|
|
|
|
Item 1.
|
Financial Statements
|
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 4, 2019
|
|
May 5, 2018
|
|
Revenue:
|
|
|
|
|
Net sales
|
$
|
869,992
|
|
|
$
|
710,437
|
|
|
Commission, franchise and other revenue
|
8,523
|
|
|
1,665
|
|
|
Total revenue
|
878,515
|
|
|
712,102
|
|
|
Cost of sales
|
(613,956
|
)
|
|
(505,212
|
)
|
|
Operating expenses
|
(222,806
|
)
|
|
(168,420
|
)
|
|
Income from equity investment in ABG-Camuto
|
2,228
|
|
|
—
|
|
|
Operating profit
|
43,981
|
|
|
38,470
|
|
|
Interest income (expense), net
|
(1,801
|
)
|
|
664
|
|
|
Non-operating expenses, net
|
(342
|
)
|
|
(2,137
|
)
|
|
Income before income taxes and loss from equity investment in TSL
|
41,838
|
|
|
36,997
|
|
|
Income tax provision
|
(10,644
|
)
|
|
(11,390
|
)
|
|
Loss from equity investment in TSL
|
—
|
|
|
(1,310
|
)
|
|
Net income
|
$
|
31,194
|
|
|
$
|
24,297
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
Basic earnings per share
|
$
|
0.41
|
|
|
$
|
0.30
|
|
|
Diluted earnings per share
|
$
|
0.40
|
|
|
$
|
0.30
|
|
|
Weighted average shares used in per share calculations:
|
|
|
|
|
Basic shares
|
77,004
|
|
|
80,108
|
|
|
Diluted shares
|
78,263
|
|
|
80,758
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 4, 2019
|
|
May 5, 2018
|
|
Net income
|
$
|
31,194
|
|
|
$
|
24,297
|
|
|
Other comprehensive income (loss), net of income taxes:
|
|
|
|
|
Foreign currency translation loss
|
(714
|
)
|
|
(4,685
|
)
|
|
Unrealized net gain (loss) on debt securities
|
242
|
|
|
(344
|
)
|
|
Reclassification adjustment for net losses (gains) realized in net income
|
(88
|
)
|
|
1,905
|
|
|
Total other comprehensive loss, net of income taxes
|
(560
|
)
|
|
(3,124
|
)
|
|
Total comprehensive income
|
$
|
30,634
|
|
|
$
|
21,173
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
70,671
|
|
|
$
|
99,369
|
|
|
$
|
197,162
|
|
|
Investments
|
51,259
|
|
|
69,718
|
|
|
71,708
|
|
|
Accounts receivable, net
|
78,287
|
|
|
68,870
|
|
|
13,571
|
|
|
Inventories
|
642,045
|
|
|
645,317
|
|
|
539,700
|
|
|
Prepaid expenses and other current assets
|
54,463
|
|
|
71,945
|
|
|
56,815
|
|
|
Total current assets
|
896,725
|
|
|
955,219
|
|
|
878,956
|
|
|
Property and equipment, net
|
405,156
|
|
|
409,576
|
|
|
352,550
|
|
|
Operating lease assets
|
993,622
|
|
|
—
|
|
|
—
|
|
|
Goodwill
|
90,881
|
|
|
89,513
|
|
|
25,899
|
|
|
Intangible assets
|
42,298
|
|
|
46,129
|
|
|
135
|
|
|
Deferred tax assets
|
27,909
|
|
|
30,283
|
|
|
28,174
|
|
|
Equity investments
|
60,193
|
|
|
58,125
|
|
|
2,401
|
|
|
Notes receivable from TSL
|
—
|
|
|
—
|
|
|
123,710
|
|
|
Other assets
|
32,384
|
|
|
31,739
|
|
|
19,793
|
|
|
Total assets
|
$
|
2,549,168
|
|
|
$
|
1,620,584
|
|
|
$
|
1,431,618
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Accounts payable
|
$
|
224,576
|
|
|
$
|
261,625
|
|
|
$
|
186,038
|
|
|
Accrued expenses
|
186,992
|
|
|
201,535
|
|
|
139,346
|
|
|
Current operating lease liabilities
|
184,456
|
|
|
—
|
|
|
—
|
|
|
Total current liabilities
|
596,024
|
|
|
463,160
|
|
|
325,384
|
|
|
Debt
|
235,000
|
|
|
160,000
|
|
|
—
|
|
|
Non-current operating lease liabilities
|
921,145
|
|
|
—
|
|
|
—
|
|
|
Other non-current liabilities
|
34,148
|
|
|
165,047
|
|
|
145,366
|
|
|
Total liabilities
|
1,786,317
|
|
|
788,207
|
|
|
470,750
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
Common shares paid-in capital, no par value
|
982,093
|
|
|
978,794
|
|
|
965,623
|
|
|
Treasury shares, at cost
|
(448,436
|
)
|
|
(373,436
|
)
|
|
(325,906
|
)
|
|
Retained earnings
|
257,453
|
|
|
254,718
|
|
|
359,342
|
|
|
Basis difference related to acquisition of commonly controlled entity
|
(24,993
|
)
|
|
(24,993
|
)
|
|
(24,993
|
)
|
|
Accumulated other comprehensive loss
|
(3,266
|
)
|
|
(2,706
|
)
|
|
(13,198
|
)
|
|
Total shareholders' equity
|
762,851
|
|
|
832,377
|
|
|
960,868
|
|
|
Total liabilities and shareholders' equity
|
$
|
2,549,168
|
|
|
$
|
1,620,584
|
|
|
$
|
1,431,618
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited and in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Amounts
|
|
|
Class A common shares
|
|
Class B common shares
|
|
Treasury shares
|
|
Common shares paid in capital
|
|
Treasury shares
|
|
Retained earnings
|
|
Basis difference related to acquisition of commonly controlled entity
|
|
Accumulated other comprehensive loss
|
|
Total
|
|
Three months ended May 4, 2019
|
|
Balance, February 2, 2019
|
70,672
|
|
|
7,733
|
|
|
15,091
|
|
|
$
|
978,794
|
|
|
$
|
(373,436
|
)
|
|
$
|
254,718
|
|
|
$
|
(24,993
|
)
|
|
$
|
(2,706
|
)
|
|
$
|
832,377
|
|
|
Cumulative effect of accounting change
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,556
|
)
|
|
—
|
|
|
—
|
|
|
(9,556
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,194
|
|
|
—
|
|
|
—
|
|
|
31,194
|
|
|
Stock-based compensation activity
|
172
|
|
|
—
|
|
|
—
|
|
|
3,299
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,299
|
|
|
Repurchase of Class A common shares
|
(3,410
|
)
|
|
—
|
|
|
3,410
|
|
|
—
|
|
|
(75,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(75,000
|
)
|
|
Dividends ($0.25 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,903
|
)
|
|
—
|
|
|
—
|
|
|
(18,903
|
)
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(560
|
)
|
|
(560
|
)
|
|
Balance, May 4, 2019
|
67,434
|
|
|
7,733
|
|
|
18,501
|
|
|
$
|
982,093
|
|
|
$
|
(448,436
|
)
|
|
$
|
257,453
|
|
|
$
|
(24,993
|
)
|
|
$
|
(3,266
|
)
|
|
$
|
762,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 5, 2018
|
|
Balance, February 3, 2018
|
72,294
|
|
|
7,733
|
|
|
13,091
|
|
|
$
|
961,245
|
|
|
$
|
(325,906
|
)
|
|
$
|
354,979
|
|
|
$
|
(24,993
|
)
|
|
$
|
(10,074
|
)
|
|
$
|
955,251
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,297
|
|
|
—
|
|
|
—
|
|
|
24,297
|
|
|
Stock-based compensation activity
|
176
|
|
|
—
|
|
|
—
|
|
|
4,378
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,378
|
|
|
Dividends ($0.25 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,934
|
)
|
|
—
|
|
|
—
|
|
|
(19,934
|
)
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,124
|
)
|
|
(3,124
|
)
|
|
Balance, May 5, 2018
|
72,470
|
|
|
7,733
|
|
|
13,091
|
|
|
$
|
965,623
|
|
|
$
|
(325,906
|
)
|
|
$
|
359,342
|
|
|
$
|
(24,993
|
)
|
|
$
|
(13,198
|
)
|
|
$
|
960,868
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 4, 2019
|
|
May 5, 2018
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
$
|
31,194
|
|
|
$
|
24,297
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
21,422
|
|
|
18,011
|
|
|
Stock-based compensation expense
|
4,370
|
|
|
4,514
|
|
|
Deferred income taxes
|
(364
|
)
|
|
(413
|
)
|
|
Loss (income) from equity investments
|
(2,228
|
)
|
|
1,310
|
|
|
Lease exit non-cash charges
|
—
|
|
|
3,559
|
|
|
Loss on foreign currency reclassified from accumulated other comprehensive loss
|
—
|
|
|
1,745
|
|
|
Other
|
(3,623
|
)
|
|
6,248
|
|
|
Change in operating assets and liabilities, net of acquired amounts:
|
|
|
|
|
Accounts receivable
|
(10,330
|
)
|
|
5,665
|
|
|
Inventories
|
1,235
|
|
|
(37,797
|
)
|
|
Prepaid expenses and other current assets
|
(880
|
)
|
|
(7,361
|
)
|
|
Accounts payable
|
(32,254
|
)
|
|
12,767
|
|
|
Accrued expenses
|
(11,568
|
)
|
|
(7,250
|
)
|
|
Net cash provided by (used in) operating activities
|
(3,026
|
)
|
|
25,295
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Cash paid for property and equipment
|
(24,879
|
)
|
|
(18,185
|
)
|
|
Purchases of available-for-sale investments
|
—
|
|
|
(8,106
|
)
|
|
Sales of available-for-sale investments
|
18,691
|
|
|
59,915
|
|
|
Additional borrowings by TSL
|
—
|
|
|
(15,989
|
)
|
|
Net cash provided by (used in) investing activities
|
(6,188
|
)
|
|
17,635
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Borrowing on revolving line of credit
|
215,200
|
|
|
—
|
|
|
Payments on revolving line of credit
|
(140,200
|
)
|
|
—
|
|
|
Cash paid for treasury shares
|
(75,000
|
)
|
|
—
|
|
|
Dividends paid
|
(18,903
|
)
|
|
(19,934
|
)
|
|
Other
|
(986
|
)
|
|
(1,766
|
)
|
|
Net cash used in financing activities
|
(19,889
|
)
|
|
(21,700
|
)
|
|
Effect of exchange rate changes on cash balances
|
839
|
|
|
—
|
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
(28,264
|
)
|
|
21,230
|
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
100,568
|
|
|
175,932
|
|
|
Cash, cash equivalents, and restricted cash, end of period
|
$
|
72,304
|
|
|
$
|
197,162
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid for income taxes
|
$
|
721
|
|
|
$
|
2,401
|
|
|
Cash paid for interest on debt
|
$
|
1,987
|
|
|
$
|
—
|
|
|
Cash paid for operating lease liabilities
|
$
|
59,162
|
|
|
$
|
—
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Property and equipment purchases not yet paid
|
$
|
6,542
|
|
|
$
|
7,186
|
|
|
Operating lease liabilities arising from lease asset additions (excluding ASU 2016-02 transition adjustments)
|
$
|
4,621
|
|
|
$
|
—
|
|
|
Adjustment to operating lease assets and lease liabilities for modifications
|
$
|
19,147
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Business Operations- On March 19, 2019, DSW Inc. changed its name to Designer Brands Inc. References to "DSW" refer to the DSW Designer Shoe Warehouse banner unless otherwise stated. The Company is a leading North American footwear and accessories designer, producer and retailer.
On May 10, 2018, we acquired the remaining interest in Town Shoes Limited ("TSL") that we did not previously own. Beginning with our second quarter of fiscal 2018, TSL ceased being accounted for under the equity method of accounting and was accounted for as a consolidated wholly-owned subsidiary. As a result of this acquisition, we now operate a Canadian business that is a retailer of branded footwear under The Shoe Company, Shoe Warehouse, and DSW Designer Shoe Warehouse banners, as well as related e-commerce sites. Subsequent to the acquisition, and as a result of our strategic review, we exited the Town Shoes banner in Canada during fiscal 2018.
On November 5, 2018, we completed the acquisition of Camuto LLC, doing business as Camuto Group ("Camuto Group"), a footwear design and brand development organization, from Camuto Group LLC (the "Sellers"). The Camuto Group acquisition provides us a global production, sourcing and design infrastructure, including operations in Brazil and China, a new state-of-the-art distribution center in New Jersey, footwear licenses of brands, including Jessica Simpson and Lucky Brand, and branded e-commerce sites. Camuto Group 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 ("First Cost"), and the sale of branded products on direct-to-consumer e-commerce sites.
Additionally, in partnership with Authentic Brands Group LLC, a global brand management and marketing company, we formed ABG-Camuto, LLC ("ABG-Camuto"), a joint venture in which we have a 40% interest. This joint venture acquired several intellectual property rights from the Sellers, including Vince Camuto, Louise et Cie, Sole Society, CC Corso Como, Enzo Angiolini and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. We have entered into a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto.
Our Affiliated Business Group ("ABG") partners with other retailers to help build and optimize their in-store and online footwear businesses by leveraging our sourcing network to produce a merchandise assortment that meets their needs. ABG currently provides services to Stein Mart stores, Steinmart.com, and a Frugal Fannie's store through ongoing supply arrangements.
On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"), an off-price footwear and accessories retailer operating in digital marketplaces. Due to recurring operating losses incurred by Ebuys since its acquisition, as well as increased competitive pressures in the digital marketplace, we decided to exit the business and ended all operations in the first quarter of fiscal 2018.
On August 2, 2016, we signed an agreement with the Apparel Group as an exclusive franchise partner in the Gulf Coast region of the Middle East. During the fourth quarter of fiscal 2018, we provided our termination notice to the Apparel Group in accordance with the terms of the agreement and we are winding down the franchise operations during fiscal 2019.
We present three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment, which was previously presented as the DSW segment, includes stores operated in the U.S. under the DSW Designer Shoe Warehouse banner and its related e-commerce site. The Canada Retail segment, which is the result of the TSL acquisition, includes stores operated in Canada under The Shoe Company, Shoe Warehouse, DSW Designer Shoe Warehouse banners and related e-commerce sites. The Brand Portfolio segment, which is the result of the Camuto Group acquisition, includes sales from wholesale, First Cost, and direct-to-consumer branded e-commerce sites. Our other operating segments, ABG and Ebuys, are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("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 February 2, 2019 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 our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 26, 2019.
Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year refer to the calendar year in which the fiscal year begins.
Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
Variable Interest Entities- We have certain joint ventures ("JVs") where each joint venture licenses brands and contracts with Camuto Group to provide design, buying and sourcing services. Under the JVs, Camuto Group is responsible for managing all aspects of the brands and the JVs pay royalties, commissions, or consulting fees to the other parties. We are responsible for providing all funding to support the working capital needs of the JVs. As a result, we have determined that we are the primary beneficiary of the JVs and consolidate the JVs within our financial statements. Assets and liabilities of the JVs in the aggregate are immaterial.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including the JVs. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in United States dollars ("USD"), unless otherwise noted.
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 date of the financial statements and reported amounts of revenue and expenses during the reporting period. Significant estimates are required as a part of 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, legal reserves, foreign tax contingent liabilities, income taxes, self-insurance reserves, and valuations used to account for acquisitions. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results could differ from these estimates.
Income Taxes- Our effective tax rate changed from 31.9% for the three months ended May 5, 2018 to 25.4% for the three months ended May 4, 2019. The decrease in the effective tax rate was primarily driven by additional valuation allowances and the impact of nondeductible charges associated with the Ebuys exit during the three months ended May 5, 2018.
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 consisted of a mandatory cash deposit for certain outstanding 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)
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
Cash and cash equivalents
|
$
|
70,671
|
|
|
$
|
99,369
|
|
|
$
|
197,162
|
|
|
Restricted cash, included in prepaid expenses and other current assets
|
1,633
|
|
|
1,199
|
|
|
—
|
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
|
$
|
72,304
|
|
|
$
|
100,568
|
|
|
$
|
197,162
|
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fair Value- Fair value is defined as the price that would be received to sell 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.
|
We measure available-for-sale investments at fair value on a recurring basis. These investments are measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2). The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature.
Prior Period Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation. Franchise costs was reclassified to operating expenses, accounts receivable from related parties was reclassified to accounts receivable, net, and accounts payable to related parties was reclassified to accounts payable.
Adoption of ASU 2016-02, Leases- During the first quarter of fiscal 2019, we adopted the new accounting standard for leases, Accounting Standards Update ("ASU") 2016-02 and the related amendments. We elected to initially apply ASU 2016-02 as of February 3, 2019, with the recognition of $1.0 billion of lease assets and $1.1 billion of lease liabilities and a cumulative-effect adjustment that decreased retained earnings by $9.6 million for transition impairments related to previously impaired leased locations. Periods prior to February 3, 2019 were not restated. Upon transition to ASU 2016-02, we recognized lease liabilities based on the present value of the remaining future fixed lease commitments, net of outstanding tenant allowance receivables, with corresponding lease assets. Amounts for prepaid expenses, deferred rent, deferred construction and tenant allowances, the accrual for lease obligations, and favorable and unfavorable leasehold interests were netted against the lease assets. At transition, we elected the package of practical expedients, which allows us to carry forward the historical lease classification and not reassess whether any expired or existing contracts are leases or contain leases. We did not elect the use of hindsight to determine the term of our leases at transition.
A lease liability for new leases is recorded based on the present value of future fixed lease commitments with a corresponding lease asset. For leases classified as operating leases, we recognize a single lease cost on a straight-line basis based on the combined amortization of the lease liability and the lease asset. Other leases will be accounted for as finance arrangements. For real estate leases, we are generally required to pay base rent, real estate taxes, and insurance, which are considered lease components, and maintenance, which is a non-lease component. As provided for under ASU 2016-02, we have elected to not separate non-lease payment components from the associated lease component for all new real estate leases. We determine the discount rate for each lease by estimating the rate that we would be required to pay on a secured borrowing for an amount equal to the lease payments over the lease term.
Prior to the adoption of ASU 2016-02, we recognized rent expense on a straight-line basis over the noncancelable terms of the lease. For leases with fixed increases of the minimum rentals during the noncancelable term, we recorded the difference between the amounts charged to expense and the rent paid as deferred rent and amortized such deferred rent upon the delivery of the lease location by the lessor. In addition, cash allowances received from landlords were deferred and amortized on a straight-line basis over the noncancelable terms of the lease as a reduction of rent expense. Deferred rent and construction and tenant allowances are included in non-current liabilities on the condensed consolidated balance sheets for periods prior to February 3, 2019. Also, we recorded reserves for leased spaces that were abandoned due to closure. Using a credit-adjusted risk-free rate to calculate the present value of the liability, we estimated future lease obligations based on remaining fixed lease payments, estimated or actual sublease income, and any other relevant factors.
Adoption of ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software- Also during the first quarter of fiscal 2019, we early adopted ASU 2018-15 on a prospective basis, which aligned the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or acquire internal-use software. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACQUISITIONS AND EQUITY METHOD INVESTMENT
Step Acquisition of TSL- On May 10, 2018, we acquired the remaining interest in TSL for $36.2 million Canadian dollars ("CAD") ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net, in the consolidated statements of operations. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.
The final purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired consisted of the following (in USD):
|
|
|
|
|
|
|
|
(in thousands)
|
Final Purchase Price and Allocation
|
|
Purchase price:
|
|
|
Cash consideration, net of cash acquired
|
$
|
28,152
|
|
|
Replacement stock-based awards attributable to pre-acquisition services
|
196
|
|
|
Fair value of previously held assets
|
92,242
|
|
|
|
$
|
120,590
|
|
|
Fair value of assets and liabilities acquired:
|
|
|
Inventories
|
$
|
66,072
|
|
|
Other current assets
|
3,687
|
|
|
Property and equipment
|
41,008
|
|
|
Goodwill
|
43,022
|
|
|
Intangible assets
|
20,689
|
|
|
Accounts payable and accrued expenses
|
(33,196
|
)
|
|
Non-current liabilities
|
(20,692
|
)
|
|
|
$
|
120,590
|
|
The fair value of previously held assets was determined immediately before the business combination, primarily by considering the income valuation approach (discounted cash flow) and the market valuation approach (precedent comparable transactions). Additionally, other information such as current market, industry and macroeconomic conditions were utilized to assist in developing these fair value measurements. The fair value of intangible assets includes $15.7 million for tradenames, $3.6 million for favorable leasehold interests, and $1.4 million for customer relationships associated with the Canada loyalty program. The fair value of unfavorable leasehold interests, included in non-current liabilities, was $7.6 million. The fair value for tradenames was determined using the relief from royalty method of the income approach, the fair value for leasehold interests was determined based on the market valuation approach, and the fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs.
The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. With this being a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during fiscal 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of the Canada Retail segment's goodwill. A portion of the goodwill is not expected to be deductible for income tax purposes.
During the three months ended May 4, 2019, our condensed consolidated statements of operations included revenue and net income for TSL of $51.8 million and $0.4 million, respectively. Primarily in fiscal 2018, we incurred $3.1 million of acquisition-related costs as a result of the step acquisition, which were included in operating expenses in the condensed consolidated statements of operations.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Acquisition of Camuto Group- On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $171.3 million, net of acquired cash of $9.7 million. The purchase price of the acquisition, along with the acquired equity investment in ABG-Camuto (discussed below), was funded with available cash and borrowings on the revolving line of credit of $160.0 million.
The following table summarizes the preliminary and revised purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Preliminary Purchase Price and Allocation
|
|
Measurement Period Adjustments
|
|
Revised Purchase Price and Allocation
|
|
Purchase price -
|
|
|
|
|
|
|
Cash consideration, net of cash acquired
|
$
|
171,251
|
|
|
$
|
—
|
|
|
$
|
171,251
|
|
|
Fair value of assets and liabilities acquired:
|
|
|
|
|
|
|
Accounts receivable
|
$
|
83,939
|
|
|
$
|
1,601
|
|
|
$
|
85,540
|
|
|
Inventories
|
74,499
|
|
|
(758
|
)
|
|
73,741
|
|
|
Other current assets
|
7,197
|
|
|
591
|
|
|
7,788
|
|
|
Property and equipment
|
43,906
|
|
|
—
|
|
|
43,906
|
|
|
Goodwill
|
63,614
|
|
|
1,368
|
|
|
64,982
|
|
|
Intangible asset
|
27,000
|
|
|
—
|
|
|
27,000
|
|
|
Other assets
|
13,351
|
|
|
—
|
|
|
13,351
|
|
|
Accounts payable and other liabilities
|
(122,811
|
)
|
|
(2,664
|
)
|
|
(125,475
|
)
|
|
Non-current liabilities
|
(19,444
|
)
|
|
(138
|
)
|
|
(19,582
|
)
|
|
|
$
|
171,251
|
|
|
$
|
—
|
|
|
$
|
171,251
|
|
The fair value of the intangible asset relates to customer relationships and was based on the excess earnings method under the income approach. The fair value measurement is based on significant unobservable inputs, including the future cash flows and discount and customer attrition rates. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. The inventory valuation step-up was recognized to cost of goods sold during the fourth quarter of fiscal 2018 based on assumed inventory turns.
The goodwill represents the excess of the purchase price over the fair value of the net assets acquired, and was primarily attributable to an assembled workforce and acquiring an established design and sourcing process, which provides us the opportunity to expand our exclusive products offering at a lower cost in our retail segments. Goodwill is expected to be deductible for income tax purposes.
Non-current liabilities includes $12.7 million of estimated unpaid foreign payroll and other taxes. We recorded an offsetting indemnification asset to other assets, which we expect to collect under the terms of the securities purchase agreement with the Sellers. See Note 16, Commitments and Contingencies, for additional information.
Adjustments to the purchase price and the allocation of the purchase price may be made during a measurement period of up to one year from the acquisition date as additional information that existed at the date of the acquisition is obtained. Measurement period adjustments are recognized on a prospective basis in the period of change. The purchase price is subject to adjustments primarily based upon a working capital provision as provided by the purchase agreement. The allocation of the purchase price is currently based on certain preliminary valuations and analysis that have not been completed as of the date of this filing. In addition, we have not completed the allocation of goodwill to our U.S. Retail and Brand Portfolio segments or the reporting units within the Brand Portfolio segment.
During the three months ended May 4, 2019, our condensed consolidated statements of operations included revenue and net losses for Camuto Group of $94.0 million and $7.5 million, respectively. Primarily during fiscal 2018, we incurred $22.2 million of acquisition-related costs as a result of the acquisition, which were included in operating expenses in the condensed consolidated statements of operations.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Equity Investment in ABG-Camuto- On November 5, 2018, we acquired a 40% interest in the newly formed ABG-Camuto joint venture for $56.8 million in partnership with Authentic Brands Group LLC. Also on November 5, 2018, ABG-Camuto acquired several intellectual property rights from the Sellers and entered into a licensing agreement with us, which earns royalties from the net sales of Camuto Group under the brands acquired.
Activity related to our equity investment in ABG-Camuto was as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended May 4, 2019
|
|
Balance at beginning of period
|
$
|
58,125
|
|
|
Share of net earnings
|
2,228
|
|
|
Distributions received
|
(160
|
)
|
|
Balance at end of period
|
$
|
60,193
|
|
Combined Results- The following table provides the supplemental pro forma total revenue and net income of the combined entity had the acquisition dates of TSL and Camuto Group and the investment in ABG-Camuto been the first day of our fiscal 2017:
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended May 5, 2018
|
|
Total revenue
|
$
|
868,430
|
|
|
Net income
|
$
|
12,055
|
|
The amounts in the supplemental pro forma results apply our accounting policies, eliminate intercompany transactions, assume the acquisition-related transaction costs were incurred in fiscal 2017, and reflect adjustments for additional expenses that would have been charged assuming borrowings on the revolving line of credit of $160 million and the same fair value adjustments to inventory, property and equipment, and acquired intangibles had been applied on the first day of our fiscal 2017. Because the ABG-Camuto investment was integral to the Camuto Group acquisition, the supplemental pro forma results include royalty expenses that would be due to ABG-Camuto using the guaranteed minimum royalties per the license agreement and the related earnings from our equity investment in ABG-Camuto had the transactions occurred on the first day of our fiscal 2017. Accordingly, these supplemental pro forma results have been prepared for comparative purposes only and are not intended to be indicative of results of operations that would have occurred had the acquisitions actually occurred in the prior year period or indicative of the results of operations for any future period.
3. REVENUE
Disaggregation of Revenue- The following table presents our total revenue disaggregated by operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Segment net sales:
|
|
|
|
|
U.S. Retail
|
$
|
691,840
|
|
|
$
|
669,784
|
|
|
Canada Retail
|
51,816
|
|
|
—
|
|
|
Brand Portfolio
|
90,729
|
|
|
—
|
|
|
Other
|
35,607
|
|
|
40,653
|
|
|
Total net sales
|
869,992
|
|
|
710,437
|
|
|
Commission, franchise and other revenue
|
8,523
|
|
|
1,665
|
|
|
Total revenue
|
$
|
878,515
|
|
|
$
|
712,102
|
|
The U.S. Retail and Brand Portfolio segments and Other net sales recognized are primarily based on sales to customers in the U.S., and Canada Retail segment net sales recognized are based on sales to customers in Canada. Revenue realized from geographic markets outside of the U.S. and Canada have collectively been immaterial.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table presents total revenue by product and service category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Net sales:
|
|
|
|
|
U.S. Retail segment:
|
|
|
|
|
Women's footwear
|
$
|
482,121
|
|
|
$
|
469,284
|
|
|
Men's footwear
|
128,989
|
|
|
133,159
|
|
|
Accessories and other
|
80,730
|
|
|
67,341
|
|
|
|
691,840
|
|
|
669,784
|
|
|
Canada Retail segment:
|
|
|
|
|
Women's footwear
|
28,626
|
|
|
—
|
|
|
Men's footwear
|
13,008
|
|
|
—
|
|
|
Accessories and other
|
10,182
|
|
|
—
|
|
|
|
51,816
|
|
|
—
|
|
|
Brand Portfolio segment:
|
|
|
|
|
Wholesale
|
81,616
|
|
|
—
|
|
|
Direct-to-consumer
|
9,113
|
|
|
—
|
|
|
|
90,729
|
|
|
—
|
|
|
Other
|
35,607
|
|
|
40,653
|
|
|
Total net sales
|
869,992
|
|
|
710,437
|
|
|
Commission, franchise and other revenue
|
8,523
|
|
|
1,665
|
|
|
Total revenue
|
$
|
878,515
|
|
|
$
|
712,102
|
|
The above tables exclude intersegment revenues for the three months ended May 4, 2019 of $10.5 million, which were eliminated in consolidation.
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
|
|
(in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Gift cards:
|
|
|
|
|
Beginning of period
|
$
|
34,998
|
|
|
$
|
32,792
|
|
|
Gift cards redeemed and breakage recognized to net sales
|
(22,255
|
)
|
|
(22,273
|
)
|
|
Gift cards issued
|
17,323
|
|
|
17,632
|
|
|
End of period
|
$
|
30,066
|
|
|
$
|
28,151
|
|
|
Loyalty programs:
|
|
|
|
|
Beginning of period
|
$
|
16,151
|
|
|
$
|
21,282
|
|
|
Loyalty certificates redeemed and expired and other adjustments recognized to net sales
|
(9,321
|
)
|
|
(6,635
|
)
|
|
Deferred revenue for loyalty points issued
|
9,323
|
|
|
7,464
|
|
|
End of period
|
$
|
16,153
|
|
|
$
|
22,111
|
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. RELATED PARTY TRANSACTIONS
Schottenstein Affiliates
As of May 4, 2019, the Schottenstein Affiliates, entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family, beneficially owned approximately 15% of the Company's outstanding common shares, representing approximately 50% of the combined voting power. As of May 4, 2019, the Schottenstein Affiliates beneficially owned 3.4 million Class A common shares and 7.7 million Class B common shares. We had the following related party transactions with Schottenstein Affiliates:
Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates. See Note 15, Leases, for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.
Other Purchases and Services- During the three months ended May 4, 2019 and May 5, 2018, we had other purchases and services from Schottenstein Affiliates of $1.9 million and $1.5 million, respectively.
Due to Related Parties- As of May 4, 2019, February 2, 2019 and May 5, 2018, we had amounts due to related parties of $0.8 million, $1.0 million and $0.9 million, respectively, included in accounts payable on the condensed consolidated balance sheets.
ABG-Camuto
Beginning in the fourth quarter of fiscal 2018, we have a 40% interest in ABG-Camuto. ABG-Camuto entered into a licensing agreement with us whereby we pay royalties on the net sales of the brands owned by ABG-Camuto. During the three months ended May 4, 2019, we recorded $5.7 million of royalty expense payable to ABG-Camuto. As of May 4, 2019 and February 2, 2019, we had $0.8 million and $2.4 million, respectively, payable to ABG-Camuto.
TSL
Prior to our acquisition of the remaining interest in TSL on May 10, 2018, our ownership interest in TSL provided us a 50% voting control and board representation equal to the co-investor, and it was treated as an equity investment. Our initial investment in TSL included an unsecured subordinated note from TSL that earned payment-in-kind interest. Effective February 2, 2018, we entered into a secured loan agreement with TSL that allowed TSL to borrow up to $100 million CAD at a variable interest rate, as defined in the agreement, paid monthly. Amounts due for the note and loan are shown as notes receivable from TSL on the condensed consolidated balance sheets.
We provided TSL certain information technology and management services under a management agreement. We licensed the use of our tradename and trademark, DSW Designer Shoe Warehouse, for a royalty fee based on a percentage of net sales from TSL's Canadian DSW stores, and we had various other transactions with TSL. All transactions in the aggregate and amounts due from TSL, other than the notes receivable from TSL, were immaterial for the three months ended and as of May 5, 2018.
5. 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, restricted stock units ("RSUs"), and performance-based restricted stock units ("PSUs") calculated using the treasury stock method.
The following is a reconciliation of the number of shares used in the calculation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Weighted average shares outstanding - Basic shares
|
77,004
|
|
|
80,108
|
|
|
Dilutive effect of stock-based compensation awards
|
1,259
|
|
|
650
|
|
|
Weighted average shares outstanding - Diluted shares
|
78,263
|
|
|
80,758
|
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three months ended May 4, 2019 and May 5, 2018, the number of potential shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive was 2.0 million and 3.9 million, respectively.
6. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Stock options
|
$
|
823
|
|
|
$
|
1,795
|
|
|
Restricted and director stock units
|
3,547
|
|
|
2,719
|
|
|
|
$
|
4,370
|
|
|
$
|
4,514
|
|
The following table summarizes the stock-based compensation award activity for the three months ended May 4, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
(in thousands)
|
Stock Options
|
|
Time-Based RSUs
|
|
Performance-Based RSUs
|
|
Outstanding - beginning of period
|
4,001
|
|
|
989
|
|
|
596
|
|
|
Granted
|
—
|
|
|
725
|
|
|
347
|
|
|
Exercised / vested
|
(29
|
)
|
|
(108
|
)
|
|
(97
|
)
|
|
Forfeited / expired
|
(29
|
)
|
|
(28
|
)
|
|
—
|
|
|
Outstanding - end of period
|
3,943
|
|
|
1,578
|
|
|
846
|
|
As of May 4, 2019, 2.8 million shares of Class A common shares remain available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan.
7. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
(in thousands)
|
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
|
85,935
|
|
|
7,733
|
|
|
85,763
|
|
|
7,733
|
|
|
85,561
|
|
|
7,733
|
|
|
Outstanding shares
|
67,434
|
|
|
7,733
|
|
|
70,672
|
|
|
7,733
|
|
|
72,470
|
|
|
7,733
|
|
|
Treasury shares
|
18,501
|
|
|
—
|
|
|
15,091
|
|
|
—
|
|
|
13,091
|
|
|
—
|
|
We have authorized 100 million shares of no par value preferred shares with no shares issued for any of the periods presented.
Dividends- On May 30, 2019, the Board of Directors declared a quarterly cash dividend payment of $0.25 per share for both Class A and Class B common shares. The dividend will be paid on July 5, 2019 to shareholders of record at the close of business on June 19, 2019.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 three months ended May 4, 2019, we repurchased 3.4 million Class A common shares at a cost of $75.0 million, with $401.6 million of Class A common shares that remain authorized under the program as of May 4, 2019. During the three months ended May 5, 2018, we did not repurchase any Class A common shares. 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.
Accumulated Other Comprehensive Income (Loss)- Changes for the balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 4, 2019
|
|
May 5, 2018
|
|
(in thousands)
|
Foreign Currency Translation
|
|
Available-for-Sale Securities
|
|
Total
|
|
Foreign Currency Translation
|
|
Available-for-Sale Securities
|
|
Total
|
|
Accumulated other comprehensive loss - beginning of period
|
$
|
(2,328
|
)
|
|
$
|
(378
|
)
|
|
$
|
(2,706
|
)
|
|
$
|
(9,278
|
)
|
|
$
|
(796
|
)
|
|
$
|
(10,074
|
)
|
|
Other comprehensive loss before reclassifications
|
(714
|
)
|
|
242
|
|
|
(472
|
)
|
|
(4,685
|
)
|
|
(344
|
)
|
|
(5,029
|
)
|
|
Amounts reclassified to non-operating expenses, net
|
—
|
|
|
(88
|
)
|
|
(88
|
)
|
|
1,745
|
|
|
160
|
|
|
1,905
|
|
|
Other comprehensive loss
|
(714
|
)
|
|
154
|
|
|
(560
|
)
|
|
(2,940
|
)
|
|
(184
|
)
|
|
(3,124
|
)
|
|
Accumulated other comprehensive loss - end of period
|
$
|
(3,042
|
)
|
|
$
|
(224
|
)
|
|
$
|
(3,266
|
)
|
|
$
|
(12,218
|
)
|
|
$
|
(980
|
)
|
|
$
|
(13,198
|
)
|
8. ACCOUNTS RECEIVABLE
Accounts receivable, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
Customer accounts receivables:
|
|
|
|
|
|
|
Serviced by third-party provider with guaranteed payment
|
$
|
57,619
|
|
|
$
|
47,599
|
|
|
$
|
—
|
|
|
Serviced by third-party provider without guaranteed payment
|
168
|
|
|
280
|
|
|
—
|
|
|
Serviced in-house
|
12,169
|
|
|
9,892
|
|
|
2,702
|
|
|
Construction and tenant allowance receivables due from landlords(1)
|
—
|
|
|
4,034
|
|
|
5,118
|
|
|
Accounts receivable due from related parties
|
—
|
|
|
—
|
|
|
795
|
|
|
Other receivables
|
10,561
|
|
|
8,004
|
|
|
4,956
|
|
|
Accounts receivable
|
80,517
|
|
|
69,809
|
|
|
13,571
|
|
|
Allowance for doubtful accounts
|
(2,230
|
)
|
|
(939
|
)
|
|
—
|
|
|
Accounts receivable, net
|
$
|
78,287
|
|
|
$
|
68,870
|
|
|
$
|
13,571
|
|
|
|
|
|
(1)
|
Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for construction and tenant allowance receivables due from landlords were netted against the operating lease liabilities.
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. INVESTMENTS
Investments in available-for-sale securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
Carrying value of investments
|
$
|
51,542
|
|
|
$
|
70,195
|
|
|
$
|
72,688
|
|
|
Unrealized gains included in accumulated other comprehensive loss
|
1
|
|
|
44
|
|
|
6
|
|
|
Unrealized losses included in accumulated other comprehensive loss
|
(284
|
)
|
|
(521
|
)
|
|
(986
|
)
|
|
Fair value
|
$
|
51,259
|
|
|
$
|
69,718
|
|
|
$
|
71,708
|
|
10. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
Land
|
$
|
1,110
|
|
|
$
|
1,110
|
|
|
$
|
1,110
|
|
|
Buildings
|
12,485
|
|
|
12,485
|
|
|
12,485
|
|
|
Building and leasehold improvements
|
439,707
|
|
|
437,116
|
|
|
405,788
|
|
|
Furniture, fixtures and equipment
|
489,477
|
|
|
487,494
|
|
|
427,026
|
|
|
Software
|
167,924
|
|
|
161,226
|
|
|
139,712
|
|
|
Construction in progress(1)
|
42,620
|
|
|
38,646
|
|
|
41,594
|
|
|
Total property and equipment
|
1,153,323
|
|
|
1,138,077
|
|
|
1,027,715
|
|
|
Accumulated depreciation and amortization
|
(748,167
|
)
|
|
(728,501
|
)
|
|
(675,165
|
)
|
|
Property and equipment, net
|
$
|
405,156
|
|
|
$
|
409,576
|
|
|
$
|
352,550
|
|
|
|
|
|
(1)
|
Construction in progress is comprised primarily of the construction of leasehold improvements and furniture and fixtures related to unopened stores and internal-use software under development.
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. GOODWILL AND INTANGIBLE ASSETS
Goodwill- Activity related to our goodwill was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 4, 2019
|
|
May 5, 2018
|
|
(in thousands)
|
Goodwill
|
|
Accumulated Impairments
|
|
Net
|
|
Goodwill
|
|
Accumulated Impairments
|
|
Net
|
|
Beginning of period by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail
|
$
|
25,899
|
|
|
$
|
—
|
|
|
$
|
25,899
|
|
|
$
|
25,899
|
|
|
$
|
—
|
|
|
$
|
25,899
|
|
|
Canada Retail
|
42,048
|
|
|
(42,048
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Brand Portfolio
|
63,614
|
|
|
—
|
|
|
63,614
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other - Ebuys
|
—
|
|
|
—
|
|
|
—
|
|
|
53,790
|
|
|
(53,790
|
)
|
|
—
|
|
|
|
131,561
|
|
|
(42,048
|
)
|
|
89,513
|
|
|
79,689
|
|
|
(53,790
|
)
|
|
25,899
|
|
|
Activity by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada Retail -
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
(1,043
|
)
|
|
1,043
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Brand Portfolio -
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price and allocation adjustments
|
1,368
|
|
|
—
|
|
|
1,368
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other - Eliminated Ebuys goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,790
|
)
|
|
53,790
|
|
|
—
|
|
|
|
325
|
|
|
1,043
|
|
|
1,368
|
|
|
(53,790
|
)
|
|
53,790
|
|
|
—
|
|
|
End of period by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail
|
25,899
|
|
|
—
|
|
|
25,899
|
|
|
25,899
|
|
|
—
|
|
|
25,899
|
|
|
Canada Retail
|
41,005
|
|
|
(41,005
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Brand Portfolio
|
64,982
|
|
|
—
|
|
|
64,982
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other - Ebuys
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
131,886
|
|
|
$
|
(41,005
|
)
|
|
$
|
90,881
|
|
|
$
|
25,899
|
|
|
$
|
—
|
|
|
$
|
25,899
|
|
Intangible Assets- Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
May 4, 2019
|
|
|
|
|
|
|
Definite-lived customer relationships
|
$
|
28,340
|
|
|
$
|
(1,326
|
)
|
|
$
|
27,014
|
|
|
Indefinite-lived trademarks and tradenames
|
15,284
|
|
|
—
|
|
|
15,284
|
|
|
|
$
|
43,624
|
|
|
$
|
(1,326
|
)
|
|
$
|
42,298
|
|
|
February 2, 2019
|
|
|
|
|
|
|
Definite-lived:
|
|
|
|
|
|
|
Customer relationships
|
$
|
28,375
|
|
|
$
|
(1,010
|
)
|
|
$
|
27,365
|
|
|
Favorable leasehold interests
|
3,513
|
|
|
(295
|
)
|
|
3,218
|
|
|
Indefinite-lived trademarks and tradenames
|
15,546
|
|
|
—
|
|
|
15,546
|
|
|
|
$
|
47,434
|
|
|
$
|
(1,305
|
)
|
|
$
|
46,129
|
|
|
May 5, 2018
|
|
|
|
|
|
|
Indefinite-lived trademarks and tradenames
|
$
|
135
|
|
|
$
|
—
|
|
|
$
|
135
|
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The customer relationships are amortized by the straight-line method over three years associated with the Canada loyalty program and ten years for Brand Portfolio customer relationships. Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for favorable leasehold interests were netted against the operating lease assets.
12. ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
Gift cards and merchandise credits
|
$
|
30,066
|
|
|
$
|
34,998
|
|
|
$
|
28,151
|
|
|
Accrued compensation and related expenses
|
25,951
|
|
|
53,577
|
|
|
13,412
|
|
|
Accrued taxes
|
23,242
|
|
|
16,491
|
|
|
24,150
|
|
|
Loyalty programs deferred revenue
|
16,153
|
|
|
16,151
|
|
|
22,111
|
|
|
Sales returns
|
21,692
|
|
|
17,743
|
|
|
16,006
|
|
|
Customer allowances and discounts
|
14,436
|
|
|
13,094
|
|
|
—
|
|
|
Other(1)
|
55,452
|
|
|
49,481
|
|
|
35,516
|
|
|
|
$
|
186,992
|
|
|
$
|
201,535
|
|
|
$
|
139,346
|
|
|
|
|
|
(1)
|
Other is comprised of various other accrued expenses that we expect will settle within one year of the applicable period.
|
13. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 4, 2019
|
|
February 2, 2019
|
|
May 5, 2018
|
|
Foreign tax contingent liabilities
|
$
|
14,118
|
|
|
$
|
13,429
|
|
|
$
|
—
|
|
|
Deferred tax liabilities
|
2,774
|
|
|
3,260
|
|
|
—
|
|
|
Construction and tenant allowances(1)
|
—
|
|
|
71,634
|
|
|
78,202
|
|
|
Deferred rent(1)
|
—
|
|
|
35,934
|
|
|
35,841
|
|
|
Accrual for lease obligations(1)
|
—
|
|
|
16,483
|
|
|
11,063
|
|
|
Unfavorable leasehold interests(1)
|
—
|
|
|
5,779
|
|
|
—
|
|
|
Other(2)
|
17,256
|
|
|
18,528
|
|
|
20,260
|
|
|
|
$
|
34,148
|
|
|
$
|
165,047
|
|
|
$
|
145,366
|
|
|
|
|
|
(1)
|
Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for deferred rent, construction and tenant allowances, the accrual for lease obligations, and unfavorable leasehold interests were netted against the operating lease assets.
|
|
|
|
|
(2)
|
Other is comprised of various other accrued expenses that we expect will settle beyond one year from the end of the applicable period.
|
The following table presents the changes and total balances for the accrual for lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Beginning of period
|
$
|
16,483
|
|
|
$
|
6,511
|
|
|
Netted against lease assets upon transition to ASU 2016-02
|
(16,483
|
)
|
|
—
|
|
|
Additions
|
—
|
|
|
4,533
|
|
|
Lease obligation payments, net of sublease income
|
—
|
|
|
(28
|
)
|
|
Adjustments
|
—
|
|
|
47
|
|
|
End of period
|
$
|
—
|
|
|
$
|
11,063
|
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14. DEBT
Credit Facility- On August 25, 2017, we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased with no change to the sub-limits. As of May 4, 2019, the Credit Facility provided a revolving line of credit up to $400 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility.
Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 4.0% as of May 4, 2019. Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.5% as of May 4, 2019. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of May 4, 2019, we had $235.0 million outstanding under the Credit Facility and $3.1 million in letters of credit issued, resulting in $161.9 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of May 4, 2019, we were in compliance with all financial covenants.
We lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by Schottenstein Affiliates. The majority of our real estate leases provide for renewal options, which are typically not included in the lease term used for measuring the lease assets and lease liabilities as it is not reasonably certain we will exercise options. We pay variable amounts for certain lease and non-lease components as well as for contingent rentals based on sales for certain leases where the sales are in excess of specified levels and for leases that have certain contingent triggering events that are in effect. We also lease equipment under operating leases.
We receive operating lease income from unrelated third parties for leasing portions or all of certain owned and leased properties. Operating lease income is included in commission, franchise and other revenue in our condensed consolidated statements of operations.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Lease income and lease expense consisted of the following for the three months ended May 4, 2019 (after the adoption of ASU 2016-02) and May 5, 2018 (prior to the adoption of ASU 2016-02):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(dollars in thousands)
|
May 4, 2019
|
|
May 5, 2018
|
|
Operating lease income
|
$
|
2,212
|
|
|
$
|
1,148
|
|
|
Operating lease expense:
|
|
|
|
|
Lease expense to unrelated parties
|
$
|
53,354
|
|
|
$
|
45,485
|
|
|
Lease expense to related parties
|
2,342
|
|
|
2,288
|
|
|
Variable lease expense to unrelated parties
|
13,022
|
|
|
6,823
|
|
|
Variable lease expense to related parties
|
302
|
|
|
—
|
|
|
|
$
|
69,020
|
|
|
$
|
54,596
|
|
|
Other operating lease information:
|
|
|
|
|
Weighted-average remaining lease term
|
6.3 years
|
|
|
|
|
Weighted-average discount rate
|
3.9
|
%
|
|
|
As of May 4, 2019, our future fixed minimum lease payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
|
Remainder of fiscal 2019
|
$
|
154,347
|
|
|
$
|
6,294
|
|
|
$
|
160,641
|
|
|
Fiscal 2020
|
232,592
|
|
|
9,364
|
|
|
241,956
|
|
|
Fiscal 2021
|
211,655
|
|
|
8,697
|
|
|
220,352
|
|
|
Fiscal 2022
|
177,966
|
|
|
6,518
|
|
|
184,484
|
|
|
Fiscal 2023
|
137,662
|
|
|
1,875
|
|
|
139,537
|
|
|
Future fiscal years thereafter
|
300,604
|
|
|
5,596
|
|
|
306,200
|
|
|
|
1,214,826
|
|
|
38,344
|
|
|
1,253,170
|
|
|
Less discounting impact on operating leases
|
(143,900
|
)
|
|
(3,669
|
)
|
|
(147,569
|
)
|
|
Total operating lease liabilities
|
1,070,926
|
|
|
34,675
|
|
|
1,105,601
|
|
|
Less current operating lease liabilities
|
(177,020
|
)
|
|
(7,436
|
)
|
|
(184,456
|
)
|
|
Non-current operating lease liabilities
|
$
|
893,906
|
|
|
$
|
27,239
|
|
|
$
|
921,145
|
|
As of May 4, 2019, we have entered into lease commitments for four new store locations and one store relocation where the leases have not yet commenced, and the lease liabilities have not yet been recorded. We expect the lease commencement to begin in the next fiscal quarter for these locations and we will record additional operating lease liabilities of approximately $10.1 million.
As of February 2, 2019, future minimum lease payment requirements, excluding contingent rental payments, maintenance, insurance, real estate taxes, and the amortization of deferred rent and construction and tenant allowances, consisted of the following, as determined prior to the adoption of ASU 2016-02:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
|
Fiscal 2019
|
$
|
233,237
|
|
|
$
|
9,425
|
|
|
$
|
242,662
|
|
|
Fiscal 2020
|
227,001
|
|
|
9,364
|
|
|
236,365
|
|
|
Fiscal 2021
|
204,803
|
|
|
8,697
|
|
|
213,500
|
|
|
Fiscal 2022
|
170,030
|
|
|
6,518
|
|
|
176,548
|
|
|
Fiscal 2023
|
131,594
|
|
|
1,874
|
|
|
133,468
|
|
|
Future fiscal years thereafter
|
298,437
|
|
|
5,596
|
|
|
304,033
|
|
|
|
$
|
1,265,102
|
|
|
$
|
41,474
|
|
|
$
|
1,306,576
|
|
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
16. 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 the 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.
Foreign Tax Contingencies- During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll and other taxes that could also result in assessed penalties and interest. We have developed an estimate of the range of outcomes related to these obligations of $14.1 million to $30.0 million for obligations we are aware of at this time. As of May 4, 2019, we recorded a contingent liability of $14.1 million representing the low end of the range and an indemnification asset of $12.7 million representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the Sellers. We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.
Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in 2024 for a location that has been leased to a third party. If the 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 May 4, 2019, the total future minimum lease payment requirements for this guarantee were approximately $16.0 million.
17. SEGMENT REPORTING
Our three reportable segments, which are also operating segments, are the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. All other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.
The following provides certain financial data by segment reconciled to the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
U.S. Retail
|
|
Canada Retail
|
|
Brand Portfolio
|
|
Other
|
|
Corporate/Eliminations
|
|
Total
|
|
Three months ended May 4, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
691,840
|
|
|
$
|
51,816
|
|
|
$
|
90,729
|
|
|
$
|
35,607
|
|
|
$
|
—
|
|
|
$
|
869,992
|
|
|
Commission, franchise and other revenue
|
—
|
|
|
—
|
|
|
3,297
|
|
|
—
|
|
|
5,226
|
|
|
8,523
|
|
|
Total revenue
|
$
|
691,840
|
|
|
$
|
51,816
|
|
|
$
|
94,026
|
|
|
$
|
35,607
|
|
|
$
|
5,226
|
|
|
$
|
878,515
|
|
|
Intersegment revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,520
|
|
|
$
|
—
|
|
|
$
|
(10,520
|
)
|
|
$
|
—
|
|
|
Gross profit(1)
|
$
|
209,891
|
|
|
$
|
15,747
|
|
|
$
|
21,994
|
|
|
$
|
9,311
|
|
|
$
|
(907
|
)
|
|
$
|
256,036
|
|
|
Income from equity investment in ABG-Camuto
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,228
|
|
|
Three months ended May 5, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
669,784
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,653
|
|
|
$
|
—
|
|
|
$
|
710,437
|
|
|
Commission, franchise and other revenue
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,665
|
|
|
1,665
|
|
|
Total revenue
|
$
|
669,784
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,653
|
|
|
$
|
1,665
|
|
|
$
|
712,102
|
|
|
Gross profit(1)
|
$
|
198,344
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,881
|
|
|
$
|
—
|
|
|
$
|
205,225
|
|
|
|
|
|
(1)
|
Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales.
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Quarterly Report on Form 10-Q may constitute forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "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 Quarterly Report on Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information 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 those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed on March 26, 2019, some important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements include, but are not limited to, the following:
|
|
|
|
•
|
our success in growing our store base and digital demand;
|
|
|
|
|
•
|
related to our acquisitions of Camuto Group and TSL, our ability to successfully integrate our businesses or realize the anticipated benefits of the acquisitions after we complete our integration efforts;
|
|
|
|
|
•
|
our ability to protect our reputation and to maintain the brands we license;
|
|
|
|
|
•
|
maintaining strong relationships with our vendors, manufacturers and wholesale customers;
|
|
|
|
|
•
|
our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
|
|
|
|
|
•
|
risks related to the loss or disruption of our distribution and/or fulfillment operations;
|
|
|
|
|
•
|
continuation of agreements with and our reliance on the financial condition of Stein Mart;
|
|
|
|
|
•
|
our ability to execute our strategies;
|
|
|
|
|
•
|
fluctuation of our comparable sales and quarterly financial performance;
|
|
|
|
|
•
|
risks related to the loss or disruption of our information systems and data;
|
|
|
|
|
•
|
our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;
|
|
|
|
|
•
|
failure to retain our key executives or attract qualified new personnel;
|
|
|
|
|
•
|
our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty;
|
|
|
|
|
•
|
risks related to leases of our properties;
|
|
|
|
|
•
|
our competitiveness with respect to style, price, brand availability and customer service;
|
|
|
|
|
•
|
our reliance on foreign sources for merchandise and risks inherent to international trade, including escalating trade tensions between the U.S. and other countries, as well as U.S. laws affecting the importation of goods, such as recent tariffs imposed on Chinese goods imported to the U.S.;
|
|
|
|
|
•
|
uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation;
|
|
|
|
|
•
|
uncertain general economic conditions;
|
|
|
|
|
•
|
risks related to holdings of cash and investments and access to liquidity; and
|
|
|
|
|
•
|
fluctuations in foreign currency exchange rates.
|
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.
Executive Overview
We began fiscal 2019 with positive momentum across our business, reporting our sixth consecutive quarter of increased comparable sales, growth across our retail segments and significant progress leveraging the Camuto Group infrastructure for the benefit of the Company. We saw strength across a number of categories, including seasonal sandals and boots. We also continued to experience strong growth in our kids business. Our Canada Retail segment provided positive operating profit for the first quarter of fiscal 2019, marking the first time in five years that the Canada business reached profitability at the start of the year. We attribute this to our ability to transfer successful practices in the U.S. to Canada, including markdown optimization and key item distortions. Our Canada Retail segment also increased its competitive positioning by moving their digital offering to our current U.S. platform. We expect to continue to transfer successful strategies to our Canada Retail segment as we leverage our previously established business disciplines and infrastructure, including the launch of new loyalty programs for our Canadian customers.
Our Brand Portfolio segment, which is made up of our newly acquired Camuto Group, also made progress. We remain on track to shift the vast majority of the design, sourcing and production of exclusive brand product that is sold through DSW in the U.S. to the Camuto Group at the start of fiscal 2020. As a result, we expect to benefit from the world class sourcing and design expertise that Camuto Group brings to the Company but also to lower our product costs to further our profit growth. The expansion of our exclusive brand offering remains a significant growth opportunity for us.
Comparability
There are a number of items that affect comparability when reviewing our results of operations for the periods presented in this Quarterly Report on Form 10-Q. Significant items to consider include:
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•
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On May 10, 2018, we acquired the remaining interest in TSL that we did not previously own. For the three months ended May 4, 2019, TSL results were included in the condensed consolidated results of operations as a wholly-owned subsidiary, whereas for the three months ended May 5, 2018, the loss from our equity investment interest in TSL was included in our condensed consolidated results of operations.
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•
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On November 5, 2018, we completed the acquisition of Camuto Group. For the three months ended May 4, 2019, Camuto Group's results were included in the condensed consolidated results of operations as a wholly-owned subsidiary with no amounts included for the three months ended May 5, 2018.
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•
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The three months ended May 5, 2018 included the wind-down operations of Ebuys, which included lease exit and other termination costs and incremental income tax expense.
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Financial Summary
Total revenue increased to $878.5 million for the three months ended May 4, 2019 from $712.1 million for the three months ended May 5, 2018. The 23.4% increase in total revenue was primarily driven by incremental revenue from acquired businesses, a 3.0% increase in comparable sales and an increase from non-comparable store sales, partially offset by the loss of sales from the exit of Ebuys last year. The comparable sales increase was driven by strong growth in digital demand.
During the three months ended May 4, 2019, gross profit as a percentage of net sales was 29.4%, an increase of 50 basis points from 28.9% in the previous year. The increase in the gross profit rate was primarily driven by margin expansion in the U.S. Retail segment and the impact of the exit of Ebuys during the previous year, partially offset by lower margins from the wholesale business of the Brand Portfolio segment. Effective inventory management in the U.S. Retail segment delivered better in-stock rates, which resulted in an increase in regular price selling.
Net income for the three months ended May 4, 2019 was $31.2 million, or $0.40 per diluted share, which included net after-tax charges of $2.4 million, or $0.03 per diluted share, primarily related to integration and restructuring expenses associated with the businesses acquired in fiscal 2018. Net income for the three months ended May 5, 2018 was $24.3 million, or $0.30 per diluted share, which included net after-tax charges of $7.2 million, or $0.09 per diluted share, primarily related to exit costs associated with Ebuys, acquisition costs related to TSL, and foreign exchange net losses.
We have continued making investments in our business that support our long-term growth objectives. During the three months ended May 4, 2019, we invested $24.9 million in capital expenditures compared to $18.2 million during the three months ended May 5, 2018. Our capital expenditures during the first quarter of fiscal 2019 primarily related to six new store openings, store remodels and business infrastructure.
Results of Operations
Comparison of the Three Months Ended May 4, 2019 with the Three Months Ended May 5, 2018
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Three months ended
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May 4, 2019
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May 5, 2018
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Change
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(dollars in thousands, except per share amounts)
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Amount
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% of Total Revenue
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Amount
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% of Total Revenue
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Amount
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%
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Revenue:
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Net sales
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$
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869,992
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99.0
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%
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$
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710,437
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99.8
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%
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$
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159,555
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22.5
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%
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Commission, franchise and other revenue
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8,523
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1.0
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1,665
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0.2
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6,858
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411.9
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%
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Total revenue
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878,515
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100.0
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712,102
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100.0
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166,413
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23.4
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%
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Cost of sales
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(613,956
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(69.9
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(505,212
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(71.0
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(108,744
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21.5
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%
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Operating expenses
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(222,806
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)
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(25.4
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)
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(168,420
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)
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(23.6
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(54,386
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)
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32.3
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%
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Income from equity investment in ABG-Camuto
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2,228
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0.3
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—
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—
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2,228
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NM
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Operating profit
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43,981
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5.0
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38,470
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5.4
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5,511
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14.3
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%
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Interest income (expense), net
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(1,801
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)
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(0.2
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)
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664
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0.1
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(2,465
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)
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NM
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Non-operating expenses, net
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(342
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)
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—
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(2,137
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)
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(0.3
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)
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1,795
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(84.0
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)%
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Income before income taxes and loss from equity investment in TSL
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41,838
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4.8
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36,997
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5.2
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4,841
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13.1
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%
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Income tax provision
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(10,644
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(1.2
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(11,390
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(1.6
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)
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746
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(6.5
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)%
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Loss from equity investment in TSL
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—
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—
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(1,310
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)
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(0.2
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)
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1,310
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NM
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Net income
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$
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31,194
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3.6
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%
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$
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24,297
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3.4
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%
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$
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6,897
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28.4
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%
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Basic and diluted earnings per share:
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Basic earnings per share
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$
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0.41
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$
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0.30
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$
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0.11
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36.7
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%
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Diluted earnings per share
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$
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0.40
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$
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0.30
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$
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0.10
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33.3
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%
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Weighted average shares used in per share calculations:
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Basic shares
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77,004
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80,108
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(3,104
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(3.9
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)%
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Diluted shares
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78,263
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80,758
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(2,495
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(3.1
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)%
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NM - Not meaningful
Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:
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(in thousands)
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Three months ended May 4, 2019
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Consolidated net sales for the same period last year
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$
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710,437
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Increase in comparable sales(1)
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20,880
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Net increase from non-comparable sales and other changes
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1,762
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Incremental external net sales from 2018 acquired businesses
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142,545
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Loss of net sales from the exit of Ebuys
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(5,632
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)
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Consolidated net sales
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$
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869,992
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(1)
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A store is considered comparable when 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 they are closed. Comparable sales includes e-commerce sales. Stores added due to the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, will be added to the comparable base beginning with the second quarter of fiscal 2019. 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.
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The following summarizes net sales by segment:
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Three months ended
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Change
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(dollars in thousands)
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May 4, 2019
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May 5, 2018
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Amount
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%
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Comparable Sales %
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Segment net sales:
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U.S. Retail
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$
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691,840
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$
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669,784
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$
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22,056
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3.3
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%
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3.0%
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Canada Retail
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51,816
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—
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51,816
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NM
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NA
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Brand Portfolio
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100,867
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—
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100,867
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NM
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NA
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Other
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35,607
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40,653
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(5,046
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(12.4
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)%
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3.2%
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880,130
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710,437
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169,693
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23.9
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%
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Elimination of intersegment net sales
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(10,138
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)
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—
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(10,138
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)
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NM
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Consolidated net sales
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$
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869,992
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$
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710,437
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$
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159,555
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22.5
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%
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3.0%
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NM - Not meaningful
NA - Not applicable
Within the U.S. Retail segment, comparable sales increased due to higher comparable transactions driven by an increase in traffic, partially offset by a decline in comparable average dollar sales per transaction. We continue to have strong growth in digital demand, including an increase in our store fulfillment of digital orders and drop ship orders fulfilled directly by vendors.
Commission, franchise and Other Revenue- Commission, franchise and other revenue consists of commission income for First Cost design and buying services in the Brand Portfolio segment, royalties and other fees paid by franchisees, and rental income on owned properties.
Gross Profit- Consolidated gross profit is determined as follows:
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Three months ended
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|
May 4, 2019
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May 5, 2018
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Change
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(dollars in thousands)
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Amount
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% of Net Sales
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Amount
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% of Net Sales
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Amount
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%
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Basis Points
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Net sales
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$
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869,992
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|
100.0
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%
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$
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710,437
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|
100.0
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%
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Cost of sales
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(613,956
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)
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(70.6
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)
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(505,212
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)
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(71.1
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)
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Gross profit
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$
|
256,036
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29.4
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%
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$
|
205,225
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28.9
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%
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$
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50,811
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24.8
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%
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50
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The following summarizes gross profit by segment:
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Three months ended
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|
May 4, 2019
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May 5, 2018
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Change
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(dollars in thousands)
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Amount
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% of Segment Net Sales
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Amount
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% of Segment Net Sales
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Amount
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%
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Basis Points
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Segment gross profit:
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U.S. Retail
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$
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209,891
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30.3
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%
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$
|
198,344
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|
29.6
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%
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|
$
|
11,547
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|
5.8
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%
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|
70
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|
|
Canada Retail
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15,747
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|
30.4
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%
|
|
—
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|
|
—
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%
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$
|
15,747
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|
|
NM
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|
NM
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Brand Portfolio
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21,994
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|
21.8
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%
|
|
—
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|
|
—
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%
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|
$
|
21,994
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|
|
NM
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|
NM
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Other
|
9,311
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|
26.1
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%
|
|
6,881
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|
16.9
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%
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|
$
|
2,430
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|
|
35.3
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%
|
|
920
|
|
|
|
256,943
|
|
|
|
|
205,225
|
|
|
|
|
|
|
|
|
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Intercompany eliminations
|
(907
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)
|
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|
|
—
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|
|
|
|
|
|
|
|
|
|
Consolidated gross profit
|
$
|
256,036
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|
|
|
|
$
|
205,225
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|
|
|
|
|
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|
The U.S. Retail segment gross profit margin improved due to higher initial markups and lower markdowns, which were partially offset by higher shipping costs. Other gross profit margin increased primarily due to the exit of Ebuys during the previous year.
Operating Expenses- For the three months ended May 4, 2019, operating expenses as a percentage of total revenue increased 180 basis points over the same period last year primarily driven by the impact of the acquired businesses, integration and restructuring costs and the change in accounting for previously exited leased space as a result of the transition to ASU 2016-02, partially offset by the exit of Ebuys during the previous year.
Income from equity investment in ABG-Camuto- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit. ABG-Camuto is an integral part of the Brand Portfolio segment, given the licensing agreement between us and ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.
Non-operating Expenses, net- Non-operating expenses, net primarily reflects recognized foreign exchange losses.
Income Taxes- Our effective tax rate changed from 31.9% for the three months ended May 5, 2018 to 25.4% for the three months ended May 4, 2019. The decrease in the effective tax rate was primarily driven by additional valuation allowances and the impact of nondeductible charges associated with the Ebuys exit during the three months ended May 5, 2018.
Seasonality
Our business is subject to seasonal merchandise trends driven by the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter.
Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels typically fluctuate seasonally.
During the three months ended May 4, 2019, we repurchased 3.4 million Class A common shares at a cost of $75.0 million, which was funded with borrowings on the revolving line of credit, with $401.6 million of Class A common shares that remain authorized under the program as of May 4, 2019. During the three months ended May 5, 2018, we did not repurchase any Class A common shares. 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.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility. We believe that cash generated from our operations, together with our current levels of cash and investments, as well as availability under our Credit Facility, are sufficient over the next 12 months and the foreseeable future to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and repurchase common shares under our share repurchase program.
Operating Cash Flows
For the three months ended May 4, 2019, net cash used in operations was $3.0 million compared to net cash provided by operations of $25.3 million for the three months ended May 5, 2018. The change was driven by a decrease in net income after adjusting for non-cash activity, including depreciation and amortization, stock-based compensation, and the prior year's lease exit charges, primarily due to including the net loss from Camuto Group during the first quarter of fiscal 2019. In addition, we had an increased use of cash to fund working capital requirements during the first quarter of fiscal 2019 due to the addition of the acquired businesses, which uses cash for working capital requirements in the first half of the year consistent with our U.S. retail operations.
Investing Cash Flows
For the three months ended May 4, 2019, our net cash used in investing activities was $6.2 million, which was due to capital expenditures of $24.9 million, partially offset by the liquidation of our available-for sale-securities. During the three months ended May 5, 2018, our net cash provided by investing activities was $17.6 million, which was due to liquidating our available-
for-sale securities denominated in CAD in preparation for the TSL acquisition, partially offset by $18.2 million for capital expenditures and $16.0 million of additional borrowings by TSL.
Financing Cash Flows
For the three months ended May 4, 2019, our net cash used in financing activities was $19.9 million compared to $21.7 million for the three months ended May 5, 2018. Net cash used in financing activities was primarily related to the payment of dividends. The repurchase of Class A common shares under the share repurchase program during three months ended May 4, 2019 was financed using our revolving line of credit.
Debt
Credit Facility- On August 25, 2017, we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased with no change to the sub-limits. As of May 4, 2019, the Credit Facility provided a revolving line of credit up to $400 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility.
Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 4.0% as of May 4, 2019. Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.5% as of May 4, 2019. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of May 4, 2019, we had $235.0 million outstanding under the Credit Facility and $3.1 million in letters of credit issued, resulting in $161.9 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of May 4, 2019, we were in compliance with all financial covenants.
Capital Expenditure Plans
We expect to spend approximately $75.0 million to $85.0 million for capital expenditures in fiscal 2019. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and information technology projects that we undertake and the timing of these expenditures. During fiscal 2019, we plan to open approximately 17 to 21 new stores.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
We have included a summary of our contractual obligations as of February 2, 2019 in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. There have been no material changes in contractual obligations outside the ordinary course of business since February 2, 2019.
Critical Accounting Policies and Estimates
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 appraisal 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 disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
