PR Newswire | Dec 9, 2020 06:45AM EST

12/09 05:45 CST

Designer Brands Inc. Reports Third Quarter 2020 Financial Results COLUMBUS, Ohio, Dec. 9, 2020

Net sales improved 33% on a sequential basis versus second quarter

Athletic comparable sales in the U.S. Retail segment were up 5% in third quarter, above the 4% increase in the second quarter, outpacing results for seasonal products

COLUMBUS, Ohio, Dec. 9, 2020 /PRNewswire/ -- Designer Brands Inc. (NYSE: DBI) (the "Company"), one of North America's largest designers, producers and retailers of footwear and accessories, announced financial results for the three months ended October 31, 2020, compared to the three months ended November 2, 2019.

Roger Rawlins, Chief Executive Officer, said, "Designer Brands delivered sequential improvement across all of our metrics in the third quarter by successfully leveraging our flexible business model to align with consumer preferences. We have been shifting our assortment to include more athletic and kids product, as well as items from the Top 10 brands in footwear, and see further opportunity to meaningfully grow these categories. Our investment in these areas has resulted in athletic penetration in our U.S. retail business increasing to 26% at the end of the third quarter, up from 17% last year, and kids penetration has grown to 10% from 7% last year. During the quarter, athletic comparable sales turned positive at DSW, growing 5%, outperforming the market and supporting our strategic decision to pivot in this environment."

Mr. Rawlins continued, "Fundamentally, our customers know Designer Brands as a dress and seasonal house. As they continue to work from home and avoid large social events, the balance of our assortment will remain challenged. We are pleased to see that a vaccine may be on the horizon, but widespread adoption will take time and our business will continue to feel pressure in the near-term. We have confidence there will be a day our customers feel comfortable going out again, and, when that time comes, we will reap the benefits of the combination of our legacy command of the dress and seasonal market coupled with recent gains we are making in athletic and kids."

Third Quarter Operating Results

* Net sales decreased 30.1% to $652.9 million in the third quarter of fiscal 2020 compared to the same period last year. * Comparable sales decreased 30.4% for the third quarter of fiscal 2020 compared to a 0.3% increase in the third quarter of fiscal 2019. * Gross profit decreased $107.7 million to $165.7 million in the third quarter of fiscal 2020 versus $273.3 million last year, and gross margin as a percentage of net sales was 25.4% as compared to 29.3% in the third quarter of fiscal 2019. The decrease in gross profit was primarily driven by the significant reduction in customer traffic with the continuing impact of COVID-19. The decline in gross margin during the period was also a result of continued elevated markdown activity in addition to the increase in shipping expense and deleverage on occupancy, fixed distribution costs, and royalty expense related to the decline in sales. * Reported operating expenses were down 8.8% to $196.1 million versus last year and the reported operating expenses as a percentage of net sales was 30.1%, above last year's level of 23.1%, due to a significantly lower sales volume. * Reported net loss was $40.6 million, or $0.56 loss per diluted share, including net charges of $0.30 per diluted share from adjusted items primarily related to impairment charges. * Adjusted net loss was $19.0 million, or $0.26 loss per diluted share.

Liquidity Highlights

* Cash and investments totaled $114.5 million at the end of the third quarter of fiscal 2020, compared to $113.8 million for the same period last year, with $295.0 million available for borrowings under our ABL Revolver. Debt totaled $274.6 million at the end of the third quarter of fiscal 2020 compared to $235.0 million debt outstanding for the same period last year. * The Company ended the quarter with inventories of $546.0 million, down 19% compared to the same period last year, primarily due to strong inventory controls and higher inventory reserves versus the prior year.

Store Openings and ClosingsDuring the third quarter of fiscal 2020, we opened four stores and closed two in the U.S. resulting in a total of 524 U.S. stores. In Canada, we opened one store with no closures resulting in a total of 145 Canadian stores.

2020 GuidanceWe continue to monitor and evaluate the impact of the COVID-19 pandemic and, given the prolonged uncertainty surrounding the impacts of COVID-19, the Company is not providing guidance at this time.

Webcast and Conference CallThe Company is hosting a conference call today at 8:30 am Eastern Time. Investors and analysts interested in participating in the call are invited to dial 1-888-317-6003, or the international dial in, 1-412-317-6061, and reference conference ID number 8509121 approximately ten minutes prior to the start of the call. The conference call will also be broadcast live over the internet and can be accessed through the following link:

https://www.webcaster4.com/Webcast/Page/1213/38606

For those unable to listen to the live webcast, an archived version will be available via the same website address until December 23, 2020. A replay of the teleconference will be available by dialing the following numbers:

U.S.: 1-877-344-7529Canada: 1-855-669-9658International: 1-412-317-0088Passcode: 10149800

About Designer BrandsDesigner Brands Inc. is one of North America's largest designers, producers and retailers of footwear and accessories. The Company operates a portfolio of retail concepts in nearly 700 locations under the DSW Designer Shoe Warehouse(r), The Shoe Company(r), and Shoe Warehouse(r) banners. The Company designs and produces footwear and accessories through Camuto Group, a leading manufacturer selling in more than 5,400 stores worldwide. Camuto Group owns licensing rights for the Jessica Simpson(r) footwear business, and footwear and handbag licenses for Lucky Brand(r) and Max Studio(r). In partnership with a joint venture with Authentic Brands Group, the Company also owns a stake in Vince Camuto(r), Louise et Cie(r), and others. More information can be found at www.designerbrands.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995Any statements in this release that are not historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In many cases, you can identify these forward-looking statements by the use of forward-looking words such as "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. These statements are based on the Company's current expectations and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, but are not limited to: risks and uncertainty related to the continued outbreak of the coronavirus disease ("COVID-19"), any future COVID-19 resurgence, and any other adverse public health developments; our ability to protect the health and safety of our employees and our customers, which may be affected by current or future government regulations related to stay-at-home orders and orders related to the operation of non-essential businesses; risks related to our holdings of cash and investments and access to liquidity and the financial markets on terms that are favorable to us, if at all; risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to foreign tax contingencies, and fluctuations in foreign currency exchange rates; maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers; our ability to successfully integrate acquired businesses or realize the anticipated benefits of the acquisitions after we complete our integration efforts; risks related to losses or disruptions associated with our distribution systems, including our distribution and fulfillment centers and our stores, whether as a result of COVID-19, reliance on third-party providers, or otherwise; our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty; our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations; failure to retain our key executives or attract qualified new personnel; risks related to the loss or disruption of our information systems and data and our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data; risks associated with remote working arrangements; our ability to comply with privacy laws and regulations, as well as other legal obligations; the effect of Stein Mart Inc. filing for relief under Chapter 11 of the United States Bankruptcy Code; our success in growing our store base and digital demand; our ability to protect our reputation and to maintain the brands we license; our ability to execute our strategies; seasonality of our business and fluctuation of our comparable sales and quarterly financial performance; uncertain general economic, political and social conditions and the related impacts to consumer discretionary spending; our competitiveness with respect to style, price, brand availability and customer service; the imposition of increased or new tariffs on our products; risks related to our qualification under the Coronavirus Aid, Relief, and Economic Security Act for payroll tax credits and deferral of payroll taxes in the U.S., as well as other similar regulations in Canada; and uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. Additional factors that could cause our actual results to differ materially from our expectations are described in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as amended, our Forms 10-Q for the fiscal quarter ended May 2, 2020 and August 1, 2020 and risk factors identified in the Company's other filings with the Securities and Exchange Commission. All forward-looking statements speak only as of the time when made. The Company undertakes no obligation to revise the forward-looking statements included in this press release to reflect any future events or circumstances, except as may be required by law.

DESIGNER BRANDS INC.

SEGMENT RESULTS

(unaudited)



Net Sales

Three months ended Change

(dollars in October 31, November 2, Amount % Comparablethousands) 2020 2019 Sales %

Segment net sales:

U.S. Retail $ 501,901 $ 716,775 $ (214,874) (30.0) (31.9)% %

Canada Retail 61,598 76,299 (14,701) (19.3) (18.7)% %

Brand Portfolio 83,905 137,496 (53,591) (39.0) 13.4% %

Other 27,020 28,848 (1,828) (6.3)% NA

Total segment net 674,424 959,418 (284,994) (29.7) (30.4)%sales %

Elimination of (15.8)intersegment net (21,554) (25,592) 4,038 %sales

Net sales $ 652,870 $ 933,826 $ (280,956) (30.1) %

NA - Not applicable

Nine months ended Change

(dollars in October 31, November 2, Amount % Comparablethousands) 2020 2019 Sales %

Segment net sales:

U.S. Retail $ 1,272,951 $ 2,086,535 $ (813,584) (39.0) (39.6)% %

Canada Retail 140,509 191,421 (50,912) (26.6) (25.5)% %

Brand Portfolio 196,476 344,989 (148,513) (43.0) 61.4% %

Other 62,909 93,935 (31,026) (33.0) (50.4)% %

Total segment net 1,672,845 2,716,880 (1,044,035) (38.4) (38.4)%sales %

Elimination of (11.8)intersegment net (47,478) (53,813) 6,335 %sales

Net sales $ 1,625,367 $ 2,663,067 $ (1,037,700) (39.0) %

Store Data

October 31, 2020 November 2, 2019

Number Square Number Square (square footage in thousands) of Footage of Footage Stores Stores

U.S. Retail segment - DSW Designer 524 10,633 521 10,579 Shoe Warehouse

Canada Retail segment:

The Shoe Company / Shoe Warehouse 118 626 119 638

DSW Designer Shoe Warehouse 27 536 27 535

145 1,162 146 1,173

Total operating stores 669 11,795 667 11,752

Gross Profit

Three months ended

October 31, 2020 November 2, 2019 Change

(dollars in thousands) Amount % of Segment Net SalesAmount % of Segment Net SalesAmount % Basis Points

Segment gross profit (loss):

U.S. Retail $117,67923.4 % $201,40928.1 % $(83,730) (41.6)%(470)

Canada Retail 18,905 30.7 % 27,485 36.0 % $(8,580) (31.2)%(530)

Brand Portfolio 22,128 26.4 % 40,849 29.7 % $(18,721) (45.8)%(330)

Other 6,272 23.2 % 6,291 21.8 % $(19) (0.3)% 140

164,984 276,034

Elimination of intersegment gross loss (profit)672 (2,726)

Gross profit $165,65625.4 % $273,30829.3 % $(107,652)(39.4)%(390)

Nine months ended

October 31, 2020 November 2, 2019 Change

(dollars in thousands) Amount % of Segment Net SalesAmount % of Segment Net SalesAmount % Basis Points

Segment gross profit (loss):

U.S. Retail $124,8069.8 % $619,35629.7 % $(494,550)(79.8)%(1,990)

Canada Retail 22,244 15.8 % 65,171 34.0 % $(42,927) (65.9)%(1,820)

Brand Portfolio 24,592 12.5 % 93,308 27.0 % $(68,716) (73.6)%(1,450)

Other 962 1.5 % 21,643 23.0 % $(20,681) (95.6)%(2,150)

172,604 799,478

Elimination of intersegment gross loss (profit)3,634 (5,664)

Gross profit $176,23810.8 % $793,81429.8 % $(617,576)(77.8)%(1,900)

Intersegment Eliminations

Three months ended

(in thousands) October 31, 2020November 2, 2019

Elimination of intersegment activity:

Net sales recognized by Brand Portfolio segment $(21,554) $(25,592)

Cost of sales:

Cost of sales recognized by Brand Portfolio segment 17,155 17,363

Recognition of intersegment gross profit for inventory previously purchased that 5,071 5,503 was subsequently sold to external customers during the current period

Gross loss (profit) $672 $(2,726)

Nine months ended

(in thousands) October 31,November 2, 2020 2019

Elimination of intersegment activity:

Net sales recognized by Brand Portfolio segment $(47,478)$(53,813)

Cost of sales:

Cost of sales recognized by Brand Portfolio segment 34,116 39,281

Recognition of intersegment gross profit for inventory previously purchased that 16,996 8,868 was subsequently sold to external customers during the current period

Gross loss (profit) $3,634 $(5,664)

DESIGNER BRANDS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share amounts)



Three months ended Nine months ended

October 31, 2020November 2, 2019October 31, 2020November 2, 2019

Net sales $ 652,870 $ 933,826 $ 1,625,367 $ 2,663,067

Cost of sales (487,214) (660,518) (1,449,129) (1,869,253)

Operating expenses (196,067) (215,038) (551,712) (654,988)

Income from equity investment 1,902 2,662 6,325 7,354

Impairment charges (30,081) (4,824) (149,363) (4,824)

Operating profit (loss) (58,590) 56,108 (518,512) 141,356

Interest expense, net (9,009) (2,174) (14,955) (5,947)

Non-operating income (expenses), net24 15 680 (128)

Income (loss) before income taxes (67,575) 53,949 (532,787) 135,281

Income tax benefit (provision) 26,932 (10,489) 178,072 (33,220)

Net income (loss) $ (40,643) $ 43,460 $ (354,715) $ 102,061

Diluted earnings (loss) per share $ (0.56) $ 0.60 $ (4.92) $ 1.36

Weighted average diluted shares 72,344 72,947 72,134 75,149

DESIGNER BRANDS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands)



October 31, February 1, November 2, 2020 2020 2019

Assets

Cash and cash equivalents $114,531 $86,564 $87,838

Investments - 24,974 25,939

Accounts receivable, net 61,840 89,151 87,313

Inventories 545,954 632,587 677,696

Prepaid expenses and other 54,577 67,534 48,077 current assets

Total current assets 776,902 900,810 926,863

Property and equipment, net 313,102 395,009 394,695

Operating lease assets 728,871 918,801 950,514

Goodwill 93,655 113,644 113,644

Intangible assets, net 15,652 22,846 23,297

Deferred tax assets 208,976 31,863 39,452

Equity investment 57,978 57,760 54,964

Other assets 31,585 24,337 33,549

Total assets $2,226,721 $2,465,070 $2,536,978



Liabilities and shareholders' equity

Accounts payable $371,382 $299,072 $266,335

Accrued expenses 171,261 194,264 190,897

Current maturities of long-term 62,500 - - debt

Current operating lease 226,423 186,695 184,598 liabilities

Total current liabilities 831,566 680,031 641,830

Long-term debt 274,635 190,000 235,000

Non-current operating lease 721,771 846,584 880,883 liabilities

Other non-current liabilities 28,228 27,541 36,084

Total liabilities 1,856,200 1,744,156 1,793,797

Total shareholders' equity 370,521 720,914 743,181

Total liabilities and $2,226,721 $2,465,070 $2,536,978 shareholders' equity

DESIGNER BRANDS INC. NON-GAAP RECONCILIATION (unaudited and in thousands, except per share amounts)



Three months ended Nine months ended

October 31, 2020November 2, 2019October 31, 2020November 2, 2019

Reported net income (loss) $ (40,643) $43,460 $(354,715) $102,061

Pre-tax adjustments:

Included in cost of sales -

COVID-19 incremental costs - - 3,676 -

Included in operating expenses:

COVID-19 incremental costs (credits), net (985) - (4,453) -

Integration and restructuring expenses 816 1,465 11,019 13,574

Amortization of intangible assets 113 617 582 664

Impairment charges 30,081 4,824 149,363 4,824

Gain on settlement - - (8,990) -

Included in non-operating expenses, net -

Foreign currency transaction losses (gains)(25) 9 (368) 216

Total pre-tax adjustments 30,000 6,915 150,829 19,278

Tax effect of adjustments (8,357) (1,789) (38,875) (3,394)

Total adjustments, after tax 21,643 5,126 111,954 15,884

Adjusted net income (loss) $ (19,000) $48,586 $(242,761) $117,945

Reported diluted earnings (loss) per share $ (0.56) $0.60 $(4.92) $1.36

Adjusted diluted earnings (loss) per share $ (0.26) $0.67 $(3.37) $1.57

Non-GAAP Measures

In addition to diluted earnings (loss) per share and net income (loss) determined in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company uses adjusted diluted earnings (loss) per share and adjusted net income (loss), which adjust for the effects of: (1) COVID-19 incremental costs and credits; (2) integration and restructuring expenses; (3) amortization expense of intangible assets; (4) impairment charges; (5) gain on settlement; (6) foreign currency transaction losses (gains); and (7) the net tax expense impact of such items. The unaudited reconciliation of adjusted results should not be construed as an alternative to the reported results determined in accordance with GAAP. These financial measures are not based on any standardized methodology and are not necessarily comparable to similar measures presented by other companies. The Company believes these non-GAAP measures provide useful information to both management and investors to increase comparability to the prior periods by adjusting for certain items that may not be indicative of core operating measures and to better identify trends in our business. The adjusted financial results are used by management to, and allow investors to, evaluate the operating performance of the Company on a comparable basis, when reviewed in conjunction with the Company's GAAP statements. These amounts are not determined in accordance with GAAP and therefore should not be used exclusively in evaluating the Company's business and operations.

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