Business context and reporting period
Designer Brands Inc. operates U.S. Retail (DSW), Canada Retail (The Shoe Company and DSW), and Brand Portfolio businesses, including wholesale, commissions, and owned-brand direct-to-consumer sales. This Form 10-Q covers the quarter ended October 29, 2022, and the nine months then ended. The request metadata says “2021 Q3,” but the filing is for third-quarter 2022.
Financial performance and key metrics
| Metric | Three months ended October 29, 2022 | Compared with 2021 | Nine months ended October 29, 2022 | Compared with 2021 |
|---|---|---|---|---|
| Net sales | $865.0 million | Up 1.4% | $2,554.9 million | Up 7.6% |
| Gross profit / margin | $285.8 million / 33.0% | $313.6 million / 36.7% | $857.2 million / 33.6% | $814.4 million / 34.3% |
| Operating profit / margin | $64.5 million / 7.4% | $104.3 million / 12.2% | $185.3 million / 7.3% | $182.7 million / 7.7% |
| Net income | $45.2 million | $80.2 million | $117.6 million | $140.1 million |
| Diluted EPS | $0.65 | $1.04 | $1.60 | $1.81 |
Quarterly comparable sales increased 3.0% overall: U.S. Retail 1.1%, Canada Retail 18.8%, and Brand Portfolio direct-to-consumer 27.0%. Owned Brands were 26.5% of quarterly consolidated sales, up from 21.5%, and their sales increased 25.0%.
For the nine months, operating cash flow was $37.9 million, versus $164.3 million; investing cash outflow was $56.0 million, versus $22.1 million; and financing cash inflow was $9.2 million, versus a $117.9 million outflow. Cash, cash equivalents, and restricted cash ended at $64.3 million. Cash and cash equivalents on the balance sheet were $62.5 million.
At October 29, 2022, debt was $415.5 million, all under the ABL Revolver; the company had $130.9 million of revolver availability after borrowings and letters of credit. Current assets were $1,027.0 million and current liabilities $717.5 million. Inventory was $681.8 million, versus $602.1 million a year earlier. Operating lease liabilities totaled $816.4 million.
Material changes and management commentary
- Quarterly gross profit fell $27.8 million and gross margin contracted 370 basis points. Management cited a more promotional retail environment, a larger clearance assortment, higher freight costs, and distribution expenses related to relocating digital fulfillment.
- The fulfillment move generated approximately $6.0 million of additional distribution costs in the quarter and approximately $16.0 million for the nine-month period, including accelerated depreciation and termination costs.
- Nine-month sales growth reflected stronger comparable sales versus COVID-affected 2021 periods and higher Brand Portfolio wholesale sales. Nine-month gross profit increased, but margin declined 70 basis points due to freight and distribution costs and increased promotions.
- Operating cash flow declined mainly because of working-capital use, including inventory purchases and the timing of receipts and vendor payments.
- The company repaid its $231.3 million Term Loan in February 2022, recording a $12.7 million debt-extinguishment loss. It replaced its prior revolving facility with a $550.0 million ABL Revolver maturing in March 2027. Revolver borrowings were subject to a 5.3% interest rate at quarter-end; the company reported covenant compliance.
- During the nine months, the company repurchased 10.7 million Class A shares for $147.5 million and paid $10.3 million in dividends. After quarter-end, the board declared a $0.05-per-share quarterly dividend.
Outlook, risks, and contingencies
- No earnings or sales guidance is provided in the filing. Management expects 2022 capital expenditures of approximately $55 million to $65 million; $41.9 million had been spent through October 29. Management believes operating cash flow, cash on hand, and revolver access should support operations, seasonal working capital, capital expenditures, and planned share repurchases over the next 12 months and beyond.
- Management cited inflation in merchandise, freight, and compensation costs, rising interest rates, foreign-currency volatility, potential recessionary pressure on discretionary spending, supply-chain disruption, and COVID-related uncertainty as risks to results.
- A valuation allowance remains on substantially all net deferred tax assets because of uncertainty about realization. Management said a partial or full release may become supportable within the next 12 months, depending on profitability; any release could create a material non-cash tax benefit, but timing and amount are uncertain.
- Future minimum lease payments under guarantees for locations leased to third parties were approximately $11.2 million. The company said pending legal proceedings were not expected to have a material effect. It reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether inventory levels and promotional activity ease, and the resulting effect on gross margin and cash conversion.
- Actual revolver availability and covenant headroom as seasonal borrowing needs change; the facility is secured by substantially all personal property assets.
- Timing and potential size of any deferred-tax valuation-allowance release, which depends on future profitability.
- Execution and total costs of the digital fulfillment relocation and the planned capital expenditure program.
- Share-repurchase and dividend levels relative to liquidity, working-capital needs, and credit-facility restrictions.