Designer Brands Inc. Reports Second Quarter 2020 Financial Results

Market Trading EssentialsSeptember 3, 2020

12 minutes read

$250 million of new debt

COLUMBUS, Ohio, Sept. 3, 2020 /CNW/ — Designer Brands Inc. (NYSE: DBI) (the “Company”), one of North America’s largest designers, producers and retailers of footwear and accessories, announced financial results for the three months ended August 1, 2020, compared to the three months ended August 3, 2019.

Roger Rawlins, Chief Executive Officer, stated, “Although the COVID-19 pandemic continues to impact consumer behavior and our business, I am confident in Designer Brands’ playbook to navigate this ever-changing environment. We believe our recent actions to right size our expense structure and obtain additional liquidity, our strategic digital investments, flexible business model, and strong vendor partnerships as well as our status as one of the largest footwear retailers have firmly positioned Designer Brands to weather the road ahead.”

Mr. Rawlins continued, “Given that we have further strengthened our balance sheet, we are well prepared to focus on growing our business’ profitability. In order to serve our customers in the near-term, we are flexing fall inventory receipts away from seasonal and dress products and towards our highest performing category, athleisure, with an emphasis on comfortable and cozy products. We have the unique ability to pivot inventory quickly and follow the customer as needs and preferences change in the future. We are confident that we know what the customer wants, and we know how to deliver it to them, be it digitally or in-person and socially distanced, and we will be prepared in any situation.”

Net sales decreased 42.8% to $489.7 million.

Comparable sales decreased 42.7% for the second quarter of fiscal 2020 compared to a 0.6% decrease in the second quarter of fiscal 2019.

Reported gross margin as a percentage of net sales was 7.6%, or 8.2% on an adjusted basis, as compared to 30.5% on both a reported and adjusted basis for the same period last year. The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations resulting in the temporary closure of stores and, subsequently, significantly reduced customer traffic upon store re-openings, which we addressed with aggressive promotional activity. The impact of COVID-19 and the actions we took resulted in higher inventory reserves, increased shipping costs in the current quarter associated with higher digital penetration, and the deleveraging of distribution and fulfillment and store occupancy expenses on lower sales volume.

Reported net loss was $98.2 million, or $1.36 loss per diluted share, including net charges of $0.08 per diluted share from adjusted items.

Adjusted net loss was $92.0 million, or $1.28 loss per diluted share.

Cash and investments totaled $206.7 million at the end of the second quarter of fiscal 2020 compared to $77.3 million for the same period last year. Debt totaled $393.0 million at the end of the second quarter of fiscal 2020 compared to $235.0 million debt outstanding for the same period last year, reflecting net borrowings from our revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S. and global markets resulting from COVID-19.

On August 7, 2020, we replaced our revolving credit facility with a $400.0 million ABL Revolver and completed a five-year, $250.0 million Secured Term Loan. We opened the new ABL Revolver with a draw at closing of $150.0 million and, combined with the proceeds from the Secured Term Loan, settled in full the amounts due under the Company’s prior credit facility, which was terminated.

The Company has reached alignment with nearly all major vendors and landlords on past-due amounts and has extended go-forward payment terms.

The Company ended the quarter with inventories of $445.0 million, down 37% compared to the same period last year, primarily due to strong inventory controls and higher inventory reserves versus the prior year.

As of the date of this release, the Company has successfully reopened nearly all of its total store base. The Company has implemented a number of measures to protect the health and safety of its customers and associates as stores are re-opened.

March 17, 2020, the Company is not issuing guidance for fiscal 2020 given continued uncertainty surrounding the impacts of COVID-19. The Company is not providing an update at this time.

8:30 am Eastern Time. Investors and analysts interested in participating in the call are invited to dial 1-888-317-6003, or the international dial in, 1-412-317-6061, and reference conference ID number 9992953 approximately ten minutes prior to the start of the call. The conference call will also be broadcast live over the internet and can be accessed through the following link:

https://www.webcaster4.com/Webcast/Page/1213/36616 ” data-reactid=”40″>https://www.webcaster4.com/Webcast/Page/1213/36616

September 17, 2020. A replay of the teleconference will be available by dialing the following numbers:

Canada: 1-855-669-9658
International: 1-412-317-0088
Passcode: 10147286

www.designerbrands.com.” data-reactid=”44″>Designer Brands Inc. is one of North America’s largest designers, producers and retailers of footwear and accessories. The Company operates a portfolio of retail concepts in nearly 700 locations under the DSW Designer Shoe Warehouse®, The Shoe Company®, and Shoe Warehouse® banners. The Company designs and produces footwear and accessories through Camuto Group, a leading manufacturer selling in more than 5,400 stores worldwide. Camuto Group owns licensing rights for the Jessica Simpson® footwear business, and footwear and handbag licenses for Lucky Brand® and Max Studio®. In partnership with a joint venture with Authentic Brands Group, the Company also owns a stake in Vince Camuto®, Louise et Cie®, CC Corso Como®, and others. More information can be found at www.designerbrands.com.

Canada; and uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. Additional factors that could cause our actual results to differ materially from our expectations are described in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as amended, our Form 10-Q for the fiscal quarter ended May 2, 2020, and risk factors identified in the Company’s other filings with the Securities and Exchange Commission. All forward-looking statements speak only as of the time when made. The Company undertakes no obligation to revise the forward-looking statements included in this press release to reflect any future events or circumstances, except as may be required by law.

DESIGNER BRANDS INC. SEGMENT RESULTS (unaudited)

Net Sales
	Three months ended				Change
(dollars in thousands)	August 1, 2020		August 3, 2019		Amount		%		Comparable Sales %
Segment net sales:
U.S. Retail	$	393,977	$	677,920	$	(283,943)	(41.9)	%	(44.9)%
Canada Retail	49,582		63,306		(13,724)		(21.7)	%	(27.9)%
Brand Portfolio	30,458		102,947		(72,489)		(70.4)	%	120.5%
Other	22,266		29,480		(7,214)		(24.5)	%	(36.2)%
Total segment net sales	496,283		873,653		(377,370)		(43.2)	%	(42.7)%
Elimination of intersegment net sales	(6,569)		(17,701)		11,132		(62.9)	%
Net sales	$	489,714	$	855,952	$	(366,238)	(42.8)	%


	Six months ended				Change
(dollars in thousands)	August 1, 2020		August 3, 2019		Amount		%		Comparable Sales %
Segment net sales:
U.S. Retail	$	771,050	$	1,369,760	$	(598,710)	(43.7)	%	(43.7)%
Canada Retail	78,911		115,122		(36,211)		(31.5)	%	(29.9)%
Brand Portfolio	112,571		207,493		(94,922)		(45.7)	%	106.5%
Other	35,889		65,087		(29,198)		(44.9)	%	(50.4)%
Total segment net sales	998,421		1,757,462		(759,041)		(43.2)	%	(42.5)%
Elimination of intersegment net sales	(25,924)		(28,221)		2,297		(8.1)	%
Net sales	$	972,497	$	1,729,241	$	(756,744)	(43.8)	%

Store Data
	August 1, 2020		August 3, 2019
(square footage in thousands)	Number of Stores	Square Footage	Number of Stores	Square Footage
U.S. Retail segment – DSW Designer Shoe Warehouse	522	10,578	518	10,543
Canada Retail segment:
The Shoe Company / Shoe Warehouse	117	623	112	611
DSW Designer Shoe Warehouse	27	536	27	534
	144	1,159	139	1,145
Total operating stores	666	11,737	657	11,688
ABG stores serviced	280		284

Gross Profit (Loss)
	Three months ended
	August 1, 2020				August 3, 2019				Change
(dollars in thousands)	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Basis Points
Segment gross profit (loss):
U.S. Retail	$	40,097	10.2	%	$	208,056	30.7	%	$	(167,959)	(80.7)	%	(2,050)
Canada Retail	5,650		11.4	%	21,939		34.7	%	$	(16,289)	(74.2)	%	(2,330)
Brand Portfolio	(11,440)		(37.6)	%	26,786		26.0	%	$	(38,226)	NM		NM
Other	118		0.5	%	6,041		20.5	%	$	(5,923)	(98.0)	%	(2,000)
	34,425				262,822
Elimination of intersegment gross loss (profit)	2,617				(1,649)
Gross profit	$	37,042	7.6	%	$	261,173	30.5	%	$	(224,131)	(85.8)	%	(2,290)


	Six months ended
	August 1, 2020				August 3, 2019				Change
(dollars in thousands)	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Basis Points
Segment gross profit (loss):
U.S. Retail	$	7,127	0.9	%	$	417,947	30.5	%	$	(410,820)	(98.3)	%	(2,960)
Canada Retail	3,339		4.2	%	37,686		32.7	%	$	(34,347)	(91.1)	%	(2,850)
Brand Portfolio	2,464		2.2	%	52,459		25.3	%	$	(49,995)	(95.3)	%	(2,310)
Other	(5,310)		(14.8)	%	15,352		23.6	%	$	(20,662)	NM		NM
	7,620				523,444
Elimination of intersegment gross loss (profit)	2,962				(2,938)
Gross profit	$	10,582	1.1	%	$	520,506	30.1	%	$	(509,924)	(98.0)	%	(2,900)

Intersegment Eliminations
	Three months ended
(in thousands)	August 1, 2020		August 3, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment	$	(6,569)	$	(17,701)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment	4,827		14,311
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	4,359		1,741
Gross loss (profit)	$	2,617	$	(1,649)


	Six months ended
(in thousands)	August 1, 2020		August 3, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment	$	(25,924)	$	(28,221)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment	16,961		21,918
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	11,925		3,365
Gross loss (profit)	$	2,962	$	(2,938)

DESIGNER BRANDS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share amounts)

	Three months ended				Six months ended
	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Net sales	$	489,714	$	855,952	$	972,497	$	1,729,241
Cost of sales	(452,672)		(594,779)		(961,915)		(1,208,735)
Operating expenses	(168,424)		(222,370)		(355,645)		(439,950)
Income from equity investment	2,153		2,464		4,423		4,692
Impairment charges	(6,735)		—		(119,282)		—
Operating profit (loss)	(135,964)		41,267		(459,922)		85,248
Interest expense, net	(3,788)		(1,972)		(5,946)		(3,773)
Non-operating income (expenses), net	743		199		656		(143)
Income (loss) before income taxes	(139,009)		39,494		(465,212)		81,332
Income tax benefit (provision)	40,795		(12,087)		151,140		(22,731)
Net income (loss)	$	(98,214)	$	27,407	$	(314,072)	$	58,601
Diluted earnings (loss) per share	$	(1.36)	$	0.37	$	(4.36)	$	0.77
Weighted average diluted shares	72,142		74,316		72,028		76,281

DESIGNER BRANDS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands)
	August 1, 2020		February 1, 2020		August 3, 2019
Assets
Cash and cash equivalents	$	206,720	$	86,564	$	51,762
Investments	—		24,974		25,504
Accounts receivable, net	49,240		89,151		85,162
Inventories	445,044		632,587		706,168
Prepaid expenses and other current assets	69,456		67,534		55,561
Total current assets	770,460		900,810		924,157
Property and equipment, net	332,730		395,009		402,779
Operating lease assets	797,413		918,801		975,963
Goodwill	93,655		113,644		116,280
Intangible assets	15,663		22,846		21,112
Deferred tax assets	182,866		31,863		29,515
Equity investment	56,690		57,760		55,033
Other assets	23,780		24,337		32,407
Total assets	$	2,273,257	$	2,465,070	$	2,557,246
Liabilities and shareholders’ equity
Accounts payable	$	224,693	$	299,072	$	289,457
Accrued expenses	202,831		194,264		173,437
Current operating lease liabilities	241,694		186,695		185,969
Total current liabilities	669,218		680,031		648,863
Debt	393,000		190,000		235,000
Non-current operating lease liabilities	778,826		846,584		905,546
Other non-current liabilities	25,586		27,541		38,590
Total liabilities	1,866,630		1,744,156		1,827,999
Total shareholders’ equity	406,627		720,914		729,247
Total liabilities and shareholders’ equity	$	2,273,257	$	2,465,070	$	2,557,246

DESIGNER BRANDS INC. NON-GAAP RECONCILIATION (unaudited and in thousands, except per share amounts)

	Three months ended				Six months ended
	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Reported net income (loss)	$	(98,214)	$	27,407	$	(314,072)	$	58,601
Pre-tax adjustments:
Included in cost of sales:
COVID-19 incremental costs	3,257		—		3,676		—
Included in operating expenses:
COVID-19 incremental costs (credits), net	(306)		—		(3,468)		—
Integration and restructuring expenses	8,455		9,621		10,203		12,109
Amortization of intangible assets	110		(271)		469		47
Impairment charges	6,735		—		119,282		—
Gain on settlement	(8,990)		—		(8,990)		—
Included in non-operating expenses, net:
Foreign currency transaction losses	(743)		(223)		(343)		207
Total pre-tax adjustments	8,518		9,127		120,829		12,363
Tax effect of adjustments	(2,295)		(780)		(30,518)		(1,605)
Total adjustments, after tax	6,223		8,347		90,311		10,758
Adjusted net income (loss)	$	(91,991)	$	35,754	$	(223,761)	$	69,359
Reported diluted earnings (loss) per share	$	(1.36)	$	0.37	$	(4.36)	$	0.77
Adjusted diluted earnings (loss) per share	$	(1.28)	$	0.48	$	(3.11)	$	0.91

the United States (“GAAP”), the Company uses adjusted diluted earnings (loss) per share and adjusted net income (loss), which adjust for the effects of: (1) COVID-19 incremental costs and credits; (2) integration and restructuring expenses; (3) amortization expense of intangible assets; (4) impairment charges; (5) gain on settlement; (6) foreign currency transaction losses; and (7) the net tax expense impact of such items. The unaudited reconciliation of adjusted results should not be construed as an alternative to the reported results determined in accordance with GAAP. These financial measures are not based on any standardized methodology and are not necessarily comparable to similar measures presented by other companies. The Company believes these non-GAAP measures provide useful information to both management and investors to increase comparability to the prior periods by adjusting for certain items that may not be indicative of core operating measures and to better identify trends in our business. The adjusted financial results are used by management to, and allow investors to, evaluate the operating performance of the Company on a comparable basis, when reviewed in conjunction with the Company’s GAAP statements. These amounts are not determined in accordance with GAAP and therefore should not be used exclusively in evaluating the Company’s business and operations.

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Market Trading EssentialsSeptember 3, 2020

12 minutes read