Business context and reporting period
Designer Brands Inc. (NYSE: DBI) filed this Form 10-K for fiscal 2019, the 52 weeks ended February 1, 2020—not a standalone “2018 Q4” filing. The company operates U.S. and Canadian footwear retail banners, including DSW, and a Brand Portfolio business encompassing wholesale, private-label sourcing and direct-to-consumer sales. Fiscal 2019 results include a full year of Camuto Group operations; fiscal 2018 included Camuto from the fourth quarter and consolidated TSL from the second quarter.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $3.493 billion | $3.178 billion |
| Gross profit / margin | $999.7 million / 28.6% | $938.7 million / 29.5% |
| Operating profit | $127.3 million | $59.0 million |
| Net income (loss) | $94.5 million | $(20.5) million |
| Diluted earnings (loss) per share | $1.27 | $(0.26) |
| Cash from operations | $196.7 million | $175.3 million |
| Capital expenditures | $77.8 million | $65.4 million |
Net sales rose 9.9%, reflecting acquired-business contributions, 0.8% comparable-sales growth and non-comparable sales, partly offset by store closures and exited businesses. Comparable sales were up 0.3% in U.S. Retail and 7.2% in Canada Retail. Brand Portfolio sales increased substantially as fiscal 2019 included a full year of Camuto operations.
Gross margin declined 90 basis points, primarily due to higher U.S. Retail shipping costs from greater digital sales and a prior-year loyalty-program accounting benefit. Canada Retail margin improved with lower clearance activity and better occupancy leverage. Fiscal 2019 net income included $19.8 million of after-tax charges, mainly integration, restructuring and impairment costs; fiscal 2018 net loss included $155.3 million of after-tax charges, including impairments, acquisition and restructuring costs, and tax effects.
At year-end, cash and investments were $111.5 million, inventory was $632.6 million, and revolving-credit debt was $190.0 million, versus $169.1 million of cash and investments and $160.0 million of debt a year earlier. The company reported $207.0 million available under its $400 million credit facility at year-end and compliance with covenants. It recorded $1.033 billion of operating lease liabilities following adoption of the lease-accounting standard; prior-period balance-sheet figures were not restated. Financing cash use was $183.4 million, including $141.6 million of share repurchases and $72.6 million of dividends.
Material developments, outlook and risks
- COVID-19 and liquidity: All U.S. and Canadian stores temporarily closed effective March 18, 2020; e-commerce continued. The company described the impact on business, liquidity and results as material and highly uncertain. It expected stores to begin reopening primarily in fiscal 2020’s second quarter, with a gradual traffic recovery, but provided no quantified earnings or sales guidance.
- Credit facility changes: After year-end, the company drew an additional $205 million, leaving $2 million available at that point. An April 30, 2020 amendment added liens on company assets, phased down borrowing availability, revised covenants and restricted dividends, share repurchases and certain acquisitions.
- Operating response: Management cited expense and capital-spending reductions, inventory discipline, temporary unpaid leave for over 80% of the workforce, and pay reductions for nearly all employees not on leave. Fiscal 2020 capital expenditures were expected to be significantly reduced.
- Integration strategy: Management said it remained on track to shift most DSW private-label production to Brand Portfolio in fiscal 2020, with expected benefits from exclusivity and higher margins; these are expectations, not assured outcomes.
- Contingencies and concentration: Foreign tax obligations identified with Camuto were estimated at $28.1–$40.0 million; the company recorded a $28.1 million liability and a $24.5 million indemnification asset, but collection is not assured. Four Brand Portfolio retailer customers represented about 60% of that segment’s sales; three retail merchandise vendors supplied about 21% of retail merchandise. Wholesale backlog was $49.3 million at year-end, with $30.2 million subsequently canceled due to COVID-19.
- Other risks: Key exposures include uncertain consumer demand, fashion and markdown risk, competition and digital execution, reliance on overseas sourcing (83% of Brand Portfolio units came from China), tariffs, vendor and distribution disruptions, cybersecurity and privacy, and Stein Mart supply arrangements.
Fiscal 2019 fourth-quarter results were net sales of $829.6 million, operating loss of $14.1 million and net loss of $7.6 million. The comparable fiscal 2018 quarter reported an operating loss of $57.0 million and net loss of $45.7 million.
Important facts for investors to verify
- How store closures, reopening pace and traffic recovery affected post-year-end sales, cash burn, inventory and asset impairment assessments.
- Actual borrowing, remaining facility availability and covenant compliance under the amended credit agreement, including the effect of its collateral, availability reductions and distribution restrictions.
- Whether the $28.1–$40.0 million foreign tax exposure changes and how much of the recorded indemnification asset is ultimately collected.
- Whether Camuto integration and private-label sourcing deliver the expected margin benefits, and whether retailer-customer concentration or cancellations impair Brand Portfolio results.
- The sustainability of dividends and repurchases: the amended facility restricts both, despite a dividend paid in April 2020 and substantial fiscal 2019 repurchases.