Designer Brands Inc. — Form 10-Q Summary
Reporting period: Quarter ended May 2, 2020 (fiscal first quarter 2020). The filing was delayed until June 19, 2020 under SEC COVID-19 relief; the filing attributes the delay to business disruption and limited availability of key personnel. The quarter is not 2019 Q1, despite the request metadata.
Business context and results
Designer Brands operates U.S. and Canadian footwear retail businesses and a Brand Portfolio business that designs, sources, wholesales, and sells branded products. COVID-19 prompted closure of all U.S. and Canadian stores effective March 18; e-commerce remained available.
| Metric | Q1 2020 | Comparable prior-year quarter |
|---|---|---|
| Net sales | $482.8 million | $873.3 million |
| Gross profit (loss) | $(26.5) million; (5.5)% of sales | $259.3 million; 29.7% of sales |
| Operating profit (loss) | $(324.0) million | $44.0 million |
| Net income (loss) | $(215.9) million | $31.2 million |
| Diluted EPS | $(3.00) | $0.40 |
| Net cash used in operating activities | $(39.5) million | $(3.0) million |
| Cash and cash equivalents at quarter-end | $250.9 million | $70.7 million at May 4, 2019 |
| Debt at quarter-end | $393.0 million | $235.0 million at May 4, 2019 |
Sales fell 44.7%; comparable sales declined 42.3%. U.S. Retail sales were $377.1 million (down 45.5%), Canada Retail $29.3 million (down 43.4%), and Brand Portfolio $82.1 million (down 21.5%). Brand Portfolio comparable sales increased 92.8%, helped by direct-to-consumer e-commerce, although wholesale orders were affected by retailer closures and cancellations.
Operating expenses were $187.2 million, down $30.4 million year over year. The company recorded $112.5 million of impairment charges, including $84.9 million for underperforming stores, $20.0 million for the First Cost reporting unit, $6.5 million for a customer-relationship intangible, and $1.1 million for The Shoe Company tradename. Additional inventory reserves were $84.0 million higher than in the prior-year quarter. The reported tax benefit was $110.3 million; the effective tax rate was 33.8%.
Liquidity, debt, and capital
- Cash increased from $86.6 million at February 1, 2020 to $250.9 million, primarily reflecting $203.0 million of net revolving-credit borrowings and liquidation of available-for-sale investments. Operating cash use was $39.5 million; investing activities provided $10.0 million, including investment sales, while capital expenditures were $14.6 million.
- At May 2, the $400 million revolving facility had $393.0 million drawn and $5.0 million of letters of credit, leaving $2.0 million available. The April 30 amendment secured the facility with liens on company assets, imposed tighter covenants and restrictions, and schedules reductions in borrowing availability beginning October 2020. The company reported covenant compliance at quarter-end.
- The amendment prohibits dividends, share repurchases, and certain acquisitions. A $0.10-per-share dividend was paid in April; subsequent dividends and repurchases were suspended.
- Operating lease liabilities totaled $1.007 billion, including $218.3 million current. Fiscal 2020 capital expenditures were estimated at $25–$35 million.
Changes, outlook, and risks
- Management said the business had been on track for fiscal-year growth, with positive comparable sales through March 5, before traffic weakened and stores closed. Reopened stores were initially generating materially lower sales than prior periods, with trends improving as more of the economy reopened.
- The company expected nearly all North American stores to reopen by the end of June 2020. It reported robust digital sales versus the prior-year quarter and said digital-focused operations would influence future decisions. No specific revenue or earnings guidance was provided.
- Management estimated approximately $8 million of COVID-related store safety and reopening costs in fiscal 2020; $1.7 million of incremental safety costs had been incurred in the quarter. Qualified payroll tax credits reduced quarterly operating expenses by $4.5 million. The company expected an approximately $140 million tax refund in fiscal 2021 from CARES Act loss carrybacks, subject to tax and realization factors.
- Liquidity actions included reducing and canceling orders, cutting expenses and capital spending, delaying vendor and landlord payments, seeking lease concessions, and furloughing or reducing pay for employees. Management believed cash, operating plans, and the credit facility were sufficient for the next 12 months, based partly on store reopenings and a gradual recovery in traffic; this outlook is highly dependent on those assumptions.
- Key risks include renewed or prolonged closures, weak discretionary spending and store traffic, promotional pressure and further inventory markdowns, supply-chain disruption, retailer-customer order reductions, credit-facility covenant compliance and limited unused borrowing capacity, and potential further asset impairments or deferred-tax-asset valuation issues.
- Foreign tax contingencies related to the Camuto acquisition were estimated at $28.1–$40.0 million; $28.1 million was accrued, with a $24.5 million indemnification asset recorded. Collection from sellers is not assured. A separate lease guarantee had approximately $12.5 million of future minimum payments.
Important facts for investors to verify
- Whether store reopenings, sales recovery, and the expected fiscal 2021 tax refund materialized as planned.
- Available borrowing capacity, covenant headroom, and compliance under the amended credit facility as borrowing availability steps down.
- Subsequent trends in comparable sales, gross margin, inventory reserves, and cash use as stores reopen.
- Whether further impairments, deferred-tax-asset valuation changes, or COVID-related costs arise.
- Resolution and recoverability of the foreign tax contingencies and related indemnification asset.