided by operations was $118.1 million compared to $147.3 million for the nine months ended November 3, 2018. The change was driven by a decrease in net income after adjusting for non-cash activity, including depreciation and amortization, stock-based compensation, impairment charges, the loss on previously held assets in TSL, loss on foreign currency reclassified from accumulated other comprehensive loss, the change in deferred income taxes, and lease exit charges, primarily due to lower performance for the U.S. Retail segment and including the net loss from Camuto Group during fiscal 2019. In addition, we had an increased
use of cash to fund working capital requirements during fiscal 2019 due to the addition of the acquired businesses as well as the impact of lower accruals for incentive compensation.
Investing Cash Flows
For the nine months ended November 2, 2019, our net cash used in investing activities was $10.3 million, which was due to capital expenditures of $59.6 million exceeding the net liquidation of our available-for sale-securities. During the nine months ended November 3, 2018,
our net cash used in investing activities was $41.0 million, which was due to the acquisition of TSL, capital expenditures of $48.5 million and $16.0 million of additional borrowings by TSL prior to the acquisition, partially offset by the net liquidation of our available-for sale-securities.
Financing Cash Flows
For the nine months ended November 2, 2019, our net cash used in financing activities was $120.6 million compared
to $60.6 million for the nine months ended November 3, 2018. The increase was primarily driven by the repurchase of Class A common shares under the share repurchase program during nine months ended November 2, 2019, which was partially financed using our revolving line of credit, partially offset by lower dividends due to fewer outstanding Class A common shares.
Debt
Credit Facility- On August 25, 2017, we entered into a senior unsecured
revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased with no change to the sub-limits. As of November 2, 2019,
the Credit Facility provided a revolving line of credit up to $400 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility.
Loans
issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.7% as of November 2, 2019. Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.8% as of November 2, 2019. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of November 2,
2019, we had $235.0 million outstanding under the Credit Facility and $3.0 million in letters of credit issued, resulting in $162.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1.
As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of November 2, 2019, we were in compliance with all financial covenants.
Capital
Expenditure Plans
We expect to spend approximately $80.0 million for capital expenditures in fiscal 2019, of which we invested $59.6 million during the nine months ended November 2, 2019. Our capital expenditures for the remainder of the year will depend primarily on the number of store projects as well as infrastructure and information technology projects that we undertake and the timing of these expenditures.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We
do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
We have included a summary of our contractual obligations as of February 2, 2019 in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. There have been no material changes in contractual obligations outside the ordinary course of business since February 2, 2019.
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 appraisal 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 disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year. We currently do not utilize hedging instruments to mitigate these market risks.
Interest Rate Risk
We hold available-for-sale securities, which are not materially affected by changes in market interest rates. Also, as of November 2, 2019, we
had $235.0 million outstanding on our revolving line of credit under our Credit Facility. Borrowings under our Credit Facility are based on a variable rate of interest, which exposes us to interest rate market risks, particularly during a period of rising interest rates. The impact of a hypothetical 100 basis point increase in interest rates on our revolving line of credit would not result in a material amount of additional expense over a 12-month period based on the balance as of November 2, 2019.
Foreign Currency Exchange Risk
We are exposed to the impact of foreign exchange rate risk primarily through our operations in Canada, where the functional
currency is the Canadian dollar, as well as foreign denominated cash accounts. A hypothetical 10% movement in the exchange rates could result in a $7.3 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive loss within the condensed consolidated balance sheets, and $1.0 million of foreign currency revaluation, which would be recorded in non-operating income (expenses), net within the condensed consolidated statements of operations.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective.
Changes 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 INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 16, Commitments and Contingencies - Legal Proceedings, of the condensed consolidated financial statements of
this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
The following risk factors supplement and update our risk factors as set forth in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
The imposition of new tariffs on our products could have a material adverse effect on our business and
financial performance.
The U.S. Government has placed tariffs on certain goods imported from China and may impose new tariffs on goods imported from China and other countries, including footwear and other products that we import. All of the Brand Portfolio segment products are manufactured from third-party manufacturing facilities outside the U.S., whereas our retail merchandise is purchased from both domestic and foreign vendors. Many of our domestic vendors import a large portion of their merchandise from abroad. We believe almost all of our merchandise was manufactured outside the U.S., with the majority manufactured in China. In retaliation, China has responded by imposing tariffs on a wide range of products imported from the U.S. and by adjusting the value of its currency. If additional tariffs or trade restrictions are implemented by the U.S. or other countries in connection
with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy. While it is too early to predict whether or how the recently enacted tariffs will impact our business, the imposition of tariffs on footwear or other items imported by us from China could require us to increase prices to our customers or, if unable to do so, result in lowering our gross margin on products sold, which could have a material adverse effect on our business and financial performance. Alternatively, we may seek to shift production outside of China, resulting in significant costs and disruption to our business. Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market's fear of an economic slowdown could lead to a decrease in consumer spending and we may experience lower net sales than expected. Reduced net sales may result in reduced operating cash flows if we are not able
to appropriately manage inventory levels or leverage expenses.
We are exposed to foreign tax contingencies as a result of the acquisition of Camuto Group, which could have a material adverse effect on our financial performance.
During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll and other taxes that could also result in assessed penalties and interest. We have developed an estimate of the range of outcomes related to these obligations of $15.5 million to $30.0 million for obligations we are aware of at this time. We are continuing to assess the exposure, which may result in
material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.
| |
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 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. Shares will be repurchased 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 share repurchases during the most recent quarter:
|
| | | | | | | | | | | | | |
(in thousands, except per share amounts) | (a) Total
Number of Shares Purchased(1) | | (b) Average Price Paid per Share | | (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 |
| 1 |
| | $ | 14.92 |
| | — |
| | $ | 351,564 |
|
| 1,004 |
| | $ | 16.63 |
| | 1,000 |
| | $ | 334,935 |
|
| 2 |
| | $ | 16.60 |
| | — |
| | $ | 334,935 |
|
Total | 1,007 |
| | $ | 16.63 |
| | 1,000 |
| | |
| |
(1)
| The total number of shares repurchased includes the shares repurchased as part of publicly announced programs (the average price paid per share includes any broker commissions) and 6,552 shares withheld in connection with tax payments due upon vesting of employee restricted stock awards. |
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. Our Credit Facility
allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility. On December 10, 2019, the Board of Directors declared a quarterly cash dividend payment of $0.25 per share for both Class A and Class B common shares. The dividend will be paid on January 3, 2020 to shareholders of record at the close of business on December 20, 2019.
Item
3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item
6. Exhibits
|
| | |
Exhibit No. | | Description |
3.1 | | |
3.2 | | |
4.1 | | |
10.1* | | |
31.1* |
| |
31.2* | | |
32.1* | | |
32.2* | | |
101* | | The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended November 2, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements
of Comprehensive 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 Consolidated Financial Statements. |
104* | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
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: | | | By: | |
| | | | |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal
Financial Officer and duly authorized officer) |
