QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 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 August 25, 2022: 56,500,918 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 six months ended July 30, 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 three months ended July 30, 2022 and July 31, 2021, we incurred severance costs of $0.3 million and $1.2 million, respectively. During the six months ended July 30, 2022 and July 31, 2021, we incurred severance costs of $1.0 million and $2.6 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of July 30, 2022, January 29, 2022, and July 31, 2021, we had accrued severance of $0.9 million, $1.9 million, and $4.9 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 as of July 30, 2022, which was significant objective negative evidence in considering whether 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 July 30, 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.
For the six months ended July 30, 2022 and July 31, 2021, our effective tax rate was 29.2% and 3.6%, respectively. The rate for the six months ended July 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the six months ended July 31, 2021 was the result of maintaining a full valuation allowance on deferred tax assets along with 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)
July 30, 2022
January 29, 2022
July 31, 2021
Cash and cash equivalents
$
50,799
$
72,691
$
46,458
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
$
52,567
$
74,459
$
48,004
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 income or 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 and six months ended July 30, 2022, we recorded impairment charges of $1.8 million and $2.9 million, respectively, in the Brand Portfolio segment resulting from subleases of abandoned leased spaces. During the three and six months ended July 31, 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
Six months ended
(in thousands)
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
Net sales:
U.S. Retail segment:
Women's footwear
$
475,079
$
467,518
$
944,210
$
872,818
Men's footwear
164,122
168,218
309,929
300,165
Kids' footwear
53,185
54,112
106,103
108,844
Accessories and other
41,677
33,245
76,566
61,924
734,063
723,093
1,436,808
1,343,751
Canada Retail segment:
Women's footwear
43,802
30,230
73,806
50,661
Men's footwear
21,462
15,805
35,890
25,333
Kids' footwear
9,592
9,554
19,409
19,067
Accessories and other
3,428
1,996
5,494
3,128
78,284
57,585
134,599
98,189
Brand Portfolio segment:
Wholesale
54,136
42,715
141,911
91,358
First Cost commission income
4,422
2,377
7,576
5,708
Direct-to-consumer
7,793
5,437
14,320
10,890
66,351
50,529
163,807
107,956
Total segment net sales
878,698
831,207
1,735,214
1,549,896
Elimination of intersegment sales
(19,379)
(13,872)
(45,352)
(29,406)
Total net sales
$
859,319
$
817,335
$
1,689,862
$
1,520,490
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
Six months ended
(in thousands)
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
Gift cards:
Beginning of period
$
32,844
$
30,809
$
36,783
$
34,442
Gift cards redeemed and breakage recognized to net sales
(18,295)
(19,210)
(36,555)
(36,380)
Gift cards issued
15,569
17,092
29,890
30,629
End of period
$
30,118
$
28,691
$
30,118
$
28,691
Loyalty programs:
Beginning of period
$
16,243
$
12,955
$
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 July 30, 2022, the Schottenstein Affiliates beneficially owned approximately 22% of the Company's outstanding common shares, representing approximately 58% of the combined voting power of the Company, consisting of, in the aggregate, 6.8 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 our fulfillment center and certain store locations owned by the Schottenstein Affiliates. During the three months ended July 30, 2022 and July 31, 2021, we recorded rent expense from leases with Schottenstein Affiliates of $2.5 million and $2.7 million, respectively. During the six months ended July 30, 2022 and July 31, 2021, we recorded rent expense from leases with Schottenstein Affiliates of $5.0 million and $5.4 million, respectively. As of July 30, 2022, January 29, 2022, and July 31, 2021, we had related party current operating lease liabilities of $5.3 million, $6.3 million, and $6.4 million, respectively, and non-current operating lease liabilities of $9.6 million, $18.3 million, and $21.3 million, respectively.
Other Purchases and Services- During the three months ended July 30, 2022 and July 31, 2021, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.4 million and $1.1 million, respectively. For both the six months ended July 30, 2022 and July 31, 2021, we had other purchases and services we incurred from the Schottenstein Affiliates of $2.5 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 both the three months ended July 30, 2022 and July 31, 2021, we recorded royalty expense for amounts paid to ABG-Camuto of $4.6 million. For both the six months ended July 30, 2022 and July 31, 2021, we recorded royalty expense for amounts paid to ABG-Camuto of $9.2 million. 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 six months ended July 30, 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
Six months ended
(in thousands)
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
Weighted average basic shares outstanding
69,604
72,932
71,263
72,773
Dilutive effect of stock-based compensation awards
For the three months ended July 30, 2022 and July 31, 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 3.1 million and 2.9 million, respectively. For both the six months ended July 30, 2022 and July 31, 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 3.0 million.
5. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:
Three months ended
Six months ended
(in thousands)
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
Stock options
$
—
$
132
$
101
$
385
Restricted and director stock units
7,369
5,776
15,862
12,980
$
7,369
$
5,908
$
15,963
$
13,365
The following table summarizes the stock-based compensation award share activity for RSUs for the six months ended July 30, 2022:
(in thousands)
Shares of Time-Based RSUs
Shares of Performance-Based RSUs
Outstanding - beginning of period
6,058
744
Granted
1,915
614
Vested
(641)
(174)
Forfeited
(115)
—
Outstanding - end of period
7,217
1,184
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:
(in thousands)
July 30, 2022
January 29, 2022
July 31, 2021
Class A
Class B
Class A
Class B
Class A
Class B
Authorized shares
250,000
100,000
250,000
100,000
250,000
100,000
Issued shares
88,397
7,733
87,793
7,733
87,405
7,733
Outstanding shares
56,803
7,733
65,624
7,733
65,236
7,733
Treasury shares
31,594
—
22,169
—
22,169
—
We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.
Dividends- On August 25, 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 October 6, 2022 to shareholders of record at the close of business on September 22, 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 six months ended July 30, 2022, we repurchased 9.4 million Class A common shares at an aggregate cost of $128.5 million, with $206.4 million of Class A common shares that remain authorized under the program as of July 30, 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)
July 30, 2022
January 29, 2022
July 31, 2021
Customer accounts receivables:
Serviced by third-party provider with guaranteed payment
$
31,172
$
27,827
$
27,638
Serviced by third-party provider without guaranteed payment
2022 ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility ("2020 ABL Revolver") with our current senior secured asset-based revolving credit facility ("2022 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 2022 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 2022 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 July 30, 2022, the 2022 ABL Revolver had a borrowing base of $550.0 million, with $387.4 million in outstanding borrowings and $4.9 million in letters of credit issued, resulting in $157.7 million available for borrowings.
Borrowings and letters of credit issued under the 2022 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 3.9% as of July 30, 2022. Commitment fees are based on the unused portion of the 2022 ABL Revolver. Interest expense related to the 2022 ABL Revolver includes interest on borrowings and letters of credit, commitment fees, and the amortization of debt issuance costs.
Debt Covenants- The 2022 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 2022 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 2022 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, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of July 30, 2022, we were in compliance with all financial covenants.
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 July 30, 2022, the total future minimum lease payment requirements under these guarantees were approximately $12.0 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS FOR THE SECOND QUARTER OF 2022
For the second quarter of 2022, consolidated net sales increased 5.1% and comparable sales increased 6.2% over the same period last year with each of our three segments contributing to these increases. Net sales during the second quarter of 2022 from our Owned Brands increased 40.4% over the same period last year, with Owned Brands represented 22.7% of consolidated net sales as compared to 17.0% for the same period last year. This growth came despite volatile market conditions, including increased freight costs and supply chain disruptions. We continue to make progress on our initiatives centered on our three pillars - Customer, Brand, and Speed - as we work towards our long-term strategic plans.
IMPACT OF THE COVID-19 PANDEMIC ON OUR RESULTS OF OPERATIONS
The COVID-19 pandemic continues to impact the global economy and has created supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. While we experienced continued improvement in our performance during the second quarter of 2022, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends in our business will continue.
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 as of July 30, 2022, which was significant objective negative evidence in considering whether 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 July 30, 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 July 30, 2022:
•Net sales increased to $859.3 million from $817.3 million for the three months ended July 31, 2021.
•Gross profit as a percentage of net sales was 34.4% compared to 34.8% for the same period last year.
•Net income was $46.2 million, or $0.62 per diluted share, which included after-tax charges of $2.0 million primarily related to impairment and restructuring charges, offset by the change in valuation allowance on deferred tax assets of $2.1 million. Net income for the three months ended July 31, 2021 was $42.9 million, or $0.55 per diluted share, which included after-tax charges of $6.0 million primarily related to target acquisition costs, restructuring charges, and impairment charges, partially offset by the change in valuation allowance on deferred tax assets of $5.4 million, or $0.01 per diluted share on a net basis.
Comparable Sales Performance Metric- The following table presents the change in comparable sales for each segment and in total:
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 July 30, 2022 and July 31, 2021, we had the following number of stores:
July 30, 2022
July 31, 2021
U.S. Retail segment - DSW stores
506
515
Canada Retail segment:
The Shoe Company stores
113
116
DSW stores
25
27
138
143
Total number of stores
644
658
RESULTS OF OPERATIONS
SECOND QUARTER OF 2022 COMPARED WITH SECOND QUARTER OF 2021
(amounts in thousands, except per share amounts)
Three months ended
July 30, 2022
July 31, 2021
Change
Amount
% of Net Sales
Amount
% of Net Sales
Amount
%
Net sales
$
859,319
100.0
%
$
817,335
100.0
%
$
41,984
5.1
%
Cost of sales
(563,649)
(65.6)
(532,654)
(65.2)
(30,995)
5.8
%
Gross profit
295,670
34.4
284,681
34.8
10,989
3.9
%
Operating expenses
(228,690)
(26.6)
(224,385)
(27.5)
(4,305)
1.9
%
Income from equity investments
2,435
0.3
2,290
0.3
145
6.3
%
Impairment charges
(1,816)
(0.2)
(1,174)
(0.1)
(642)
54.7
%
Operating profit
67,599
7.9
61,412
7.5
6,187
10.1
%
Interest expense, net
(2,752)
(0.3)
(8,072)
(1.0)
5,320
(65.9)
%
Non-operating income (expenses), net
37
—
(244)
—
281
NM
Income before income taxes
64,884
7.6
53,096
6.5
11,788
22.2
%
Income tax provision
(18,671)
(2.2)
(10,236)
(1.3)
(8,435)
82.4
%
Net income
$
46,213
5.4
%
$
42,860
5.2
%
$
3,353
7.8
%
Basic and diluted earnings per share:
Basic earnings per share
$
0.66
$
0.59
$
0.07
11.9
%
Diluted earnings per share
$
0.62
$
0.55
$
0.07
12.7
%
Weighted average shares used in per share calculations:
Net Sales- The following summarizes net sales by segment:
Three months ended
(dollars in thousands)
July 30, 2022
July 31, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Comparable Sales
Segment net sales:
U.S. Retail
$
734,063
83.5
%
$
723,093
87.0
%
$
10,970
1.5
%
2.7
%
Canada Retail
78,284
8.9
%
57,585
6.9
%
20,699
35.9
%
47.3
%
Brand Portfolio
66,351
7.6
%
50,529
6.1
%
15,822
31.3
%
43.3
%
Total segment net sales
878,698
100.0
%
831,207
100.0
%
47,491
5.7
%
6.2
%
Elimination of intersegment net sales
(19,379)
(13,872)
(5,507)
39.7
%
Consolidated net sales
$
859,319
$
817,335
$
41,984
5.1
%
The improvement in sales during the three months ended July 30, 2022 over the same period last year was primarily due to the increase in comparable sales across all segments, with a significant increase from the Canada Retail segment as it was impacted during the three months ended July 31, 2021 by continued mandated closures and restrictions in certain key markets. The U.S. Retail segment's comparable sales benefited from higher comparable average unit retail prices. In addition, wholesale sales in the Brand Portfolio segment were higher in the second quarter of 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 stores closed since the end of the second quarter of 2021.
Gross Profit- The following summarizes gross profit by segment:
Three months ended
(dollars in thousands)
July 30, 2022
July 31, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Basis Points
Segment gross profit:
U.S. Retail
$
251,143
34.2
%
$
256,893
35.5
%
$
(5,750)
(2.2)
%
(130)
Canada Retail
30,974
39.6
%
18,768
32.6
%
12,206
65.0
%
700
Brand Portfolio
12,294
18.5
%
8,533
16.9
%
3,761
44.1
%
160
Total segment gross profit
294,411
33.5
%
284,194
34.2
%
10,217
3.6
%
(70)
Net recognition of intersegment gross profit
1,259
487
772
Consolidated gross profit
$
295,670
34.4
%
$
284,681
34.8
%
$
10,989
3.9
%
(40)
The increase in consolidated gross profit was primarily driven by increased sales during the second quarter of 2022 over the same period last year, partially offset by higher freight costs. The decrease in U.S. Retail segment gross profit was also impacted by 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. Consolidated gross profit as a percentage of consolidated net sales was down slightly due to higher freight costs impacting all of our segments, as well as the U.S. Retail segment with an increase in clearance sales and distribution costs, whereas the Canada Retail and Brand Portfolio segments increased due to being less promotional and improved leverage of occupancy costs and royalty expenses on higher sales volume.
The net recognition of intersegment gross profit consisted of the following:
Three months ended
(in thousands)
July 30, 2022
July 31, 2021
Recognition (elimination) of intersegment activity:
Net sales recognized by Brand Portfolio segment
$
(19,379)
$
(13,872)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
12,554
9,707
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
8,084
4,652
$
1,259
$
487
Operating Expenses- For the three months ended July 30, 2022, operating expenses increased by $4.3 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses in line with the increase in net sales, partially offset by target acquisition costs recognized last year. Operating expenses as a percentage of sales improved to 26.6% compared to 27.5% in the same period last year due to the improvement in net sales year over year as we leveraged our fixed costs.
Interest Expense, net- For the three months ended July 30, 2022, interest expense, net, decreased by $5.3 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 2022 ABL Revolver.
Income Taxes- For the three months ended July 30, 2022 and July 31, 2021, our effective tax rate was 28.8% and 19.3%, respectively. The rate for three months ended July 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the three months ended July 31, 2021 was the result of maintaining a full valuation allowance on deferred tax assets.
SIX MONTHS OF 2022 COMPARED WITH SIX MONTHS OF 2021
(amounts in thousands, except per share amounts)
Six months ended
July 30, 2022
July 31, 2021
Change
Amount
% of Net Sales
Amount
% of Net Sales
Amount
%
Net sales
$
1,689,862
100.0
%
$
1,520,490
100.0
%
$
169,372
11.1
%
Cost of sales
(1,118,447)
(66.2)
(1,019,698)
(67.1)
(98,749)
9.7
%
Gross profit
571,415
33.8
500,792
32.9
70,623
14.1
%
Operating expenses
(452,116)
(26.8)
(425,199)
(28.0)
(26,917)
6.3
%
Income from equity investments
4,380
0.3
3,998
0.3
382
9.6
%
Impairment charges
(2,888)
(0.2)
(1,174)
(0.1)
(1,714)
146.0
%
Operating profit
120,791
7.1
78,417
5.1
42,374
54.0
%
Interest expense, net
(5,704)
(0.3)
(16,886)
(1.1)
11,182
(66.2)
%
Loss on extinguishment of debt and write-off of debt issuance costs
(12,862)
(0.7)
—
—
(12,862)
NM
Non-operating income, net
43
—
562
—
(519)
(92.3)
%
Income before income taxes
102,268
6.1
62,093
4.0
40,175
64.7
%
Income tax provision
(29,873)
(1.8)
(2,207)
(0.1)
(27,666)
1,253.6
%
Net income
$
72,395
4.3
%
$
59,886
3.9
%
$
12,509
20.9
%
Basic and diluted earnings per share:
Basic earnings per share
$
1.02
$
0.82
$
0.20
24.4
%
Diluted earnings per share
$
0.96
$
0.78
$
0.18
23.1
%
Weighted average shares used in per share calculations:
Basic shares
71,263
72,773
(1,510)
(2.1)
%
Diluted shares
75,369
77,271
(1,902)
(2.5)
%
NM - Not meaningful
Net Sales- The following summarizes net sales by segment:
Six months ended
(dollars in thousands)
July 30, 2022
July 31, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Comparable Sales
Segment net sales:
U.S. Retail
$
1,436,808
82.8%
$
1,343,751
86.7%
$
93,057
6.9
%
7.8
%
Canada Retail
134,599
7.8%
98,189
6.3%
36,410
37.1
%
44.8
%
Brand Portfolio
163,807
9.4%
107,956
7.0%
55,851
51.7
%
31.5
%
Total segment net sales
1,735,214
100%
1,549,896
100.0%
185,318
12.0
%
10.4
%
Elimination of intersegment net sales
(45,352)
(29,406)
(15,946)
54.2
%
Consolidated net sales
$
1,689,862
$
1,520,490
$
169,372
11.1
%
The improvement in sales during the six months ended July 30, 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 six months ended July 31, 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 continued mandated closures and restrictions in certain key markets. In addition, wholesale sales in the Brand Portfolio segment were higher in the first half of 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 stores closed since the end of the second quarter of 2021.
Gross Profit- The following summarizes gross profit by segment:
Six months ended
(dollars in thousands)
July 30, 2022
July 31, 2021
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Basis Points
Segment gross profit:
U.S. Retail
$
484,210
33.7
%
$
450,006
33.5
%
$
34,204
7.6
%
20
Canada Retail
49,847
37.0
%
29,603
30.1
%
20,244
68.4
%
690
Brand Portfolio
36,136
22.1
%
20,459
19.0
%
15,677
76.6
%
310
Total segment gross profit
570,193
32.9
%
500,068
32.3
%
70,125
14.0
%
60
Net recognition of intersegment gross profit
1,222
724
498
Consolidated gross profit
$
571,415
33.8
%
$
500,792
32.9
%
$
70,623
14.1
%
90
The improvement in consolidated gross profit was primarily driven by increased sales during the six months ended July 30, 2022 over the same period last year and being less promotional, partially offset by higher freight costs and distribution costs. Gross profit as a percentage of net sales for the U.S. Retail and Canada Retail segments increased due to being less promotional and improved leverage on occupancy costs, partially offset by higher freight costs in both segments and higher distribution costs in the U.S. Retail segment. The higher distribution costs within the U.S. Retail segment were primarily driven by moving digital fulfillment activities from our Columbus location to our New Jersey location. The improvement in gross profit as a percentage of net sales for the Brand Portfolio segment was primarily driven by the leverage of royalty expenses on higher sales volume.
The net recognition of intersegment profit consisted of the following:
Six months ended
(in thousands)
July 30, 2022
July 31, 2021
Recognition (elimination) of intersegment activity:
Net sales recognized by Brand Portfolio segment
$
(45,352)
$
(29,406)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
30,723
20,642
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
15,851
9,488
$
1,222
$
724
Operating Expenses- For the six months ended July 30, 2022, operating expenses increased by $26.9 million over the same period last year, primarily driven by an increase in store payroll and marketing expenses in line with the increase in net sales. Operating expenses as a percentage of sales improved to 26.8% compared to 28.0% in the same period last year, due to the improvement in net sales year over year as we leveraged our fixed costs.
Interest Expense, net- For the six months ended July 30, 2022, interest expense, net, decreased by $11.2 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 2022 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 six months ended July 30, 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 2020 ABL Revolver during the six months ended July 30, 2022, we also wrote-off $0.2 million of debt issuance costs.
Income Taxes- For the six months ended July 30, 2022 and July 31, 2021, our effective tax rate was 29.2% and 3.6%, respectively. The rate for the six months ended July 30, 2022 was impacted by permanent tax adjustments, primarily non-deductible compensation. The rate for the six months ended July 31, 2021 was the result of maintaining a full valuation allowance on deferred tax assets along with net discrete tax benefits, primarily as a result of adjustments to our estimated 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 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 six months ended July 30, 2022, we repurchased 9.4 million Class A common shares at an aggregate cost of $128.5 million, with $206.4 million of Class A common shares that remain authorized under the program as of July 30, 2022. During the six months ended July 31, 2021, we did not repurchase any Class A common shares. We anticipate receiving approximately $160.0 million in the near future from the Internal Revenue Service as a result of the Coronavirus Aid, Relief, and Economic Security Act.
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 2022 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:
Six months ended
(in thousands)
July 30, 2022
July 31, 2021
Change
Net cash provided by operating activities
$
10,864
$
96,229
$
(85,365)
Net cash used in investing activities
(40,234)
(13,189)
(27,045)
Net cash provided by (used in) financing activities
7,398
(94,955)
102,353
Effect of exchange rate changes on cash balances
80
338
(258)
Net decrease in cash, cash equivalents and restricted cash
$
(21,892)
$
(11,577)
$
(10,315)
OPERATING CASH FLOWS
The decrease in net cash provided by operations was driven by higher spend on working capital as our business continues to recover from the impacts of the COVID-19 pandemic with increases in consolidated inventories, increases in receivables on wholesale sales, and timing of payments to vendors. This was partially offset by the increase in net income recognized in the six months ended July 30, 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, and stock-based compensation expense.
INVESTING CASH FLOWS
For the six months ended July 30, 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 six months ended July 31, 2021, the net cash used in investing activities was due to capital expenditures relating to IT projects and store improvements.
For the six months ended July 30, 2022, net cash provided by financing activities was due to net receipts of $387.4 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 9.4 million Class A common shares at an aggregate cost of $128.5 million, and the payment of dividends of $7.1 million. During the six months ended July 31, 2021, net cash used in financing activities was due to net payments of $83.2 million on our revolving lines of credit and payments on the Term Loan of $6.3 million.
DEBT
2022 ABL Revolver- On March 30, 2022, we replaced our 2020 ABL Revolver with our current 2022 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 2022 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 2022 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 July 30, 2022, the 2022 ABL Revolver had a borrowing base of $550.0 million, with $387.4 million in outstanding borrowings and $4.9 million in letters of credit issued, resulting in $157.7 million available for borrowings.
Debt Covenants- The 2022 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 2022 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 July 30, 2022, we were in compliance with all financial covenants.
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 $65.0 million to $75.0 million for capital expenditures in 2022, of which we invested $27.2 million during the six months ended July 30, 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 July 30, 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
May 1, 2022 to May 28, 2022
1,829
$
13.56
1,829
$
287,386
May 29, 2022 to July 2, 2022
1,558
$
13.92
1,543
$
265,894
July 3, 2022 to July 30, 2022
4,405
$
13.50
4,397
$
206,437
Total
7,792
$
13.62
7,769
(1) The total number of shares repurchased includes the shares repurchased as part of publicly announced programs and 22,605 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 August 25, 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 October 6, 2022 to shareholders of record at the close of business on September 22, 2022, and is expected to be recorded against retained earnings.
RESTRICTIONS
The 2022 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 July 30, 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:
August 31, 2022
By:
/s/ Jared Poff
Jared Poff
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized officer)