Designer Brands Inc. — FY2020 Form 10-K Summary
Period clarification: The filing is the annual report for the 52 weeks ended January 30, 2021, comparing FY2020 with FY2019. It is not a standalone 2019 Q4 filing; quarterly Q4 results are not clearly provided in the supplied text.
Business context
Designer Brands operates U.S. Retail (DSW), Canada Retail (The Shoe Company, Shoe Warehouse and DSW), and Brand Portfolio businesses, including wholesale, First Cost commissions and Vince Camuto direct-to-consumer sales. The fiscal year was significantly affected by COVID-19 store closures, reduced traffic, and changed consumer preferences. The company ended the year with 663 stores, versus 666 a year earlier.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2.235 billion | $3.493 billion |
| Gross profit / margin | $311.2 million / 13.9% | $999.7 million / 28.6% |
| Operating income (loss) | $(586.3) million | $127.3 million |
| Net income (loss) | $(488.7) million | $94.5 million |
| Diluted EPS | $(6.77) | $1.27 |
| Cash from (used in) operations | $(153.8) million | $196.7 million |
| Capital expenditures | $31.1 million | $77.8 million |
Comparable sales fell 34.2% overall: U.S. Retail declined 34.9% and Canada Retail 26.0%. Brand Portfolio direct-to-consumer comparable sales rose 38.2%, although total Brand Portfolio segment sales declined 44.5% to $248.6 million as wholesale customers reduced orders. Ending inventory was down 25.2% year over year.
FY2020 loss included $153.6 million of impairment charges and net after-tax charges of $207.1 million, or $2.87 per diluted share, primarily associated with impairments and restructuring, partly offset by a vendor settlement gain and affected by a deferred-tax valuation allowance. Gross margin contracted sharply amid aggressive markdowns, higher shipping costs, and deleveraging of occupancy, distribution and royalty expenses.
Liquidity, debt and cash flow
Cash and cash equivalents were $59.6 million at year-end, down from $86.6 million. Current assets were $780.6 million and current liabilities were $752.7 million. Operating cash outflow was $153.8 million, partly offset by inventory reductions and other working-capital actions. Financing activities provided $123.0 million.
Total debt was $343.8 million: $100.0 million drawn under the ABL Revolver and $243.8 million outstanding under the Term Loan. The $400 million ABL facility had $294.7 million available at year-end after borrowings and letters of credit. The Term Loan’s stated interest rate was 9.75% (11.81% including debt-issuance-cost amortization); the ABL rate was 3.25%. The company reported compliance with financial covenants at January 30, 2021. Management said cash, operating cash flow and ABL access were expected to be sufficient for operations, capital expenditures and debt service over the next 12 months.
Material changes, outlook and risks
- COVID-19 led to temporary closure of all U.S. and Canadian stores beginning March 18, 2020, later reopenings, continuing traffic weakness and further localized closures. Digital demand was strong relative to the prior year, and digital fulfillment helped mitigate store weakness.
- Management shifted merchandise emphasis toward athletic, casual and kids’ products and reduced inventory exposure. The company eliminated approximately 1,000 associate positions, including vacant roles, during FY2020.
- Impairments included $127.1 million for retail store assets, $6.5 million for a Brand Portfolio customer-relationship intangible, and $20.0 million to fully impair the First Cost reporting unit.
- The company replaced its prior revolving credit facility in August 2020 with the ABL Revolver and added a $250 million Term Loan. Dividends were reduced and then suspended for the remainder of FY2020; debt restrictions limited dividends and buybacks until at least the third quarter of FY2021. Management did not anticipate resuming either in the near term.
- FY2021 capital expenditures were expected to be approximately $35 million to $45 million, with plans to open 7 to 12 stores. The filing provides no specific sales or earnings guidance.
- Key risks include continued pandemic effects and uncertain consumer recovery; fashion and demand shifts; vendor and retailer concentration; foreign sourcing and supply-chain disruption; lease commitments; and cybersecurity and data privacy. Three third-party vendors supplied about 22% of retail merchandise, and four Brand Portfolio customers accounted for about 50% of that segment’s external sales.
- Other notable items: a $9.0 million vendor settlement gain was recorded in operating expenses; $11.4 million of payroll-tax credits reduced operating expenses; and a $3.0 million insurance recovery was recorded for a third-party service outage. The company had $101.2 million of deferred-tax valuation allowance and $10.1 million of gross unrecognized tax benefits.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers FY2020 ended January 30, 2021, not 2019 Q4.
- Assess whether sales, store traffic and gross margins recover, and whether markdowns and fulfillment costs remain elevated.
- Monitor cash use, the $294.7 million of reported ABL availability, covenant headroom and the high-cost Term Loan, including required maturities.
- Review impairment and deferred-tax assumptions, particularly given the substantial FY2020 loss and valuation allowance.
- Track recovery of Brand Portfolio wholesale customers and concentration in key vendors, customers and overseas sourcing.