Designer Brands Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 31, 2020 (fiscal 2020 Q3), not 2019 Q3. Prior-year comparisons are for the quarter ended November 2, 2019.
Business context and reporting period
Designer Brands operates footwear and accessories retail businesses in the U.S. and Canada, and a Brand Portfolio business spanning wholesale, commissions and direct-to-consumer sales. The unaudited filing reports three- and nine-month results through October 31, 2020. COVID-19-related store closures earlier in the year and continued weak customer traffic materially affected results; all stores were open at quarter-end.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $652.9m | $933.8m | $1,625.4m | $2,663.1m |
| Gross profit / margin | $165.7m / 25.4% | $273.3m / 29.3% | $176.2m / 10.8% | $793.8m / 29.8% |
| Operating income (loss) | $(58.6)m | $56.1m | $(518.5)m | $141.4m |
| Net income (loss) | $(40.6)m | $43.5m | $(354.7)m | $102.1m |
| Diluted EPS | $(0.56) | $0.60 | $(4.92) | $1.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(106.3)m | $118.1m |
Q3 comparable sales declined 30.4% overall: U.S. Retail fell 31.9%, Canada Retail fell 18.7%, while Brand Portfolio comparable sales rose 13.4%. For the nine months, comparable sales fell 38.4% overall; Brand Portfolio reported a 61.4% increase, partly reflecting its direct-to-consumer comparison basis.
At October 31, 2020, cash and cash equivalents were $114.5m, inventory was $546.0m, and total assets were $2,226.7m. Total debt was $346.9m, including $100.0m outstanding on the ABL Revolver and $246.9m carrying value on the Term Loan; $62.5m was classified as current debt. The ABL had $295.0m available, including the effect of $5.0m in letters of credit. Total liabilities were $1,856.2m and shareholders’ equity was $370.5m. Operating lease liabilities totaled $948.2m.
Material changes and unusual items
- Q3 sales fell 30.1% year over year, and nine-month sales fell 39.0%. Management cited COVID-19 closures and reduced traffic, lower wholesale demand and dress-product sales, and a temporary ransomware-related disruption at a third-party e-commerce fulfillment vendor.
- Gross margin contracted sharply, driven by markdowns, approximately $18.0m of additional inventory reserves versus the prior-year period, higher digital shipping costs, and under-absorbed store and distribution costs.
- Nine-month impairment charges were $149.4m: $122.9m for store-level assets, $20.0m for Brand Portfolio First Cost goodwill, and $6.5m for a customer-relationship intangible. Q3 included $30.1m of store impairment charges.
- Operating expenses included $9.3m of qualified payroll tax credits for the nine months and a $9.0m vendor-settlement gain. The company also incurred $8.5m of incremental COVID-related costs and $10.0m of severance costs during the nine months.
- In August 2020, the company replaced its prior credit facility with a $400m ABL Revolver maturing in 2025 and entered a $250m Term Loan due in 2025. Reported October 31 interest rates were 3.25% on the ABL and 9.75% on the Term Loan.
- The company eliminated approximately 1,000 associate positions, including more than 200 vacant positions. It reduced inventory 19% year over year and cut capital expenditures to preserve liquidity.
Outlook, risks and contingencies
Management said cash from operations, existing cash and ABL availability should be sufficient to support operations, working capital and capital expenditures for the next 12 months. Fiscal 2020 capital expenditures were expected to be approximately $30m–$35m; $26.9m had been spent through October 31. The filing does not provide a sales or earnings forecast.
Management warned that renewed COVID-19 restrictions could cause store closures, further weaken traffic and discretionary spending, and prompt additional inventory, receivable, long-lived asset, intangible or goodwill impairments or deferred-tax-asset valuation changes. It also cited supply-chain, vendor and fulfillment disruptions, fashion-mix changes, and weakness among Brand Portfolio retail customers. Stein Mart, a primary customer in the Other segment, filed for Chapter 11 and liquidated; the filing said its stores were closed and only an immaterial amount of receivables remained at quarter-end.
Debt agreements impose availability and, under specified liquidity conditions, an EBITDA covenant; they also restrict dividends and share repurchases until at least Q3 fiscal 2021. The company reported a $4.9m remaining foreign-tax contingency, partly offset by a $3.8m indemnification asset, and a $10.9m potential lease guarantee. Management considered current legal proceedings not material.
Key facts for investors to verify
- Confirm the intended reporting year: this filing covers Q3 2020, despite the request specifying 2019 Q3.
- Track store traffic, comparable sales, online sales and margin recovery, including the effects of markdowns and inventory reserves.
- Monitor operating cash flow, cash levels, ABL availability, debt balances, interest costs and compliance with credit covenants.
- Assess whether further COVID-19 disruption or impairment charges affect asset values and deferred tax asset realization.
- Verify the outcomes of foreign-tax negotiations, the Stein Mart customer exposure and the third-party fulfillment vendor disruption.