Designer Brands Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 30, 2022. The filing is for fiscal 2022, notwithstanding the request metadata’s “2021 Q2” label. Designer Brands operates U.S. Retail, Canada Retail, and Brand Portfolio segments, selling footwear and accessories through stores, e-commerce, wholesale, and commission arrangements.
Financial performance
| Metric | Three months ended July 30, 2022 | Six months ended July 30, 2022 |
|---|---|---|
| Net sales | $859.3 million, up 5.1% year over year | $1,689.9 million, up 11.1% |
| Gross profit / margin | $295.7 million / 34.4%, versus 34.8% | $571.4 million / 33.8%, versus 32.9% |
| Operating profit / margin | $67.6 million / 7.9% | $120.8 million / 7.1% |
| Net income | $46.2 million; diluted EPS $0.62 | $72.4 million; diluted EPS $0.96 |
| Operating cash flow | Not separately reported for the quarter | $10.9 million, versus $96.2 million |
Second-quarter comparable sales increased 6.2%. Segment sales rose 1.5% in U.S. Retail, 35.9% in Canada Retail, and 31.3% in Brand Portfolio. Owned Brands were 22.7% of consolidated quarterly sales, up from 17.0% a year earlier. Higher sales and lower operating expenses as a percentage of sales supported results; freight and distribution costs pressured margins. The U.S. Retail segment also incurred about $6.0 million of additional distribution costs, including accelerated depreciation, in connection with moving digital fulfillment operations.
For the six-month period, lower interest expense helped results after the company repaid its Term Loan, but a $12.9 million debt-extinguishment and issuance-cost charge and a higher tax provision reduced the benefit. Effective tax rates were 29.2% for the first half of 2022 and 3.6% in the comparable 2021 period; substantially all net deferred tax assets remained subject to a valuation allowance.
Liquidity, debt, and capital allocation
- At July 30, 2022, cash and cash equivalents were $50.8 million ($52.6 million including restricted cash). Current assets were $1.00 billion and current liabilities were $740.1 million.
- Inventory was $694.0 million, up from $586.4 million at January 29, 2022. Management attributed the decline in operating cash flow primarily to higher working-capital needs, including inventory, wholesale receivables, and vendor-payment timing.
- Long-term debt was $387.4 million, all under the $550 million asset-based revolver; $157.7 million was available after $4.9 million of letters of credit. The facility matures in March 2027; the reported interest rate was 3.9%. The company reported compliance with financial covenants.
- First-half investing cash outflow was $40.2 million, including $27.2 million of capital expenditures and an $8.2 million investment in Le Tigre. Financing cash inflow was $7.4 million, reflecting revolver borrowings partly offset by Term Loan repayment, share repurchases, and dividends.
- The company repurchased 9.4 million Class A shares for $128.5 million in the first half. It declared a subsequent quarterly dividend of $0.05 per share. Planned 2022 capital expenditures were approximately $65 million to $75 million.
Outlook, risks, and unusual items
No specific revenue or earnings guidance is provided in the filing. Management said operating cash flow, existing cash, and the revolver were expected to support operations, seasonal working capital, capital expenditures, and repurchases over the next 12 months and beyond. It also anticipated approximately $160 million from the IRS in the near future related to the CARES Act. Management cautioned that COVID-19 effects and recent improvements remained difficult to predict.
Risks highlighted include inflation, higher freight and labor costs, supply-chain disruption, uncertain consumer spending, fashion and demand shifts, vendor and distribution dependencies, cyber and privacy threats, foreign currency and international exposure, and COVID-19 developments. The company maintained a valuation allowance on substantially all net deferred tax assets; a possible release within the next 12 months could produce a material non-cash tax benefit, but timing and amount depend on future profitability. Legal proceedings were described as incidental, with potential liabilities not expected to be material. Lease guarantees for locations leased to third parties represented approximately $12.0 million of future minimum payments.
Unusual items included the $12.9 million first-half debt-extinguishment and debt-cost charge, impairment charges of $2.9 million in the first half (primarily abandoned leased spaces in Brand Portfolio), and elevated distribution costs associated with the fulfillment move. The filing reported no material changes to risk factors or internal controls.
Important facts for investors to verify
- Whether sales and comparable-sales momentum persists, particularly given prior-year COVID-related closures and restrictions.
- Whether elevated inventory converts to sales without increased promotions, markdowns, or further margin pressure.
- Revolver utilization, borrowing availability, interest costs, and covenant headroom as seasonal working-capital needs change.
- Timing and amount of the anticipated IRS refund and any change to the deferred-tax valuation allowance.
- Execution and returns on planned capital spending, the Le Tigre investment, and ongoing share repurchases and dividends.