Business context and reporting period
Designer Brands Inc. (DBI) designs, produces and retails footwear and accessories through U.S. and Canadian retail businesses and its Brand Portfolio segment. The filing covers the quarter ended August 1, 2020 and the six months then ended. The request metadata says “2019 Q2,” but the filing is for fiscal 2020 Q2.
Key financial metrics
| Metric | Three months ended August 1, 2020 | Six months ended August 1, 2020 |
|---|---|---|
| Net sales | $489.7 million, down 42.8% | $972.5 million, down 43.8% |
| Gross profit / margin | $37.0 million / 7.6% | $10.6 million / 1.1% |
| Operating loss | $136.0 million | $459.9 million |
| Net loss | $98.2 million; $1.36 diluted loss per share | $314.1 million; $4.36 diluted loss per share |
| Operating cash flow | Quarterly figure not separately provided | $(79.6) million, versus $34.2 million provided a year earlier |
At August 1, 2020, cash was $206.7 million, debt was $393.0 million, and only $2.0 million remained available under the then-current credit facility. Current assets were $770.5 million and current liabilities $669.2 million. Operating lease liabilities totaled $1.02 billion. Six-month capital expenditures were $22.1 million.
Material changes versus the prior comparable period
- COVID-19-related store closures and reduced traffic drove a 42.7% decline in comparable sales for the quarter. Most stores had reopened by the second and third quarters, but traffic and sales remained significantly below prior-year levels.
- Quarterly gross margin fell to 7.6% from 30.5%; first-half margin fell to 1.1% from 30.1%. Management cited aggressive promotions, inventory reserves, higher digital shipping costs and under-absorbed store and fulfillment costs.
- Retail and Brand Portfolio sales were sharply lower. Brand Portfolio quarterly sales declined 70.4%, including reduced wholesale orders and cancellations; its comparable sales rose 120.5%, reflecting direct-to-consumer performance.
- Cash increased from $86.6 million at fiscal year-end, but the company used $79.6 million of operating cash and increased revolving borrowings by a net $203.0 million during the first half.
Outlook, risks and unusual items
- Management said cash, operating cash generation and access to the ABL revolver were expected to be sufficient for operations and capital needs over the next 12 months. Fiscal 2020 capital expenditures were estimated at $30–35 million. No sales or earnings guidance was provided.
- On August 7, 2020, after quarter-end, DBI replaced its credit facility with a five-year $400 million asset-based revolver and a $250 million secured term loan. At closing, the ABL borrowing base was $274.3 million; after $150 million initial revolver borrowing and $5 million in letters of credit, $119.3 million was available. The facilities are secured and include availability and liquidity-related covenants and restrictions on dividends and repurchases.
- First-half impairment charges totaled $119.3 million, including retail store assets, a fully impaired Brand Portfolio customer relationship intangible and a fully impaired $20.0 million First Cost reporting unit. Additional inventory reserves were approximately $64 million above the prior-year period.
- Quarterly results included a $9.0 million vendor-settlement gain and $3.5 million of payroll tax credits; first-half payroll credits were $7.9 million. The company also reported incremental COVID-related costs of $8.1 million for the first half and said further similar costs were expected.
- In July, DBI eliminated more than 1,000 associate positions, including about 220 vacant roles. Management warned that renewed outbreaks, prolonged closures, weak demand, supply-chain disruption and further asset or inventory write-downs could materially affect results and liquidity.
- Stein Mart filed for Chapter 11 on August 12, 2020. At August 1, DBI had $15.2 million of inventory at cost and a $2.1 million receivable at Stein Mart; management did not expect material losses but noted recovery was not assured. On September 4, DBI established an at-the-market offering allowing up to $100 million of Class A shares to be sold; it was not required to sell shares.
Important facts for investors to verify
- Whether store traffic, comparable sales and gross margins recovered after August 1, and how digital sales performed as stores reopened.
- Actual liquidity under the ABL borrowing base, compliance with facility covenants and the terms and outstanding balance of the term loan after refinancing.
- Whether deferred tax assets of $182.9 million are realizable and whether additional impairments or inventory reserves are required.
- Recovery of the Stein Mart inventory and receivable, and final resolution of the foreign tax contingencies, estimated at $10.7 million with a related $9.6 million indemnification asset.
- Whether DBI sells shares under the $100 million ATM program and the resulting dilution and use of proceeds.