QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-32545
DESIGNER BRANDS INC.
(Exact name of registrant as specified in its charter)
Ohio
31-0746639
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
810 DSW Drive,
Columbus,
Ohio
43219
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (614) 237-7100
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Shares, without par value
DBI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑Yes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares outstanding of each of the registrant's classes of common stock, as of November 23, 2022: 55,899,696 Class A common shares and 7,732,743 Class B common shares.
All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q for the quarter ended October 29, 2022 (this "Form 10-Q") mean Designer Brands Inc. and its subsidiaries.
We have included website addresses throughout this report as inactive textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-Q.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Form 10-Q may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of words such as "outlook," "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations, and assumptions relating to our operations, results of operations, financial condition, and liquidity. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that the future plans, estimates, or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. In addition to other factors discussed elsewhere in this report, under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the "2021 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 21, 2022, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements that include, but are not limited to, the following:
•risks and uncertainties related to the ongoing coronavirus ("COVID-19") pandemic, any future COVID-19 resurgence, and any other adverse public health developments;
•risks that recent inflationary pressures, including higher freight costs, could have on our results of operations and customer demand based on pricing actions and operating measures taken to mitigate the impact of inflation;
•uncertain general economic conditions, including inflation and supply chain pressures, domestic and global political and social conditions and the potential impact of geopolitical turmoil or conflict, and the related impacts to consumer discretionary spending;
•our ability to execute on our long-term strategic plans;
•our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
•our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•risks related to losses or disruptions associated with our distribution systems, including our distribution centers and fulfillment center and stores, whether as a result of the COVID-19 pandemic, reliance on third-party providers, or otherwise;
•our reliance on our loyalty programs and marketing to drive traffic, sales, and customer loyalty;
•risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems;
•our ability to protect our reputation and to maintain the brands we license;
•our competitiveness with respect to style, price, brand availability, and customer service;
•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to political, economic, operational, compliance and other risks, and fluctuations in foreign currency exchange rates;
•our ability to comply with privacy laws and regulations, as well as other legal obligations;
•risks associated with climate change and other corporate responsibility issues; and
•uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance, or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time, and it is not possible for management to predict all such factors, nor can management assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Business Operations- Designer Brands Inc. ("we," "us," "our," and the "Company") is one of the world's largest designers, producers, and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its direct-to-consumer U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company and DSW banners through its direct-to-consumer Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40% stake in ABG-Camuto, a joint venture that holds several intellectual property rights, including, among others, Vince Camuto and Louise et Cie, and focuses on licensing and developing new category extensions to support the global growth of these brands. Camuto Group has a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands managed by ABG-Camuto, subject to guaranteed minimums. Camuto Group also holds footwear and certain handbag licensing rights of Jessica Simpson, Lucky Brand and, through a joint venture, JLO Jennifer Lopez.
Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 29, 2022 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2021 Form 10-K.
Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year (e.g., "2022") refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year (including 2022 and 2021), but occasionally will contain an additional week resulting in a 53-week fiscal year (including 2023).
SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2021 Form 10-K.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. dollars.
Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, income taxes, and self-insurance reserves. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
Severance- During the nine months ended October 29, 2022 and October 30, 2021, we incurred severance costs of $1.2 million and $2.6 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of October 29, 2022, January 29, 2022, and October 30, 2021, we had accrued severance of $0.7 million, $1.9 million, and $2.5 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.
Income Taxes- We continue to assess the likelihood of realizing the benefits of our deferred tax assets by evaluating historical and projected future operating results, the reversal of existing temporary differences, taxable income in permitted carry back years, and the availability of tax planning strategies. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in 2020 due to the impacts of the COVID-19 pandemic, we were in a three-year cumulative loss position in the U.S. as of October 29, 2022, which was significant objective negative evidence in considering whether U.S. deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. As of October 29, 2022, a valuation allowance has been maintained as a reserve on substantially all of our net deferred tax assets due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Given the continued realization of income since 2020 and projected future income, sufficient positive evidence may become available for the release of all or a portion of the valuation allowance within the next twelve months. Such a release would result in a material non-cash income tax benefit in our consolidated statement of operations in the period of release and the recording of additional deferred tax assets on our consolidated balance sheet. However, the exact timing and amount of the valuation allowance releases are subject to change based on the level of profitability achieved in future periods.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.
For the nine months ended October 29, 2022 and October 30, 2021, our effective tax rate was 27.3% and 11.8%, respectively. The rate for the nine months ended October 29, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the nine months ended October 30, 2021 was the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.
Cash, Cash Equivalents, and Restricted Cash- Cash and cash equivalents represent cash, money market funds, and credit card receivables that generally settle within three days. Restricted cash represents cash that is restricted as to withdrawal or usage and consists of a mandatory cash deposit maintained for certain insurance policies and letters of credit.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
(in thousands)
October 29, 2022
January 29, 2022
October 30, 2021
Cash and cash equivalents
$
62,507
$
72,691
$
83,069
Restricted cash, included in prepaid expenses and other current assets
1,768
1,768
1,546
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
64,275
$
74,459
$
84,615
Equity Investment in Le Tigre- On July 1, 2022, we acquired a 33.3% interest in Le Tigre 360 Global LLC ("Le Tigre"), which manages the Le Tigre brand, for $8.2 million. We account for our investment in Le Tigre, where we exercise significant influence but do not have control, using the equity method. The difference between the purchase price of Le Tigre and our interest in Le Tigre's underlying net equity is comprised of a definite lived tradename intangible asset and equity method goodwill. Our share of net loss of Le Tigre and amortization of the intangible asset is included in income from equity investments on the consolidated statements of operations.
Intangible Assets- During the first quarter of 2022, we acquired the rights to the shoes.com tradename for $4.9 million, which was recorded as a definite lived tradename intangible asset with a useful life of 15 years.
Fair Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
•Level 3 - Unobservable inputs in which little or no market activity exists.
The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowings under our revolving lines of credit approximated fair value based on its term and variable interest rate.
Impairment of Long-Lived Assets- During the three months ended October 29, 2022, we recorded impairment charges of $1.3 million with $0.4 million in the U.S. Retail segment related to an early store closure and $0.9 million in the Brand Portfolio segment resulting from the sublease of an abandoned leased space. During nine months ended October 29, 2022, we recorded impairment charges of $4.2 million, primarily in the Brand Portfolio segment resulting from subleases of abandoned leased spaces. During the nine months ended October 30, 2021, we recorded an impairment charge of $1.2 million in the U.S. Retail segment for abandoned equipment we replaced.
2. REVENUE
DISAGGREGATION OF NET SALES
Net Sales by Brand Categories- The following table presents net sales disaggregated by brand categories for each segment:
Net Sales by Product and Service Categories- The following table presents net sales disaggregated by product and service
category for each segment:
Three months ended
Nine months ended
(in thousands)
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
Net sales:
U.S. Retail segment:
Women's footwear
$
450,130
$
448,879
$
1,394,340
$
1,321,697
Men's footwear
151,106
154,523
461,035
454,688
Kids' footwear
65,638
69,159
171,742
178,003
Accessories and other
39,517
37,047
116,082
98,971
706,391
709,608
2,143,199
2,053,359
Canada Retail segment:
Women's footwear
41,381
34,495
115,187
85,156
Men's footwear
20,334
17,963
56,224
43,296
Kids' footwear
17,291
19,607
36,700
38,674
Accessories and other
3,283
2,727
8,777
5,855
82,289
74,792
216,888
172,981
Brand Portfolio segment:
Wholesale
95,837
90,558
237,748
181,916
First Cost commission income
1,811
5,635
9,387
11,343
Direct-to-consumer
9,810
7,726
24,130
18,616
107,458
103,919
271,265
211,875
Total segment net sales
896,138
888,319
2,631,352
2,438,215
Elimination of intersegment sales
(31,118)
(34,852)
(76,470)
(64,258)
Total net sales
$
865,020
$
853,467
$
2,554,882
$
2,373,957
DEFERRED REVENUE LIABILITIES
We record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers.The following table presents the changes and total balances for gift cards and our loyalty programs:
Three months ended
Nine months ended
(in thousands)
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
Gift cards:
Beginning of period
$
30,118
$
28,691
$
36,783
$
34,442
Gift cards redeemed and breakage recognized to net sales
(14,341)
(14,483)
(50,896)
(50,863)
Gift cards issued
12,312
12,966
42,202
43,595
End of period
$
28,089
$
27,174
$
28,089
$
27,174
Loyalty programs:
Beginning of period
$
16,788
$
15,255
$
15,736
$
11,379
Loyalty certificates redeemed and expired and other adjustments recognized to net sales
We have transactions with entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family ("Schottenstein Affiliates"). As of October 29, 2022, the Schottenstein Affiliates beneficially owned approximately 23% of the Company's outstanding common shares, representing approximately 58% of the combined voting power of the Company, consisting of, in the aggregate, 6.7 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases- We lease certain store and office locations that are owned by Schottenstein Affiliates. We also leased a fulfillment center from a Schottenstein Affiliate through September 2022 that was not renewed. During the three months ended October 29, 2022 and October 30, 2021, we recorded rent expense from leases with Schottenstein Affiliates of $2.3 million and $2.7 million, respectively. During the nine months ended October 29, 2022 and October 30, 2021, we recorded rent expense from leases with Schottenstein Affiliates of $7.3 million and $8.1 million, respectively. As of October 29, 2022, January 29, 2022, and October 30, 2021, we had related party current operating lease liabilities of $5.4 million, $6.3 million, and $7.1 million, respectively, and non-current operating lease liabilities of $11.5 million, $18.3 million, and $19.3 million, respectively.
Other Purchases and Services-For both the three months ended October 29, 2022 and October 30, 2021, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.2 million. For both the nine months ended October 29, 2022 and October 30, 2021, we had other purchases and services we incurred from the Schottenstein Affiliates of $3.7 million.
Due to Related Parties-Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
Equity Method Investments
ABG-Camuto- We have a 40% interest in our equity investment in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands managed by ABG-Camuto, subject to guaranteed minimums. For the three months ended October 29, 2022 and October 30, 2021, we recorded royalty expense for amounts paid to ABG-Camuto of $4.6 million and $4.4 million, respectively. For the nine months ended October 29, 2022 and October 30, 2021, we recorded royalty expense for amounts paid to ABG-Camuto of $13.7 million and $13.6 million, respectively. Amounts due to ABG-Camuto were immaterial for all periods presented.
Le Tigre- We have a 33.3% interest in our equity investment in Le Tigre. On July 1, 2022, we entered into a license agreement with Le Tigre whereby we pay royalties on our net sales from the Le Tigre brand, subject to guaranteed minimums. The license agreement provides for the exclusive right to design and produce Le Tigre branded footwear to be sold primarily through our DSW and The Shoe Company direct-to-consumer stores and e-commerce sites. Activity with Le Tigre during the nine months ended October 29, 2022 was immaterial.
4. EARNINGS PER SHARE
Basic earnings per share is based on net income and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options and restricted stock units ("RSUs") calculated using the treasury stock method.
The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings per share:
Three months ended
Nine months ended
(in thousands)
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
Weighted average basic shares outstanding
64,245
73,191
68,924
72,911
Dilutive effect of stock-based compensation awards
4,895
3,944
4,363
4,305
Weighted average diluted shares outstanding
69,140
77,135
73,287
77,216
For the three months ended October 29, 2022 and October 30, 2021, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was 2.7 million and 3.6 million, respectively. For the nine months ended October 29, 2022 and October 30, 2021, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was 2.8 million and 3.0 million, respectively.
5. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:
Three months ended
Nine months ended
(in thousands)
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
Stock options
$
—
$
130
$
101
$
515
Restricted and director stock units
6,364
5,151
22,226
18,131
$
6,364
$
5,281
$
22,327
$
18,646
The following table summarizes the stock-based compensation award share activity for RSUs for the nine months ended October 29, 2022:
(in thousands)
Shares of Time-Based RSUs
Shares of Performance-Based RSUs
Outstanding - beginning of period
6,058
744
Granted
1,965
617
Vested
(1,235)
(174)
Forfeited
(232)
—
Outstanding - end of period
6,556
1,187
6. SHAREHOLDERS' EQUITY
Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be exchanged for the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to one vote per share and holders of Class B common shares are entitled to eight votes per share on matters submitted to shareholders for approval.
The following table provides additional information for our common shares:
We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.
Dividends- On November 17, 2022, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on December 28, 2022 to shareholders of record at the close of business on December 13, 2022, and is expected to be recorded against retained earnings.
Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the nine months ended October 29, 2022, we repurchased 10.7 million Class A common shares at an aggregate cost of $147.5 million, with $187.4 million of Class A common shares that remain authorized under the program as of October 29, 2022. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.
7. RECEIVABLES
Receivables, net, consisted of the following:
(in thousands)
October 29, 2022
January 29, 2022
October 30, 2021
Customer accounts receivables:
Serviced by third-party provider with guaranteed payment
$
53,304
$
27,827
$
51,574
Serviced by third-party provider without guaranteed payment
270
82
960
Serviced in-house
2,302
2,783
3,113
Income tax receivable
165,218
162,240
166,934
Other receivables
8,729
8,026
10,043
Total receivables
229,823
200,958
232,624
Allowance for doubtful accounts
(1,077)
(1,132)
(1,233)
$
228,746
$
199,826
$
231,391
In November 2022, we received $120.3 million of our income tax receivable from the Internal Revenue Service as a result of the Coronavirus Aid, Relief, and Economic Security Act. We anticipate receiving the remaining income tax receivable within the next twelve months.
ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current senior secured asset-based revolving credit facility ("ABL Revolver"), which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing loan advances for U.S. borrowings, and a $5.5 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in March 2027 and is secured by a first priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 29, 2022, the ABL Revolver had a borrowing base of $550.0 million, with $415.5 million in outstanding borrowings and $3.6 million in letters of credit issued, resulting in $130.9 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate (as defined and subject to a floor of 0%) plus 0.5%, and (iii) the one-month Adjusted Term SOFR (as defined) plus 1.0%; or (B) a one-month, three-month or six-month Adjusted Term SOFR per annum (subject to a floor of 0%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 5.3% as of October 29, 2022. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees, and the amortization of debt issuance costs.
Debt Covenants- The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million and 10.0% of the maximum borrowing amount. The ABL Revolver also contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. The ABL Revolver contains customary events of default, including failure to comply with certain financial and other covenants. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, our obligations under the ABL Revolver may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of October 29, 2022, we were in compliance with all financial covenants contained in the ABL Revolver.
Termination of Term Loan- On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our senior secured term loan agreement ("Term Loan"). In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to our results of operations or financial condition. As additional information becomes available, we will assess any potential liability related to pending litigation and revise the estimates as needed.
Guarantee- We provide guarantees for lease obligations that are scheduled to expire in 2023 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of October 29, 2022, the total future minimum lease payment requirements under these guarantees were approximately $11.2 million.
11. SEGMENT REPORTING
The following provides certain key financial data by segment reconciled to the condensed consolidated financial statements:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS FOR THE THIRD QUARTER OF 2022
For the third quarter of 2022, net sales increased 1.4% and comparable sales increased 3.0% over the same period last year. Net sales during the third quarter of 2022 from our Owned Brands increased 25.0% over the same period last year, with Owned Brands representing 26.5% of consolidated net sales as compared to 21.5% for the same period last year. The increase in net sales from our Owned Brands demonstrates progress towards our long-term plan of doubling net sales of our Owned Brands by 2026. Gross profit, operating profit, and net income for the third quarter of 2022 were lower when compared to the same period last year, which had record-setting results, as we were impacted by a more promotional retail environment as the industry experienced a shift from tighter inventory positions to excess inventory, resulting in us also being more promotional. In addition, we strategically increased our clearance assortment in order for us to attract customers who are more value oriented and this allows us to manage our inventory more effectively and proactively.
IMPACT OF THE COVID-19 PANDEMIC AND GLOBAL ECONOMIC CONDITIONS ON OUR RESULTS OF OPERATIONS
The COVID-19 pandemic continues to impact the global economy, including disrupted supply chain operations globally, temporary factory closures, labor shortages, vessel, container and other transportation shortages, and port congestion. Such disruptions have at times reduced the availability of inventory while at other times have caused excess inventory as the timing of inventory receipts has been disrupted. Disruptions may continue especially in geographic locations where government responses may result in mandated quarantines and closures of facilities and operations we depend on. Accordingly, it is not clear at this time how long and to what extent the pandemic will last and we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic.
In addition, other changes in economic conditions, most notably inflationary pressures (including increases in the cost of merchandise, transportation, and compensation), rising interest rates, significant foreign currency volatility, and the growing concerns of a potential recession, have also impacted consumer discretionary income levels and spending. In response to such pressures, as well as in an effort to reduce elevated inventory levels, many retailers have become increasingly more promotional in an attempt to offset traffic declines and increase conversion. The continuation of these trends could have a material adverse effect on our business or operating results.
We continue to assess the likelihood of realizing the benefits of our deferred tax assets by evaluating historical and projected future operating results, the reversal of existing temporary differences, taxable income in permitted carry back years, and the availability of tax planning strategies. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in 2020 due to the impacts of the COVID-19 pandemic, we were in a three-year cumulative loss position in the U.S. as of October 29, 2022, which was significant objective negative evidence in considering whether U.S. deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. As of October 29, 2022, a valuation allowance has been maintained as a reserve on substantially all of our net deferred tax assets due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Given the continued realization of income since 2020 and projected future income, sufficient positive evidence may become available for the release of all or a portion of the valuation allowance within the next twelve months. Such a release would result in a material non-cash income tax benefit in our consolidated statement of operations in the period of release and the recording of additional deferred tax assets on our consolidated balance sheet. However, the exact timing and amount of the valuation allowance releases are subject to change based on the level of profitability achieved in future periods.
FINANCIAL SUMMARY AND OTHER KEY METRICS
For the three months ended October 29, 2022:
•Net sales increased to $865.0 million from $853.5 million for the three months ended October 30, 2021.
•Gross profit as a percentage of net sales was 33.0% compared to 36.7% for the same period last year.
•Net income was $45.2 million, or $0.65 per diluted share, which included after-tax charges of $2.0 million primarily related to impairment and termination costs partially offset by the change in valuation allowance on deferred tax assets of $1.1 million. Net income for the three months ended October 30, 2021 was $80.2 million, or $1.04 per diluted share, which included after-tax charges of $13.6 million, or $0.18 per diluted share, primarily related to the change in valuation allowance on deferred tax assets.
We consider the change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses. We include in our comparable sales metric stores in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include stores temporarily closed as a result of the COVID-19 pandemic as management continues to believe that this metric is meaningful to monitor our performance. Comparable sales also include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site www.vincecamuto.com. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.
Number of Stores- As of October 29, 2022 and October 30, 2021, we had the following number of stores:
THIRD QUARTER OF 2022 COMPARED WITH THIRD QUARTER OF 2021
(amounts in thousands, except per share amounts)
Three months ended
October 29, 2022
October 30, 2021
Change
Amount
% of Net Sales
Amount
% of Net Sales
Amount
%
Net sales
$
865,020
100.0
%
$
853,467
100.0
%
$
11,553
1.4
%
Cost of sales
(579,201)
(67.0)
(539,850)
(63.3)
(39,351)
7.3
%
Gross profit
285,819
33.0
313,617
36.7
(27,798)
(8.9)
%
Operating expenses
(222,232)
(25.7)
(211,909)
(24.8)
(10,323)
4.9
%
Income from equity investments
2,290
0.3
2,600
0.3
(310)
(11.9)
%
Impairment charges
(1,349)
(0.2)
—
—
(1,349)
NM
Operating profit
64,528
7.4
104,308
12.2
(39,780)
(38.1)
%
Interest expense, net
(4,826)
(0.5)
(7,706)
(0.9)
2,880
(37.4)
%
Non-operating income (expenses), net
(152)
—
172
—
(324)
NM
Income before income taxes
59,550
6.9
96,774
11.3
(37,224)
(38.5)
%
Income tax provision
(14,379)
(1.7)
(16,590)
(1.9)
2,211
(13.3)
%
Net income
$
45,171
5.2
%
$
80,184
9.4
%
$
(35,013)
(43.7)
%
Basic and diluted earnings per share:
Basic earnings per share
$
0.70
$
1.10
$
(0.40)
(36.4)
%
Diluted earnings per share
$
0.65
$
1.04
$
(0.39)
(37.5)
%
Weighted average shares used in per share calculations:
Basic shares
64,245
73,191
(8,946)
(12.2)
%
Diluted shares
69,140
77,135
(7,995)
(10.4)
%
NM - Not meaningful
Net Sales- The following summarizes net sales by segment:
Three months ended
(dollars in thousands)
October 29, 2022
October 30, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Comparable Sales
Segment net sales:
U.S. Retail
$
706,391
78.8
%
$
709,608
79.9
%
$
(3,217)
(0.5)
%
1.1
%
Canada Retail
82,289
9.2
%
74,792
8.4
%
7,497
10.0
%
18.8
%
Brand Portfolio
107,458
12.0
%
103,919
11.7
%
3,539
3.4
%
27.0
%
Total segment net sales
896,138
100.0
%
888,319
100.0
%
7,819
0.9
%
3.0
%
Elimination of intersegment net sales
(31,118)
(34,852)
3,734
(10.7)
%
Consolidated net sales
$
865,020
$
853,467
$
11,553
1.4
%
The improvement in net sales during the three months ended October 29, 2022 over the same period last year was primarily due to the increase in comparable sales across all segments, offset by store closures since the end of the third quarter of 2021. The decrease in net sales for the U.S. Retail segment was driven by store closures partially offset by the increase in comparable sales, which benefited from higher comparable transactions that more than offset lower comparable average unit retail prices. The increase in net sales for the Canada Retail segment was driven by the increase in comparable sales, which had higher comparable transactions and higher comparable average unit retail prices, partially offset by the unfavorable impact from
foreign currency translation. The Brand Portfolio segment delivered increases in comparable sales for www.vincecamuto.com and wholesale sales, while commission income decreased.
Gross Profit- The following summarizes gross profit by segment:
Three months ended
(dollars in thousands)
October 29, 2022
October 30, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Basis Points
Segment gross profit:
U.S. Retail
$
232,058
32.9
%
$
258,059
36.4
%
$
(26,001)
(10.1)
%
(350)
Canada Retail
31,298
38.0
%
28,588
38.2
%
2,710
9.5
%
(20)
Brand Portfolio
23,839
22.2
%
32,329
31.1
%
(8,490)
(26.3)
%
(890)
Total segment gross profit
287,195
32.0
%
318,976
35.9
%
(31,781)
(10.0)
%
(390)
Net elimination of intersegment gross profit
(1,376)
(5,359)
3,983
Consolidated gross profit
$
285,819
33.0
%
$
313,617
36.7
%
$
(27,798)
(8.9)
%
(370)
The decrease in consolidated gross profit during the three months ended October 29, 2022 over the same period last year was impacted by a more promotional retail environment as the industry experienced a shift from tighter inventory positions to excess inventory, resulting in us being more promotional in both the U.S. Retail and the Brand Portfolio segments as well as our increase in freight costs. The decrease in the U.S. Retail segment gross profit was also impacted by strategically increasing our clearance assortment and moving our digital fulfillment activities from our Columbus location to our New Jersey location, which resulted in recognizing approximately $6.0 million of additional distribution costs, including accelerated depreciation and termination costs. The decrease in the Brand Portfolio segment gross profit was also impacted by lower commission income. As a result, consolidated gross profit as a percentage of consolidated net sales was down 370 basis points.
The net elimination of intersegment gross profit consisted of the following:
Three months ended
(in thousands)
October 29, 2022
October 30, 2021
Recognition (elimination) of intersegment activity:
Net sales recognized by Brand Portfolio segment
$
(31,118)
$
(34,852)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
21,426
22,950
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
8,316
6,543
$
(1,376)
$
(5,359)
Operating Expenses- For the three months ended October 29, 2022, operating expenses increased by $10.3 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses. Operating expenses as a percentage of sales were 25.7% compared to 24.8% in the same period last year.
Interest Expense, net- For the three months ended October 29, 2022, interest expense, net, decreased by $2.9 million over the same period last year, primarily due to the termination of the Term Loan in the first quarter of 2022, which had a higher interest rate than the ABL Revolver.
Income Taxes- For the three months ended October 29, 2022 and October 30, 2021, our effective tax rate was 24.1% and 17.1%, respectively. The rate for three months ended October 29, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the three months ended October 30, 2021 was the result of maintaining a full valuation allowance on deferred tax assets.
NINE MONTHS OF 2022 COMPARED WITH NINE MONTHS OF 2021
(amounts in thousands, except per share amounts)
Nine months ended
October 29, 2022
October 30, 2021
Change
Amount
% of Net Sales
Amount
% of Net Sales
Amount
%
Net sales
$
2,554,882
100.0
%
$
2,373,957
100.0
%
$
180,925
7.6
%
Cost of sales
(1,697,648)
(66.4)
(1,559,548)
(65.7)
(138,100)
8.9
%
Gross profit
857,234
33.6
814,409
34.3
42,825
5.3
%
Operating expenses
(674,348)
(26.4)
(637,108)
(26.9)
(37,240)
5.8
%
Income from equity investments
6,670
0.3
6,598
0.3
72
1.1
%
Impairment charges
(4,237)
(0.2)
(1,174)
—
(3,063)
260.9
%
Operating profit
185,319
7.3
182,725
7.7
2,594
1.4
%
Interest expense, net
(10,530)
(0.4)
(24,592)
(1.0)
14,062
(57.2)
%
Loss on extinguishment of debt and write-off of debt issuance costs
(12,862)
(0.5)
—
—
(12,862)
NM
Non-operating income (expenses), net
(109)
—
734
—
(843)
NM
Income before income taxes
161,818
6.4
158,867
6.7
2,951
1.9
%
Income tax provision
(44,252)
(1.7)
(18,797)
(0.8)
(25,455)
135.4
%
Net income
$
117,566
4.7
%
$
140,070
5.9
%
$
(22,504)
(16.1)
%
Basic and diluted earnings per share:
Basic earnings per share
$
1.71
$
1.92
$
(0.21)
(10.9)
%
Diluted earnings per share
$
1.60
$
1.81
$
(0.21)
(11.6)
%
Weighted average shares used in per share calculations:
Basic shares
68,924
72,911
(3,987)
(5.5)
%
Diluted shares
73,287
77,216
(3,929)
(5.1)
%
NM - Not meaningful
Net Sales- The following summarizes net sales by segment:
Nine months ended
(dollars in thousands)
October 29, 2022
October 30, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Comparable Sales
Segment net sales:
U.S. Retail
$
2,143,199
81.5%
$
2,053,359
84.2%
$
89,840
4.4
%
5.5
%
Canada Retail
216,888
8.2%
172,981
7.1%
43,907
25.4
%
33.5
%
Brand Portfolio
271,265
10.3%
211,875
8.7%
59,390
28.0
%
29.6
%
Total segment net sales
2,631,352
100%
2,438,215
100.0%
193,137
7.9
%
7.8
%
Elimination of intersegment net sales
(76,470)
(64,258)
(12,212)
19.0
%
Consolidated net sales
$
2,554,882
$
2,373,957
$
180,925
7.6
%
The improvement in sales during the nine months ended October 29, 2022 over the same period last year was primarily due to the increase in comparable sales across all segments, primarily driven by the fact that during the nine months ended October 30, 2021, the prolonged COVID-19 pandemic resulted in significantly reduced store traffic in the U.S. Retail and Canada Retail segments with the Canada Retail segment also impacted by mandated closures and restrictions in certain key markets. In addition, wholesale sales in the Brand Portfolio segment were higher during the nine months ended October 29, 2022 as compared to the same period last year due to increased orders as our retailer customers continue to recover. These increases
were partially offset by the impact of store closures since the end of the third quarter of 2021 and the unfavorable impact from foreign currency translation of the Canada Retail segment net sales.
Gross Profit- The following summarizes gross profit by segment:
Nine months ended
(dollars in thousands)
October 29, 2022
October 30, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Basis Points
Segment gross profit:
U.S. Retail
$
716,268
33.4
%
$
708,065
34.5
%
$
8,203
1.2
%
(110)
Canada Retail
81,145
37.4
%
58,191
33.6
%
22,954
39.4
%
380
Brand Portfolio
59,975
22.1
%
52,788
24.9
%
7,187
13.6
%
(280)
Total segment gross profit
857,388
32.6
%
819,044
33.6
%
38,344
4.7
%
(100)
Net elimination of intersegment gross profit
(154)
(4,635)
4,481
Consolidated gross profit
$
857,234
33.6
%
$
814,409
34.3
%
$
42,825
5.3
%
(70)
The increase in consolidated gross profit was primarily driven by increased sales during the nine months ended October 29, 2022 over the same period last year, partially offset by higher freight and distribution costs as well as a shift towards being more promotional in the U.S. Retail and Brand Portfolio segments during the third quarter of 2022. Higher distribution costs within the U.S. Retail segment were primarily driven by moving our digital fulfillment activities from our Columbus location to our New Jersey location, which resulted in recognizing approximately $16.0 million of additional distribution costs, including accelerated depreciation and termination costs. As a result, consolidated gross profit as a percentage of consolidated net sales was down 70 basis points.
The net elimination of intersegment profit consisted of the following:
Nine months ended
(in thousands)
October 29, 2022
October 30, 2021
Recognition (elimination) of intersegment activity:
Net sales recognized by Brand Portfolio segment
$
(76,470)
$
(64,258)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
52,149
43,592
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
24,167
16,031
$
(154)
$
(4,635)
Operating Expenses- For the nine months ended October 29, 2022, operating expenses increased by $37.2 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses. Operating expenses as a percentage of sales improved to 26.4% compared to 26.9% in the same period last year, due to the improvement in net sales year over year as we leveraged our fixed costs.
Impairment Charges- During the nine months ended October 29, 2022, we recorded impairment charges of $4.2 million, primarily in the Brand Portfolio segment resulting from subleases of abandoned leased spaces. During the nine months ended October 30, 2021, we recorded an impairment charge of $1.2 million in the U.S. Retail segment for abandoned equipment we replaced.
Interest Expense, net- For the nine months ended October 29, 2022, interest expense, net, decreased by $14.1 million over the same period last year, primarily due to the termination of the Term Loan in the first quarter of 2022, which had a higher interest rate than the ABL Revolver.
Loss on extinguishment of debt and write-off of debt issuance costs- In connection with the settlement of our Term Loan on February 8, 2022, during the nine months ended October 29, 2022 we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs. As a result of
the replacement of the ABL Revolver during the nine months ended October 29, 2022, we also wrote-off $0.2 million of debt issuance costs.
Income Taxes- For the nine months ended October 29, 2022 and October 30, 2021, our effective tax rate was 27.3% and 11.8%, respectively. The rate for the nine months ended October 29, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the nine months ended October 30, 2021 was the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies.
SEASONALITY
Our business consists of two principal selling seasons; the spring season, which includes the first and second fiscal quarters, and the fall season, which includes the third and fourth fiscal quarters. Generally, net sales in the fall season have been slightly higher than the spring season. Our seasonal results of operations may fluctuate based on global economic conditions, the change in weather conditions, and our customers' interest in new seasonal styles. Due to the COVID-19 pandemic, we did not experience the typical seasonal trends during 2021 given the changes in customer behavior.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, and capital expenditures. Our working capital and inventory levels fluctuate seasonally. During the nine months ended October 29, 2022, we repurchased 10.7 million Class A common shares at an aggregate cost of $147.5 million, with $187.4 million of Class A common shares that remain authorized under the program as of October 29, 2022. During the nine months ended October 30, 2021, we did not repurchase any Class A common shares. In November 2022, we received $120.3 million of our income tax receivable from the Internal Revenue Service as a result of the Coronavirus Aid, Relief, and Economic Security Act. We anticipate receiving the remaining income tax receivable within the next twelve months.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including any ongoing impacts of the COVID-19 pandemic. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and repurchase common shares under our share repurchase program over the next 12 months and beyond.
The following table presents the key categories of our condensed consolidated statements of cash flows:
Nine months ended
(in thousands)
October 29, 2022
October 30, 2021
Change
Net cash provided by operating activities
$
37,940
$
164,294
$
(126,354)
Net cash used in investing activities
(56,009)
(22,061)
(33,948)
Net cash provided by (used in) financing activities
9,246
(117,863)
127,109
Effect of exchange rate changes on cash balances
(1,361)
664
(2,025)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(10,184)
$
25,034
$
(35,218)
OPERATING CASH FLOWS
The decrease in net cash provided by operations was driven by higher spend on working capital due to earlier receipts and vendor payments this year compared to last year as we experienced continued impacts of the COVID-19 pandemic with shipping delays and extended vendor payment terms. This higher spend on working capital was partially offset by an increase in net income for the nine months ended October 29, 2022 over the same period last year, after adjusting for non-cash activity including the loss from extinguishment of debt and write-off of debt issuance costs, depreciation and amortization, impairment charges, and stock-based compensation expense.
For the nine months ended October 29, 2022, net cash used in investing activities was primarily due to capital expenditures relating to infrastructure and information technology ("IT") projects and store improvements as well as our investment in Le Tigre. During the nine months ended October 30, 2021, the net cash used in investing activities was due to capital expenditures relating to IT projects and store improvements. Capital expenditures for the nine months ended October 29, 2022 exceeded the capital expenditures for the same period last year as we continue to invest in our initiatives centered on our three pillars of Customer, Brand, and Speed.
FINANCING CASH FLOWS
For the nine months ended October 29, 2022, net cash provided by financing activities was due to net receipts of $415.5 million from our revolving lines of credit, partially offset by the payments of $238.2 million due to the settlement of the Term Loan, the repurchase of 10.7 million Class A common shares at an aggregate cost of $147.5 million, and the payment of dividends of $10.3 million. During the nine months ended October 30, 2021, net cash used in financing activities was due to net payments of $100.0 million on our revolving lines of credit and payments on the Term Loan of $9.4 million.
DEBT
ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing loan advances for U.S. borrowings, and a $5.5 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in March 2027 and is secured by a first priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 29, 2022, the ABL Revolver had a borrowing base of $550.0 million, with $415.5 million in outstanding borrowings and $3.6 million in letters of credit issued, resulting in $130.9 million available for borrowings.
Debt Covenants- The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million and 10.0% of the maximum borrowing amount. The ABL Revolver also contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. As of October 29, 2022, we were in compliance with all financial covenants contained in the ABL Revolver.
Termination of Term Loan - On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Term Loan. In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
Refer to Note 9, Debt, of the Condensed Consolidated Financial Statements of this Form 10-Q for further information about our debt arrangements.
CAPITAL EXPENDITURE PLANS
We expect to spend approximately $55.0 million to $65.0 million for capital expenditures in 2022, of which we invested $41.9 million during the nine months ended October 29, 2022. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies and estimates disclosed in our 2021 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2021 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Form 10-Q, that such disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements in this Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
As of the date of this filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 2021 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SHARE REPURCHASE PROGRAM
On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The
share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase
any amount of our common shares under the program. Shares will be repurchased in the open market at times and in amounts
considered appropriate based on price and market conditions.
The following table sets forth the Class A common shares repurchased during the three months ended October 29, 2022:
(in thousands, except per share amounts)
(a) Total Number of Shares Purchased(1)
(b) Average Price Paid Per Share(2)
(c) Total Number of Shares Purchased as Part of Publicly Announced Programs
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
July 31, 2022 to August 27, 2022
307
$
14.41
306
$
202,044
August 28, 2022 to October 1, 2022
444
$
15.84
224
$
198,689
October 2, 2022 to October 29, 2022
761
$
14.89
758
$
187,386
Total
1,512
$
14.79
1,288
(1) The total number of shares repurchased includes the shares repurchased as part of publicly announced programs and 223,987 shares withheld in connection with tax payments due upon vesting of employee restricted stock awards.
(2) The average price paid per share includes broker commissions paid.
DIVIDENDS
The payment of any future dividends is at the discretion of our Board of Directors and is based on our future earnings, cash flow, financial condition, capital requirements, changes in taxation laws, general economic condition and any other relevant factors. It is anticipated that dividends will be declared on a quarterly basis.
On November 17, 2022, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on December 28, 2022 to shareholders of record at the close of business on December 13, 2022, and is expected to be recorded against retained earnings.
RESTRICTIONS
The ABL Revolver contains customary covenants restricting our activities, including limitations on the ability to pay dividends or repurchase stock. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability.
Section 1350 Certification - Principal Financial Officer.
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101*
The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended October 29, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed the Consolidated Financial Statements.
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104*
Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DESIGNER BRANDS INC.
Date:
December 1, 2022
By:
/s/ Jared Poff
Jared Poff
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
