Designer Brands Inc. — Form 10-K Summary
Reporting period: Fiscal year 2022, ended January 28, 2023 (52 weeks), compared with fiscal 2021 ended January 29, 2022. The request metadata says “2021 Q4,” but the supplied filing is an annual report for fiscal 2022.
Business context
Designer Brands operates the DSW U.S. retail business, The Shoe Company and DSW Canada retail businesses, and a Brand Portfolio segment selling owned and licensed brands through wholesale, commission, and direct-to-consumer channels. It had 639 stores at year-end, down from 648. Retail loyalty members totaled 32.1 million, and generated 89% of retail-segment sales.
Financial performance
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $3.315 billion | $3.197 billion | +3.7% |
| Comparable sales | +4.4% | +51.6% | Growth moderated |
| Gross profit | $1.079 billion; 32.6% margin | $1.069 billion; 33.4% margin | Margin down 0.8 percentage points |
| Operating profit | $187.4 million; 5.7% margin | $205.2 million; 6.4% margin | Down 8.7% |
| Net income attributable to Designer Brands | $162.7 million; diluted EPS $2.26 | $154.5 million; diluted EPS $2.00 | Net income +5.3% |
| Operating cash flow | $201.4 million | $171.4 million | +$30.0 million |
| Capital expenditures | $55.0 million | $33.0 million | +$22.0 million |
Sales growth reflected recovery from pandemic-related disruption in 2021, higher wholesale orders, and comparable-sales gains across segments. Owned Brands sales rose 32.1% and reached 24.4% of consolidated sales, versus 19.2% in 2021. U.S. Retail comparable sales rose 2.0%, Canada Retail 28.8%, and Brand Portfolio direct-to-consumer 34.5%.
Gross margin weakened amid heavier promotions, excess industry inventory, and higher freight and distribution costs. U.S. Retail gross margin fell 1.3 percentage points to 32.4%; Brand Portfolio fell 1.3 points to 22.0%; Canada Retail improved 2.3 points to 35.0%. U.S. digital fulfillment relocation added approximately $16 million in distribution costs.
Net income increased despite lower operating profit and pretax income, principally because the company released $55.7 million of its deferred-tax valuation allowance. The 2022 effective tax rate was negative 2.0%, versus a 10.7% tax provision rate in 2021. The company reported $29.0 million of net after-tax benefits from specified items, including the tax valuation allowance change, partly offset by debt extinguishment, restructuring, CEO transition, impairment, and acquisition costs.
Liquidity, debt, and capital allocation
Year-end cash was $58.8 million, down from $72.7 million. Current assets were $789.9 million and current liabilities $636.1 million. Operating cash flow included a $120.3 million IRS tax refund; the company expected to collect a further $44.0 million within 12 months. Cash used in investing was $88.1 million and cash used in financing was $128.5 million.
Debt was $281.0 million under a $550 million asset-based revolving credit facility (ABL), with $243.9 million available at year-end after borrowings and letters of credit. The ABL matures in March 2027; the reported interest rate was 6.6%. The prior $231.3 million term loan was repaid in February 2022, producing a $12.7 million extinguishment loss. The company was compliant with financial covenants at year-end. In February 2023, it increased ABL capacity to $600 million and drew a new $30 million FILO term loan.
During 2022, the company repurchased 10.7 million Class A shares for $147.5 million and paid $13.5 million in dividends. Future cash commitments include $934.7 million of undiscounted fixed lease payments and $226.7 million of minimum royalties. Management stated operating cash, existing cash, and ABL availability should support operations, seasonal needs, acquisitions, capital expenditures, and repurchases. Planned 2023 capital expenditures are $50 million to $70 million.
Outlook, developments, and risks
- The filing provides no specific 2023 revenue or earnings guidance. Management expected inflationary pressures to continue into 2023 and described uncertainty around consumer spending and economic conditions.
- Promotional competition, inflation in merchandise, transportation and labor costs, and unseasonably warm weather weighed on the second half of 2022; second-half sales and gross profit declined.
- Topo acquisition: 79.4% acquired in December 2022 for $19.1 million, with options relating to the remaining interest. Topo’s year-end contribution was not material.
- Keds acquisition: completed February 4, 2023 for $123.3 million, funded with cash and ABL borrowings; results are to be included in Brand Portfolio beginning in the first quarter of 2023. The purchase-price allocation was still being developed.
- Long-term strategy: double Owned Brands net sales by 2026 using 2021 as the baseline while maintaining national-brand sales; management expects Owned Brands to represent about one-third of total sales by then.
- CEO succession was planned for April 1, 2023: Doug Howe to succeed Roger Rawlins. Estimated transition costs total $9.4 million, of which $3.7 million was recorded in 2022.
- Key risks include discretionary-spending weakness, promotional pressure, supply-chain and China sourcing concentration, fashion and inventory execution, dependence on major Brand Portfolio customers, cyber and ERP implementation risks, and acquisition integration. Four Brand Portfolio customers accounted for approximately 53% of that segment’s sales, excluding intersegment sales.
- Other unusual items include a $5.2 million termination fee related to dissolution of the JLO joint venture and $4.3 million in 2022 impairment charges. Legal proceedings were described as incidental, with potential liabilities not expected to be material.
Investor verification points
- Assess whether the $55.7 million tax valuation-allowance release and the resulting negative effective tax rate obscure the underlying earnings trend.
- Check subsequent results for sustained sales, comparable-sales, and gross-margin performance after the 2022 promotional shift.
- Review inventory aging, markdown assumptions, and clearance sell-through; inventory valuation was the auditor’s critical audit matter.
- Track post-Keds leverage, ABL availability, covenant headroom, variable-rate interest costs, and the terms and use of the $30 million FILO loan.
- Monitor Keds and Topo integration, acquisition returns, and the potential cost of Topo’s remaining redeemable interest.
- Evaluate the company’s substantial lease and royalty commitments, the concentration of Brand Portfolio sales, and CEO transition execution.
Audit and controls: Deloitte issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of January 28, 2023.