Washington, D.C. 20549
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DSW
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Net income (loss) | $ | 42,860 | | | $ | (98,214) | | | $ | 59,886 | | | $ | (314,072) | |
Other comprehensive income (loss), net of income taxes: | | | | | | | |
Foreign currency translation gain (loss) | (298) | | | 1,290 | | | 245 | | | (2,251) | |
Unrealized net gain on debt securities | — | | | — | | | — | | | 195 | |
Reclassification adjustment for net gains realized in net loss | — | | | — | | | — | | | (368) | |
Total other comprehensive income (loss), net of income taxes | (298) | | | 1,290 | | | 245 | | | (2,424) | |
Total comprehensive income (loss) | $ | 42,562 | | | $ | (96,924) | | | $ | 60,131 | | | $ | (316,496) | |
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
ASSETS | | | | | |
Cash and cash equivalents | $ | 149,485 |
| | $ | 110,657 |
| | $ | 60,962 |
|
Short-term investments | 180,066 |
| | 98,530 |
| | 78,512 |
|
Accounts receivable | 19,102 |
| | 18,456 |
| | 20,334 |
|
Accounts receivable from related parties | 1,315 |
| | 550 |
| | 1,029 |
|
Inventories | 546,553 |
| | 499,995 |
| | 562,701 |
|
Prepaid expenses and other current assets | 25,445 |
| | 31,074 |
| | 24,566 |
|
Prepaid rent to related parties | — |
| | 4 |
| | 13 |
|
Total current assets | 921,966 |
| | 759,266 |
| | 748,117 |
|
Property and equipment, net | 358,154 |
| | 375,251 |
| | 381,218 |
|
Long-term investments | — |
| | 77,904 |
| | 76,126 |
|
Goodwill | 25,899 |
| | 79,689 |
| | 77,208 |
|
Deferred income taxes | 35,284 |
| | 14,934 |
| | 21,103 |
|
Long-term prepaid rent to related parties | 688 |
| | 768 |
| | 795 |
|
Equity investment in Town Shoes | 7,180 |
| | 15,830 |
| | 17,996 |
|
Note receivable from Town Shoes | 60,249 |
| | 53,121 |
| | 50,579 |
|
Intangible assets | 3,135 |
| | 35,108 |
| | 38,243 |
|
Other assets | 19,023 |
| | 16,605 |
| | 20,530 |
|
Total assets | $ | 1,431,578 |
| | $ | 1,428,476 |
| | $ | 1,431,915 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
Accounts payable | $ | 193,607 |
| | $ | 185,497 |
| | $ | 160,621 |
|
Accounts payable to related parties | 706 |
| | 774 |
| | 641 |
|
Accrued expenses | 141,990 |
| | 130,334 |
| | 143,653 |
|
Total current liabilities | 336,303 |
| | 316,605 |
| | 304,915 |
|
Non-current liabilities | 141,752 |
| | 141,179 |
| | 144,654 |
|
Contingent consideration liability | 4,962 |
| | 33,204 |
| | 58,923 |
|
Total liabilities | 483,017 |
| | 490,988 |
| | 508,492 |
|
Commitments and contingencies |
|
| |
|
| |
|
|
Shareholders' equity: | | | | | |
Common shares paid-in capital, no par value; 250,000 Class A Common Shares authorized; 85,346, 85,038 and 84,875 issued, respectively; 72,255, 72,447 and 72,635 outstanding, respectively; 100,000 Class B Common Shares authorized, 7,733 issued and outstanding | 957,960 |
| | 946,351 |
| | 941,485 |
|
Preferred shares, no par value; 100,000 authorized; no shares issued or outstanding | — |
| | — |
| | — |
|
Treasury shares, at cost, 13,091, 12,591 and 12,240 outstanding, respectively | (325,906 | ) | | (316,531 | ) | | (309,229 | ) |
Retained earnings | 354,315 |
| | 346,602 |
| | 332,051 |
|
Basis difference related to acquisition of commonly controlled entity | (24,993 | ) | | (24,993 | ) | | (24,993 | ) |
Accumulated other comprehensive loss | (12,815 | ) | | (13,941 | ) | | (15,891 | ) |
Total shareholders' equity | 948,561 |
| | 937,488 |
| | 923,423 |
|
Total liabilities and shareholders' equity | $ | 1,431,578 |
| | $ | 1,428,476 |
| | $ | 1,431,915 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
(unaudited and in thousands)
| | | | | | | | | | | | | | | | | |
| July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
ASSETS | | | | | |
Cash and cash equivalents | $ | 46,458 | | | $ | 59,581 | | | $ | 206,720 | |
| | | | | |
Receivables, net | 199,371 | | | 196,049 | | | 49,240 | |
Inventories | 504,316 | | | 473,183 | | | 445,044 | |
Prepaid expenses and other current assets | 53,616 | | | 51,772 | | | 69,456 | |
Total current assets | 803,761 | | | 780,585 | | | 770,460 | |
Property and equipment, net | 271,401 | | | 296,469 | | | 332,730 | |
Operating lease assets | 676,665 | | | 700,481 | | | 797,413 | |
Goodwill | 93,655 | | | 93,655 | | | 93,655 | |
Intangible assets, net | 15,905 | | | 15,635 | | | 15,663 | |
Deferred tax assets | — | | | — | | | 182,866 | |
Equity investment | 55,149 | | | 58,598 | | | 56,690 | |
Other assets | 29,513 | | | 31,172 | | | 23,780 | |
Total assets | $ | 1,946,049 | | | $ | 1,976,595 | | | $ | 2,273,257 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
Accounts payable | $ | 299,322 | | | $ | 245,071 | | | $ | 224,693 | |
Accrued expenses | 222,055 | | | 200,326 | | | 202,831 | |
Current maturities of long-term debt | 62,500 | | | 62,500 | | | — | |
Current operating lease liabilities | 190,853 | | | 244,786 | | | 241,694 | |
Total current liabilities | 774,730 | | | 752,683 | | | 669,218 | |
Long-term debt | 184,569 | | | 272,319 | | | 393,000 | |
Non-current operating lease liabilities | 645,136 | | | 677,735 | | | 778,826 | |
Other non-current liabilities | 30,502 | | | 30,841 | | | 25,586 | |
Total liabilities | 1,634,937 | | | 1,733,578 | | | 1,866,630 | |
Commitments and contingencies |
| |
0 | |
0 |
0Shareholders' equity: | | | | | |
Common shares paid-in capital, no par value | 998,117 | | | 990,153 | | | 980,749 | |
Treasury shares, at cost | (515,065) | | | (515,065) | | | (515,065) | |
Retained deficit | (168,899) | | | (228,785) | | | (54,138) | |
Accumulated other comprehensive loss | (3,041) | | | (3,286) | | | (4,919) | |
Total shareholders' equity | 311,112 | | | 243,017 | | | 406,627 | |
Total liabilities and shareholders' equity | $ | 1,946,049 | | | $ | 1,976,595 | | | $ | 2,273,257 | |
|
| | | | | | | |
| Nine months ended |
| October 28, 2017 | | October 29, 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 55,603 |
| | $ | 94,009 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 61,444 |
| | 61,029 |
|
Stock-based compensation expense | 11,339 |
| | 10,156 |
|
Deferred income taxes | (20,381 | ) | | 712 |
|
Income from Town Shoes | (543 | ) | | (1,237 | ) |
Goodwill and intangible assets impairment charges | 82,701 |
| | — |
|
Change in fair value of contingent consideration liability | (28,926 | ) | | 5,080 |
|
Loss on disposal of long-lived assets | 1,050 |
| | 699 |
|
Loss on foreign currency transactions | 2,186 |
| | — |
|
Amortization of investment discounts and premiums | 481 |
| | 992 |
|
Change in operating assets and liabilities: | | | |
Accounts receivable | (1,411 | ) | | (4,276 | ) |
Inventories | (46,558 | ) | | (48,313 | ) |
Prepaid expenses and other current assets | 979 |
| | 11,318 |
|
Accounts payable | 8,790 |
| | (55,572 | ) |
Accrued expenses | 10,598 |
| | 32,570 |
|
Other | 1,224 |
| | 3,592 |
|
Net cash provided by operating activities | 138,576 |
| | 110,759 |
|
Cash flows from investing activities: | | | |
Cash paid for property and equipment | (39,552 | ) | | (73,157 | ) |
Purchases of available-for-sale investments | (98,855 | ) | | (69,960 | ) |
Sales of available-for-sale investments | 96,649 |
| | 215,524 |
|
Additional borrowings by Town Shoes | (5,689 | ) | | (7,023 | ) |
Acquisition of Ebuys | — |
| | (59,481 | ) |
Net cash provided by (used in) investing activities | (47,447 | ) | | 5,903 |
|
Cash flows from financing activities: | | | |
Proceeds from exercise of stock options | 1,133 |
| | 3,615 |
|
Net change in vendor payment program | 1,058 |
| | — |
|
Payment of credit facility costs | (1,018 | ) | | — |
|
Cash paid for income taxes for stock-based compensation shares withheld | (863 | ) | | (2,421 | ) |
Cash paid for treasury shares | (9,375 | ) | | (42,698 | ) |
Dividends paid | (47,890 | ) | | (49,098 | ) |
Net cash used in financing activities | (56,955 | ) | | (90,602 | ) |
Net increase in cash, cash equivalents, and restricted cash | 34,174 |
| | 26,060 |
|
Cash, cash equivalents, and restricted cash, beginning of period | 115,311 |
| | 40,171 |
|
Cash, cash equivalents, and restricted cash, end of period | $ | 149,485 |
| | $ | 66,231 |
|
Supplemental disclosures of cash flow information - | | | |
Cash paid during the period for income taxes | $ | 64,441 |
| | $ | 40,057 |
|
Non-cash investing and financing activities: | | | |
Property and equipment purchases not yet paid | $ | 7,138 |
| | $ | 4,829 |
|
Ebuys contingent purchase price | $ | — |
| | $ | 53,843 |
|
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 (deficit) | | Accumulated other comprehensive loss | | Total |
Three months ended July 31, 2021 |
Balance, May 1, 2021 | 65,134 | | | 7,733 | | | 22,169 | | | $ | 992,379 | | | $ | (515,065) | | | $ | (211,759) | | | $ | (2,743) | | | $ | 262,812 | |
Net income | — | | | — | | | — | | | — | | | — | | | 42,860 | | | — | | | 42,860 | |
Stock-based compensation activity | 102 | | | — | | | — | | | 5,738 | | | — | | | — | | | — | | | 5,738 | |
| | | | | | | | | | | | | | | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (298) | | | (298) | |
Balance, July 31, 2021 | 65,236 | | | 7,733 | | | 22,169 | | | $ | 998,117 | | | $ | (515,065) | | | $ | (168,899) | | | $ | (3,041) | | | $ | 311,112 | |
Three months ended August 1, 2020 |
Balance, May 2, 2020 | 64,302 | | | 7,733 | | | 22,169 | | | $ | 975,304 | | | $ | (515,065) | | | $ | 44,076 | | | $ | (6,209) | | | $ | 498,106 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (98,214) | | | — | | | (98,214) | |
Stock-based compensation activity | 276 | | | — | | | — | | | 5,445 | | | — | | | — | | | — | | | 5,445 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 1,290 | | | 1,290 | |
Balance, August 1, 2020 | 64,578 | | | 7,733 | | | 22,169 | | | $ | 980,749 | | | $ | (515,065) | | | $ | (54,138) | | | $ | (4,919) | | | $ | 406,627 | |
Six months ended July 31, 2021 |
Balance, January 30, 2021 | 64,666 | | | 7,733 | | | 22,169 | | | $ | 990,153 | | | $ | (515,065) | | | $ | (228,785) | | | $ | (3,286) | | | $ | 243,017 | |
Net income | — | | | — | | | — | | | — | | | — | | | 59,886 | | | — | | | 59,886 | |
Stock-based compensation activity | 570 | | | — | | | — | | | 7,964 | | | — | | | — | | | — | | | 7,964 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 245 | | | 245 | |
Balance, July 31, 2021 | 65,236 | | | 7,733 | | | 22,169 | | | $ | 998,117 | | | $ | (515,065) | | | $ | (168,899) | | | $ | (3,041) | | | $ | 311,112 | |
Six months ended August 1, 2020 |
Balance, February 1, 2020 | 64,033 | | | 7,733 | | | 22,169 | | | $ | 971,380 | | | $ | (515,065) | | | $ | 267,094 | | | $ | (2,495) | | | $ | 720,914 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (314,072) | | | — | | | (314,072) | |
Stock-based compensation activity | 545 | | | — | | | — | | | 9,369 | | | — | | | — | | | — | | | 9,369 | |
| | | | | | | | | | | | | | | |
Dividends ($0.10 per share) | — | | | — | | | — | | | — | | | — | | | (7,160) | | | — | | | (7,160) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (2,424) | | | (2,424) | |
Balance, August 1, 2020 | 64,578 | | | 7,733 | | | 22,169 | | | $ | 980,749 | | | $ | (515,065) | | | $ | (54,138) | | | $ | (4,919) | | | $ | 406,627 | |
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)
| | | | | | | | | | | |
| Six months ended |
| July 31, 2021 | | August 1, 2020 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 59,886 | | | $ | (314,072) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 40,257 | | | 44,075 | |
Stock-based compensation expense | 13,365 | | | 10,596 | |
Deferred income taxes | 100 | | | (152,988) | |
Income from equity investment | (3,998) | | | (4,423) | |
Distributions received from equity investment | 7,447 | | | 5,493 | |
Impairment charges | 1,174 | | | 119,282 | |
Gain on settlement | — | | | (8,990) | |
Other | 800 | | | 403 | |
Change in operating assets and liabilities: | | | |
Accounts receivable | 5,859 | | | 30,699 | |
Income tax receivable | (9,066) | | | — | |
Inventories | (30,114) | | | 186,965 | |
Prepaid expenses and other current assets | (612) | | | (847) | |
Accounts payable | 53,009 | | | (67,282) | |
Accrued expenses | 21,546 | | | 26,693 | |
Operating lease assets and liabilities, net | (63,424) | | | 44,777 | |
Net cash provided by (used in) operating activities | 96,229 | | | (79,619) | |
Cash flows from investing activities: | | | |
Cash paid for property and equipment | (13,189) | | | (22,141) | |
| | | |
Sales of available-for-sale investments | — | | | 24,755 | |
Proceeds from settlement | — | | | 4,166 | |
Net cash provided by (used in) investing activities | (13,189) | | | 6,780 | |
Cash flows from financing activities: | | | |
Borrowing on revolving line under Credit Facility | — | | | 251,000 | |
Payments on revolving line under Credit Facility | — | | | (48,000) | |
Borrowing under ABL Revolver | 342,053 | | | — | |
Payments on borrowings under ABL Revolver | (425,243) | | | — | |
| | | |
Payments on borrowings under Term Loan | (6,251) | | | — | |
| | | |
| | | |
Dividends paid | — | | | (7,160) | |
Other | (5,514) | | | (2,646) | |
Net cash provided by (used in) financing activities | (94,955) | | | 193,194 | |
Effect of exchange rate changes on cash balances | 338 | | | (199) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (11,577) | | | 120,156 | |
Cash, cash equivalents and restricted cash, beginning of period | 59,581 | | | 86,564 | |
Cash, cash equivalents and restricted cash, end of period | $ | 48,004 | | | $ | 206,720 | |
Supplemental disclosures of cash flow information: | | | |
Cash paid (received) for income taxes | $ | (3,372) | | | $ | 165 | |
Cash paid for interest on debt | $ | 13,437 | | | $ | 5,606 | |
Cash paid for operating lease liabilities | $ | 162,602 | | | $ | 62,262 | |
Non-cash investing and financing activities: | | | |
Property and equipment purchases not yet paid | $ | 2,320 | | | $ | 1,981 | |
Operating lease liabilities arising from lease asset additions | $ | 11,109 | | | $ | 9,408 | |
Net increase to operating lease assets and lease liabilities for modifications | $ | 45,723 | | | $ | 23,195 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATIONSIGNIFICANT ACCOUNTING POLICIES
Business Operations- DSW Designer Brands Inc., an Ohio corporation, together with its wholly-owned subsidiaries, is the destination for fabulous footwear brandsone of North America's largest designers, producers and accessories at a great value every single day. We offer a wide assortmentretailers of brand name dress, casual and athletic footwear and accessories for women, men and kids.accessories. We conduct businessoperate in two3 reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW segmentDesigner Shoe Warehouse ("DSW"), which includes DSW banner through its U.S. stores and dsw.com, and the Affiliated Business Group ("ABG") segment.
e-commerce site. The ABGCanada Retail segment partners with three other retailers to help build and optimize their in-store and online footwear businesses. ABG supplies merchandise for the shoe departments of Stein Mart, Gordmans, and Frugal Fannie's. On March 13, 2017, Gordmans filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and announced its plan to liquidate inventory and other assets. Stage Stores, Inc. acquired 58 of the Gordmans' stores and we have signed an agreement to provide services for these stores through the end of fiscal 2017.
We also have an equity investment in Town Shoes Limited ("Town Shoes"). Town Shoes is the market leader in Canada for the sale of branded footwear offered in stores and on e-commerce sites under the banners ofoperates The Shoe Company, Shoe Warehouse, Town Shoes and DSW.
During fiscal 2016,DSW banners through its Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we completedrefer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40% stake in ABG-Camuto, a joint venture that owns several transactions that supportedintellectual property rights, including Vince Camuto, Louise et Cie, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. Camuto Group has a licensing agreement with ABG-Camuto whereby we pay royalties on our effortsnet sales from the brands owned by ABG-Camuto, subject to grow market share withinguaranteed minimums. Camuto Group also owns footwear and accessories domesticallycertain handbag licensing rights of Jessica Simpson, Lucky Brand and, internationally. On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"),through a leading off price footwearjoint venture, Jennifer Lopez. Our other operating segments are below the quantitative and accessories retailer operating in digital marketplaces. Ebuys sells products to customers located in North America, Europe, Australiaqualitative thresholds for reportable segments and Asia. 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. Under this franchise agreement, the first two franchise stores opened during fiscal 2017.are aggregated into Other for segment reporting purposes.
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 StatesU.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 28, 201730, 2021 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 onthe 2020 Form 10-K for the fiscal year ended January 28, 2017, filed with the U.S. Securities and Exchange Commission on March 23, 2017.10-K.
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.
2. ACQUISITION AND EQUITY INVESTMENT
Acquisition of Ebuys- On March 4, 2016, we acquired 100% ownership of Ebuys for cash and future amounts to be paid to the sellers of Ebuys contingent upon achievement of certain milestones. During fiscal 2016, we had purchase price adjustments based on working capital adjustments and measurement period adjustments of the contingent consideration liability, based on additional information about facts and circumstances that existed at the acquisition date that were obtained after that date. We also made various measurement period adjustments for the assets and liabilities acquired.
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The preliminary and final purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired consisted of the following:
|
| | | | | | | | | | | |
| Preliminary Purchase Price as of March 4, 2016 | | Adjustments | | Final Purchase Price as of January 28, 2017 |
| (in thousands) |
Purchase price: | | | | | |
Cash consideration | $ | 60,411 |
| | $ | (635 | ) | | $ | 59,776 |
|
Contingent consideration | 56,000 |
| | (2,645 | ) | | 53,355 |
|
| $ | 116,411 |
| | $ | (3,280 | ) | | $ | 113,131 |
|
Fair value of assets and liabilities acquired: | | | | | |
Accounts and other receivables | $ | 1,623 |
| | $ | (287 | ) | | $ | 1,336 |
|
Inventory | 30,152 |
| | 18 |
| | 30,170 |
|
Other current assets | 191 |
| | 335 |
| | 526 |
|
Property and equipment | 1,221 |
| | 22 |
| | 1,243 |
|
Goodwill | 54,785 |
| | (995 | ) | | 53,790 |
|
Intangible assets | 41,301 |
| | (2,600 | ) | | 38,701 |
|
Accounts payable and other long-term liabilities | (12,862 | ) | | 227 |
| | (12,635 | ) |
| $ | 116,411 |
| | $ | (3,280 | ) | | $ | 113,131 |
|
The final fair value of intangible assets includes $22.3 million for online retailer and customer relationships based on using the excess earnings method, $11.0 million for tradenames based on using the relief from royalty method, and $5.4 million for non-compete agreements based on using the with-and-without method. The categorization of the fair value framework used for these methods are considered Level 3 due to the subjective nature of the unobservable inputs used to determine the fair value.
The goodwill represents the intangible assets that do not qualify for separate recognition and is primarily the result of expected synergies, vertical integration as a market for selling aged inventory, online presence, and the acquired workforce. Goodwill related to this acquisition is deductible for income tax purposes.
Equity Investment in Town Shoes- In May 2014, we acquired a 49.2% interest in Town Shoes for $75.1 million Canadian dollars ("CAD") ($68.9 million United States dollars ("USD")), which included the purchase of an unsecured subordinated note from Town Shoes issued on February 14, 2012 that earns payment-in-kind interest at 12% and matures on February 14, 2022. As of October 28, 2017, our ownership percentage was 46.3%. The dilution of our ownership is due to Town Shoes' employee exercise of stock options. Our ownership stake provides 50% voting control and board representation equal to the co-investor.
Additionally, the Town Shoes co-investor holds a put option to sell the remaining interest in Town Shoes in fiscal 2017 to the Company and for the subsequent two years. We hold a call option to purchase the remaining interest in Town Shoes in fiscal 2018, and for the subsequent two years, if the Town Shoes co-investor has not exercised their put option. During fiscal 2015, we invested $100 million CAD in available-for-sale securities denominated in CAD in anticipation of funding the future purchase of the remaining interest in Town Shoes. As of October 28, 2017, these available-for-sale securities are classified as short-term investments based on management's intent to exercise the call option to purchase the remaining interest in Town Shoes in the first half of fiscal 2018.
3. SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report2020 Form 10-K.
Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as changes to our expense and capital expenditure plans.
During the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions. The severance charges recorded as a result of this reorganization are included in our severance discussion below.
Although operating results have improved throughout the first half of fiscal 2021, we continue to experience adverse impacts due to COVID-19, including temporary store closures, reduced hours and other requirements in certain areas where government-imposed restrictions were mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences.
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analyses for our U.S. Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on Form 10-Kprojected discounted cash flows over the remaining lease term. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the three months ended August 1, 2020, we recorded an impairment charge of $6.7 million for the U.S. Retail segment. During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million ($73.1 million and $19.7 million for the U.S. Retail segment and Canada Retail segment, respectively). Also during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).
As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of COVID-19 on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of fiscal 2020. We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories reflects reductions for merchandise marked down with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using moving average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our fiscal 2020 peak spring selling season and reduced traffic experienced since re-opening stores. During the six months ended August 1, 2020, we recorded $64.0 million of additional inventory reserves over the same period of the previous year.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which, among other things, provided employer payroll tax credits for wages paid to employees who were unable to work over a defined period and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualified for certain employer payroll tax credits, which were treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future. Similar credits were also available in Canada and continue to be provided. During the three months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $1.0 million and $3.5 million, respectively, on our condensed consolidated statements of operations. During the six months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $3.7 million and $7.9 million, respectively, on our condensed consolidated statements of operations. As of July 31, 2021, we had $10.0 million of deferred qualified payroll and other tax obligations, half of which is included in accrued expenses on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2021, with the remaining included in other non-current liabilities on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2022.
We recorded our income tax expense, income tax receivable, and deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. Our ability to recover these deferred tax assets depends on several factors, including our ability to project future taxable income. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in fiscal 2020 due to COVID-19, we are in a three-year cumulative loss position as of July 31, 2021, which is significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. A valuation allowance has been recognized as a reserve on the total deferred tax asset balance due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Our effective tax rate changed from 32.5% for the six months ended
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
August 1, 2020 to 3.6% for the six months ended July 31, 2021. The rate for the six months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
The impacts from the COVID-19 pandemic remain challenging and unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19, and the global availability and use of vaccines, which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.
Severance- During the three months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $1.2 million and $7.3 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $2.6 million and $9.0 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of July 31, 2021, January 28, 2017.30, 2021 and August 1, 2020, we had accrued severance of $4.9 million, $6.5 million and $8.4 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.
Gain on Settlement- During the three months ended August 1, 2020, we recognized a gain of $9.0 million, recorded to operating expenses in the condensed consolidated statements of operations, due to a settlement with a vendor for costs incurred on internal-use software that was capitalized and impaired in a previous fiscal year. During the three months ended August 1, 2020, we collected $4.2 million, net of legal costs incurred, and recorded a $4.8 million receivable included in receivables, net, on the condensed consolidated balance sheets, which has been subsequently received.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of DSWDesigner Brands Inc. and its wholly-owned subsidiaries.subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in USD, unless otherwise noted.U.S. dollars.
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 datedates of the financial statements and reported amounts of revenuesnet sales and expenses during the reporting period.periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us, along with the estimated, but uncertain, future impacts of COVID-19. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, inventory valuation, contingent consideration liability, customer loyalty program reserve, recoverabilityimpairments of long-lived assets, intangibles and intangible assets, legal reserves, accrual forgoodwill, lease obligationsaccounting, income taxes, and establishing reserves for self-insurance.self-insurance reserves. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions itwe may undertake in the future,future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
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 representsrepresented cash that is restricted as to withdrawal or usage and consistedconsists of a mandatory cash deposit maintained for outstanding letters of credit under our previous credit facility.certain insurance policies.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
Cash and cash equivalents | $ | 46,458 | | | $ | 59,581 | | | $ | 206,720 | |
Restricted cash, included in prepaid expenses and other current assets | 1,546 | | | — | | | — | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 48,004 | | | $ | 59,581 | | | $ | 206,720 | |
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in thousands) |
Cash and cash equivalents | $ | 149,485 |
| | $ | 110,657 |
| | $ | 60,962 |
|
Restricted cash, included in prepaid expenses and other current assets | — |
| | 4,654 |
| | 5,269 |
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 149,485 |
| | $ | 115,311 |
| | $ | 66,231 |
|
Fair Value- Fair value is defined as the price that would be received to sellin the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
•Level 3 - Unobservable inputs in which little or no market activity exists.
ImpairmentThe carrying value of Long-Lived Assets- We periodically evaluatecash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under our ABL Revolver and our previous senior unsecured revolving credit agreement ("Credit Facility") approximated the carrying amountvalue. As of July 31, 2021, the fair value of borrowings under our long-lived assets, primarily property and equipment and definite-lived intangible assets, when events and circumstances warrant such a reviewTerm Loan was $250.2 million compared to ascertain if any assets have been impaired. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group. The reviews are conducted at the lowest identifiable level. The impairment loss recognized is the excess of the carrying$237.5 million. The fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2 under the asset or asset group over its fair value.value hierarchy).
DueImpairment of Long-Lived Assets- Refer to recurring operating losses incurred by Ebuys since its acquisition as well as increased competitive pressures in the digital marketplaces, we revised our growth expectations assumed at the timesection above, Impact of the acquisition and have moderated future expectations for the business. As a result,COVID-19, regarding impairment charges of long-lived assets during fiscal 2020. During the three months ended October 28, 2017,July 31, 2021, we undertook a reviewrecorded an impairment charge of the carrying amount of Ebuys’ intangible assets and recorded intangible assets impairment charges of $28.9$1.2 million in the accompanying condensed consolidated statementsU.S. Retail segment for abandoned equipment we are replacing.
2. REVENUE
Disaggregation of operations.Net Sales- The following table presents net sales disaggregated by product and service category for each segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Net sales: | | | | | | | |
U.S. Retail segment: | | | | | | | |
Women's footwear | $ | 467,518 | | | $ | 253,539 | | | $ | 872,818 | | | $ | 513,102 | |
Men's footwear | 168,218 | | | 85,012 | | | 300,165 | | | 155,367 | |
Kids' footwear | 54,112 | | | 32,232 | | | 108,844 | | | 61,415 | |
Accessories and other | 33,245 | | | 23,194 | | | 61,924 | | | 41,166 | |
| 723,093 | | | 393,977 | | | 1,343,751 | | | 771,050 | |
Canada Retail segment: | | | | | | | |
Women's footwear | 30,230 | | | 25,329 | | | 50,661 | | | 41,301 | |
Men's footwear | 15,805 | | | 13,970 | | | 25,333 | | | 20,773 | |
Kids' footwear | 9,554 | | | 8,231 | | | 19,067 | | | 13,787 | |
Accessories and other | 1,996 | | | 2,052 | | | 3,128 | | | 3,050 | |
| 57,585 | | | 49,582 | | | 98,189 | | | 78,911 | |
Brand Portfolio segment: | | | | | | | |
Wholesale | 42,715 | | | 15,563 | | | 91,358 | | | 82,867 | |
Commission income | 2,377 | | | 5,018 | | | 5,708 | | | 10,141 | |
Direct-to-consumer | 5,437 | | | 9,877 | | | 10,890 | | | 19,563 | |
| 50,529 | | | 30,458 | | | 107,956 | | | 112,571 | |
Other | — | | | 22,266 | | | — | | | 35,889 | |
Total segment net sales | 831,207 | | | 496,283 | | | 1,549,896 | | | 998,421 | |
Elimination of intersegment sales | (13,872) | | | (6,569) | | | (29,406) | | | (25,924) | |
Total net sales | $ | 817,335 | | | $ | 489,714 | | | $ | 1,520,490 | | | $ | 972,497 | |
Goodwill- We evaluate goodwill for impairment annually during our fourth quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant and sustained decline in our stock price, that would indicate that impairment may exist. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, we will calculate the estimated fair value of the reporting unit. Fair value is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow analysis. For certain reporting units, where deemed appropriate, we may also utilize a market approach for estimating fair value.
In the third quarter of fiscal 2017, we early adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2017-04, Simplifying the Accounting for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the requirement to determine the implied fair value of goodwill to measure an impairment of
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
goodwill. Rather, goodwill impairment charges are calculated asDeferred Revenue Liabilities- We record deferred revenue liabilities, included in accrued expenses on the amount by which a reporting unit's carrying amount exceeds its fair value.
Due to recurring operating losses incurred by Ebuys since its acquisition as well as increased competitive pressures in the digital marketplaces, we revised our growth expectations assumed at the time of the acquisition and have moderated future expectationscondensed consolidated balance sheets, for the business. As a result, during the three months ended October 28, 2017, we undertook a review of the carrying amount of Ebuys, which included goodwill and reflected the impact of the intangible assets impairment charges. We utilized a discounted cash flow analysis to determine the implied fair value of Ebuys, which was then compared with its carrying value, resulting in a goodwill impairment charge of $53.8 million.
Share Repurchase Program- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of DSW Common Shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the nine months ended October 28, 2017, we repurchased 0.5 million Class A Common Shares at a cost of $9.4 million, with $524.1 million of Class A Common Shares that remain authorized under the program. The share repurchase program may be suspended, modified or discontinued at any time, andobligations 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):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended |
| October 28, 2017 | | October 29, 2016 |
| Foreign Currency Translation | | Available-for-Sale Securities | | Total | | Foreign Currency Translation | | Available-for-Sale Securities | | Total |
| (in thousands) |
Accumulated other comprehensive loss - beginning of period | $ | (13,699 | ) | | $ | (242 | ) | | $ | (13,941 | ) | | $ | (20,530 | ) | | $ | (173 | ) | | $ | (20,703 | ) |
Other comprehensive income (loss) before reclassifications | (806 | ) | | (149 | ) | | (955 | ) | | 4,709 |
| | 103 |
| | 4,812 |
|
Amounts reclassified to non-operating income | 2,186 |
| | (105 | ) | | 2,081 |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | 1,380 |
| | (254 | ) | | 1,126 |
| | 4,709 |
| | 103 |
| | 4,812 |
|
Accumulated other comprehensive loss - end of period | $ | (12,319 | ) | | $ | (496 | ) | | $ | (12,815 | ) | | $ | (15,821 | ) | | $ | (70 | ) | | $ | (15,891 | ) |
Adopted Accounting Standards- In the first quarter of fiscal 2017, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which eliminated the requirement to recognize excess tax benefits in common shares paid-in capital and the requirement to evaluate tax deficiencies for common shares paid-in capital or income tax expense classification, and provides for these benefits or deficiencies to be recorded as an income tax expense or benefit on a prospective basis. For the consolidated statements of cash flows, excess tax benefits related to stock-based compensation is no longer presented, on a retroactive basis, as a financing activity cash inflow and as an operating activity cash outflow.
In the first quarter of fiscal 2017, we early adopted ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires that the consolidated statements of cash flows provides the change in the total of cash, cash equivalents, and restricted cash. As a result of this adoption, we no longer showcustomers. The following table presents the changes in restricted cash balance as a component of cash flows from investing activities but instead include the balance of restricted cash together with cash and cash equivalentstotal balances for the beginning and end of the periods presented.
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As a result of adopting ASU 2016-09 and ASU 2016-18, we adjusted the statements of cash flows on a retroactive basis as follows:
|
| | | |
| Nine Months Ended October 29, 2016 |
| (in thousands) |
Net cash provided by operating activities, as previously reported | $ | 110,635 |
|
Eliminated the excess tax benefits related to stock-based compensation | 124 |
|
Net cash provided by operating activities, as adjusted | $ | 110,759 |
|
Net cash provided by investing activities, as previously reported | $ | 8,310 |
|
Eliminated the decrease in restricted cash | (2,407 | ) |
Net cash provided by investing activities, as adjusted | $ | 5,903 |
|
Net cash used in financing activities, as previously reported | $ | (90,478 | ) |
Eliminated the excess tax benefits related to stock-based compensation | (124 | ) |
Net cash used in financing activities, as adjusted | $ | (90,602 | ) |
Net increase in cash and cash equivalents, as previously reported | $ | 28,467 |
|
Eliminated the impact of the decrease in restricted cash | (2,407 | ) |
Net increase in cash, cash equivalents, and restricted cash, as adjusted | $ | 26,060 |
|
Cash and cash equivalents, beginning of period, as previously reported | $ | 32,495 |
|
Included restricted cash | 7,676 |
|
Cash, cash equivalents, and restricted cash, beginning of period, as adjusted | $ | 40,171 |
|
Cash and cash equivalents, end of period, as previously reported | $ | 60,962 |
|
Included restricted cash | 5,269 |
|
Cash, cash equivalents, and restricted cash, end of period, as adjusted | $ | 66,231 |
|
Recent Accounting Pronouncements- In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Under ASU 2014-09, companies will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The standard also will require enhanced disclosures and provide more comprehensive guidance for transactions such as service revenue and contract modifications. The standard is effective for us in the first quarter of fiscal 2018, which we plan to adopt using the full retrospective method where each prior period presented is restated. We have completed an assessment identifying areas of impact to our financial statements, including sales returns, licensing arrangements, gift cards and our loyalty and co-branded credit card programs. The adoption of the new standard will result in changes in classification between net sales, other revenues, cost of sales, and operating expenses. For income from breakage of gift cards, which is currently recognized as a reduction to operating expenses when the redemption of the gift card is deemed remote, the new standard will require classification within net sales recognized proportionately over the expected redemption period. Also upon adoption of the standard, we will no longer use the incremental cost method and record to cost of sales for our loyalty program, rather we will use a deferred revenue model. We do not expect the adoption of ASU 2014-09 will have a material impact to our reported net sales, operating profit, net income, shareholders’ equity or cash flows, with the primary impacts of adopting the new standard relating to changes in classification of amounts shown on the consolidated financial statements and additional disclosures.programs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Gift cards: | | | | | | | |
Beginning of period | $ | 30,809 | | | $ | 30,908 | | | $ | 34,442 | | | $ | 35,461 | |
Gift cards redeemed and breakage recognized to net sales | (19,210) | | | (11,343) | | | (36,380) | | | (24,868) | |
Gift cards issued | 17,092 | | | 10,354 | | | 30,629 | | | 19,326 | |
End of period | $ | 28,691 | | | $ | 29,919 | | | $ | 28,691 | | | $ | 29,919 | |
Loyalty programs: | | | | | | | |
Beginning of period | $ | 12,955 | | | $ | 14,568 | | | $ | 11,379 | | | $ | 16,138 | |
Loyalty certificates redeemed and expired and other adjustments recognized to net sales | (6,008) | | | (4,277) | | | (10,904) | | | (10,886) | |
Deferred revenue for loyalty points issued | 8,308 | | | 4,506 | | | 14,780 | | | 9,545 | |
End of period | $ | 15,255 | | | $ | 14,797 | | | $ | 15,255 | | | $ | 14,797 | |
In February 2016, the FASB issued ASU 2016-02, Leases, which will change how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to current accounting for capital leases. Upon transition, we will recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The standard is effective for us in the first quarter of fiscal 2019 with early adoption permitted. We will not early adopt ASU
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2016-02 and we expect the standard will have a material impact to our consolidated balance sheets. We are continuing to assess and evaluate the full impact of the standard on our financial statements and we are developing an implementation plan.
4.3. RELATED PARTY TRANSACTIONS
Accounts receivable, accounts payable, and prepaid expenses associated with related parties are separately presented on the consolidated balance sheets. Accounts receivable from and payables to related parties normally settle in the form of cash in 30 to 60 days.
Schottenstein Affiliates
As of October 28, 2017,July 31, 2021, the Schottenstein Affiliates consist of entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family, beneficially owned approximately 18% of the Company's outstanding Common Shares, representing approximately 51% of the combined voting power.family. As of October 28, 2017,July 31, 2021, the Schottenstein Affiliates beneficially owned 7.1approximately 17% of the Company's outstanding common shares, representing approximately 52% of the combined voting power, consisting of, in the aggregate, 4.8 million Class A Common Sharescommon shares and 7.7 million Class B Common Shares.common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases with Related Parties- Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates. During the three months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $2.2$2.7 million and $2.0$2.6 million respectively., respectively. During the ninesix months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $6.8$5.4 million and $6.1$5.3 million, respectively. As of July 31, 2021, January 30, 2021 and August 1, 2020, we had related party current operating lease liabilities of $6.4 million, $8.0 million and $7.9 million, respectively, and non-current operating lease liabilities of $21.3 million, $24.6 million and $28.5 million, respectively.
Basis Difference Related to Acquisition of Commonly Controlled Entity- The basis difference related to acquisition of commonly controlled entity balance, as shown on our consolidated balance sheets, relates to a legal entity acquisition in fiscal 2012 from certain Schottenstein affiliates. The legal entity owned property that was previously leased by us. As this was a transaction between entities under common control, there was no adjustment to the historical cost carrying amounts of assets transferred to the Company. The difference between the historical cost carrying amounts and the consideration transferred was reflected as an equity transaction.
Other Purchases and Services-During the three months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $0.3$1.1 million and $0.4$1.2 million, respectively. During both the ninesix months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $0.9 million and $0.9 million, respectively.$2.5 million.
Town ShoesDue to Related Parties-Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
As of October 28, 2017, our ownership percentage in Town Shoes was 46.3%, which provides us a 50% voting control and board representation equal to the co-investor, and is treated as an equity investment.ABG-Camuto
Management Agreement- We have a management40% interest in our equity investment in ABG-Camuto. We have a licensing agreement with Town Shoes underABG-Camuto, pursuant to which we provide certain information technology and management services.pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. During both the three months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, we recognized incomerecorded royalty expense for amounts paid to ABG-Camuto of $0.3$4.6 million. During the six months ended July 31, 2021 and August 1, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $9.2 million and $0.4$9.0 million, respectively. During the nine months ended October 28, 2017 and October 29, 2016, we recognized income of $0.9 million and $0.4 million, respectively.
License Agreement- We license the use of our tradename and trademark, DSW Designer Shoe Warehouse,Amounts due to Town ShoesABG-Camuto were immaterial for a royalty fee based on a percentage of net sales from its Canadian DSW stores, which are included in net sales. The license is exclusive and non-transferable for use in Canada. During the three months ended October 28, 2017 and October 29, 2016, we recognized royalty income of $0.2 million and $0.2 million, respectively. During the nine months ended October 28, 2017 and October 29, 2016, we recognized royalty income of $0.5 million and $0.4 million, respectively.
Other Purchases and Services- During the three and nine months ended October 28, 2017, Town had other purchases and services from us of $0.3 million and $1.9 million, respectively. During the three and nine months ended October 29, 2016, no other purchases and services were provided.
all periods presented.
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
David Duong, Co-founder of Ebuys
On March 4, 2016, we acquired 100% ownership of Ebuys from its co-founders, including David Duong, who continues to serve on the board of directors of Ebuys, for cash and future amounts to be paid to the co-founders contingent upon achievement of certain milestones. See Note 13, Commitments and Contingencies, for the estimated fair value of the contingent consideration liability and changes recognized. Mr. Duong will receive 50% of any future payments of the contingent consideration.
5.4. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on net income (loss) and the weighted average of Class A and Class B Common Sharescommon shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options and 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 ofbetween basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Weighted average basic shares outstanding | 72,932 | | | 72,142 | | | 72,773 | | | 72,028 | |
Dilutive effect of stock-based compensation awards | 4,687 | | | — | | | 4,498 | | | — | |
Weighted average diluted shares outstanding | 77,619 | | | 72,142 | | | 77,271 | | | 72,028 | |
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
| (in thousands) |
Weighted average shares outstanding - Basic shares | 80,112 |
| | 82,026 |
| | 80,215 |
| | 82,011 |
|
Dilutive effect of stock-based compensation awards | 535 |
| | 511 |
| | 484 |
| | 632 |
|
Weighted average shares outstanding - Diluted shares | 80,647 |
| | 82,537 |
| | 80,699 |
| | 82,643 |
|
For the three months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, the number of potential shares relating to potentially dilutive stock-based compensation awards that were not included inexcluded from the computation of diluted earnings (loss) per share because thedue to their anti-dilutive effect would be anti-dilutive was 4.52.9 million and 3.15.9 million, respectively. For the ninesix months ended October 28, 2017July 31, 2021 and October 29, 2016,August 1, 2020, the number of potential shares relating to potentially dilutive stock-based compensation awards that were not included inexcluded from the computation of diluted earnings (loss) per share because thedue to their anti-dilutive effect would be anti-dilutive was 4.43.0 million and 3.35.5 million, respectively.
6.5. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands) | July 31, 2021 | | August 1, 2020 | | July 31, 2021 | | August 1, 2020 |
Stock options | $ | 132 | | | $ | 407 | | | $ | 385 | | | $ | 870 | |
Restricted and director stock units | 5,776 | | | 5,272 | | | 12,980 | | | 9,726 | |
| $ | 5,908 | | | $ | 5,679 | | | $ | 13,365 | | | $ | 10,596 | |
The following table summarizes the stock-based compensation award activity for RSUs for the six months ended July 31, 2021:
| | | | | | | | | | | |
| Number of shares |
(in thousands) | Time-Based RSUs | | Performance-Based RSUs |
Outstanding - beginning of period | 6,445 | | | 540 | |
Granted | 1,033 | | | — | |
Vested | (512) | | | (359) | |
Forfeited | (225) | | | (17) | |
Outstanding - end of period | 6,741 | | | 164 | |
6. SHAREHOLDERS' EQUITY
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
| (in thousands) |
Stock options | $ | 1,467 |
| | $ | 1,313 |
| | $ | 4,804 |
| | $ | 4,538 |
|
Restricted stock units | 809 |
| | 782 |
| | 2,294 |
| | 2,651 |
|
Performance-based restricted stock units | 1,022 |
| | 547 |
| | 2,969 |
| | 1,779 |
|
Director stock units ("DSUs") | 190 |
| | 198 |
| | 1,272 |
| | 1,188 |
|
| $ | 3,488 |
| | $ | 2,840 |
| | $ | 11,339 |
| | $ | 10,156 |
|
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 1 vote per share and holders of Class B common shares are entitled to 8 votes per share on matters submitted to shareholders for approval.
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The fair value for stock option awards was estimated at the grant date using the Black-Scholes pricing model with the following weighted average assumptions for the options granted:
|
| | | |
| Nine months ended |
| October 28, 2017 | | October 29, 2016 |
Assumptions: | | | |
Risk-free interest rate | 1.9% | | 1.5% |
Expected volatility | 34.4% | | 36.0% |
Expected option term | 5.5 years | | 5.4 years |
Dividend yield | 3.9% | | 3.0% |
Other data: | | | |
Weighted average grant date fair value | $4.17 | | $6.59 |
The following table summarizes the stock-based compensation award activity:provides additional information for our common shares:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
(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 | 87,405 | | | 7,733 | | | 86,835 | | | 7,733 | | | 86,747 | | | 7,733 | |
Outstanding shares | 65,236 | | | 7,733 | | | 64,666 | | | 7,733 | | | 64,578 | | | 7,733 | |
Treasury shares | 22,169 | | | — | | | 22,169 | | | — | | | 22,169 | | | — | |
|
| | | | | | | | | | | |
| Nine months ended October 28, 2017 |
| Stock Options | | RSUs | | PSUs | | DSUs |
| (in thousands) |
Outstanding - beginning of period | 3,799 |
| | 351 |
| | 250 |
| | 311 |
|
Granted | 1,756 |
| | 292 |
| | 263 |
| | 85 |
|
Exercised / vested | (151 | ) | | (82 | ) | | (50 | ) | | (46 | ) |
Forfeited / expired | (426 | ) | | (85 | ) | | (5 | ) | | — |
|
Outstanding - end of period | 4,978 |
| | 476 |
| | 458 |
| | 350 |
|
As of October 28, 2017, 4.7We have authorized 100 million shares of Class A Common Shares remain availableno par value preferred shares, with no shares issued for future stock-based compensation grants underany of the 2014 Long-Term Incentive Plan.periods presented.
Accumulated Other Comprehensive Loss- For the six months ended August 1, 2020, changes for the balances of each component of accumulated other comprehensive loss, net of tax, were as follows (for all other periods presented, the change was due to foreign currency translation adjustments as shown in the condensed consolidated statements of shareholders' equity): | | | | | | | | | | | | | | | | | |
(in thousands) | Foreign Currency Translation | | Available-for-Sale Securities | | Total |
Accumulated other comprehensive income (loss) - beginning of period | $ | (2,668) | | | $ | 173 | | | $ | (2,495) | |
Other comprehensive income (loss) before reclassifications | (2,251) | | | 195 | | | (2,056) | |
Amounts reclassified to non-operating income, net | — | | | (368) | | | (368) | |
Other comprehensive loss | (2,251) | | | (173) | | | (2,424) | |
Accumulated other comprehensive loss - end of period | $ | (4,919) | | | $ | — | | | $ | (4,919) | |
7. INVESTMENTSRECEIVABLES
We hold available-for-sale investments primarily in bonds and term notes. InvestmentsReceivables, net, consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
Customer accounts receivables: | | | | | |
Serviced by third-party provider with guaranteed payment | $ | 27,638 | | | $ | 29,615 | | | $ | 20,268 | |
Serviced by third-party provider without guaranteed payment | 76 | | | 363 | | | 739 | |
Serviced in-house | 2,665 | | | 4,576 | | | 6,248 | |
Income tax receivable | 158,890 | | | 149,824 | | | — | |
Other receivables | 11,295 | | | 12,865 | | | 23,973 | |
Total receivables | 200,564 | | | 197,243 | | | 51,228 | |
Allowance for doubtful accounts | (1,193) | | | (1,194) | | | (1,988) | |
| $ | 199,371 | | | $ | 196,049 | | | $ | 49,240 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Short-term Investments | | Long-term Investments |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 | | October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in thousands) |
Available-for-sale investments: | | | | | | | | | | | |
Carrying value | $ | 180,531 |
| | $ | 98,793 |
| | $ | 78,497 |
| | $ | — |
| | $ | 77,882 |
| | $ | 76,206 |
|
Unrealized gains included in accumulated other comprehensive loss | 47 |
| | 101 |
| | 156 |
| | — |
| | 133 |
| | 29 |
|
Unrealized losses included in accumulated other comprehensive loss | (512 | ) | | (364 | ) | | (141 | ) | | — |
| | (111 | ) | | (109 | ) |
Total investments | $ | 180,066 |
| | $ | 98,530 |
| | $ | 78,512 |
| | $ | — |
| | $ | 77,904 |
| | $ | 76,126 |
|
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. FAIR VALUE MEASUREMENTSGOODWILL AND INTANGIBLE ASSETS
Financial Assets and Liabilities-FinancialGoodwill- The following table presents the changes to goodwill by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended |
| July 31, 2021 | | August 1, 2020 |
(in thousands) | Goodwill | | Accumulated Impairments | | Net | | Goodwill | | Accumulated Impairments | | Net |
Beginning of period by segment: | | | | | | | | | | | |
U.S. Retail | $ | 93,655 | | | $ | — | | | $ | 93,655 | | | $ | 93,655 | | | $ | — | | | $ | 93,655 | |
Canada Retail | 43,086 | | | (43,086) | | | — | | | 41,610 | | | (41,610) | | | — | |
Brand Portfolio | 19,989 | | | (19,989) | | | — | | | 19,989 | | | — | | | 19,989 | |
| 156,730 | | | (63,075) | | | 93,655 | | | 155,254 | | | (41,610) | | | 113,644 | |
Activity by segment: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Canada Retail- | | | | | | | | | | | |
Currency translation adjustment | 1,098 | | | (1,098) | | | — | | | (534) | | | 534 | | | — | |
Brand Portfolio- | | | | | | | | | | | |
Impairment charge | — | | | — | | | — | | | — | | | (19,989) | | | (19,989) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 1,098 | | | (1,098) | | | — | | | (534) | | | (19,455) | | | (19,989) | |
End of period by segment: | | | | | | | | | | | |
U.S. Retail | 93,655 | | | — | | | 93,655 | | | 93,655 | | | — | | | 93,655 | |
Canada Retail | 44,184 | | | (44,184) | | | — | | | 41,076 | | | (41,076) | | | — | |
Brand Portfolio | 19,989 | | | (19,989) | | | — | | | 19,989 | | | (19,989) | | | — | |
| $ | 157,828 | | | $ | (64,173) | | | $ | 93,655 | | | $ | 154,720 | | | $ | (61,065) | | | $ | 93,655 | |
Intangible Assets- Intangible assets and liabilities measured at fair value on a recurring basis consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | Cost | | Accumulated Amortization | | Net |
July 31, 2021 | | | | | |
Definite-lived customer relationships | $ | 1,444 | | | $ | (1,444) | | | $ | — | |
Indefinite-lived trademarks and tradenames | 15,905 | | | — | | | 15,905 | |
| $ | 17,349 | | | $ | (1,444) | | | $ | 15,905 | |
January 30, 2021 | | | | | |
Definite-lived customer relationships | $ | 2,909 | | | $ | (2,791) | | | $ | 118 | |
Indefinite-lived trademarks and tradenames | 15,517 | | | — | | | 15,517 | |
| $ | 18,426 | | | $ | (2,791) | | | $ | 15,635 | |
August 1, 2020 | | | | | |
Definite-lived customer relationships | $ | 2,843 | | | $ | (2,507) | | | $ | 336 | |
Indefinite-lived trademarks and tradenames | 15,327 | | | — | | | 15,327 | |
| $ | 18,170 | | | $ | (2,507) | | | $ | 15,663 | |
|
| | | | | | | | | | | | | | | |
| October 28, 2017 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (in thousands) |
Financial assets: | | | | | | | |
Cash and cash equivalents | $ | 149,485 |
| | $ | 149,485 |
| | $ | — |
| | $ | — |
|
Short-term investments | 180,066 |
| | 527 |
| | 179,539 |
| | — |
|
| $ | 329,551 |
| | $ | 150,012 |
| | $ | 179,539 |
| | $ | — |
|
Financial liabilities - | | | | | | | |
Contingent consideration liability | $ | 4,962 |
| | $ | — |
| | $ | — |
| | $ | 4,962 |
|
| $ | 4,962 |
| | $ | — |
| | $ | — |
| | $ | 4,962 |
|
|
| | | | | | | | | | | | | | | |
| January 28, 2017 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (in thousands) |
Financial assets: | | | | | | | |
Cash and cash equivalents | $ | 110,657 |
| | $ | 110,657 |
| | $ | — |
| | $ | — |
|
Short-term investments | 98,530 |
| | 2,446 |
| | 96,084 |
| | — |
|
Long-term investments | 77,904 |
| | 431 |
| | 77,473 |
| | — |
|
| $ | 287,091 |
| | $ | 113,534 |
| | $ | 173,557 |
| | $ | — |
|
Financial liabilities - | | | | | | | |
Contingent consideration liability | $ | 33,204 |
| | $ | — |
| | $ | — |
| | $ | 33,204 |
|
| $ | 33,204 |
| | $ | — |
| | $ | — |
| | $ | 33,204 |
|
|
| | | | | | | | | | | | | | | |
| October 29, 2016 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (in thousands) |
Financial assets: | | | | | | | |
Cash and cash equivalents | $ | 60,962 |
| | $ | 60,962 |
| | $ | — |
| | $ | — |
|
Short-term investments | 78,512 |
| | 2,547 |
| | 75,965 |
| | — |
|
Long-term investments | 76,126 |
| | 405 |
| | 75,721 |
| | — |
|
| $ | 215,600 |
| | $ | 63,914 |
| | $ | 151,686 |
| | $ | — |
|
Financial liabilities - | | | | | | | |
Contingent consideration liability | $ | 58,923 |
| | $ | — |
| | $ | — |
| | $ | 58,923 |
|
| $ | 58,923 |
| | $ | — |
| | $ | — |
| | $ | 58,923 |
|
The short-term and long-term investments categorized as Level 2 were valued using a market-based approach using inputs such as prices of similar assets in active markets. See Note 13, Commitments and Contingencies, for the estimated fair value (categorized as Level 3) of the contingent consideration liability and changes recognized.
We have financial assets and liabilities not required to be measured at fair value on a recurring basis, which primarily consist of accounts receivables, note receivable from Town Shoes, and accounts payables. The carrying value of accounts receivables and accounts payables approximated their fair values due to their short-term nature. As of October 28, 2017, January 28, 2017 and October 29, 2016, the fair value of the note receivable from Town Shoes was $49.9 million, $45.7 million and $44.4 million, respectively, compared to the carrying value of $60.2 million, $53.1 million and $50.6 million, respectively. We estimated the fair value of the note receivable based upon current interest rates offered on similar instruments. The change in fair value is
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
based on the change in comparable rates on similar instruments. Based on our intention and ability to hold the note until maturity or the exercise of the put/call option, the carrying value is not other-than-temporarily impaired.
Non-Financial Assets- As discussed in Note 3, Significant Accounting Policies, during the three months ended October 28, 2017, we recorded impairment charges related to Ebuys of $53.8 million for goodwill, which resulted in writing off all of Ebuys' goodwill, and $28.9 million for intangible assets. We determined that the carrying values exceeded the related estimated fair values (categorized as Level 3). After the impairment charges were recorded, the balance of the tradename intangibles was $3.0 million. The fair value of intangible assets for tradenames was based on using the relief from royalty method using a royalty rate of 0.5% and a discount rate of 11.0%. We wrote-off the remaining carrying value of intangible assets for online retailer and customer relationships and for non-compete agreements due to the lack of sufficient projected cash flows.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in thousands) |
Land | $ | 1,110 |
| | $ | 1,110 |
| | $ | 1,110 |
|
Buildings | 12,485 |
| | 12,485 |
| | 12,485 |
|
Building and leasehold improvements | 399,905 |
| | 393,505 |
| | 388,085 |
|
Furniture, fixtures and equipment | 418,432 |
| | 408,653 |
| | 403,632 |
|
Software | 136,295 |
| | 123,460 |
| | 122,946 |
|
Construction in progress(1) | 33,169 |
| | 27,456 |
| | 25,021 |
|
Total property and equipment | 1,001,396 |
| | 966,669 |
| | 953,279 |
|
Accumulated depreciation and amortization | (643,242 | ) | | (591,418 | ) | | (572,061 | ) |
Property and equipment, net | $ | 358,154 |
| | $ | 375,251 |
| | $ | 381,218 |
|
| |
(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. |
10. ACCRUED EXPENSES
Accrued expenses consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
Gift cards | $ | 28,691 | | | $ | 34,442 | | | $ | 29,919 | |
Accrued compensation and related expenses | 49,037 | | | 49,864 | | | 29,422 | |
Accrued taxes | 35,030 | | | 24,206 | | | 22,624 | |
Loyalty programs deferred revenue | 15,255 | | | 11,379 | | | 14,797 | |
Sales returns | 19,204 | | | 17,333 | | | 20,713 | |
Customer allowances and discounts | 2,103 | | | 4,579 | | | 8,644 | |
Other | 72,735 | | | 58,523 | | | 76,712 | |
| $ | 222,055 | | | $ | 200,326 | | | $ | 202,831 | |
10. DEBT
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in thousands) |
Gift cards and merchandise credits | $ | 38,423 |
| | $ | 45,743 |
| | $ | 36,455 |
|
Compensation | 22,390 |
| | 17,132 |
| | 23,872 |
|
Taxes | 20,361 |
| | 21,764 |
| | 29,658 |
|
Customer loyalty program | 12,659 |
| | 11,502 |
| | 11,914 |
|
Other(1) | 48,157 |
| | 34,193 |
| | 41,754 |
|
| $ | 141,990 |
| | $ | 130,334 |
| | $ | 143,653 |
|
| |
(1) | Other is comprised of deferred revenue, sales return allowance, and various other accrued expenses, including amounts owed under our vendor payment program described below. |
To better facilitateDebt consisted of the processing efficiencyfollowing:
| | | | | | | | | | | | | | | | | |
(in thousands) | July 31, 2021 | | January 30, 2021 | | August 1, 2020 |
ABL Revolver | $ | 16,810 | | | $ | 100,000 | | | $ | — | |
Term Loan | 237,500 | | | 243,750 | | | — | |
Credit Facility | — | | | — | | | 393,000 | |
Total debt | 254,310 | | | 343,750 | | | 393,000 | |
Less unamortized Term Loan debt issuance costs | (7,241) | | | (8,931) | | | — | |
Less current maturities of long-term debt | (62,500) | | | (62,500) | | | — | |
Long-term debt | $ | 184,569 | | | $ | 272,319 | | | $ | 393,000 | |
ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain vendor payments, during fiscal 2016,reserves. As of July 31, 2021, the ABL Revolver had a borrowing base of $386.1 million, with $16.8 million outstanding and $5.3 million in letters of credit issued, resulting in $364.0 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of July 31, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Term Loan- On August 7, 2020, we also entered into a vendor payment program with a payment processing intermediary. Under the vendor payment program, the intermediary makes regularly-scheduled$250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments to participating vendors and we, in turn, settle monthly with the intermediary. The net change in theremaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is reflected ascollateralized by a financing activity infirst priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the consolidated statements of cash flows.ABL Revolver.
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. NON-CURRENT LIABILITIES
Non-current liabilities consisted of the following:
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in thousands) |
Construction and tenant allowances | $ | 82,135 |
| | $ | 87,886 |
| | $ | 90,359 |
|
Deferred rent | 37,820 |
| | 37,779 |
| | 38,218 |
|
Accrual for lease obligations | 8,310 |
| | 7,283 |
| | 8,237 |
|
Other(1)
| 13,487 |
| | 8,231 |
| | 7,840 |
|
| $ | 141,752 |
| | $ | 141,179 |
| | $ | 144,654 |
|
| |
(1) | Other is comprised of various other accrued expenses that we expect will settle beyond one year from the end of the applicable period. |
12. 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. The Credit Facility provides a revolving line of credit up to $300 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 further increased by up to $100 million subject to agreed-upon terms and conditions. The Credit Facility may be used to provide funds for working capital, capital expenditures, dividends and share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility.
Loans issuedBorrowings under the revolving line of credit bearTerm Loan accrue interest, at our option, at a rate equal to: (A) a base rate or an alternate baseper annum equal to the greater of (i) 3.25%, (ii) the prime rate, as defined in(iii) the Credit Facility plus a margin based on our leverage ratio, with any loans issued in CAD bearing interest at the alternate baseovernight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a margin based on our leverage ratio. Interest on lettersfloor of credit issued under the Credit Facility is variable based on our leverage ratio and the type 1.25%), plus 8.5%, with an interest rate of letters9.8% (effective interest rate of credit. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of October 28, 2017, we had no outstanding borrowings under the Credit Facility and $2.5 million in letters of credit issued, resulting in $297.5 million available for borrowings. Interest expense related to the Credit Facility includes letters of credit interest, commitment fees and11.8% when including the amortization of debt issuance costs.costs) as of July 31, 2021.
Debt Covenants-The Credit FacilityABL Revolver contains financiala minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, butin some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary events of default with cross-default provisions. Upon an event of default that is not limitedcured or waived within the cure periods, in addition to limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio notother remedies that may be available to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. 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 andobligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and requireremedies may be exercised against the immediate repayment of any outstanding loans under the Credit Facility.collateral. As of October 28, 2017,July 31, 2021, we were in compliance with all financial covenants.
13.11. COMMITMENTS AND CONTINGENCIES
Contingent Consideration Liability- The contingent consideration liability resulted from the acquisition of Ebuys and is based on a defined earnings performance measure for fiscal years 2017, 2018 and 2019 with no defined maximum earn-out. The contingent consideration liability is based on our estimated fair value with any differences between the final acquisition-date fair value and the estimated settlement of the obligation, as remeasured each reporting period, being recognized as an adjustment to income from operations.
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Activity for the contingent consideration liability was as follows:
|
| | | | | | | |
| Nine months ended |
| October 28, 2017 | | October 29, 2016 |
| (in thousands) |
Contingent consideration liability - beginning of period | $ | 33,204 |
| | $ | — |
|
Preliminary purchase price | — |
| | 56,000 |
|
Accretion in value | 3,506 |
| | 5,080 |
|
Fair value adjustment(1) | (32,432 | ) | | — |
|
Purchase price and other adjustments | 684 |
| | (2,157 | ) |
Contingent consideration liability - end of period | $ | 4,962 |
| | $ | 58,923 |
|
| |
(1) | Fair value was determined using an income valuation approach, primarily based on discounted cash flows related to the projected earnings performance measure with a discount rate of approximately 13.0%. The categorization of the fair value framework used to price the liability is considered Level 3 due to the subjective nature of the unobservable inputs used to determine fair value. |
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.
Guarantee- AsInsurance Recoveries- During fiscal 2020, a third-party vendor experienced a shutdown of services to us that impacted our ability to fulfill orders from customers for a limited period of time. This incident was covered under an insurance policy that provides for reimbursement of lost profits and recognized losses as a result of a previous merger,the outage. During the fourth quarter of fiscal 2020, we provided a guaranteerecognized an insurance recovery receivable of $3.0 million, recorded as an offset to cost of sales, for arecognized losses that we believe are probable of being reimbursed through the insurance policy. Reimbursement for lost profits and any additional recoveries in excess of recognized losses are treated as gain contingencies and will be recognized when realized or realizable. We continue to work with the insurance carrier to reach an agreement on the total amount to be recovered.
Guarantee- We provide guarantees for lease commitmentobligations that isare scheduled to expire in 2024 of a locationfiscal 2023 for locations that hashave been leased to a third party.parties. If thea third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord.
Contractual Obligations-As of October 28, 2017, we have entered into various construction commitments, including capital items to be purchasedJuly 31, 2021, the total future minimum lease payment requirements for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments were $0.2 million as of October 28, 2017. In addition, we have entered into various noncancelable purchase and service agreements. The obligations under these agreementsguarantees were approximately $21.6 million as of October 28, 2017.$13.3 million.
DSWDESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14.12. SEGMENT REPORTING
Our two reportable segments, which are also operating segments, are the DSW segment, which includes DSW stores and dsw.com, and the ABG segment. Other includes Ebuys and franchise activity with the Apparel Group. The following provides certain key 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 July 31, 2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 723,093 | | | $ | 57,585 | | | $ | 36,657 | | | $ | — | | | $ | — | | | $ | 817,335 | |
Intersegment sales | — | | | — | | | 13,872 | | | — | | | (13,872) | | | — | |
Total net sales | $ | 723,093 | | | $ | 57,585 | | | $ | 50,529 | | | $ | — | | | $ | (13,872) | | | $ | 817,335 | |
Gross profit | $ | 256,893 | | | $ | 18,768 | | | $ | 8,533 | | | $ | — | | | $ | 487 | | | $ | 284,681 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 2,290 | | | $ | — | | | $ | — | | | $ | 2,290 | |
Three months ended August 1, 2020 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 393,977 | | | $ | 49,582 | | | $ | 23,889 | | | $ | 22,266 | | | $ | — | | | $ | 489,714 | |
Intersegment sales | — | | | — | | | 6,569 | | | — | | | (6,569) | | | — | |
Total net sales | $ | 393,977 | | | $ | 49,582 | | | $ | 30,458 | | | $ | 22,266 | | | $ | (6,569) | | | $ | 489,714 | |
Gross profit (loss) | $ | 40,097 | | | $ | 5,650 | | | $ | (11,440) | | | $ | 118 | | | $ | 2,617 | | | $ | 37,042 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 2,153 | | | $ | — | | | $ | — | | | $ | 2,153 | |
Six months ended July 31, 2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 78,550 | | | $ | — | | | $ | — | | | $ | 1,520,490 | |
Intersegment sales | — | | | — | | | 29,406 | | | — | | | (29,406) | | | — | |
Total net sales | $ | 1,343,751 | | | $ | 98,189 | | | $ | 107,956 | | | $ | — | | | $ | (29,406) | | | $ | 1,520,490 | |
Gross profit | $ | 450,006 | | | $ | 29,603 | | | $ | 20,459 | | | $ | — | | | $ | 724 | | | $ | 500,792 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 3,998 | | | $ | — | | | $ | — | | | $ | 3,998 | |
Six months ended August 1, 2020 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 771,050 | | | $ | 78,911 | | | $ | 86,647 | | | $ | 35,889 | | | $ | — | | | $ | 972,497 | |
Intersegment sales | — | | | — | | | 25,924 | | | — | | | (25,924) | | | — | |
Total net sales | $ | 771,050 | | | $ | 78,911 | | | $ | 112,571 | | | $ | 35,889 | | | $ | (25,924) | | | $ | 972,497 | |
Gross profit (loss) | $ | 7,127 | | | $ | 3,339 | | | $ | 2,464 | | | $ | (5,310) | | | $ | 2,962 | | | $ | 10,582 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 4,423 | | | $ | — | | | $ | — | | | $ | 4,423 | |
|
| | | | | | | | | | | | | |
| DSW segment | | ABG segment | | Other | | Total |
| (in thousands) |
Three months ended October 28, 2017 | | | | | | | |
Net sales | $ | 654,587 |
| | 31,059 |
| | 22,662 |
| | $ | 708,308 |
|
Gross profit | $ | 202,267 |
| | 7,130 |
| | (2,680 | ) | | $ | 206,717 |
|
Three months ended October 29, 2016 | | | | | | | |
Net sales | $ | 639,136 |
| | 36,154 |
| | 21,326 |
| | $ | 696,616 |
|
Gross profit | $ | 203,978 |
| | 7,850 |
| | (48 | ) | | $ | 211,780 |
|
Nine months ended October 28, 2017 | | | | | | | |
Net sales | $ | 1,907,753 |
| | 106,377 |
| | 65,689 |
| | $ | 2,079,819 |
|
Gross profit | $ | 579,455 |
| | 24,066 |
| | (4,603 | ) | | $ | 598,918 |
|
Nine months ended October 29, 2016 | | | | | | | |
Net sales | $ | 1,866,096 |
| | 114,738 |
| | 55,993 |
| | $ | 2,036,827 |
|
Gross profit | $ | 573,283 |
| | 25,880 |
| | 3,835 |
| | $ | 602,998 |
|
15. SUBSEQUENT EVENT
On November 21, 2017, the Board of Directors declared a quarterly cash dividend payment of $0.20 per share for both Class A and Class B Common Shares. The dividend will be paid on December 29, 2017 to shareholders of record at the close of business on December 15, 2017.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Information
Executive Overview and Trends in our Business
Operating profit in the second quarter of fiscal 2021 surpassed pre-COVID-19 levels with growth of 49% compared to the second quarter of 2019. This growth came despite the lingering effects of COVID-19, including global supply chain challenges. The volatile macro environment and supply chain disruptions have required us to be nimble and quickly adapt our business model.
As we look ahead to our strategic growth, we have organized our efforts around three pillars: Customer, Brand and Speed:
•Customer- More than ever, our customers have a great desire for Purposesproducts and experiences, and we are adding resources to our digital, IT and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience. Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in targeted and personalized ways that we have never deployed before. We are also developing new ideas for how we can provide more value to our VIP rewards members who continue to be the lifeblood of our business and our largest competitive differentiator.
•Brand- Controlling our own brand destiny is critical for our growth. As we continue to design some of the "Safe Harbor" Provisionsbest brands in the industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we are combining that with our strong direct-to-consumer distribution through our physical footprint in North America and digital infrastructure. We are also partnering with some of the Private Securities Litigation Reform Act of 1995
Sometop brands in the industry to offer one of the statementslargest and most broad assortments. We remain focused on investing in this Quarterly Report on Form 10-Qsome of the top 50 brands in footwear and will continue to prioritize growing our own brands.
•Speed- Moving quickly is of the utmost importance to consumers. We are developing processes to deliver products more quickly. Fulfillment of digital customer orders takes 5 to 7 business days and we are working to improve that to 2 to 3 calendar days while simultaneously finding efficiencies to contain forward-looking statements which reflectcosts. We are optimizing our current viewsinfrastructure and expanding our delivery partnerships. We are also working to improve collaboration through technology and processes across our organization and to gain additional efficiencies in our overall development cycle.
We have a proven track record of staying ahead of trends to ensure our success, despite some of the challenges we face, including COVID-19 variants and supply chain disruptions.
Impact of COVID-19
In response to the sudden and significant impacts resulting from the COVID-19 pandemic, we took several actions during the first quarter of fiscal 2020 to reduce costs and operations to levels that were more commensurate with respectthen-current sales, including furloughs and pay reductions. As this continues to among other things, future eventsbe an unprecedented period of uncertainty, we have made and financial performance. Such forward-looking statements can be identified by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "should," "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 relatingmay continue to make adjustments to our operations,operational plans, inventory controls, and liquidity management, as well as changes to our expense and capital expenditure plans.
Although operating results have improved throughout the first half 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 subjectfiscal 2021, we continue to numerous risks, uncertaintiesexperience adverse impacts due to COVID-19, including temporary store closures, reduced hours and other factors that may cause actual results, performance or achievements to be materially differentrequirements in certain areas where government-imposed restrictions were mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences. The impacts 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 23, 2017, 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,COVID-19 pandemic remain challenging and unpredictable. While trends improved during the following:
our success in growing our store base and digital demand;
our ability to protect our reputation;
maintaining strong relationships with our vendors;
our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
risks related to the planned acquisitionfirst half of Town Shoes;
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 our affiliated business and international partners;
our ability to successfully integrate Ebuys, Inc.;
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 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 competitiveness with respect to style, price, brand availability and customer service;
our reliance on our DSW Rewards program and marketing to drive traffic, sales and customer loyalty;
uncertain general economic conditions;
our reliance on foreign sources for merchandise and risks inherent to international trade;
risks related to leases of our properties;
risks related to prior and current acquisitions;
risks related to future legislation, regulatory reform or policy changes;
fluctuations in foreign currency exchange rates; and
risks related to holdings of cash and investments and access to liquidity.
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 whatfiscal 2021, 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 orcannot reasonably estimate the extent to which any factor,our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or combination of factors, may cause results to differ materially from those containedif COVID-19 will result in any forward-looking statement. Any forward-looking statement speaks only aslong-term changes in consumer behavior. The ongoing and prolonged nature of the dateoutbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19, and the global availability and use of vaccines, which such statement is made,are highly uncertain and except as required by law,cannot be predicted. As a result, we undertake no obligationmay have future write-downs or adjustments to update any forward-looking statement to reflect events or circumstances afterinventories, receivables, long-lived assets, intangibles, goodwill, and the datevaluation allowance on which such statement is made or to reflect the occurrence of unanticipated events.deferred tax assets.
With our mission to inspire self-expression, we are deepening our customer connection with unique products and meaningful experiences that will define us as the trusted authority for all things footwear. We are focused on differentiating our assortment by growing relevant brands and improving consistency and localization across our fleet. Furthermore, we are putting more product closer to the customer and co-developing technology that will empower associates to better serve our customers.
We are focused on leveraging our warehouse network and accelerating digital demand. With our brick and mortar locations within 20 miles from approximately 70% of our target population, we aim to provide a seamless shopping experience across all channels, with capabilities such as buy online, pickup in store and buy online, ship to store. We are mobilizing inventory across our channels, which increases our assortment breadth and enables us to effectively manage inventory within the enterprise. With our acquisition of Ebuys, we have expanded our presence in the fast-growing digital marketplaces and have started building the infrastructure that will better leverage Ebuys' platform in the coming years.
As of October 28, 2017, we operated 514 DSW stores, dsw.com and shoe departments in 292 Stein Mart stores and Steinmart.com, 58 Gordmans stores, and one Frugal Fannie's store. On March 13, 2017, Gordmans filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and announced its plan to liquidate inventory and other assets. Stage Stores, Inc. acquired 58 of the Gordmans' stores and we have signed an agreement to provide services for these stores through the end of fiscal 2017. During the nine months ended October 28, 2017, Gordmans closed 48 stores.
Financial Summary and Other Key Metrics for the Second Quarter of Fiscal 2021
Total netNet sales increased to $708.3$817.3 million for the three months ended October 28, 2017July 31, 2021 from $696.6$489.7 million for the three months ended October 29, 2016.August 1, 2020. The 1.7%66.9% increase in total net sales was primarily driven by new storean 84.9% increase in comparable sales during the three months ended July 31, 2021, due to the fact that during the three months ended August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since reopening. The higher net sales due to the increase in total comparable sales were partially offset by store closures, including those serviced in the 0.4% decreaseOther segment. Also, during the first quarter of fiscal 2020, we maintained higher sales returns reserves with stores not being available to accept returns, which resulted in comparablesignificantly lower net sales. However, sales(1) returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 as customer behavior has remained consistent. In addition, the closureBrand Portfolio segment net sales were higher in the quarter as compared to the second quarter of 48 Gordmans stores.fiscal 2020 due to increased orders as our retailer customers recover, but still below pre-COVID-19 levels.
During the three months ended October 28, 2017,July 31, 2021, gross profit as a percentage of net sales was 29.2%, a decrease of 120 basis points from 30.4% in34.8% as compared to 7.6% for the previoussame period last year. The decreaseimprovement in the gross profit rate was primarily driven by increased sales as compared to the second quarter of fiscal 2020. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings, with aggressive promotional activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the second quarter of fiscal 2021, tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the second quarter of fiscal 2021 tracked higher markdowns.than the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019.
Net income for the three months ended October 28, 2017July 31, 2021 was $4.0$42.9 million, or $0.55 earnings per diluted share, which included net after-tax charges of $0.6 million, or $0.01 per diluted share, primarily related to target acquisition costs, restructuring charges, impairment charges, and the change in the valuation allowance on deferred tax assets. Net loss for the three months ended August 1, 2020 was $98.2 million, or a loss of $1.36 per diluted share, which included net after-tax charges of $4.1 million, or $0.05 per diluted share, which included pre-tax charges of $52.7 million, or $0.40 per share,primarily related to the goodwill and intangible assets impairment charges amortization of intangibles and integration and restructuring expenses, offset by a gain from a settlement with a vendor.
Comparable Sales Performance Metric
The following table presents the changeincrease (decrease) in fair valuecomparable sales for each segment and in total:
| | | | | | | | | | | |
| Three months ended |
| July 31, 2021 | | August 1, 2020 |
Comparable sales: | | | |
U.S. Retail segment | 94.3 | % | | (44.9) | % |
Canada Retail segment | 14.6 | % | | (27.9) | % |
Brand Portfolio segment - direct-to-consumer channel | 10.6 | % | | 120.5 | % |
Other | NA | | (36.2) | % |
Total comparable sales | 84.9 | % | | (42.7) | % |
NA - Not applicable
We consider comparable sales, a primary metric commonly used throughout the retail industry, to be an important indicator of the contingent consideration liability associated withperformance of our retail and direct-to-consumer businesses. We include stores in our comparable sales metric for those stores in operation for at least 14 months at the acquisitionbeginning of Ebuys, restructuring costs,the fiscal year. Stores are added to the comparable base at the beginning of the year and foreign exchange losses. Due to recurring operating losses incurred by Ebuys since its acquisition as well as increased competitive pressuresare dropped for comparative purposes in the digital marketplaces, we revisedquarter in which they are closed. Comparable sales include stores temporarily closed as a result of COVID-19 as management continues to believe that this metric is meaningful to monitor our growth expectations assumedperformance. Comparable sales include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the timeforeign currency exchange rate used in the comparable period of the acquisition and have moderated future expectationsprior year. Comparable sales for the business. As a result, we undertook a review of Ebuys’ goodwill and intangible assets duringBrand Portfolio segment include the direct-to-consumer e-commerce site, www.vincecamuto.com. Beginning with the third quarter of fiscal 20172020, comparable sales no longer include the Other segment due to no longer having activity in the Other segment. The calculation of comparable sales
varies across the retail industry and, recorded impairment chargesas a result, the calculations of $53.8 million for goodwill and $28.9 million for intangible assets. We also updatedother retail companies may not be consistent with our estimated fair valuecalculation.
Number of Stores
At the end of the contingent consideration liabilitysecond quarter of fiscal 2021 and recorded a gain from2020, we had the fair value adjustmentfollowing number of $32.4 million. stores:
| | | | | | | | | | | | | | | |
| July 31, 2021 | | August 1, 2020 |
| | | | | | | |
U.S. Retail segment - DSW stores | 515 | | | | | 522 | | | |
Canada Retail segment: | | | | | | | |
The Shoe Company / Shoe Warehouse stores | 116 | | | | | 117 | | | |
DSW stores | 27 | | | | | 27 | | | |
| 143 | | | | | 144 | | | |
Total number of stores | 658 | | | | | 666 | | | |
| | | | | | | |
Results of Operations
Comparison of the Three Months Ended July 31, 2021 with the Three Months Ended August 1, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | |
| July 31, 2021 | | August 1, 2020 | | Change |
(dollars in thousands, except per share amounts) | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % |
Net sales | $ | 817,335 | | | 100.0 | % | | $ | 489,714 | | | 100.0 | % | | $ | 327,621 | | | 66.9 | % |
Cost of sales | (532,654) | | | (65.2) | | | (452,672) | | | (92.4) | | | (79,982) | | | 17.7 | % |
Gross profit | 284,681 | | | 34.8 | | | 37,042 | | | 7.6 | | | 247,639 | | | 668.5% |
Operating expenses | (224,385) | | | (27.5) | | | (168,424) | | | (34.4) | | | (55,961) | | | 33.2 | % |
Income from equity investment | 2,290 | | | 0.3 | | | 2,153 | | | 0.4 | | | 137 | | | 6.4 | % |
Impairment charges | (1,174) | | | (0.1) | | | (6,735) | | | (1.4) | | | 5,561 | | | (82.6)% |
Operating profit (loss) | 61,412 | | | 7.5 | | | (135,964) | | | (27.8) | | | 197,376 | | | NM |
Interest expense, net | (8,072) | | | (1.0) | | | (3,788) | | | (0.8) | | | (4,284) | | | 113.1 | % |
Non-operating income (expenses), net | (244) | | | (0.0) | | | 743 | | | 0.2 | | | (987) | | | NM |
Income (loss) before income taxes | 53,096 | | | 6.5 | | | (139,009) | | | (28.4) | | | 192,105 | | | NM |
Income tax benefit (provision) | (10,236) | | | (1.3) | | | 40,795 | | | 8.3 | | | (51,031) | | | NM |
Net income (loss) | $ | 42,860 | | | 5.2 | % | | $ | (98,214) | | | (20.1) | % | | $ | 141,074 | | | NM |
Basic and diluted earnings (loss) per share: | | | | | | | | | | | |
Basic earnings (loss) per share | $ | 0.59 | | | | | $ | (1.36) | | | | | $ | 1.95 | | | NM |
Diluted earnings (loss) per share | $ | 0.55 | | | | | $ | (1.36) | | | | | $ | 1.91 | | | NM |
Weighted average shares used in per share calculations: | | | | | | | | | | | |
Basic shares | 72,932 | | | | | 72,142 | | | | | 790 | | | 1.1 | % |
Diluted shares | 77,619 | | | | | 72,142 | | | | | 5,477 | | | 7.6 | % |
NM - Not meaningful
Net income forSales- The following summarizes net sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Change |
(dollars in thousands) | July 31, 2021 | | August 1, 2020 | | Amount | | % | | Comparable Sales % |
Segment net sales: | | | | | | | | | |
U.S. Retail | $ | 723,093 | | | $ | 393,977 | | | $ | 329,116 | | | 83.5 | % | | 94.3% |
Canada Retail | 57,585 | | | 49,582 | | | 8,003 | | | 16.1 | % | | 14.6% |
Brand Portfolio | 50,529 | | | 30,458 | | | 20,071 | | | 65.9 | % | | 10.6% |
Other | — | | | 22,266 | | | (22,266) | | | NM | | NA |
Total segment net sales | 831,207 | | | 496,283 | | | 334,924 | | | 67.5 | % | | 84.9% |
Elimination of intersegment net sales | (13,872) | | | (6,569) | | | (7,303) | | | 111.2 | % | | |
Consolidated net sales | $ | 817,335 | | | $ | 489,714 | | | $ | 327,621 | | | 66.9 | % | | |
NA - Not applicable
NM - Not meaningful
The improvement in sales, including increases in comparable sales and total consolidated net sales, during the three months ended October 29, 2016July 31, 2021 over the same period last year was $39.0 million, or $0.47 per diluted share, which included pre-tax charges of $4.4 million, or $0.04 per share, relateddue to transaction costs, purchase accounting impacts and change in fair value of the contingent consideration liability associated with the acquisition of Ebuys.
We have continued making investments in our businessfact that support our long-term growth objectives. During the nine months ended October 28, 2017, we invested $39.6 million in capital expenditures compared to $73.2 million during the nine months ended October 29, 2016. Our capital expenditures during fiscal 2017 primarily related to 15 new store openings, store remodels and business infrastructure.
| |
(1) | A store or affiliated shoe department is considered comparable when in operation for at least 14 months at the beginning of the fiscal year. Stores or affiliated business departments, as the case may be, 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 sales from dsw.com and currently excludes sales from Gordmans and Ebuys. 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. |
Results of Operations
The following represents components of our consolidated results of operations, expressed as percentages of net sales:
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | (70.8 | ) | | (69.6 | ) | | (71.2 | ) | | (70.4 | ) |
Gross profit | 29.2 |
| | 30.4 |
| | 28.8 |
| | 29.6 |
|
Operating expenses | (21.4 | ) | | (21.2 | ) | | (21.8 | ) | | (21.9 | ) |
Goodwill and intangible assets impairment charges | (11.7 | ) | | — |
| | (4.0 | ) | | — |
|
Change in fair value of contingent consideration liability | 4.4 |
| | (0.2 | ) | | 1.4 |
| | (0.3 | ) |
Operating profit | 0.5 |
| | 9.0 |
| | 4.4 |
| | 7.4 |
|
Interest income, net | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
Non-operating income (expense) | 0.0 |
| | 0.0 |
| | (0.1 | ) | | 0.0 |
|
Income before income taxes and income from Town Shoes | 0.6 |
| | 9.1 |
| | 4.4 |
| | 7.5 |
|
Income tax provision | (0.2 | ) | | (3.7 | ) | | (1.7 | ) | | (3.0 | ) |
Income from Town Shoes | 0.2 |
| | 0.2 |
| | 0.0 |
| | 0.1 |
|
Net income | 0.6 | % | | 5.6 | % | | 2.7 | % | | 4.6 | % |
Three and Nine Months Ended October 28, 2017 Compared to Three and Nine Months Ended October 29, 2016
Net Sales
Net sales for the three months ended October 28, 2017August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since re-opening. During a portion of the second quarter of fiscal 2021, the Canada Retail segment was impacted by ongoing temporary closures and restrictions in certain key markets. The higher net sales due to the increase in total comparable sales was partially offset by store closures, including those serviced in the Other segment. Also, during the first quarter of fiscal 2020, we maintained higher sales returns reserves with stores not being available to accept returns, which resulted in significantly lower net sales. However, sales returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 as customer behavior has remained consistent. In addition, the Brand Portfolio segment net sales were higher in the quarter as compared to the second quarter of fiscal 2020 due to increased 1.7%orders as our retailer customers recover, but still below pre-COVID-19 levels.
Gross Profit- The following summarizes gross profit (loss) by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | |
| July 31, 2021 | | August 1, 2020 | | |
(dollars in thousands) | Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Change | | | | |
Segment gross profit (loss): | | | | | | | | | | | | | |
U.S. Retail | $ | 256,893 | | | 35.5 | % | | $ | 40,097 | | | 10.2 | % | | $ | 216,796 | | | | | |
Canada Retail | 18,768 | | | 32.6 | % | | 5,650 | | | 11.4 | % | | $ | 13,118 | | | | | |
Brand Portfolio | 8,533 | | | 16.9 | % | | (11,440) | | | (37.6) | % | | $ | 19,973 | | | | | |
Other | — | | | — | % | | 118 | | | 0.5 | % | | $ | (118) | | | | | |
| 284,194 | | | | | 34,425 | | | | | | | | | |
Elimination of intersegment gross profit | 487 | | | | | 2,617 | | | | | | | | | |
Gross profit | $ | 284,681 | | | 34.8 | % | | $ | 37,042 | | | 7.6 | % | | $ | 247,639 | | | | | |
The improvement in gross profit was primarily driven by increased sales during the quarter as compared to the three months ended October 29, 2016. Net sales forAugust 1, 2020. In the nine months ended October 28, 2017 increased 2.1% comparedsecond quarter of fiscal 2020, in response to the nine months ended October 29, 2016. The following summarizesimpacts of COVID-19 on our operations, we addressed the change in total net sales from the same period last year:
|
| | | | | | | |
| Three months ended October 28, 2017 | | Nine months ended October 28, 2017 |
| (in thousands) |
Net sales for the same period last year | $ | 696,616 |
| | $ | 2,036,827 |
|
Decrease in comparable sales | (2,513 | ) | | (18,385 | ) |
Net increase from non-comparable store sales, Gordmans, Ebuys and other changes | 14,205 |
| | 61,377 |
|
Total net sales | $ | 708,308 |
| | $ | 2,079,819 |
|
The following summarizes net sales by segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 28, 2017 | | October 29, 2016 | | Change | | October 28, 2017 | | October 29, 2016 | | Change |
| (in thousands) | | |
DSW segment | $ | 654,587 |
| | $ | 639,136 |
| | $ | 15,451 |
| | $ | 1,907,753 |
| | $ | 1,866,096 |
| | $ | 41,657 |
|
ABG segment | 31,059 |
| | 36,154 |
| | (5,095 | ) | | 106,377 |
| | 114,738 |
| | (8,361 | ) |
Other(1) | 22,662 |
| | 21,326 |
| | 1,336 |
| | 65,689 |
| | 55,993 |
| | 9,696 |
|
Total net sales | $ | 708,308 |
| | $ | 696,616 |
| | $ | 11,692 |
| | $ | 2,079,819 |
| | $ | 2,036,827 |
| | $ | 42,992 |
|
| |
(1) | Other represents net sales for Ebuys and franchise activity with the Apparel Group. |
The following summarizes our comparable sales change by reportable segment and in total:
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
DSW segment | (0.4 | )% | | (1.8 | )% | | (1.0 | )% | | (1.5 | )% |
ABG segment | 0.5 | % | | (4.6 | )% | | (0.5 | )% | | (3.1 | )% |
Total Company | (0.4 | )% | | (2.0 | )% | | (1.0 | )% | | (1.6 | )% |
Our increase in total net sales for the three and nine months ended October 28, 2017 over the same periods last year was primarily driven by new store sales, offset by the decrease in comparable salestemporary closure of stores and the decrease due to the closure of 48 Gordmans stores. Within the DSW segment, comparable sales decreased as we had a declinesubsequent reduction in comparable average dollar sales per transaction, partially offset bycustomer traffic upon store re-openings with aggressive promotional activity. These actions resulted in higher comparable transactions. We had growth ininventory reserves, increased shipping costs associated with higher digital demand with an increase in our store fulfillment of digital orders.
Gross Profit
Gross profit decreased as a percentage of net sales to 29.2% for the three months ended October 28, 2017 from 30.4% for the three months ended October 29, 2016. Gross profit decreased as a percentage of net sales to 28.8% for the nine months ended October 28, 2017 from 29.6% for the nine months ended October 29, 2016. The following presents each segment's gross profit and their components,penetration, and the total Companydeleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the second quarter of fiscal 2021, tight inventory positions resulted in being less
promotional. Accordingly, gross profit as a percentage of net sales:sales for the second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the quarter as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the second quarter of fiscal 2019 due to the deleverage impacts of lower net sales.
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
DSW segment merchandise margin | 44.0 | % | | 45.0 | % | | 43.7 | % | | 44.0 | % |
Store occupancy expenses | (10.9 | ) | | (10.8 | ) | | (11.1 | ) | | (11.1 | ) |
Distribution and fulfillment expenses | (2.2 | ) | | (2.3 | ) | | (2.2 | ) | | (2.2 | ) |
DSW segment gross profit | 30.9 | % | | 31.9 | % | | 30.4 | % | | 30.7 | % |
ABG segment merchandise margin | 44.3 | % | | 43.5 | % | | 44.3 | % | | 44.1 | % |
Occupancy expenses | (20.2 | ) | | (20.7 | ) | | (20.6 | ) | | (20.4 | ) |
Distribution and fulfillment expenses | (1.1 | ) | | (1.1 | ) | | (1.1 | ) | | (1.1 | ) |
ABG segment gross profit | 23.0 | % | | 21.7 | % | | 22.6 | % | | 22.6 | % |
Other segment merchandise margin - Ebuys | 18.1 | % | | 27.7 | % | | 22.7 | % | | 31.6 | % |
Marketplace fees | (12.9 | ) | | (12.4 | ) | | (12.2 | ) | | (11.8 | ) |
Fulfillment expenses | (17.0 | ) | | (15.5 | ) | | (17.5 | ) | | (13.0 | ) |
Other segment gross profit - Ebuys | (11.8 | )% | | (0.2 | )% | | (7.0 | )% | | 6.8 | % |
Total Company gross profit | 29.2 | % | | 30.4 | % | | 28.8 | % | | 29.6 | % |
Elimination of intersegment gross profit consisted of the following: | | | | | | | | | | | | | | | |
| Three months ended | | |
(in thousands) | July 31, 2021 | | August 1, 2020 | | | | |
Elimination of intersegment activity: | | | | | | | |
Net sales recognized by Brand Portfolio segment | $ | (13,872) | | | $ | (6,569) | | | | | |
Cost of sales: | | | | | | | |
Cost of sales recognized by Brand Portfolio segment | 9,707 | | | 4,827 | | | | | |
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 4,652 | | | 4,359 | | | | | |
Gross profit | $ | 487 | | | $ | 2,617 | | | | | |
DSW segment merchandise margin decreased 100 basis points for
Operating Expenses- For the three months ended October 28, 2017July 31, 2021, operating expenses increased by $56.0 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave for most of the second quarter of fiscal 2020. Operating expenses during the second quarter of fiscal 2020 were offset by a gain from a settlement with a vendor of $9.0 million. Operating expenses as a percentage of sales improved to 27.5% compared to 34.4% in the same period last year but were still elevated compared to the pre-COVID-19 rate for the second quarter of fiscal 2019, which was 26.0% as a percentage of sales, primarily due to higher shipping costsdirect marketing and higher markdowns, partially offset by higher initial markup, while occupancy expensesincentive compensation expense and distributionlower sales in the Brand Portfolio segment.
Impairment Charges- During the three months ended July 31, 2021 and fulfillment expenses remained relatively flat. ABG segment gross profit increased 130 basis pointsAugust 1, 2020, we evaluated certain long-lived assets based on our intent to use such assets going forward and, as a result, we recorded impairment charges of $1.2 million and $6.7 million, respectively.
Income Taxes- Our effective tax rate changed from 29.3% for the three months ended October 28, 2017August 1, 2020 to 19.3% for the three months ended July 31, 2021. The rate for the three months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets. The rate for the three months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
Comparison of the Six Months Ended July 31, 2021 with the Six Months Ended August 1, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended | | | | |
| July 31, 2021 | | August 1, 2020 | | Change |
(dollars in thousands, except per share amounts) | Amount | | % of Net Sales | | Amount | | % of Net Sales | | Amount | | % |
Net sales | $ | 1,520,490 | | | 100.0 | % | | $ | 972,497 | | | 100.0 | % | | $ | 547,993 | | | 56.3 | % |
Cost of sales | (1,019,698) | | | (67.1) | | | (961,915) | | | (98.9) | | | (57,783) | | | 6.0 | % |
Gross profit | 500,792 | | | 32.9 | | | 10,582 | | | 1.1 | | | 490,210 | | | 4,632.5% |
Operating expenses | (425,199) | | | (28.0) | | | (355,645) | | | (36.6) | | | (69,554) | | | 19.6 | % |
Income from equity investment | 3,998 | | | 0.3 | | | 4,423 | | | 0.5 | | | (425) | | | (9.6) | % |
Impairment charges | (1,174) | | | (0.1) | | | (119,282) | | | (12.3) | | | 118,108 | | | (99.0)% |
Operating profit (loss) | 78,417 | | | 5.1 | | | (459,922) | | | (47.3) | | | 538,339 | | | NM |
Interest expense, net | (16,886) | | | (1.1) | | | (5,946) | | | (0.6) | | | (10,940) | | | 184.0 | % |
Non-operating income, net | 562 | | | 0.0 | | | 656 | | | 0.1 | | | (94) | | | (14.3)% |
Income (loss) before income taxes | 62,093 | | | 4.0 | | | (465,212) | | | (47.8) | | | 527,305 | | | NM |
Income tax benefit (provision) | (2,207) | | | (0.1) | | | 151,140 | | | 15.5 | | | (153,347) | | | NM |
Net income (loss) | $ | 59,886 | | | 3.9 | % | | $ | (314,072) | | | (32.3) | % | | $ | 373,958 | | | NM |
Basic and diluted earnings (loss) per share: | | | | | | | | | | | |
Basic earnings (loss) per share | $ | 0.82 | | | | | $ | (4.36) | | | | | $ | 5.18 | | | NM |
Diluted earnings (loss) per share | $ | 0.78 | | | | | $ | (4.36) | | | | | $ | 5.14 | | | NM |
Weighted average shares used in per share calculations: | | | | | | | | | | | |
Basic shares | 72,773 | | | | | 72,028 | | | | | 745 | | | 1.0 | % |
Diluted shares | 77,271 | | | | | 72,028 | | | | | 5,243 | | | 7.3 | % |
NM - Not meaningful
Net Sales- The following summarizes net sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended | | Change |
(dollars in thousands) | July 31, 2021 | | August 1, 2020 | | Amount | | % | | Comparable Sales % |
Segment net sales: | | | | | | | | | |
U.S. Retail | $ | 1,343,751 | | | $ | 771,050 | | | $ | 572,701 | | | 74.3 | % | | 74.5% |
Canada Retail | 98,189 | | | 78,911 | | | 19,278 | | | 24.4 | % | | 12.6% |
Brand Portfolio | 107,956 | | | 112,571 | | | (4,615) | | | (4.1) | % | | 8.6% |
Other | — | | | 35,889 | | | (35,889) | | | NM | | NA |
Total segment net sales | 1,549,896 | | | 998,421 | | | 551,475 | | | 55.2 | % | | 68.1% |
Elimination of intersegment net sales | (29,406) | | | (25,924) | | | (3,482) | | | 13.4 | % | | |
Consolidated net sales | $ | 1,520,490 | | | $ | 972,497 | | | $ | 547,993 | | | 56.3 | % | | |
NA - Not applicable
NM - Not meaningful
The increases in comparable sales for all segments and in total consolidated net sales was a result of the temporary closure of all stores beginning in March 2020 through much of the second quarter of fiscal 2020 and, since re-opening, we experienced significantly reduced customer traffic and net sales. During a portion of the first half of fiscal 2021, the Canada Retail segment was impacted by ongoing temporary closures and restrictions in certain key markets. The higher net sales due to the increase in total comparable sales was partially offset by store closures, including those serviced in the Other segment.
Gross Profit- The following summarizes gross profit (loss) by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended | | |
| July 31, 2021 | | August 1, 2020 | | |
(dollars in thousands) | Amount | | % of Segment Net Sales | | Amount | | % of Segment Net Sales | | Change | | | | |
Segment gross profit (loss): | | | | | | | | | | | | | |
U.S. Retail | $ | 450,006 | | | 33.5 | % | | $ | 7,127 | | | 0.9 | % | | $ | 442,879 | | | | | |
Canada Retail | 29,603 | | | 30.1 | % | | 3,339 | | | 4.2 | % | | $ | 26,264 | | | | | |
Brand Portfolio | 20,459 | | | 19.0 | % | | 2,464 | | | 2.2 | % | | $ | 17,995 | | | | | |
Other | — | | | — | % | | (5,310) | | | (14.8) | % | | $ | 5,310 | | | | | |
| 500,068 | | | | | 7,620 | | | | | | | | | |
Elimination of intersegment gross profit | 724 | | | | | 2,962 | | | | | | | | | |
Gross profit | $ | 500,792 | | | 32.9 | % | | $ | 10,582 | | | 1.1 | % | | $ | 490,210 | | | | | |
The improvement in gross profit was primarily driven by increased sales during the six months ended July 31, 2021 as compared to the same period last year. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings with aggressive promotional activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the six months ended July 31, 2021, tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the six months ended July 31, 2021 tracked higher than the pre-COVID-19 rate, which was 30.1% for the same period in fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the six months ended July 31, 2021 as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the same period in fiscal 2019 due to the deleverage impacts of lower net sales.
Elimination of intersegment gross profit consisted of the following:
| | | | | | | | | | | | | | | |
| Six months ended | | |
(in thousands) | July 31, 2021 | | August 1, 2020 | | | | |
Elimination of intersegment activity: | | | | | | | |
Net sales recognized by Brand Portfolio segment | $ | (29,406) | | | $ | (25,924) | | | | | |
Cost of sales: | | | | | | | |
Cost of sales recognized by Brand Portfolio segment | 20,642 | | | 16,961 | | | | | |
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 9,488 | | | 11,925 | | | | | |
Gross profit | $ | 724 | | | $ | 2,962 | | | | | |
Operating Expenses- For the six months ended July 31, 2021, operating expenses increased by $69.6 million over the same period last year, dueprimarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to higher initial markups, partially offset by higher markdowns, and lower occupancy expenses. DuringCOVID-19 for most of the three months ended October 28, 2017, Ebuys' merchandise margin was negatively impacted by lower markups and additional inventory reserves, as well as higher fulfillment expenses as Ebuys transitioned to a single fulfillment center.
DSW segment merchandise margin decreased 30 basis points for the nine months ended October 28, 2017 over the same period last year due to higher shipping costs and higher markdowns, partially offset by higher initial markup, while occupancy expenses and distribution and fulfillment expenses remained flat. For the nine months ended October 28, 2017, ABG segment gross profit was flat to last year. During the nine months ended October 28, 2017, Ebuys' merchandise margin was negatively impacted by higher markdowns and additional inventory reserves, as well as higher fulfillment expenses as Ebuys transitioned to a single fulfillment center.
first half of fiscal 2020. Operating Expenses
For the three months ended October 28, 2017, operating expenses as a percentage of net sales increased 20 basis points over the same period last year dueimproved to higher marketing and technology expenses partially offset by lower corporate expenses, improved leverage of store expenses, and higher transaction costs associated with the acquisition of Ebuys included in the same period last year. For the nine months ended October 28, 2017, operating expenses as a percentage of net sales decreased 10 basis points over the same period last year due28.0% compared to lower corporate expenses, improved leverage of store expenses, and higher transaction costs associated with the acquisition of Ebuys included36.6% in the same period last year partially offset bybut were still elevated compared to the pre-COVID-19 rate, which was 25.4% as a percentage of sales for the same period in fiscal 2019, primarily due to higher direct marketing expense and technology expenses.incentive compensation and lower sales.
Goodwill and intangible assets
Impairment Charges- During the six months ended July 31, 2021, we recorded an impairment charges
charge of $1.2 million for abandoned equipment we are replacing. As a result of the recurring operating losses incurred by Ebuys since its acquisition as well as increased competitive pressuresmaterial reduction in net sales and cash flows due to the digital marketplaces, we undertook a reviewtemporary closure of Ebuys’ goodwill and intangible assetsall of our stores during the third quarter of fiscal 2017 andsix months ended August 1, 2020, we performed an impairment analysis at the store-level. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the six months ended August 1, 2020, we recorded impairment charges of $53.8$92.8 million for goodwill and $28.9under-performing stores. Also during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible assets.
Changeresulting in fair value of contingent consideration liability
During the third quarter of fiscal 2017 in conjunction with our review of the carrying amount of Ebuys' goodwill and intangible assets, we made fair value adjustmentsa full impairment due to the contingent consideration liability based on Ebuys' resultslack of operations during the year and revised projections forprojected cash flows over the remaining contingent periods. For the three and nine months ended October 28, 2017, we recorded a net gainuseful life. Further, as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of COVID-19 on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair value adjustments net of accretion and other adjustments. For the three andFirst Cost reporting unit within the nineBrand Portfolio segment did not exceed its carrying value. Accordingly, during the six months ended October 29, 2016,August 1, 2020, we had accretion expense as we increasedrecorded an impairment charge of $20.0 million for the contingent consideration over time.First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
Non-operating Income (Expense)
Non-operating income (expense) primarily reflects recognized foreign exchange gains (losses) resulting from transactions with our Canadian investments.
Income Taxes
Taxes- Our effective tax rate changed from 32.5% for the threesix months ended October 28, 2017 and October 29, 2016 was 27.0% and 39.7%, respectively.August 1, 2020 to 3.6% for the six months ended July 31, 2021. The decrease inrate for the quarterly effective incomesix months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was primarily driven by applying the quarterly change of the fiscal year rate on significantly lower pre-tax income. Our effective tax rate for the nine months ended October 28, 2017 and October 29, 2016 was 39.0% and 39.1%, respectively.35%.
Income from Town Shoes
Income from Town Shoes includes our portion of the income (loss) in Town Shoes' operations, offset by the interest income on the note receivable from Town Shoes.
Seasonality
Our business is generally 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. Since the COVID-19 outbreak, we have not experienced the typical seasonal trends given the changes in customer behavior.
Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing commitments, other working capital needs, capital expenditures, for new stores, improving our information technology systems and infrastructure growth.debt service. Our working capital and inventory levels typically buildfluctuate seasonally. During the first half of fiscal 2018, we intend to exercise the call option to purchase the remaining interest in Town Shoes.
On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A Common Shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the nine months ended October 28, 2017, we repurchased 0.5 million Class A Common Shares at a cost of $9.4 million,
with $524.1 million of Class A Common Shares that remain authorized under the program. 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.volatility, including the impact of COVID-19. We believe that cash generated from our operations, together with our current levels of cash, and investments, as well as availability underthe use of our Credit Facility,ABL Revolver, are sufficient over the next 12 months and the foreseeable future to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, repurchase common shares underand meet our share repurchase program, and completedebt service obligations over the Town Shoes acquisition.next 12 months.
Operating Cash Flows
For the ninesix months ended October 28, 2017,July 31, 2021, net cash provided by operations was $138.6$96.2 million compared to $110.8net cash used in operations of $79.6 million for the ninesix months ended October 29, 2016.August 1, 2020. The increasechange was primarily driven by the timing of working capital paymentsnet income recognized in the six months ended July 31, 2021 versus a net loss incurred during that same period last year as a result of shifts in receipts of inventory offset by higher payments for income taxes as well as lower net income adjustedCOVID-19, after adjusting for non-cash activity. Non-cash activity included goodwill and intangible assetsincluding impairment charges the change in the fair value of the contingent consideration liability, depreciation and amortization, stock-based compensation expense, and the related change in deferred income taxes. This was partially offset by higher spend on working capital as business recovers from COVID-19 and the measures we implemented last year to manage our working capital to preserve liquidity, including delaying vendor and landlord payments while we renegotiate terms, reducing inventory orders, and significantly cutting costs.
Investing Cash Flows
For the ninesix months ended October 28, 2017,July 31, 2021, our net cash used in investing activities was $47.4$13.2 million, comparedwhich was due to capital expenditures relating to infrastructure and IT projects and store improvements. During the six months ended August 1, 2020, our net cash provided by investing activities was $6.8 million, which was due to the liquidation of $5.9 million forour available-for-sale securities and the nine months ended October 29, 2016. During the nine months ended October 28, 2017, we paid $39.6 million forproceeds from a settlement from a vendor partially offset by capital expenditures of which $16.2 million related to stores, $16.6 million related to technology and the remaining related to other business projects. During the nine months ended October 29, 2016, we paid $73.2 million for capital expenditures, of which $36.9 million related to new stores, $17.6 million related to technology and the remaining related to other business projects. During the nine months ended October 28, 2017, we had net purchases of investments of $2.2 million compared to net sales of investments of $145.6 million during the nine months ended October 29, 2016, which was partially used to fund the $59.5 million acquisition of Ebuys.$22.1 million.
Financing Cash Flows
For the ninesix months ended October 28, 2017,July 31, 2021, our net cash used in financing activities was $57.0$95.0 million compared to $90.6net cash provided by financing activities of $193.2 million for the ninesix months ended October 29, 2016. NetAugust 1, 2020. During the six months ended July 31, 2021, we had net payments of $83.2 million from the ABL Revolver and payments on the Term Loan of $6.3 million. During the six months ended August 1, 2020, we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash used in financing activities was primarily related toposition and preserve financial flexibility considering the payment of dividends and cash paid for treasury shares under our share repurchase program.uncertainty from COVID-19.
Debt
Credit Facility- ABL Revolver- On August 25, 2017,7, 2020, we entered into a senior unsecured revolving credit agreement (the "Credit Facility")replaced the Credit Facility with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. The Credit Facilitythe ABL Revolver, which provides a revolving line of credit of up to $300$400.0 million, with sub-limitsincluding a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of up to $50 million in letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of up to $15 million,our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the issuance of up to $75 million in foreign currency revolving loans and letters of credit.Term Loan. The Credit Facility may be further increased by up to $100 million subject to agreed-upon terms and conditions. The Credit Facility may be used to provide funds for working capital, capital expenditures, dividends and share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility.
Loans issued under the revolving lineamount of credit bear interest, at our option, atavailable is limited to a borrowing base rate or an alternate base rate as defined in the Credit Facility plusformulated on, among other things, a margin based on our leverage ratio, with any loans issued in CAD bearing 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. Commitment fees are based on the average unused portionpercentage of the Credit Facility at a variable rate based on our leverage ratio.book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 28, 2017, weJuly 31, 2021, the ABL Revolver had noa borrowing base of $386.1 million, with $16.8 million outstanding borrowings under the Credit Facility and $2.5$5.3 million in letters of credit issued, resulting in $297.5$364.0 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of July 31, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the Credit FacilityABL Revolver includes interest on borrowings and letters of credit, interest, commitment fees and the amortization of debt issuance costs.
Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.
Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of July 31, 2021.
Debt Covenants-The Credit FacilityABL Revolver contains financiala minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum EBITDA covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, butin some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary covenants of default with cross-default provisions. Upon an event of default that is not limitedcured or waived within the cure periods, in addition to limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio notother remedies that may be available to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. 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 andobligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and requireremedies may be exercised against the immediate repayment of any outstanding loans under the Credit Facility.collateral. As of October 28, 2017,July 31, 2021, we were in compliance with all financial covenants.
Capital Expenditure Plans
We expect to spend approximately $75 $35.0 million to $45.0 million for capital expenditures in fiscal 2017, with approximately a third going into new stores and store remodels and2021, of which we invested $13.2 million during the remaining going into technology investments, including digital investments, and other business projects.six months ended July 31, 2021. Our future investmentscapital expenditures for the remainder of the year will depend primarily on the number of stores we open and remodel,store projects, as well as infrastructure and information technologyIT projects that we undertake and the timing of these expenditures. During fiscal 2017, we opened 15 stores. The average investment required to open a new DSW store is approximately $1.4 million, prior to construction and tenant allowances, which average $0.4 million. Of this amount, gross inventory typically accounts for $0.5 million, fixtures and leasehold improvements typically account for $0.7 million, and new store advertising and other new store expenses typically account for $0.2 million.
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 January 28, 2017 in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. As of October 28, 2017, we have entered into various noncancelable purchase and service agreements resulting in purchase obligations of approximately $21.6 million. In addition, we reduced our expected future payments for the contingent consideration liability related to the Ebuys acquisition to approximately $5.6 million. There have been no other material changes in contractual obligations outside the ordinary course of business since January 28, 2017.
Recent Accounting Pronouncements
The information related to recent accounting pronouncements as set forth in Note 3, Significant Accounting Policies, of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.
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 revenuesrevenue 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 appraisalvaluation 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. The descriptionThere have been no material changes to the application of critical accounting policies is includeddisclosed in our Annual Report on2020 Form 10-K for the fiscal year ended January 28, 2017.10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
We hold available-for-sale investments. Our results of operations are not materially affected byThere have been no material changes in market interest rates. Also, asour primary risk exposures or management of October 28, 2017, we did not have borrowings under our Credit Facility and, consequently, did not have any material exposure to interest rate market risks during or at the end of this period. However, as any future borrowings underfrom those disclosed in our Credit Facility will be at a variable rate of interest, we could potentially be impacted should we require significant borrowings in the future, particularly during a period of rising interest rates.2020 Form 10-K.
Foreign Currency Exchange Risk
The functional currency of Town Shoes is CAD. As USD is our reporting currency, we are required to translate the investment in and note receivable from Town Shoes into USD balances. Each quarter, the income or loss from Town Shoes is recorded in USD at the average exchange rate for the period. The investment in and note receivable from Town Shoes is translated in USD at the exchange rate prevailing at the balance sheet date. As we have designated the note receivable from Town Shoes as an investment of a long-term investment nature, we record the translation gains and losses arising from changes in exchange rates in other comprehensive income. In anticipation of funding the future purchase of the remaining interest in Town Shoes, we hold $100 million CAD in available-for-sale securities denominated in CAD, with any foreign currency exchange gains or losses recorded within other comprehensive income. A hypothetical 10% movement in the CAD exchange rate could result in a $14.8 million foreign currency translation fluctuation, which would be recorded initially in other comprehensive income.
We currently do not utilize hedging instruments to mitigate foreign currency exchange risks.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We, under the supervision and with the participation of our management, including theour Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as such term is(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report,Form 10-Q, that such disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 13, 11, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
The following risk factor supplements ourAs of the date of the filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017:
The planned acquisition of Town Shoes could disrupt our ongoing business and adversely impact our results of operations.
During the first half of fiscal 2018, we intend to exercise the call option to purchase the remaining interest in Town Shoes. We may not succeed in executing the acquisition on time, within budget, or at all. The acquisition of Town Shoes may disrupt our business or divert the attention of our management. Achieving the expected benefits depends in large part on our successful integration of Town Shoes' operations, systems and personnel with our own in a timely and efficient manner. We cannot ensure that all of our integration efforts will be completed on a timely basis or as planned. Our operating results or
financial condition may be adversely impacted by pre-existing claims or liabilities, both known and unknown. In addition, the integration process may strain our financial and managerial controls and reporting systems and procedures and may also result in the diversion of management and financial resources from core business objectives. Our ability to successfully operate Town Shoes in Canada may be adversely affected by political, economic and social conditions beyond our control, local laws and customs, and legal and regulatory constraints, including compliance with applicable anti-corruption and currency laws and regulations. Risks inherent1A., Risk Factors, in our existing and future operations also include, among others, the costs and difficulties of managing operations outside of the United States, suffering possible adverse tax consequences from changes in tax laws or the unfavorable resolution of tax assessments or audits, and greater difficulty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fluctuations thereof may have an adverse effect on our financial results. There can be no assurance that we will successfully integrate our businesses or that we will realize the anticipated benefits of the acquisition after we complete our integration efforts.2020 Form 10-K.
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Item 2. | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
On August 17, 2017,, the Board of Directors authorized the repurchase of anadditional$500 $500 million of Class A Common Sharescommon shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The share repurchase program is subject to the ABL Revolver and Term Loan restrictions and 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. SharesAny share repurchases will be repurchasedcompleted in the open market at times and in amounts considered appropriate based on price and market conditions.
The following table sets forthABL Revolver and the Class A Common Share repurchases duringTerm Loan each contain customary covenants restricting our ability to pay dividends or repurchase stock. We are restricted from paying dividends or repurchasing stock until the most recent quarter:third quarter of fiscal 2021 at the earliest, after which certain limitations apply. We currently do not anticipate paying dividends or repurchasing additional shares under our share repurchase program.
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| | | | | | | | | | | | | |
| (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Programs | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| (in thousands, except per share amounts) |
July 30, 2017 to August 26, 2017 | — |
| | $ | — |
| | — |
| | $ | 533,469 |
|
August 27, 2017 to September 30, 2017(1) | 171 |
| | $ | 19.52 |
| | 500 |
| | $ | 524,094 |
|
October 1, 2017 to October 28, 2017 | — |
| | $ | — |
| | — |
| | $ | 524,094 |
|
| 171 |
| | $ | 19.52 |
| | 500 |
| | |
| |
(1) | The total number of shares repurchased includes shares repurchased as part of publicly announced programs (the average price paid per share includes any broker commissions) and shares withheld in connection with tax payments due upon vesting of employee restricted stock awards. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| | | | | | | |
Exhibit No. | | Description |
3.131.1* | | |
3.2 | | |
4.1 | | |
10.1 | | Revolving Credit Facility Credit Agreement, dated August 25, 2017, by and among DSW Inc., as designated borrower and guarantor, and certain financial institutions named herein, as lenders, and PNC Bank, National Association, as administrative agent. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 001-32545) filed August 31, 2017.
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31.1* |
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31.2* | | |
32.1** | | |
32.2** | | |
101* | | XBRL Instance DocumentsThe following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended July 31, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements. |
104* | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* Filed herewith
** Furnished herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DSWDESIGNER BRANDS INC.
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Date: | November 22, 2017August 31, 2021 | | By: | /s/ Jared Poff |
| | | | Jared Poff |
| | | | SeniorExecutive Vice President and Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer and duly authorized officer) |