Designer Brands Inc. Reports Second Quarter 2023 Financial Results
Reporting sequential improvement in sales and gross margin over the first quarter 2023
Reaffirming 2023 guidance
COLUMBUS, Ohio, September 7, 2023 - Designer Brands Inc. (NYSE: DBI) (the "Company" and "Designer Brands"), one of the world's largest designers, producers, and retailers of footwear and accessories, announced financial results for the second quarter ended July 29, 2023.
Doug Howe, Chief Executive Officer, stated, "I am proud of the sequential improvement in both sales and profitability in the second quarter as well as the progress that has been made on our strategic initiatives, with several exciting milestones in the quarter – including new collaborations and celebrity partnerships. Our portfolio of Owned Brands and National Brand partners remains strong and we are excited to be rolling out our new athletic and athleisure offerings from Le Tigre and Keds while continuing to elevate our relationship with Nike during a time that athletic and athleisure demand continues to grow.
"The unique synergies between our legacy retail business and our brand portfolio are putting us on a path to being more resilient than ever and we will continue to build out our leadership and structure our teams accordingly. As we look ahead, we do anticipate near-term headwinds will persist, but we are confident in our plans to continue optimizing and spotlighting our unparalleled assortment."
Second Quarter Operating Results (Unless otherwise stated, all comparisons are to the second quarter of 2022)
•Net sales decreased 7.8% to $792.2 million.
•Total comparable sales decreased by 8.9%.
•Gross profit decreased to $273.4 million versus $295.7 million last year, and gross margin was 34.5% compared to 34.4% for the same period last year.
•Reported net income attributable to Designer Brands Inc. was $37.2 million, or diluted earnings per share ("EPS") of $0.56, including net after-tax charges of $0.03 per diluted share from adjusted items, primarily related to CEO transition, restructuring, and integration costs.
•Adjusted net income was $39.4 million, or adjusted diluted EPS of $0.59.
Liquidity
•Cash and cash equivalents totaled $46.2 million at the end of the second quarter of 2023, compared to $50.8 million at the end of the same period last year, with $233.7 million available for borrowings under our senior secured asset-based revolving credit facility and $85.0 million available for borrowings by September 21, 2023 under our new senior secured term loan credit agreement ("Term Loan"). Debt totaled $331.0 million at the end of the second quarter of 2023 compared to $387.4 million at the end of the same period last year.
•The Company ended the second quarter with inventories of $606.8 million compared to $694.0 million at the end of the same period last year.
Capital Allocation
•During the second quarter, the Company repurchased an aggregate 2.1 million Class A common shares, including open market purchases and purchases under our previously-disclosed Dutch auction tender offer. As of July 29, 2023, $166.5 million of Class A common shares remained available for future repurchase under the share repurchase program.
•During the third quarter through September 5, 2023, the Company has repurchased an additional $58.3 million Class A common shares through open market purchases at an average price of $10.18 per share. As of September 5, 2023, the Company maintains $102.8 million authorized for future repurchases under its share repurchase program.
•The Company anticipates drawing an additional $85.0 million under the Term Loan throughout the remainder of 2023. As of September 5, 2023, our outstanding debt balance was $341.4 million.
Store Openings and Closings
During the second quarter of 2023, we closed one store in the U.S. and one store in Canada, resulting in a total of 498 U.S. stores and 138 Canadian stores as of July 29, 2023.
Updated 2023 Financial Outlook
The Company is reaffirming the following guidance for the full year 2023:
Metric
Guidance
Net Sales:
Designer Brands net sales growth, excluding Keds
Down mid- to high-single digits
Incremental net sales from Keds acquisition
$75.0 million to $85.0 million
Diluted EPS:
Designer Brands, excluding Keds
$1.20 - $1.50
Contribution from Keds acquisition
~$0.00
Webcast and Conference Call
The Company is hosting a conference call today at 8:30 am Eastern Time. Investors and analysts interested in participating in the call are invited to dial 1-888-317-6003, or the international dial in, 1-412-317-6061, and reference conference ID number 7689007 approximately ten minutes prior to the start of the conference call. The conference call will also be broadcast live over the internet and can be accessed through the following link, as well as through the Company's investor website at investors.designerbrands.com:
https://app.webinar.net/5xmnwoEQVrJ
For those unable to listen to the live webcast, an archived version will be available at the same location until September 21, 2023. A replay of the teleconference will be available by dialing the following numbers:
U.S.: 1-877-344-7529
Canada: 1-855-669-9658
International: 1-412-317-0088
Passcode: 4386380
Important information may be disseminated initially or exclusively via the Company’s investor website; investors should consult the site to access this information.
About Designer Brands
Designer Brands is one of the world's largest designers, producers, and retailers of the most recognizable footwear brands and accessories, transforming and defining the footwear industry through a mission of inspiring self-expression. With a diversified, world-class portfolio of coveted brands, including Keds, Lucky Brand, Crown Vintage, Vince Camuto, Topo Athletic, Jessica Simpson, Le Tigre and others, Designer Brands designs and produces on-trend footwear and accessories for all of life's occasions delivered to the consumer through a robust direct-to-consumer omni-channel infrastructure and powerful national wholesale distribution. Powered by a billion-dollar digital commerce business across multiple domains and nearly 640 DSW Designer Shoe Warehouse and The Shoe Company stores in North America, Designer Brands delivers current, in-line footwear and accessories from the largest national brands in the industry and holds leading market share positions in key product categories across Women's, Men's, and Kids'. Designer Brands also distributes its brands internationally through select wholesale and distributor relationships while also leveraging design and sourcing expertise to build private label product for national retailers. Designer Brands is committed to being a difference maker in the world, taking steps forward to advance diversity, equity, and inclusion in the footwear industry and supporting a global community and the health of the planet by donating more than seven million pairs of shoes to the global non-profit Soles4Souls. To learn more, visit www.designerbrands.com.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements in this press release may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by the use of forward-looking 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. These statements are based on the Company's current views and expectations and involve known and unknown 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. These factors include, but are not limited to: uncertain general economic conditions, including recession concerns, inflationary pressures and
rising interest rates, and the related impacts to consumer discretionary spending; supply chain challenges; risks related to adverse public health developments; 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 stores, whether as a result of reliance on third-party providers, or otherwise; our ability to retain our existing management team, and continue to attract qualified new personnel; risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information technology ("IT") systems; risks related to the implementation of an enterprise resource planning system software solution and other IT systems; our reliance on our loyalty programs and marketing to drive traffic, sales, and customer loyalty; 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; domestic and global political and social conditions; geopolitical tensions; 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. Risks and other factors that could cause our actual results to differ materially from our forward-looking statements are described in the Company's latest Annual Report on Form 10-K or other reports made or filed with the Securities and Exchange Commission. All forward-looking statements speak only as of the time when made. The Company undertakes no obligation to update or revise the forward-looking statements included in this press release to reflect any future events or circumstances.
DESIGNER BRANDS INC.
SEGMENT RESULTS
(unaudited)
Net Sales
Three months ended
(dollars in thousands)
July 29, 2023
July 30, 2022
Change
Amount
% of Segment Net Sales
Amount
% of Total Segment Net Sales
Amount
%
Segment net sales:
U.S. Retail
$
658,542
81.0
%
$
734,063
83.5
%
$
(75,521)
(10.3)
%
Canada Retail
70,266
8.6
%
78,284
8.9
%
(8,018)
(10.2)
%
Brand Portfolio
84,217
10.4
%
66,351
7.6
%
17,866
26.9
%
Total segment net sales
813,025
100.0
%
878,698
100.0
%
(65,673)
(7.5)
%
Elimination of intersegment net sales
(20,808)
(19,379)
(1,429)
7.4
%
Consolidated net sales
$
792,217
$
859,319
$
(67,102)
(7.8)
%
Six months ended
(dollars in thousands)
July 29, 2023
July 30, 2022
Change
Amount
% of Segment Net Sales
Amount
% of Total Segment Net Sales
Amount
%
Segment net sales:
U.S. Retail
$
1,271,428
80.8
%
$
1,436,808
82.8
%
$
(165,380)
(11.5)
%
Canada Retail
124,221
7.9
%
134,599
7.8
%
(10,378)
(7.7)
%
Brand Portfolio
177,200
11.3
%
163,807
9.4
%
13,393
8.2
%
Total segment net sales
1,572,849
100.0
%
1,735,214
100.0
%
(162,365)
(9.4)
%
Elimination of intersegment net sales
(38,550)
(45,352)
6,802
(15.0)
%
Consolidated net sales
$
1,534,299
$
1,689,862
$
(155,563)
(9.2)
%
Net Sales by Brand Categories
(in thousands)
U.S. Retail
Canada Retail
Brand Portfolio
Eliminations
Consolidated
Three months ended July 29, 2023
Owned Brands:(1)
Direct-to-consumer
$
115,749
$
—
$
15,776
$
—
$
131,525
External customer wholesale, commission income, and other
—
—
47,633
—
47,633
Intersegment wholesale and commission income
—
—
20,808
(20,808)
—
Total Owned Brands
115,749
—
84,217
(20,808)
179,158
National brands
542,793
—
—
—
542,793
Canada Retail(2)
—
70,266
—
—
70,266
Total net sales
$
658,542
$
70,266
$
84,217
$
(20,808)
$
792,217
Three months ended July 30, 2022
Owned Brands:(1)
Direct-to-consumer
$
147,877
$
—
$
7,793
$
—
$
155,670
External customer wholesale, commission income, and other
—
—
39,179
—
39,179
Intersegment wholesale and commission income
—
—
19,379
(19,379)
—
Total Owned Brands
147,877
—
66,351
(19,379)
194,849
National brands
586,186
—
—
—
586,186
Canada Retail(2)
—
78,284
—
—
78,284
Total net sales
$
734,063
$
78,284
$
66,351
$
(19,379)
$
859,319
Six months ended July 29, 2023
Owned Brands:(1)
Direct-to-consumer
$
238,958
$
—
$
26,400
$
—
$
265,358
External customer wholesale, commission income, and other
—
—
112,250
—
112,250
Intersegment wholesale and commission income
—
—
38,550
(38,550)
—
Total Owned Brands
238,958
—
177,200
(38,550)
377,608
National brands
1,032,470
—
—
—
1,032,470
Canada Retail(2)
—
124,221
—
—
124,221
Total net sales
$
1,271,428
$
124,221
$
177,200
$
(38,550)
$
1,534,299
Six months ended July 30, 2022
Owned Brands:(1)
Direct-to-consumer
$
287,032
$
—
$
14,320
$
—
$
301,352
External customer wholesale, commission income, and other
—
—
104,135
—
104,135
Intersegment wholesale and commission income
—
—
45,352
(45,352)
—
Total Owned Brands
287,032
—
163,807
(45,352)
405,487
National brands
1,149,776
—
—
—
1,149,776
Canada Retail(2)
—
134,599
—
—
134,599
Total net sales
$
1,436,808
$
134,599
$
163,807
$
(45,352)
$
1,689,862
(1) "Owned Brands" refers to those brands we have rights to sell through ownership or license arrangements. Beginning in the first quarter of 2023, sales of the Keds brand are included in Owned Brands as a result of our acquisition of the Keds business. Sales of the Keds brand in periods prior to the first quarter of 2023 are not restated, as this brand was considered a national brand during those periods.
(2) We currently do not report the Canada Retail segment net sales by brand categories.
Net recognition (elimination) of intersegment gross profit
(490)
1,259
(1,749)
Consolidated gross profit
$
273,387
34.5
%
$
295,670
34.4
%
$
(22,283)
(7.5)
%
10
Six months ended
(dollars in thousands)
July 29, 2023
July 30, 2022
Change
Amount
% of Segment Net Sales
Amount
% of Segment Net Sales
Amount
%
Basis Points
Segment gross profit:
U.S. Retail
$
422,582
33.2
%
$
484,210
33.7
%
$
(61,628)
(12.7)
%
(50)
Canada Retail
40,985
33.0
%
49,847
37.0
%
(8,862)
(17.8)
%
(400)
Brand Portfolio
46,383
26.2
%
36,136
22.1
%
10,247
28.4
%
410
Total segment gross profit
509,950
32.4
%
570,193
32.9
%
(60,243)
(10.6)
%
(50)
Net recognition of intersegment gross profit
1,176
1,222
(46)
Consolidated gross profit
$
511,126
33.3
%
$
571,415
33.8
%
$
(60,289)
(10.6)
%
(50)
Intersegment Eliminations
Three months ended
(in thousands)
July 29, 2023
July 30, 2022
Intersegment recognition and elimination activity:
Net sales recognized by Brand Portfolio segment
$
(20,808)
$
(19,379)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
15,066
12,554
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
5,252
8,084
$
(490)
$
1,259
Six months ended
(in thousands)
July 29, 2023
July 30, 2022
Intersegment recognition and elimination activity:
Net sales recognized by Brand Portfolio segment
$
(38,550)
$
(45,352)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment
28,277
30,723
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
11,449
15,851
$
1,176
$
1,222
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
Three months ended
Six months ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Net sales
$
792,217
$
859,319
$
1,534,299
$
1,689,862
Cost of sales
(518,830)
(563,649)
(1,023,173)
(1,118,447)
Gross profit
273,387
295,670
511,126
571,415
Operating expenses
(214,530)
(228,690)
(434,649)
(452,116)
Income from equity investments
2,138
2,435
4,469
4,380
Impairment charges
(308)
(1,816)
(649)
(2,888)
Operating profit
60,687
67,599
80,297
120,791
Interest expense, net
(6,932)
(2,752)
(13,529)
(5,704)
Loss on extinguishment of debt and write-off of debt issuance costs
—
—
—
(12,862)
Non-operating income, net
579
37
245
43
Income before income taxes
54,334
64,884
67,013
102,268
Income tax provision
(17,079)
(18,671)
(18,385)
(29,873)
Net income
37,255
46,213
48,628
72,395
Net income attributable to redeemable noncontrolling interest
(51)
—
(9)
—
Net income attributable to Designer Brands Inc.
$
37,204
$
46,213
$
48,619
$
72,395
Diluted earnings per share attributable to Designer Brands Inc.
$
0.56
$
0.62
$
0.73
$
0.96
Weighted average diluted shares
66,997
73,942
66,863
75,369
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
July 29, 2023
January 28, 2023
July 30, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
46,187
$
58,766
$
50,799
Receivables, net
97,364
77,763
204,880
Inventories
606,841
605,652
694,010
Prepaid expenses and other current assets
50,308
47,750
51,558
Total current assets
800,700
789,931
1,001,247
Property and equipment, net
226,634
235,430
242,147
Operating lease assets
751,637
700,373
646,062
Goodwill
135,259
97,115
93,655
Intangible assets, net
72,640
31,866
20,237
Deferred tax assets
48,100
48,285
—
Equity investments
62,938
63,820
61,957
Other assets
49,430
42,798
37,134
Total assets
$
2,147,338
$
2,009,618
$
2,102,439
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
294,724
$
255,364
$
337,543
Accrued expenses
172,130
190,676
210,469
Current maturities of long-term debt
2,500
—
—
Current operating lease liabilities
181,484
190,086
192,130
Total current liabilities
650,838
636,126
740,142
Long-term debt
328,506
281,035
387,441
Non-current operating lease liabilities
682,248
631,412
588,064
Other non-current liabilities
22,784
24,989
25,844
Total liabilities
1,684,376
1,573,562
1,741,491
Redeemable noncontrolling interest
3,144
3,155
—
Total shareholders' equity
459,818
432,901
360,948
Total liabilities, redeemable noncontrolling interest, and shareholders' equity
$
2,147,338
$
2,009,618
$
2,102,439
DESIGNER BRANDS INC.
NON-GAAP RECONCILIATION
(unaudited and in thousands, except per share amounts)
Three months ended
Six months ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Operating expenses
$
(214,530)
$
(228,690)
$
(434,649)
$
(452,116)
Non-GAAP adjustments:
CEO transition costs
744
—
2,954
—
Restructuring and integration costs
818
992
2,938
1,606
Acquisition-related costs
90
—
1,597
—
Total non-GAAP adjustments
1,652
992
7,489
1,606
Adjusted operating expenses
$
(212,878)
$
(227,698)
$
(427,160)
$
(450,510)
Operating profit
$
60,687
$
67,599
$
80,297
$
120,791
Non-GAAP adjustments:
CEO transition costs
744
—
2,954
—
Restructuring and integration costs
818
992
2,938
1,606
Acquisition-related costs
90
—
1,597
—
Impairment charges
308
1,816
649
2,888
Total non-GAAP adjustments
1,960
2,808
8,138
4,494
Adjusted operating profit
$
62,647
$
70,407
$
88,435
$
125,285
Net income attributable to Designer Brands Inc.
$
37,204
$
46,213
$
48,619
$
72,395
Non-GAAP adjustments:
CEO transition costs
744
—
2,954
—
Restructuring and integration costs
818
992
2,938
1,606
Acquisition-related costs
90
—
1,597
—
Impairment charges
308
1,816
649
2,888
Loss on extinguishment of debt and write-off of debt issuance costs
—
—
—
12,862
Foreign currency transaction gains
(579)
(37)
(245)
(43)
Total non-GAAP adjustments before tax effect
1,381
2,771
7,893
17,313
Tax effect on above non-GAAP adjustments
(377)
(735)
(2,032)
(4,374)
Discrete and permanent tax on non-deductible CEO transition costs
1,750
—
1,897
—
Valuation allowance change on deferred tax assets
(607)
(2,135)
(2,724)
(2,495)
Total non-GAAP adjustments, after tax
2,147
(99)
5,034
10,444
Net income attributable to redeemable noncontrolling interest
51
—
9
—
Adjusted net income
$
39,402
$
46,114
$
53,662
$
82,839
Diluted earnings per share
$
0.56
$
0.62
$
0.73
$
0.96
Adjusted diluted earnings per share
$
0.59
$
0.62
$
0.80
$
1.10
Non-GAAP Measures
To supplement amounts presented in our consolidated financial statements determined in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company uses certain non-GAAP financial measures, including adjusted operating expenses, adjusted operating profit, adjusted net income, and adjusted diluted earnings per share as shown in the table above. These measures adjust for the effects of: (1) CEO transition costs; (2) restructuring and integration costs, including severance charges other than those included in CEO transition costs; (3) acquisition-related costs; (4) impairment charges; (5) loss on extinguishment of debt and write-off of debt issuance costs; (6) foreign currency transaction gains; (7) the net tax impact of such items, including discrete and permanent tax on non-deductible CEO transition costs; (8) the change in the valuation allowance on deferred tax assets; and (9) net income attributable to redeemable noncontrolling interest. The unaudited adjusted results should not be construed as an alternative to the reported results determined in accordance with GAAP. These financial measures are not based on any standardized methodology and are not necessarily comparable to similar measures presented by other companies. The Company believes these non-GAAP financial measures provide useful information to both management and investors to increase comparability to prior periods by adjusting for certain items that may not be indicative of core operating measures and to better identify trends in our business. The adjusted financial results are used by management to, and allow investors to, evaluate the operating performance of the Company compared to prior periods, when reviewed in conjunction with the Company’s GAAP statements. These amounts are not determined in accordance with GAAP and therefore should not be used exclusively in evaluating the Company’s business and operations.
Comparable Sales Performance Metric
We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses. We include in our comparable sales metric sales from stores in operation for at least 14 months at the beginning of the applicable 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 the e-commerce sales of the U.S. Retail and Canada Retail segments. 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 sales of www.vincecamuto.com. The e-commerce sales for Topo Athletic and the Keds business will be added to the comparable base for the Brand Portfolio segment beginning with the first quarter of 2024 and the second quarter of 2024, respectively. 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.
