Designer Brands Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended May 1, 2021, compared with the quarter ended May 2, 2020. Although the request metadata says “2020 Q1,” this filing reports fiscal 2021 Q1. Amounts below are in U.S. dollars.
Business context and results
Designer Brands operates U.S. Retail (DSW), Canada Retail, and Brand Portfolio businesses. The quarter marked a return to profitability following the severe disruption caused by COVID-19 in the prior-year quarter. Results are not directly comparable without accounting for prior-year store closures, elevated returns reserves, markdowns, and impairment charges.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $703.2 million | $482.8 million |
| Gross profit (loss) / margin | $216.1 million / 30.7% | $(26.5) million / (5.5)% |
| Operating profit (loss) | $17.0 million | $(324.0) million |
| Net income (loss) | $17.0 million | $(215.9) million |
| Diluted EPS | $0.22 | $(3.00) |
| Operating expenses | $200.8 million (28.5% of sales) | $187.2 million (38.8% of sales) |
| Net cash used in operating activities | $1.4 million | $39.5 million |
Sales, margins, and material changes
- Sales rose 45.6%; total comparable sales increased 52.2%, against a prior-year period when all stores had closed beginning in March 2020. U.S. Retail sales increased 64.6%, Canada Retail increased 38.4%, and Brand Portfolio sales declined 30.1%.
- Management attributed the gross-margin recovery to higher sales and tighter inventory management with fewer promotions. Gross margin exceeded the 29.7% rate in Q1 fiscal 2019, the cited pre-COVID comparison.
- Brand Portfolio sales were pressured by lower retailer orders as customers shifted toward athletic and casual merchandise. Canada continued to face mandated closures and restrictions in some markets.
- Prior-year operating results included $112.5 million of impairment charges; current-quarter impairment charges were zero. Prior-year net loss also included $85.6 million of after-tax charges, primarily impairments and integration and restructuring expenses.
Liquidity, debt, and cash flow
- At May 1, 2021, cash was $49.3 million. Total debt was $345.5 million, including $104.8 million outstanding on the ABL Revolver and $240.6 million on the Term Loan. The balance sheet reported $62.5 million of current maturities.
- The ABL Revolver had $289.9 million available for borrowing after outstanding borrowings and letters of credit. Its stated interest rate was 3.0%; the Term Loan rate was 9.8%, or 11.8% including debt-issuance-cost amortization.
- Operating cash use was $1.4 million, with inventory investment a significant working-capital use; accounts payable increased by $94.5 million. Investing cash use was $5.6 million, primarily capital expenditures. Financing cash use was $3.6 million.
- The company said cash, operating cash generation, and ABL availability should be sufficient for operations, capital expenditures, and debt service over the next 12 months. It reported compliance with financial covenants. A springing Term Loan minimum-EBITDA covenant applies if liquidity falls below $150 million.
Outlook, commentary, and risks
- No sales or earnings guidance was provided. Management expected fiscal 2021 capital expenditures of approximately $35 million to $45 million; $5.6 million had been spent in Q1.
- Management cited strong digital demand, continued use of store-based fulfillment, and an opportunity to expand in athletic merchandise. It also said seasonal and dress categories remained below pre-COVID levels, though some demand was strengthening.
- COVID-19 effects remained uncertain, including possible renewed restrictions, store closures, reduced traffic and consumer spending, and changes in customer preferences. Management warned of potential future inventory, receivable, long-lived asset, goodwill, intangible, and deferred-tax-asset adjustments.
- The quarter’s $17.0 million net income included $7.6 million of net after-tax benefits, primarily related to the deferred-tax-asset valuation allowance. The company maintained a full valuation allowance amid a three-year cumulative loss position.
- Other disclosed items include $10.0 million of deferred payroll and other tax obligations, an unresolved insurance recovery discussion, and approximately $14.4 million of future minimum payments under guarantees of third-party lease obligations. Management believed pending litigation would not materially affect results or financial condition.
Important facts for investors to verify
- How much of the sales and comparable-sales rebound reflects reopening against the unusually weak, store-closure-affected prior-year base.
- Whether improved gross margin and inventory discipline persist as promotions, merchandise costs, and customer demand evolve.
- Whether operating cash flow improves as inventory and other working-capital needs rise during the recovery.
- ABL borrowing availability, covenant headroom, and the cost and repayment requirements of the Term Loan.
- The durability of the tax benefit and the assumptions supporting deferred-tax-asset realizability.
- Progress against the capital expenditure plan and developments in COVID-19 restrictions, especially in Canada.