Designer Brands Inc. — Form 10-Q Summary
Period clarification: The request identifies “2020 Q3,” but the supplied filing is for the quarter ended October 30, 2021 (fiscal 2021 third quarter), filed December 7, 2021. Comparisons are with the quarter ended October 31, 2020. Amounts below are in U.S. dollars.
Business context and reporting period
Designer Brands operates U.S. and Canadian footwear retail businesses, including DSW, and a Brand Portfolio business that sells wholesale products, earns commissions, and sells directly to consumers. The filing reports three and nine months ended October 30, 2021. Results reflect recovery from pandemic-affected 2020 comparisons, alongside continued supply-chain, labor, and customer-traffic challenges.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $853.5 million | $652.9 million | $2,374.0 million | $1,625.4 million |
| Gross profit / margin | $313.6 million / 36.7% | $165.7 million / 25.4% | $814.4 million / 34.3% | $176.2 million / 10.8% |
| Operating profit (loss) | $104.3 million | ($58.6 million) | $182.7 million | ($518.5 million) |
| Net income (loss) | $80.2 million | ($40.6 million) | $140.1 million | ($354.7 million) |
| Diluted EPS | $1.04 | ($0.56) | $1.81 | ($4.92) |
| Operating cash flow | Not presented separately | Not presented separately | $164.3 million | ($106.3 million) |
For Q3, operating margin was 12.2% versus negative 9.0% a year earlier. Management reported that Q3 operating profit was 86% above Q3 2019. Q3 diluted EPS included $0.18 per share of net after-tax benefits, primarily related to changes in the deferred-tax valuation allowance. Nine-month investing cash outflow was $22.1 million and financing cash outflow was $117.9 million, including $100.0 million of net ABL Revolver repayments.
At October 30, 2021, cash and cash equivalents were $83.1 million ($84.6 million including restricted cash). Inventory was $602.1 million and accounts payable was $401.3 million. Principal debt outstanding was $234.4 million (net carrying amount $227.9 million, including current maturities). The ABL Revolver had no borrowings, $5.3 million in letters of credit, and $394.7 million available. The Term Loan interest rate was 9.8% (11.8% effective including debt-cost amortization). The company reported compliance with financial covenants.
Material changes versus the prior comparable period
- Q3 sales rose 30.7%; total comparable sales rose 40.8%, including 43.9% for U.S. Retail, 15.2% for Canada Retail, and 50.4% for Brand Portfolio direct-to-consumer. The prior-year period was substantially affected by COVID-related traffic declines and a third-party vendor ransomware disruption.
- Gross margin improved to 36.7%, which management attributed to higher sales and fewer promotions amid tight inventory. It exceeded the 29.3% Q3 2019 margin.
- Q3 operating expenses increased 8.1% in dollars but declined to 24.8% of sales from 30.1%. Management cited higher store payroll and incentive compensation; expenses as a sales percentage remained above the Q3 2019 level.
- The prior-year periods included substantial impairment charges: $30.1 million in Q3 2020 and $149.4 million for the first nine months of 2020. The 2021 nine-month period included $1.2 million for abandoned equipment.
- Nine-month sales increased 46.1%, and operating cash flow improved from a $106.3 million use to $164.3 million provided. The comparisons are heavily affected by 2020 store closures, reduced sales, and cost and working-capital actions.
Outlook, commentary, risks, and unusual items
- Management said cash from operations, existing cash, and the ABL Revolver were expected to be sufficient for operations, capital expenditures, and debt service over the next 12 months and beyond. Fiscal 2021 capital expenditures were estimated at $35 million to $45 million; $22.1 million had been spent in the first nine months.
- Management described investments in customer analytics and digital capabilities, growth of owned brands and major footwear brands, and faster fulfillment. Digital order fulfillment was then five to seven business days, with a goal of two to three calendar days.
- COVID-19 effects remained uncertain. Risks included new variants, supply-chain disruption and higher shipping costs, labor shortages and higher labor costs, reduced customer traffic, and possible future asset, inventory, or deferred-tax-asset adjustments. Management noted that consolidated sales and traffic remained below pre-pandemic levels.
- The company maintained a full valuation allowance on deferred tax assets and reported a three-year cumulative loss position as of the period end, despite the 2021 return to profitability. Tax estimates and future realization of deferred tax assets remain uncertain.
- Potential federal vaccine requirements were stayed pending judicial review at the time of filing. The company warned that a requirement could contribute to employee attrition and recruiting challenges.
- Debt agreements restrict dividends, repurchases, and other payments; the filing states that restricted payments above a maximum of $10 million over the Term Loan’s term are limited. The company did not anticipate dividends or share repurchases in fiscal 2021.
- Other exposures include a $14.6 million maximum future lease-payment obligation under guarantees for locations leased to third parties, and an unresolved insurance recovery related to a prior vendor service shutdown. Management said current litigation was not expected to have a material effect.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q3 fiscal 2021, not Q3 2020.
- Assess sales and margin trends against pre-pandemic periods, considering the unusually weak 2020 comparison and the role of limited inventory and reduced promotions.
- Track inventory, accounts payable, shipping and labor costs, and cash conversion as operations recover.
- Review Term Loan costs, repayment requirements, covenant headroom, ABL borrowing-base availability, and restrictions on distributions.
- Monitor the deferred-tax valuation allowance, tax benefits included in reported earnings, and potential impairment or inventory adjustments.
- Follow COVID-related developments, supply-chain and workforce conditions, the vaccine-mandate litigation, and the outcome of the insurance recovery.