Business context and reporting period
Designer Brands Inc. operates U.S. Retail (DSW), Canada Retail, and Brand Portfolio businesses, including owned and licensed footwear brands. This Form 10-Q covers the quarter ended April 29, 2023; the comparable quarter ended April 30, 2022. The request metadata says “2022 Q1,” but the filing is for 2023 Q1.
On February 4, 2023, the company acquired the Keds business, expanding its owned-brand casual and athleisure footwear offering.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $742.1 million | $830.5 million |
| Gross profit / margin | $237.7 million / 32.0% | $275.7 million / 33.2% |
| Operating profit / margin | $19.6 million / 2.6% | $53.2 million / 6.4% |
| Net income attributable to Designer Brands | $11.4 million | $26.2 million |
| Diluted earnings per share | $0.17 | $0.34 |
| Operating cash flow | $22.5 million | $(40.7) million |
Cash and cash equivalents were $50.6 million at quarter-end. Long-term debt was $390.3 million. Under the ABL Revolver, the company reported $360.5 million of revolving borrowings and $5.0 million of letters of credit, with $200.3 million of borrowing availability; the $30.0 million FILO Term Loan was fully drawn. The company said it was in compliance with financial covenants and believed cash, operating cash flow, and revolver availability would support operations and planned needs.
Capital expenditures were $14.4 million in the quarter; management expected full-year 2023 capital expenditures of approximately $50 million to $70 million.
Material changes versus the prior comparable period
- Sales declined 10.7%, and total comparable sales fell 10.4%. U.S. Retail sales fell 12.8% and comparable sales fell 11.6%; Canada Retail comparable sales rose 2.9%, while Brand Portfolio direct-to-consumer comparable sales rose 8.3%.
- Gross margin contracted 120 basis points, primarily from lower sales and fixed occupancy cost deleverage in U.S. Retail, as well as increased promotional activity.
- Operating profit declined 63.1%, and attributable net income declined 56.4%. Net interest expense increased to $6.6 million from $3.0 million.
- Operating cash flow improved by $63.2 million year over year, principally reflecting lower working-capital investment and lease-payment timing; investing cash outflow increased to $123.9 million, largely due to the Keds acquisition.
- Keds was acquired for $124.9 million of stated purchase consideration, including $109.4 million cash consideration and amounts due to or from the seller. The purchase-price allocation remained preliminary.
Outlook, commentary, risks, and unusual items
- Management cited inflation, higher interest rates, recession concerns, reduced discretionary spending, excess industry inventory, and competitive promotional pressure. It noted that continued pressure could require operating-efficiency measures.
- Owned Brands represented 26.7% of consolidated sales, compared with 25.4% a year earlier; management’s long-term goal is one-third of sales by 2026. No formal revenue or earnings guidance is provided in the supplied filing text.
- Q1 2023 attributable net income included $2.8 million of net after-tax charges, primarily for the CEO transition, restructuring, integration, and acquisition costs, partly offset by a deferred-tax valuation-allowance change. Management estimated total CEO-transition costs of $8.1 million, with $2.2 million of additional costs expected during the remainder of 2023.
- The prior-year quarter included a $12.9 million debt-extinguishment and debt-issuance-cost charge related to repayment of the former term loan.
- After quarter-end, the company announced a proposed tender offer for up to $100 million of Class A shares at an anticipated $7 to $8 per share, and said it intended to enter into a $135 million term loan principally to fund the offer. These were announced plans, not completed transactions as of the filing.
- The company disclosed approximately $7.4 million of future potential payments under lease guarantees, scheduled to expire in 2025. It said pending legal proceedings were not expected to have a material effect.
Important facts for investors to verify
- Confirm the period is Q1 2023, ended April 29, 2023, rather than the “2022 Q1” in the request metadata.
- Review the drivers and persistence of comparable-sales declines, promotional activity, and gross-margin pressure.
- Track ABL borrowing availability, total debt and interest costs, covenant headroom, and the financing and terms of the proposed tender offer.
- Check final Keds purchase-price allocation, seller contingent consideration, and the acquired business’s contribution to results.
- Monitor remaining CEO-transition costs, planned capital expenditures, and management’s liquidity assumptions amid macroeconomic uncertainty.