Business context and reporting period
Designer Brands Inc. operates U.S. Retail (DSW), Canada Retail, and Brand Portfolio businesses, including owned and licensed footwear brands. This Form 10-Q covers the quarter and six months ended July 29, 2023; figures below compare with the periods ended July 30, 2022 unless noted. The filing is for 2023 Q2, notwithstanding the request metadata’s “2022 Q2.”
Financial performance and position
| Metric | Q2 2023 | Q2 2022 |
|---|---|---|
| Net sales | $792.2 million | $859.3 million |
| Gross profit / margin | $273.4 million / 34.5% | $295.7 million / 34.4% |
| Operating profit / margin | $60.7 million / 7.7% | $67.6 million / 7.9% |
| Net income attributable to Designer Brands | $37.2 million | $46.2 million |
| Diluted EPS | $0.56 | $0.62 |
- For the six months, sales were $1.534 billion (down 9.2%); gross profit was $511.1 million (margin 33.3%, down 50 basis points); operating profit was $80.3 million; attributable net income was $48.6 million; and diluted EPS was $0.73.
- Six-month operating cash flow was $134.4 million, versus $10.9 million. Investing cash outflow was $152.6 million, including $127.3 million for Keds and $25.1 million of capital expenditures. Financing cash inflow was $5.6 million. Cash declined $12.6 million to $46.2 million.
- At July 29, 2023, debt was $334.7 million: $284.7 million under the ABL Revolver and $50.0 million under the Term Loan. ABL revolving availability was $233.7 million after borrowings and letters of credit. The Term Loan interest rate was 12.4% (12.9% effective); the ABL Revolver rate was 7.6%.
- Current assets were $800.7 million and current liabilities $650.8 million. Operating lease liabilities totaled approximately $863.7 million.
Material changes versus prior periods
- Q2 comparable sales fell 8.9% overall: U.S. Retail declined 9.2%, Canada Retail 7.3%, and Brand Portfolio direct-to-consumer sales increased 0.5%. Consolidated sales fell 7.8%.
- U.S. Retail sales decreased 10.3%, largely on lower traffic and more promotional pricing, as well as store closures. Canada Retail sales declined 10.2%, reflecting lower comparable sales and unfavorable currency translation. Brand Portfolio sales rose 26.9%, helped by acquired Topo and Keds, partly offset by lower wholesale orders.
- Q2 gross margin rose 10 basis points overall. Lower freight, shipping, and distribution costs helped, while promotional activity and lower sales pressured results. Canada Retail margin fell 570 basis points; Brand Portfolio margin rose 1,040 basis points.
- Interest expense increased $4.2 million in Q2, primarily due to higher rates and the new Term Loan. For the six months, interest expense rose $7.8 million. Prior-year six-month results included a $12.9 million loss related to extinguishing the former term loan.
- The Keds acquisition was completed February 4, 2023. The company repurchased 2.1 million shares for $22.4 million in the first half, including 1.5 million shares through a tender offer.
Outlook, commentary, risks, and unusual items
- Management expects 2023 capital expenditures of approximately $50 million to $60 million; $25.1 million had been spent in the first half. No specific revenue or earnings guidance is provided in the filing.
- Management’s long-term goal is for Owned Brands to represent one-third of sales by 2026; they were 22.6% of Q2 consolidated sales. Management believes cash, operating cash generation, and available financing are sufficient for operations and obligations over the next 12 months and beyond.
- Management cited inflation, rising rates, recession concerns, foreign-currency volatility, lower store traffic, excess industry inventory, and promotional competition as pressures on discretionary spending and sales. Further efficiency measures may be needed and could adversely affect results.
- CEO transition costs were estimated at $8.1 million in total; $2.9 million was recognized in the first half, with an estimated $1.5 million remaining to be recorded in 2023. The Keds purchase-price allocation remains preliminary and includes estimated contingent consideration; the seller may pay up to $15 million based on specified inventory-related conditions.
- The company was in compliance with financial covenants at quarter-end. It disclosed a $6.2 million exposure under guarantees of third-party lease obligations. Management said current litigation liabilities were not expected to be material. Financial ERP modules were implemented during the quarter; related controls will continue to be evaluated.
Important facts for investors to verify
- Whether comparable-sales weakness, traffic declines, and promotional pressure continue, especially in U.S. Retail and Canada.
- How acquired Keds and Topo contribute to Brand Portfolio growth and margins, and whether the Keds purchase-price adjustments are finalized.
- Liquidity and covenant headroom, including the status and terms of available Term Loan delayed draws and ABL borrowing availability.
- Interest expense and debt levels amid high variable rates, alongside share repurchases and dividend payments.
- Progress against capital expenditure plans, the Owned Brands target, CEO transition spending, and ERP control implementation.