Designer Brands Inc. — Form 10-Q Summary
Period clarification: The request identifies 2021 Q1, but the supplied filing is for the three months ended April 30, 2022 (first quarter of fiscal 2022). Comparative results are for the three months ended May 1, 2021. Amounts below are in U.S. dollars.
Business context and results
Designer Brands operates U.S. Retail (DSW), Canada Retail (The Shoe Company and DSW), and Brand Portfolio businesses, including wholesale, First Cost commissions, and direct-to-consumer sales. Consolidated net sales increased 18.1% to $830.5 million; comparable sales rose 15.3%. Management noted that the prior-year period was affected by pandemic-related traffic declines and Canadian store restrictions.
- U.S. Retail sales increased 13.2% to $702.7 million; Canada Retail rose 38.7% to $56.3 million; Brand Portfolio increased 69.7% to $97.5 million.
- Owned Brands sales rose 68.3% year over year and represented 25.4% of consolidated sales, versus 17.8%.
- Gross profit was $275.7 million, or 33.2% of sales, compared with $216.1 million, or 30.7%. Management attributed margin improvement to higher sales and fewer promotions, partly offset by freight costs.
- Operating expenses were $223.4 million, or 26.9% of sales, versus $200.8 million, or 28.5%; higher store payroll and marketing costs were partly offset by improved fixed-cost leverage.
- Operating profit was $53.2 million, compared with $17.0 million. Net income was $26.2 million, or $0.34 per diluted share, versus $17.0 million, or $0.22 per diluted share.
Cash flow, liquidity, and debt
- Operating cash flow was negative $40.7 million, versus negative $1.4 million. The use of cash reflected increased inventory and wholesale receivables and payment timing, partly offset by higher earnings.
- Investing cash flow was negative $17.1 million, including $12.2 million of capital expenditures. Financing cash flow was positive $39.8 million; cash and restricted cash declined $17.9 million to $56.6 million.
- Inventory was $672.5 million at quarter-end, up from $586.4 million at January 29, 2022. Cash and cash equivalents were $54.8 million.
- The company repaid its $231.3 million Term Loan in February and replaced its prior ABL facility with a $550 million revolver maturing in March 2027. At quarter-end, $306.9 million was borrowed, $4.9 million of letters of credit was outstanding, and $238.2 million was available. The reported revolver rate was 2.4%; the company was in compliance with financial covenants.
- Management expects 2022 capital expenditures of approximately $70 million to $80 million and believes cash, operating cash generation, and revolver availability will support operations and liquidity needs over the next 12 months and beyond.
Material changes, unusual items, and outlook
- Quarterly earnings included a $12.9 million debt-extinguishment and debt-issuance-cost charge, primarily the Term Loan prepayment premium and write-off of unamortized costs. Management estimated the net after-tax impact at $10.5 million, or $0.14 per diluted share.
- The effective tax rate was 30.0%, compared with negative 89.2% in the prior-year quarter. The current-period rate reflected permanent tax adjustments, primarily nondeductible compensation; the prior period included discrete tax benefits and a full valuation allowance on deferred tax assets.
- The company recorded a $1.1 million impairment charge related to subleasing abandoned leased space and acquired the shoes.com tradename for $4.9 million.
- The company repurchased 1.7 million Class A shares for $22.7 million and declared quarterly dividends of $0.05 per share. A further $312.2 million remained authorized under the repurchase program at April 30, 2022.
- Management cited COVID-19 uncertainty, inflation, higher freight and labor costs, supply-chain disruptions, labor shortages, economic conditions, and consumer discretionary spending as risks. The filing gives no specific sales or earnings guidance. It also discloses approximately $12.9 million of future minimum lease payments under third-party lease guarantees; management considers pending legal matters not material.
Important facts for investors to verify
- Whether sales and comparable-sales growth persist after accounting for the unusually weak pandemic-affected prior-year comparison.
- Inventory levels, cash conversion, freight and labor costs, and the effect of supply-chain conditions on margins and liquidity.
- Revolver availability, borrowing-base capacity, interest costs, covenant thresholds, and restrictions on dividends and share repurchases.
- The sustainability of capital returns alongside planned capital expenditures and working-capital needs.
- The actual impact of the Term Loan repayment, tax adjustments, and other unusual items on future reported earnings.