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(Exact name of registrant as specified in its charter)
iOhio
i31-0746639
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i810 DSW Drive,
iColumbus,
iOhio
i43219
(Address
of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: i(614)i237-7100
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
iClass A Common Shares, without par value
iDBI
iNew
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. ☑ iYes ☐ 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). ☑ iYes ☐ 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.
iLarge
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 November 28, 2023: i49,124,473
Class A common shares and i7,732,733 Class B common shares.
All
references to "we,""us,""our,""Designer Brands,""Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q for the quarter ended October 28, 2023 (this "Form 10-Q") mean Designer Brands Inc. and its subsidiaries.
We have included certain website addresses throughout this report as inactive textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-Q.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Form 10-Q may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of words such as "outlook,""could,""believes,""expects,""potential,""continues,""may,""will,""should,""would,""seeks,""approximately,""predicts,""intends,""plans,""estimates,""anticipates,"
or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, and liquidity. The inclusion of any forward-looking statements 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 other factors discussed elsewhere in this report, including those factors described under Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the fiscal year ended January 28, 2023 (the "2022 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 16, 2023, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance, or achievements to differ materially from those discussed in forward-looking statements that include, but are not limited to, the following:
•uncertain general economic conditions, including recession concerns, inflationary pressures and rising interest rates, and the related impacts to consumer discretionary spending;
•supply chain challenges;
•risks related
to adverse public health developments;
•our ability to anticipate and respond to fashion trends, consumer preferences, and changing customer expectations;
•our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•risks related to losses or disruptions associated with our distribution systems, including our distribution centers and stores, whether as a result of reliance on third-party providers or otherwise;
•our ability to retain our existing management team, and continue to attract qualified new personnel;
•risks related to cyber security threats and privacy or data security
breaches or the potential loss or disruption of our information technology ("IT") systems;
•risks related to the implementation of an enterprise resource planning system ("ERP") software solution and other IT systems;
•our reliance on our loyalty programs and marketing to drive traffic, sales, and customer loyalty;
•our ability to protect our reputation and to maintain the brands we license;
•our competitiveness with respect to style, price, brand availability, and customer service;
•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to
political, economic, operational, compliance and other risks, and fluctuations in foreign currency exchange rates;
•our ability to comply with privacy laws and regulations, as well as other legal obligations;
•domestic and global political and social conditions;
•geopolitical tensions, including relating to the ongoing war in Ukraine and the Israel-Hamas war;
•risks associated with climate change and other corporate responsibility issues; and
•uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
If
one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance, or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time and it is not possible for management to predict all such factors, nor can management assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
1.
iDESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Business Operations- Designer Brands Inc. is one of the world's largest designers, producers, and retailers of footwear and accessories. We operate in ithree
reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its direct-to-consumer U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company and DSW banners through its direct-to-consumer Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the wholesale of products to retailers and international distributors, commission for serving retailers as the design and buying agent for products under private labels, and the sale of our branded products through direct-to-consumer e-commerce sites for the Vince Camuto, Keds, Hush Puppies, and Topo brands. Our equity investments in ABG-Camuto, LLC ("ABG-Camuto") and Le Tigre 360 Global LLC ("Le Tigre") are an integral part of the Brand Portfolio segment. We have a i40%
ownership interest in ABG-Camuto, a joint venture that owns the intellectual property rights of Vince Camuto and other brands. We are party to a licensing agreement with ABG-Camuto, which provides for the exclusive right to design, source, and sell footwear and handbags under the brands that ABG-Camuto owns. In July 2022, we acquired a i33.3% ownership interest in Le Tigre, which manages the Le Tigre brand. We are also party to a license agreement with Le Tigre, which provides for the exclusive right to design, source, and sell Le Tigre-branded footwear. In addition, we own the licensing rights for footwear of the Jessica
Simpson brand and, beginning in the third quarter of 2023, the Hush Puppies brand and we own the licensing rights for footwear and handbags of the Lucky Brand.
On February 4, 2023, we completed the acquisition of the Keds business ("Keds") from Wolverine World Wide, Inc. This expanded the reach of our Owned Brands offerings, which refers to those brands that we have rights to sell through ownership or license arrangements, into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels, complementing the additions of Le Tigre and Topo Athletic LLC ("Topo") during 2022.
Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles
generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. The condensed consolidated financial position, results of operations, and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet as of January 28, 2023 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and
the notes thereto included in the 2022 Form 10-K.
i
Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year (e.g., "2023") refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year (including 2022), but occasionally will contain an additional week resulting in a 53-week fiscal year (including 2023).
SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies-
The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2022 Form 10-K.
i
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including any variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in United States ("U.S.") dollars.
Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer
allowances and discounts reserve, 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, redeemable noncontrolling interest, income taxes and valuation allowances on deferred tax assets, self-insurance reserves, and acquisitions. Although we believe that these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
i
Chief
Executive Officer Transition- In January 2023, we announced our succession process relating to the Company's Chief Executive Officer ("CEO") role, whereby our former CEO, Roger Rawlins, stepped down from his role as CEO and as a member of the Company's Board of Directors (the "Board") effective April 1, 2023, at which time, Doug Howe, who previously served as Executive Vice President of the Company and President of DSW, assumed the CEO role and joined the Board. Mr. Rawlins commenced service as a strategic advisor to the Company and the Board
effective April 1, 2023 through April 1, 2024 under the terms of a transition and consulting agreement. In conjunction with the CEO transition, we estimate that the CEO transition costs will total $i8.1 million, consisting of $i2.2
million in severance costs, $i2.8 million in accelerated stock-based compensation (net of stock awards forfeited), and $i3.1 million in retention stock awards to certain members of our leadership
team and other related professional fees. During the three and nine months ended October 28, 2023, we recognized $i1.1 million and $i4.0 million, respectively, of CEO transition costs in operating expenses on the condensed consolidated statements
of operations. Since the fourth quarter of 2022, we have recognized $i7.7 million of CEO transition costs, with the remaining estimated $i0.4 million to be recorded
during the fourth quarter of 2023.
Severance- During the three months ended October 28, 2023 and October 29, 2022, we incurred severance costs, excluding the severance related to the CEO transition, of $i1.9 million and $i0.2
million, respectively. During the nine months ended October 28, 2023 and October 29, 2022, we incurred severance costs, excluding the severance related to the CEO transition, of $i4.3 million and $i1.2 million,
respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of October 28, 2023, January 28, 2023, and October 29, 2022, we had $i4.3 million, $i5.7
million, and $i0.7 million, respectively, of severance liability, including the severance related to the CEO transition, included in accrued expenses on the condensed consolidated balance sheets.
/
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 maintained for certain insurance policies and 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 on
the condensed consolidated statements of cash flows:
Restricted
cash, included in prepaid expenses and other current assets
i—
i—
i1,768
Total
cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
i54,638
$
i58,766
$
i64,275
/
i
Fair
Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
• Level 1 - Quoted prices in active markets for identical assets or liabilities.
• Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
• Level 3 - Unobservable inputs in which little or no market activity exists.
The carrying value of cash and cash equivalents, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowings under our senior secured asset-based revolving credit facility ("ABL Revolver") and our new senior secured term loan credit agreement, as amended ("Term Loan"), approximated fair value based on the terms and variable interest rates.
2. iACQUISITIONS
ACQUISITION
OF TOPO
On December 13, 2022, we acquired a i79.4% ownership interest in Topo for $i19.3 million
in cash. We have an exclusive call option to purchase the remaining i20.6% ownership interest in Topo upon the occurrence of certain events or after a period of itwo years following the close of the transaction. The noncontrolling interest holders also have a put option with respect to
the remaining i20.6% ownership interest in Topo upon the occurrence of certain events or after a period of ithree years following the close of the transaction. The redemption price is defined in the operating agreement and is based primarily on a fixed multiple of Topo's trailing 12 months
of adjusted earnings before interest, taxes, depreciation, amortization, and other agreed upon adjustments.
i
The final purchase price and the allocation of the total consideration to the fair values of the assets, liabilities, and redeemable noncontrolling interest consisted of the following:
Final Purchase Price and Allocation as of April 29, 2023
Purchase price cash consideration
$
i19,062
$
i193
$
i19,255
Fair
value of assets and liabilities acquired:
Accounts receivables
$
i3,195
$
(i150)
$
i3,045
Inventories
i5,612
(i20)
i5,592
Goodwill
i3,460
i868
i4,328
Intangible
assets
i12,500
(i500)
i12,000
Other
assets
i1,898
—
i1,898
Accounts
payable and other liabilities
(i4,438)
(i5)
(i4,443)
Redeemable
noncontrolling interest
(i3,165)
—
(i3,165)
$
i19,062
$
i193
$
i19,255
/
The
fair value of the intangible assets relates to customer relationships and a tradename, which are amortized over a useful life of i10 and i15 years, respectively, and are based on the excess earnings method under the income approach. The fair value measurements
are based on significant unobservable inputs, including discounted future cash flows and customer attrition rates. The fair value measurement of the redeemable noncontrolling interest was calculated by considering the implied fair value of Topo using the purchase price and an estimated amount to redeem the noncontrolling interest. 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 for athletic footwear. Goodwill is expected to be deductible for income tax purposes. During 2022, we incurred $i1.3 million
of acquisition-related costs in connection with the acquisition of Topo, which was included in operating expenses on the consolidated statements of operations.
On February 4, 2023, we acquired the Keds business, including the Keds brand, inventory, and inventory-related accounts payable, from Wolverine World Wide, Inc. ("Seller"). The cash consideration was funded with available cash and borrowings on the ABL Revolver.
The
preliminary purchase price and the allocation of the total consideration to the fair values of the assets and liabilities consisted of the following:
(in thousands)
Preliminary Purchase Price and Allocation as of February 4, 2023
Measurement
Period Adjustments
Preliminary Purchase Price and Allocation as of October 28, 2023
Purchase price:
Cash Consideration
$
i109,360
$
i17,944
$
i127,304
Due
to Seller
i19,040
(i19,040)
i—
Due
from Seller for estimated contingent consideration
(i3,500)
(i5,399)
(i8,899)
$
i124,900
$
(i6,495)
$
i118,405
Fair
value of assets and liabilities acquired:
Inventories
$
i46,700
$
(i4,184)
$
i42,516
Goodwill
i36,787
(i11,011)
i25,776
Intangible
assets
i44,800
i8,700
i53,500
Accounts
payable
(i3,387)
—
(i3,387)
$
i124,900
$
(i6,495)
$
i118,405
We
recorded an allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The purchase price was subject to adjustments primarily based upon estimated contingent considerations as provided by the purchase agreement, which are based on recognized sales and incurred marketing costs for certain identified aged inventories and may result in the Seller paying us up to $i15.0 million by March 2024. We recorded an estimated amount due from Seller at fair value based on our
estimated probability of the conditions being met requiring payment. Any subsequent changes to the contingent consideration will be recorded to earnings. The allocation of the purchase price is based on certain preliminary valuations and analysis primarily related to the intangible assets that have not been completed as of the date of this filing. Subsequent changes, if any, in the estimated fair values assumed upon the finalization of more detailed analysis within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. We expect to finalize the valuations during the fourth quarter of 2023.
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 fair value of the intangible assets relates to $i46.9
million of an indefinite-lived tradename and $i6.6 million of customer relationships, which is amortized over a useful life of i10
years, and are based on the excess earnings method under the income approach. The fair value measurements are based on significant unobservable inputs, including discounted future cash flows and customer attrition rates. 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 for casual footwear, including kids' footwear, with international distribution. Goodwill is expected to be deductible for income tax purposes. We incurred $i2.9 million of acquisition-related
costs in connection with the acquisition of Keds, which was included in operating expenses on the consolidated statements of operations.
COMBINED RESULTS OF ACQUIRED ENTITIES
The results of operations for Topo and Keds for the nine months ended October 28, 2023 were not material and are included in the condensed consolidated statements of operations within the Brand Portfolio segment. Supplemental pro forma results of operations reflecting the acquisitions are not presented as the impact on our consolidated financial results would not have been material.
External
customer wholesale, commission income, and other
i—
i—
i170,665
—
i170,665
Intersegment
wholesale and commission income
—
—
i76,470
(i76,470)
—
Total
Owned Brands
i440,343
i—
i271,265
(i76,470)
i635,138
National
brands
i1,702,856
i—
i—
—
i1,702,856
Canada
Retail(2)
i—
i216,888
i—
—
i216,888
Total
net sales
$
i2,143,199
$
i216,888
$
i271,265
$
(i76,470)
$
i2,554,882
(1) "Owned
Brands" refers to those brands we have rights to sell through ownership or license arrangements. Beginning in the first quarter of 2023, sales of the Keds brand are included in Owned Brands as a result of our acquisition of Keds. Sales of the Keds brand in periods prior to the first quarter of 2023 are not restated, as this brand was considered a national brand during those periods.
(2) We currently do not report the Canada Retail segment net sales by brand categories.
Net Sales by Product and Service Categories- The following table presents net sales disaggregated by product and service
During the three months ended October 28, 2023, we identified an error in the classification of certain net sales categories for the U.S. Retail segment in the Net Sales by Product and Service Categories table within Note 3, Revenue, of our condensed consolidated financial statements for the Quarterly Reports on Forms 10-Q for the first and second quarters of 2023. The above table for the nine months ended October 28, 2023 has been corrected to reflect the reduction of $i22.2
million of U.S. Retail segment net sales from accessories and other and increases of $i10.0 million and $i12.2 million of U.S. Retail segment net sales to women’s footwear and men’s footwear, respectively, representing the impact of the error for the first and second quarters of 2023. This immaterial correction did not impact the condensed
consolidated statements of operations, comprehensive income, or balance sheets.
DEFERRED REVENUE LIABILITIES
iWe record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers.iThe
following table presents the changes and total balances for gift cards and loyalty programs:
Gift
cards redeemed and breakage recognized to net sales
(i12,764)
(i14,341)
(i45,601)
(i50,896)
Gift
cards issued
i10,759
i12,312
i36,709
i42,202
End
of period
$
i26,229
$
i28,089
$
i26,229
$
i28,089
Loyalty
programs:
Beginning of period
$
i16,762
$
i16,788
$
i16,900
$
i15,736
Loyalty
certificates redeemed and expired and other adjustments recognized to net sales
(i7,434)
(i7,974)
(i22,861)
(i24,034)
Deferred
revenue for loyalty points issued
i7,923
i8,795
i23,212
i25,907
End
of period
$
i17,251
$
i17,609
$
i17,251
$
i17,609
4.
iRELATED PARTY TRANSACTIONS
SCHOTTENSTEIN AFFILIATES
We have transactions with entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board, and members of his family (collectively, the "Schottenstein Affiliates"). As of October 28, 2023, the Schottenstein Affiliates beneficially owned i26%
of the Company's outstanding common shares, representing i62% of the combined voting power of the Company, consisting of i7.0
million Class A common shares and i7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases-We lease certain store and office locations that are owned by the Schottenstein Affiliates. We also leased a fulfillment
center from a Schottenstein Affiliate through September 2022 that was not renewed. For the three
months ended October 28, 2023 and October 29, 2022, we recorded rent expense from leases with Schottenstein Affiliates of $i2.0 million and $i2.3 million, respectively. For the nine
months ended October 28, 2023 and October 29, 2022, we recorded rent expense from the leases with Schottenstein Affiliates of $i6.0 million and $i7.3 million, respectively. As of October
28, 2023, January 28, 2023, and October 29, 2022, we had related party current operating lease liabilities of $i4.6 million, $i5.6 million,
and $i5.4 million, respectively, and non-current operating lease liabilities of $i17.7 million, $i14.0
million, and $i11.5 million, respectively.
Other Purchases and Services- For the three months ended October 28, 2023 and October 29, 2022, we had other purchases and services we incurred from the Schottenstein Affiliates of $i0.8
million and $i1.2 million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, we had other purchases and services we incurred from the Schottenstein Affiliates of $i2.0
million and $i3.7 million, respectively.
Due to Related Parties-Amounts due to the Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
ABG-Camuto- We have a i40% ownership interest in ABG-Camuto. We are party to a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. For the three months ended October 28, 2023 and October 29, 2022, we recorded royalty expense for amounts paid to ABG-Camuto of $i4.5
million and $i4.6 million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, we recorded royalty expense for amounts paid to ABG-Camuto of $i13.6 million and $i13.7
million, respectively.
Le Tigre- In July 2022, we acquired a i33.3% ownership interest in Le Tigre. We are also party to a license agreement with Le Tigre whereby we pay royalties on our net sales of the Le Tigre brand, subject to guaranteed minimums. Activity with Le Tigre was immaterial for all periods presented.
5. iEARNINGS
PER SHARE
iBasic earnings per share is based on net income attributable to Designer Brands Inc. 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 between basic and diluted weighted average shares outstanding, as used in the calculation of earnings per share attributable to Designer Brands Inc.:
Dilutive
effect of stock-based compensation awards
i2,772
i4,895
i2,432
i4,363
Weighted
average diluted shares outstanding
i61,405
i69,140
i65,292
i73,287
/
For
the three months ended October 28, 2023 and October 29, 2022, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was i2.4 million and i2.7
million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was i3.3 million and i2.8 million,
respectively.
6. iSTOCK-BASED COMPENSATION
i
Stock-based
compensation expense, included in operating expenses on the condensed consolidated statements of operations, consisted of the following:
The following table summarizes the stock-based compensation award share activity for RSUs for the nine months ended October 28, 2023:
(in thousands)
Shares
of Time-Based RSUs
Shares of Performance-Based RSUs
Outstanding - beginning of period
i6,790
i969
Granted
i2,586
i813
Vested
(i4,107)
(i249)
Forfeited
(i519)
(i250)
Outstanding
- end of period
i4,750
i1,283
/
7.
iSHAREHOLDERS' EQUITY
SHARES
i
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 converted into 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 ione vote per share and holders of Class B common shares are entitled to ieight
votes per share on matters submitted to shareholders for approval.
/
i
The following table provides additional information for our common shares:
We
have authorized i100 million shares of ino par value preferred shares, with ino
shares issued for any of the periods presented.
DIVIDENDS
On November 16, 2023, the Board declared a quarterly cash dividend payment of $i0.05 per share for both Class A and Class B common shares. The dividend will be paid on December 14, 2023 to shareholders of record at the close of business on November 30,
2023.
SHARE REPURCHASES
i
On August 17, 2017, the Board authorized the repurchase of an additional $i500.0
million of Class A common shares under our share repurchase program, which was added to the $i33.5 million remaining from the previous authorization. On June 8, 2023, we commenced a modified "Dutch Auction" tender offer (the "Tender Offer"), to purchase up to $i100.0
million of the Company's Class A common shares. The Tender Offer expired on July 7, 2023 and on July 12, 2023, we repurchased i1.5 million Class A common shares under the Tender Offer at a purchase price of $i10.00
per share and at an aggregate cost of $i15.1 million, including transaction costs. During the nine months ended October 28, 2023, we repurchased an aggregate of i9.7 million
Class A common shares, including open market purchases and the i1.5 million Class A common shares purchased under the Tender Offer, at an aggregate cost of $i102.1 million, including transaction costs and excise tax. Share repurchases
were funded from the proceeds from our Term Loan. As of October 28, 2023, $i87.7 million of Class A common shares remained available for repurchase under the share repurchase program. The share repurchase program may be suspended, modified, or discontinued at any time, and we have no obligation to repurchase any amount of our Class A common shares under the program. Under the share repurchase program, shares will be repurchased in the open market at times and in amounts considered appropriate
based on price and market conditions.
As of October 28, 2023, future maturities of debt are as follows:
(in thousands)
Remainder of 2023
$
i1,250
2024
i2,500
2025
i2,500
2026
i2,500
2027
i371,821
Total
$
i380,571
/
ABL
REVOLVER
On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which was subsequently amended on February 28, 2023 and June 23, 2023. The amended ABL Revolver provides a revolving line of credit of up to $i600.0 million, including a Canadian sub-limit of up to $i60.0
million, a $i75.0 million sub-limit for the issuance of letters of credit, a $i60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $i6.0
million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a first-in last-out term loan ("FILO Term Loan") of up to $i30.0 million, which was drawn in full on February 28, 2023. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables
and inventory. The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 28, 2023, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $i518.9
million, with $i300.6 million in outstanding borrowings and $i5.0 million in letters of credit issued, resulting in $i213.3
million available for borrowings.
Borrowings under the revolving line of credit and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate (as defined in the credit facility agreement and subject to a floor of i0%) plus i0.5%,
and (iii) Adjusted Term SOFR (as defined in the credit facility agreement) plus i1.0%; or (B) a one-month, three-month, or six-month Adjusted Term SOFR per annum (subject to a floor of i0%), plus, in each instance, an applicable rate to be determined based
on average availability. The FILO Term Loan accrues interest, at our option, at a rate equal to: (A) a fluctuating interest rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate plus i0.5%, or (iii) Adjusted Term SOFR plus i1.0%,
plus i2.5%; or (B) Adjusted Term SOFR for the interest period in effect for such borrowing plus i3.5%. Commitment fees are based on the unused portion of the ABL Revolver available for borrowings. Interest expense related to the ABL Revolver includes
interest on borrowings and letters of credit, with an interest rate of i7.6% as of October 28, 2023, commitment fees, and the amortization of debt issuance costs.
TERM LOAN
On June 23, 2023, we entered into the Term Loan, which provides for a maximum aggregate principal amount of $i135.0
million, consisting of (A) borrowings at closing of a $i45.0 million U.S. loan and a $i5.0 million Canadian loan (denominated in USD) and (B) delay draw loans available to borrow up to $i76.5
million in U.S. loans and $i8.5 million in Canadian loans (denominated in USD). The Term Loan was amended on September 21, 2023 to extend the date through which the delay draw loans remain available, and on October 31, 2023, we borrowed $i25.0
million of the delay draw loans with any remaining delay draw loans to be taken by January 31, 2024. The Term Loan matures at the earliest of the date the ABL Revolver matures (currently March 2027) or ifive years from closing of the Term Loan (June 2028). The Term Loan is collateralized by a first priority lien on substantially all of our personal, real, and intellectual property and by a second priority lien on the assets used as collateral for the ABL revolver, primarily credit card receivables, accounts receivable, and inventory.
Borrowings under the Term Loan bear interest at a per
annum rate equal to: (A) an adjusted three-month SOFR per annum (subject to a floor of i2.0%), plus i7.0%; or if (A) is not available, then (B) a base rate per annum equal to the greater of (i) i2.0%,
(ii) the prime rate, (iii) the Fed Funds Rate plus i0.5%, and (iv) the Adjusted Term SOFR plus i1.0%; plus, in each instance, i6.0%,
with an interest rate of i12.5% (effective interest rate of i13.4% when including the amortization of debt issuance costs) as of October 28, 2023.
The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than i1:1 when availability is less than the greater of $i47.3
million or i10.0% of the maximum borrowing amount. At any time that liquidity is less than $i100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month, calculated on a trailing
twelve-month basis, of (1) i2.25 to 1.00 for any trailing twelve-month period through February 3, 2024, and (2) i2.50 to 1.00 thereafter. Testing of the consolidated net leverage ratio
ends after liquidity has been greater than or equal to $i100.0 million for a period of i45 consecutive days. The ABL Revolver and the Term Loan also contain customary covenants restricting
certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. The ABL Revolver and the Term Loan contain customary events of default, including failure to comply with certain financial and other covenants. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, our obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of October 28, 2023, we were in compliance with all financial covenants
contained in the ABL Revolver and the Term Loan.
TERMINATION OF PREVIOUS TERM LOAN
On February 8, 2022, we settled in full the $i231.3 million principal amount outstanding on that date under our previous senior secured term loan agreement ("Previous Term Loan"). In connection with this settlement, during the nine months ended October 29, 2022, we incurred a $i12.7
million loss on extinguishment of debt, composed of a $i6.9 million prepayment premium and a $i5.7 million
write-off of unamortized debt issuance costs.
12. iCOMMITMENTS 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 our 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.
GUARANTEES
We provide guarantees for lease obligations that are scheduled to expire in2025 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of October 28, 2023, the total future payment requirements for these guarantees were approximately $i5.5
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS
For the third quarter of 2023, net sales decreased 9.1% and total comparable sales decreased 9.3%
compared to the same period last year. Net sales during the third quarter of 2023 from our Owned Brands decreased 11.6% compared to the same period last year, with Owned Brands representing 25.8% of consolidated net sales, down from 26.5% for the same period last year. At the beginning of 2023, we completed the acquisition of Keds, expanding our Owned Brands' reach into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels and complementing the additions of Le Tigre and Topo during 2022. We believe these acquisitions represent significant steps taken toward our long-term goal of net sales from our Owned Brands reaching one-third of total sales by 2026. Gross profit as a percentage of net sales for the third quarter of 2023 was 40 basis points lower when compared to the same period last year, primarily due to promotional pricing and the deleveraging effect of lower
sales on fixed occupancy costs, which more than offset lower logistics costs including freight, shipping, and distribution.
EFFECTS OF GLOBAL ECONOMIC CONDITIONS
Throughout 2023, a downturn in global economic conditions, most notably the growing concerns of a potential recession, rising interest rates, inflationary pressures, changes in employment levels, and significant foreign currency volatility, has adversely impacted discretionary consumer income levels and spending for our customers. Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence. We are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such
circumstances could have on our business.
During the second half of 2022 and continuing into 2023, our net sales declined as we experienced lower traffic and became more promotional under a more competitive landscape. Competitive pricing pressure has been exacerbated by a more promotional retail environment as the industry experienced a shift from tighter inventory positions to excess inventory and as macroeconomic conditions continue to impact discretionary consumer spending. These factors ultimately could require us to enact mitigating operating efficiency measures that could have a material adverse effect on business, operations, and results of operations.
•Net sales decreased to $786.3 million from $865.0 million for the same period last year.
•Gross profit as a percentage of net sales was 32.6% compared to 33.0% for the same period last year.
•Net income attributable to Designer Brands Inc. was $10.1 million, or $0.17 per diluted share, compared to $45.2 million, or $0.65 per diluted share, for the same period last year.
Comparable Sales Performance Metric- The following table presents the percent change in comparable sales for each segment and in total:
We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses. We include in our comparable sales metric sales from stores in operation for at least 14 months at the beginning of the applicable year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include the e-commerce sales of the U.S. Retail and Canada Retail segments. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales include the e-commerce
sales of the Brand Portfolio segment from the direct-to-consumer e-commerce site for the Vince Camuto brand. The e-commerce sales for Topo, Keds, and Hush Puppies will be added to the comparable base for the Brand Portfolio segment beginning with the first quarter of 2024, the second quarter of 2024, and the third quarter of 2024, respectively. 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.
For
the three months ended October 28, 2023, net sales decreased in the U.S. Retail segment with $68.0 million of the decline due to the decrease in comparable sales and the majority of the remaining decrease due to the impact of store closures since the end of the third quarter of 2022. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions of approximately 6%, driven by lower traffic, and a decrease in the comparable average sales amounts per transaction of approximately 4% as we were more promotional than we were during the same period last year. Net sales decreased in the Canada Retail segment primarily due to lower comparable sales. The decrease in comparable sales for the Canada Retail segment
was primarily driven by lower comparable average sales amount per transaction. Net sales for the Brand Portfolio segment decreased with approximately $34.0 million of the decline due to lower wholesale sales as retailer customers continued to pull back on orders, partially offset primarily from the net sales added from acquired Topo and Keds businesses.
GROSS PROFIT
The following table summarizes gross profit by segment:
Net recognition (elimination) of intersegment
gross profit
878
(1,376)
2,254
Consolidated gross profit
$
256,406
32.6
%
$
285,819
33.0
%
$
(29,413)
(10.3)
%
(40)
The
decrease in consolidated gross profit was primarily driven by the decrease in consolidated net sales during the three months ended October 28, 2023over the same period last year, partially offset by lower freight and shipping costs for all segments and lower distribution costs in the U.S. Retail segment as we realized the benefit of moving our digital fulfillment activities from our Ohio location to our New Jersey location. Gross profit as a percentage of net sales decreased by 120 basis points for the U.S. Retail segment when compared to the same period last year, primarily due to promotional pricing and the deleveraging effect of lower sales on fixed store occupancy costs, which more than offset lower logistics costs including freight, shipping and distribution. Gross
profit as a percentage of net sales decreased 280 basis points for the Canada Retail segment when compared to the same period last year, primarily due to a mix shift in sales towards lower margin products and the deleveraging effect of lower sales on fixed store occupancy costs. Gross profit as a percentage of net sales increased 830 basis points for the Brand
Portfolio segment when compared to the same period last year, primarily due to the change in mix of products sold, improved inventory positions, and lower freight costs.
The net
recognition (elimination) of intersegment gross profit consisted of the following:
Intersegment recognition and elimination activity:
Net
sales recognized by Brand Portfolio segment
$
(14,948)
$
(31,118)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
9,857
21,426
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers
during the current period
5,969
8,316
$
878
$
(1,376)
OPERATING EXPENSES
For the three months ended October 28, 2023, operating expenses increased by $8.6 million over the same period last year, primarily driven by an increase in marketing expenses and the additional
operating expenses from the acquired businesses, partially offset by lower store payroll in line with lower sales. Operating expenses, as a percentage of net sales, increased 370 basis points over the same period last year, due to higher marketing expenses and the deleveraging of costs on lower sales.
INTEREST EXPENSE, NET
For the three months ended October 28, 2023, interest expense, net, increased by $3.9 million over the same period last year, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over the same period last year and the addition of the Term Loan.
For
the nine months ended October 28, 2023, net sales decreased in the U.S. Retail segment with $214.0 million of the decline due to the decrease in comparable sales and the majority of the remaining decrease due to the impact of store closures since the end of the third quarter of 2022. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions of approximately 7%, driven by lower traffic, and a decrease in the comparable average sales amounts per transaction of approximately 3% as we were more promotional than we were during the same period last year. Net sales decreased in the Canada Retail segment with $10.5 million of the decline due to the decrease in comparable sales and the majority of the remaining decrease due to the unfavorable impact
from foreign currency translation. The decrease in the comparable sales for the Canada Retail segment was impacted primarily by lower comparable average sales amount per transaction. Net sales for the Brand Portfolio segment were flat to last year with the net sales added from the acquired Topo and Keds businesses offset by lower wholesale sales as retailer customers pulled back on orders.
GROSS PROFIT
The following table summarizes gross profit by segment:
Net recognition (elimination) of intersegment
gross profit
2,054
(154)
2,208
Consolidated gross profit
$
767,532
33.1
%
$
857,234
33.6
%
$
(89,702)
(10.5)
%
(50)
The
decrease in consolidated gross profit was primarily driven by the decrease in consolidated net sales during the nine months ended October 28, 2023 over the same period last year, partially offset by lower freight and shipping costs for all segments and lower distribution costs in the U.S. Retail segment as we realized the benefit of moving our digital fulfillment activities from our Ohio location to our New Jersey location. Gross profit as a percentage of net sales decreased 70 basis points for the U.S. Retail segment when compared to the same period last year, primarily due to the deleveraging effect of lower sales on fixed store occupancy costs, as well as being more promotional, partially offset by lower logistics costs including freight, shipping, and distribution. Gross profit as a percentage of net sales decreased 360 basis points for the Canada Retail segment when compared to the same period
last year, primarily due to a mix shift in sales towards lower margin products and the deleveraging
effect of lower sales on fixed store occupancy costs. Gross profit as a percentage of net sales increased 560 basis points for the Brand Portfolio segment when compared to the same period last year, primarily due to the change in mix of products sold, improved inventory positions, and lower freight costs.
The net recognition (elimination) of intersegment gross profit consisted of the following:
Intersegment recognition and elimination activity:
Net sales recognized by Brand Portfolio segment
$
(53,498)
$
(76,470)
Cost
of sales:
Cost of sales recognized by Brand Portfolio segment
38,134
52,149
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
17,418
24,167
$
2,054
$
(154)
OPERATING
EXPENSES
For the nine months ended October 28, 2023, operating expenses decreased by $8.9 million over the same period last year, primarily driven by a decrease in incentive compensation and store payroll in line with lower net sales, partially offset by an increase in CEO transition, restructuring, integration, and acquisition costs, as well as the additional operating expenses from the acquired businesses. Operating expenses, as a percentage of net sales, increased 230 basis points over the same period last year, due to the lower net sales as we deleveraged our costs.
INTEREST EXPENSE, NET
For the nine months ended October 28, 2023, interest expense, net, increased
by $11.8 million over the same period last year, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over the same period last year and the addition of the Term Loan.
LOSS ON EXTINGUISHMENT OF DEBT AND WRITE-OFF OF DEBT ISSUANCE COSTS
In connection with the settlement of our Term Loan on February 8, 2022, during the nine months ended October 29, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs. As a result of the replacement of the ABL Revolver during 2023, we also wrote off $0.2 million of debt issuance costs.
LIQUIDITY
AND CAPITAL RESOURCES
OVERVIEW
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally.
During 2023, we had the following significant transactions that impacted our liquidity:
•On February 4, 2023, we completed the acquisition of Keds with $127.3 million in cash consideration, funded with available cash and borrowings on the ABL Revolver.
•On
February 28, 2023, the ABL Revolver was amended to increase the available capacity under the revolving line of credit from $550.0 million to $600.0 million and to add a FILO Term Loan of up to $30.0 million, which was drawn in full, subject to a borrowing base.
•On June 23, 2023, we entered into a Term Loan that provides for a maximum aggregate principal amount of $135.0 million, which is made up of $50.0 million in loans taken during the second quarter of 2023 and delay draw loans available to borrow up to $85.0 million.
•The
Term Loan was amended on September 21, 2023 to extend the date through which the delay draw loans remain available and on October 31, 2023, we borrowed $25.0 million of the delay draw loans with any remaining delay draw loans to be taken by January 31, 2024.
•We repurchased an aggregate 9.7 million Class A common shares, including open market purchases and purchases under the Tender Offer, at an aggregate cost of $102.1 million, including transaction costs and excise tax, under our share repurchase program. As of October 28, 2023, $87.7 million of Class A common shares remained available for repurchase under the share repurchase program.
We
are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy, and withstand unanticipated business volatility, including the impacts of the global economic conditions on our results of operations. We believe that cash generated from our operations, together with our current levels of cash, as well as the availability under our ABL Revolver and Term Loan, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund acquisitions and capital expenditures, repurchase common shares under our share repurchase program, and meet our debt service obligations over the next 12 months and beyond.
The following table presents the key categories of our condensed consolidated statements of cash flows:
Net cash provided by (used in) financing activities
(36,098)
9,246
(45,344)
Effect of exchange rate changes on cash balances
(740)
(1,361)
621
Net
decrease in cash, cash equivalents and restricted cash
$
(4,128)
$
(10,184)
$
6,056
OPERATING CASH FLOWS
The increase in net cash provided by operations was largely driven by lower spend on working capital during the nine months ended October 28, 2023 over the same period last year, due to the decreased investment in inventory with the slowdown in sales, as discussed above in the results of
operations, and the timing of payments on liabilities, which was partially offset by the decrease in net income recognized in the nine months ended October 28, 2023 over the same period last year, after adjusting for non-cash activity including depreciation and amortization and the loss on extinguishment of debt and write-off of debt issuance costs.
INVESTING CASH FLOWS
For the nine months ended October 28, 2023, net cash used in investing activities was primarily due to the acquisition of Keds for $127.3 million and capital expenditures of $42.3 million relating to infrastructure and IT projects, new stores, and store improvements. For the nine months ended October 29, 2022, net cash used in investing activities
was primarily due to capital expenditures of $41.9 million relating to infrastructure and IT projects and store improvements as well as our $8.2 million investment in Le Tigre.
FINANCING CASH FLOWS
For the nine months ended October 28, 2023, net cash used in financing activities was primarily due to the repurchase of 9.7 million Class A common shares at an aggregate cost of $102.1 million, payments of $15.7 million for taxes for stock-based compensation shares withheld, and payments of dividends of $9.3 million, partially offset by proceeds from the issuance of the Term Loan of $50.0 million and net receipts of $49.5 million from our ABL Revolver. For the nine months ended October 29, 2022, net cash provided by financing activities
was primarily due to net receipts of $415.5 million from our revolving lines of credit, partially offset by payments of $238.2 million for the settlement of the Previous Term Loan, the repurchase of 10.7 million Class A common shares at an aggregate cost of $147.5 million, and the payments of dividends of $10.3 million.
ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which was subsequently amended on February
28, 2023 and June 23, 2023. The amended ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a FILO Term Loan of up to $30.0 million, which was drawn in full on February 28, 2023. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The ABL Revolver
may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 28, 2023, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $518.9 million, with $300.6 million in outstanding borrowings and $5.0 million in letters of credit issued, resulting in $213.3 million available for borrowings.
Term Loan- On June 23, 2023, we entered into a Term Loan that provides for a maximum aggregate principal amount of $135.0 million,
which is made up of (a) borrowings at closing of a $45.0 million U.S. loan and a $5.0 million Canadian loan (denominated in USD) and (b) delay draw loans available to borrow up to $76.5 million in U.S. loans and $8.5 million in Canadian loans (denominated in USD). The Term Loan was amended on September 21, 2023 to extend the date through which the delay draw loans remain available, and on October 31, 2023, we borrowed $25.0 million of the delay draw loans with any remaining delay draw loans to be taken by January 31, 2024. The Term Loan matures at the earliest of the date the ABL Revolver matures (currently March 2027) or five years from closing of the Term Loan (June 2028). The Term Loan is collateralized by a first priority lien on substantially all of our personal, real, and intellectual property and by a second priority
lien on the assets used as collateral for the ABL revolver, primarily credit card receivables, accounts receivable, and inventory.
Debt Covenants- The ABL Revolver required us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $47.3 million or 10.0% of the maximum borrowing amount. At any time that liquidity is less than $100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month, calculated on a trailing twelve-month basis, of (1) 2.25 to 1.00 for any trailing twelve-month period through February 3, 2024, and (2) 2.50 to 1.00 thereafter. Testing of the consolidated net leverage ratio ends after liquidity has been greater than or equal to $100.0 million for a period of 45 consecutive days. The ABL Revolver
and the Term Loan also contain customary covenants restricting certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. As of October 28, 2023, we were in compliance with all financial covenants contained in the ABL Revolver and the Term Loan.
Termination of Previous Term Loan- On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Previous Term Loan. In connection with this settlement, during
the nine months ended October 29, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
Refer to Note 11, Debt, of the condensed consolidated financial statements of this Form 10-Q for further information about our debt arrangements.
CAPITAL EXPENDITURE PLANS
We expect to spend approximately $55.0 million to $60.0 million for capital expenditures in 2023, $42.3 million of which was spent during the nine months ended October 28, 2023. Our future investments will depend primarily on the number of stores we open and remodel,
infrastructure and IT projects that we undertake, and the timing of these expenditures.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed
consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies and estimates disclosed in our 2022 Form 10-K.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2022 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Form 10-Q, that such disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL 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
ITEM
1. LEGAL PROCEEDINGS
The information set forth in Note 12, Commitments and Contingencies - Legal Proceedings, of the condensed consolidated financial statements of this Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
As of the date of this filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk
Factors, in our 2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
SHARE
REPURCHASE PROGRAM
On August 17, 2017, the Board authorized the repurchase of an additional $500.0 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 Class A common shares under the program. Under this share repurchase 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 shares repurchased during the three months ended October
28, 2023:
(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) The
total number of shares repurchased includes shares repurchased as part of publicly announced programs and 278,015 shares withheld in connection with tax payments due upon vesting of stock-based compensation awards.
DIVIDENDS
The payment of any future dividends is at the discretion of our Board 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. We anticipate declaring dividends on a quarterly basis. On November 16, 2023, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on December 14,
2023 to shareholders of record at the close of business on November 30, 2023.
RESTRICTIONS
The ABL Revolver and the Term Loan contain customary covenants restricting our activities, including limitations on the ability to pay dividends or repurchase stock. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability.
During the three months ended October 28, 2023, none of our directors or executive officers iiadopted/ or iiterminated/
any contract, instruction, or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K).
First Amendment dated as of September 21, 2023, to Term Credit Agreement dated as
of June 23, 2023 among Designer Brands Inc., Designer Brands Canada Inc., certain of domestic subsidiaries as guarantors, the lenders party thereto, and PLC Agent LLC, as Administrative Agent and Lead Arranger.
Section 1350 Certification - Principal Financial Officer.
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101*
The
following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended October 28, 2023, 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 the Condensed Consolidated Financial Statements.
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104*
Cover
Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
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.
