Designer Brands Inc. (DBI) — Form 10-Q summary
Period note: The request identifies “2020 Q2,” but the supplied filing is for the quarter ended July 31, 2021, with comparisons to the quarter ended August 1, 2020. This summary covers the filing actually provided.
Business context and reporting period
Designer Brands designs, produces and retails footwear and accessories through U.S. Retail, Canada Retail and Brand Portfolio segments. The filing reports the second quarter and first six months of fiscal 2021. Results improved as stores reopened and customer traffic recovered from pandemic-related disruption in the prior-year period; comparisons are therefore against a heavily affected base.
Key financial metrics
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Quarter ended Jul. 31, 2021 | Quarter ended Aug. 1, 2020 | Six months ended Jul. 31, 2021 | Six months ended Aug. 1, 2020 |
|---|---|---|---|---|
| Net sales | $817.3 | $489.7 | $1,520.5 | $972.5 |
| Gross profit / margin | $284.7 / 34.8% | $37.0 / 7.6% | $500.8 / 32.9% | $10.6 / 1.1% |
| Operating profit (loss) | $61.4 | ($136.0) | $78.4 | ($459.9) |
| Net income (loss) | $42.9 | ($98.2) | $59.9 | ($314.1) |
| Diluted EPS | $0.55 | ($1.36) | $0.78 | ($4.36) |
- Quarterly comparable sales increased 84.9% overall: U.S. Retail +94.3%, Canada Retail +14.6%, and Brand Portfolio direct-to-consumer +10.6%. Six-month consolidated sales increased 56.3% year over year.
- Quarterly operating margin was 7.5%, versus a 27.8% operating loss margin a year earlier. Gross margin exceeded the second-quarter fiscal 2019 rate of 30.5%, according to management.
- Six-month operating cash flow was $96.2, versus cash used of $79.6 a year earlier. Investing cash flow was negative $13.2, mainly capital expenditures; financing cash flow was negative $95.0, including net ABL repayments and Term Loan payments. Cash and cash equivalents were $46.5 at July 31, 2021, down from $59.6 at fiscal year-end.
- At July 31, total debt was $254.3, comprising $16.8 outstanding on the ABL Revolver and a $237.5 Term Loan. Net of cash, debt was approximately $207.9. The ABL borrowing base supported $364.0 of remaining availability, including the effect of outstanding letters of credit.
- Current assets were $803.8 and current liabilities were $774.7. The balance sheet also included $835.989 of operating lease liabilities, current and non-current combined.
Material changes versus the prior comparable period
- Revenue and profitability rebounded sharply from the prior-year period, when widespread store closures, reduced traffic, promotions and inventory reserves weighed on results. The comparison also reflects the prior-year change in sales-return reserves.
- Management attributed stronger gross margin to higher sales and tight inventory that reduced promotional activity. Operating expenses rose in dollars, partly because of prior-year furloughs and pay reductions, but fell to 27.5% of sales from 34.4%.
- Prior-year six-month results included $119.3 of impairment charges, including store, intangible and goodwill impairments; current-period impairment charges were $1.2. Prior-year quarterly operating expenses included a $9.0 vendor-settlement gain.
- Interest expense increased: $8.1 for the quarter and $16.9 for six months, versus $3.8 and $5.9, respectively, reflecting the newer debt structure. The Term Loan carried a stated 9.8% rate, or 11.8% including debt-issuance-cost amortization.
Outlook, risks and unusual items
- No quantified sales or earnings forecast is provided. Management said cash from operations, cash on hand and ABL availability should be sufficient for operations, capital expenditures and debt service over the next 12 months.
- Fiscal 2021 capital expenditure guidance was approximately $35–$45; $13.2 had been spent in the first six months. Management did not anticipate dividends or share repurchases.
- Management cited continuing uncertainty from COVID-19, variants and possible restrictions, global supply-chain disruption, consumer behavior and merchandise availability. These could affect operations and prompt further inventory, asset or tax-asset valuation adjustments.
- The company maintained a full valuation allowance on deferred tax assets. It reported a three-year cumulative loss position as of July 31, 2021, and noted that deferred tax asset realization remains uncertain.
- Debt agreements impose availability and liquidity-related covenants and restrict certain actions, including dividends and repurchases. The company reported compliance with all financial covenants at July 31, 2021. The Term Loan minimum-EBITDA covenant can apply if liquidity falls below $150.0.
- Legal proceedings were described as ordinary-course matters, with potential liabilities not expected to be material. The company also disclosed lease guarantees with approximately $13.3 of future minimum payments and an unresolved insurance recovery related to a prior vendor service outage.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q covers Q2 2021, not Q2 2020.
- Assess how much of the sales and margin rebound reflects recovery versus the unusually weak pandemic comparison, and track performance against pre-pandemic levels.
- Monitor inventory availability, supply-chain costs, promotional intensity and any renewed store restrictions.
- Review liquidity, ABL borrowing-base availability, debt service and covenant headroom, particularly given the Term Loan’s high interest rate.
- Track cash conversion, planned capital spending, deferred tax asset valuation and any future impairment or insurance-recovery developments.