PR Newswire | Sep 3, 2020 06:45AM EDT

09/03 05:45 CDT

Designer Brands Inc. Reports Second Quarter 2020 Financial Results COLUMBUS, Ohio, Sept. 3, 2020

Bolstered liquidity and raised $250 million of new debt

Inventory was down 37%, in line with sales down 43%, compared to the same period last year; well-positioned to chase into developing Fall trends

COLUMBUS, Ohio, Sept. 3, 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 August 1, 2020, compared to the three months ended August 3, 2019.

Roger Rawlins, Chief Executive Officer, stated, "Although the COVID-19 pandemic continues to impact consumer behavior and our business, I am confident in Designer Brands' playbook to navigate this ever-changing environment. We believe our recent actions to right size our expense structure and obtain additional liquidity, our strategic digital investments, flexible business model, and strong vendor partnerships as well as our status as one of the largest footwear retailers have firmly positioned Designer Brands to weather the road ahead."

Mr. Rawlins continued, "Given that we have further strengthened our balance sheet, we are well prepared to focus on growing our business' profitability. In order to serve our customers in the near-term, we are flexing fall inventory receipts away from seasonal and dress products and towards our highest performing category, athleisure, with an emphasis on comfortable and cozy products. We have the unique ability to pivot inventory quickly and follow the customer as needs and preferences change in the future. We are confident that we know what the customer wants, and we know how to deliver it to them, be it digitally or in-person and socially distanced, and we will be prepared in any situation."

Second Quarter Operating Results

* Net sales decreased 42.8% to $489.7 million. * Comparable sales decreased 42.7% for the second quarter of fiscal 2020 compared to a 0.6% decrease in the second quarter of fiscal 2019. * Reported gross margin as a percentage of net sales was 7.6%, or 8.2% on an adjusted basis, as compared to 30.5% on both a reported and adjusted basis for the same period last year. The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations resulting in the temporary closure of stores and, subsequently, significantly reduced customer traffic upon store re-openings, which we addressed with aggressive promotional activity. The impact of COVID-19 and the actions we took resulted in higher inventory reserves, increased shipping costs in the current quarter associated with higher digital penetration, and the deleveraging of distribution and fulfillment and store occupancy expenses on lower sales volume. * Reported net loss was $98.2 million, or $1.36 loss per diluted share, including net charges of $0.08 per diluted share from adjusted items. * Adjusted net loss was $92.0 million, or $1.28 loss per diluted share.

Liquidity Highlights

* Cash and investments totaled $206.7 million at the end of the second quarter of fiscal 2020 compared to $77.3 million for the same period last year. Debt totaled $393.0 million at the end of the second quarter of fiscal 2020 compared to $235.0 million debt outstanding for the same period last year, reflecting net borrowings from our revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S. and global markets resulting from COVID-19. * On August 7, 2020, we replaced our revolving credit facility with a $400.0 million ABL Revolver and completed a five-year, $250.0 million Secured Term Loan. We opened the new ABL Revolver with a draw at closing of $150.0 million and, combined with the proceeds from the Secured Term Loan, settled in full the amounts due under the Company's prior credit facility, which was terminated. * The Company has reached alignment with nearly all major vendors and landlords on past-due amounts and has extended go-forward payment terms. * The Company ended the quarter with inventories of $445.0 million, down 37% compared to the same period last year, primarily due to strong inventory controls and higher inventory reserves versus the prior year.

Operations Update

As of the date of this release, the Company has successfully reopened nearly all of its total store base. The Company has implemented a number of measures to protect the health and safety of its customers and associates as stores are re-opened.

2020 Guidance

As previously announced on March 17, 2020, the Company is not issuing guidance for fiscal 2020 given continued uncertainty surrounding the impacts of COVID-19. The Company is not providing an update at this time.

Webcast and Conference Call

The Company is hosting a conference call today at 8:30 am Eastern Time. Investors and analysts interested in participating in the call are invited to dial 1-888-317-6003, or the international dial in, 1-412-317-6061, and reference conference ID number 9992953 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/1213/36616

For those unable to listen to the live webcast, an archived version will be available via the same website address until September 17, 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: 10147286

About Designer Brands

Designer 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), CC Corso Como(r), and others. More information can be found at www.designerbrands.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Any 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 uncertainties related to the continued outbreak of the coronavirus ("COVID-19") global pandemic, 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 the loss or disruption, whether as a result of COVID-19 or otherwise, of any of our distribution or fulfillment centers; 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 Form 10-Q for the fiscal quarter ended May 2, 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 thousands) August 1, August 3, Amount % Comparable Sales % 2020 2019

Segment net sales:

U.S. Retail $ 393,977 $ 677,920 $ (283,943) (41.9) % (44.9)%

Canada Retail 49,582 63,306 (13,724) (21.7) % (27.9)%

Brand Portfolio 30,458 102,947 (72,489) (70.4) % 120.5%

Other 22,266 29,480 (7,214) (24.5) % (36.2)%

Total segment net sales 496,283 873,653 (377,370) (43.2) % (42.7)%

Elimination of intersegment net sales (6,569) (17,701) 11,132 (62.9) %

Net sales $ 489,714 $ 855,952 $ (366,238) (42.8) %

Six months ended Change

(dollars in thousands) August 1, August 3, Amount % Comparable Sales % 2020 2019

Segment net sales:

U.S. Retail $ 771,050 $ 1,369,760 $ (598,710) (43.7) % (43.7)%

Canada Retail 78,911 115,122 (36,211) (31.5) % (29.9)%

Brand Portfolio 112,571 207,493 (94,922) (45.7) % 106.5%

Other 35,889 65,087 (29,198) (44.9) % (50.4)%

Total segment net sales 998,421 1,757,462 (759,041) (43.2) % (42.5)%

Elimination of intersegment net sales (25,924) (28,221) 2,297 (8.1) %

Net sales $ 972,497 $ 1,729,241 $ (756,744) (43.8) %

Store Data

August 1, 2020 August 3, 2019

(square footage in thousands) Number ofSquare Number ofSquare Stores FootageStores Footage

U.S. Retail segment - DSW Designer Shoe Warehouse522 10,578518 10,543

Canada Retail segment:

The Shoe Company / Shoe Warehouse 117 623 112 611

DSW Designer Shoe Warehouse 27 536 27 534

144 1,159 139 1,145

Total operating stores 666 11,737657 11,688

ABG stores serviced 280 284

Gross Profit (Loss)

Three months ended

August 1, 2020 August 3, 2019 Change

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

Segment gross profit (loss):

U.S. Retail $40,09710.2 %$208,05630.7 % $(167,959)(80.7)%(2,050)

Canada Retail 5,650 11.4 %21,939 34.7 % $(16,289) (74.2)%(2,330)

Brand Portfolio (11,440)(37.6) %26,786 26.0 % $(38,226) NM NM

Other 118 0.5 %6,041 20.5 % $(5,923) (98.0)%(2,000)

34,425 262,822

Elimination of intersegment 2,617 (1,649) gross loss (profit)

Gross profit $37,0427.6 %$261,17330.5 % $(224,131)(85.8)%(2,290)





Six months ended

August 1, 2020 August 3, 2019 Change

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

Segment gross profit (loss):

U.S. Retail $7,127 0.9 %$417,94730.5 % $(410,820)(98.3)%(2,960)

Canada Retail 3,339 4.2 %37,686 32.7 % $(34,347) (91.1)%(2,850)

Brand Portfolio 2,464 2.2 %52,459 25.3 % $(49,995) (95.3)%(2,310)

Other (5,310) (14.8) %15,352 23.6 % $(20,662) NM NM

7,620 523,444

Elimination of intersegment 2,962 (2,938) gross loss (profit)

Gross profit $10,5821.1 %$520,50630.1 % $(509,924)(98.0)%(2,900)

Intersegment Eliminations

Three months ended

(in thousands) August 1, 2020August 3, 2019

Elimination of intersegment activity:

Net sales recognized by Brand Portfolio segment $(6,569) $(17,701)

Cost of sales:

Cost of sales recognized by Brand Portfolio segment4,827 14,311

Recognition of intersegment gross profit for inventory previously purchased that was 4,359 1,741 subsequently sold to external customers during the current period

Gross loss (profit) $2,617 $(1,649)





Six months ended

(in thousands) August 1, 2020August 3, 2019

Elimination of intersegment activity:

Net sales recognized by Brand Portfolio segment $(25,924) $(28,221)

Cost of sales:

Cost of sales recognized by Brand Portfolio segment16,961 21,918

Recognition of intersegment gross profit for inventory previously purchased that was 11,925 3,365 subsequently sold to external customers during the current period

Gross loss (profit) $2,962 $(2,938)

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

Three months ended Six months ended

August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Net sales $ 489,714 $ 855,952 $ 972,497 $ 1,729,241

Cost of sales (452,672) (594,779) (961,915) (1,208,735)

Operating expenses (168,424) (222,370) (355,645) (439,950)

Income from equity investment 2,153 2,464 4,423 4,692

Impairment charges (6,735) - (119,282) -

Operating profit (loss) (135,964) 41,267 (459,922) 85,248

Interest expense, net (3,788) (1,972) (5,946) (3,773)

Non-operating income (expenses), net 743 199 656 (143)

Income (loss) before income taxes (139,009) 39,494 (465,212) 81,332

Income tax benefit (provision) 40,795 (12,087) 151,140 (22,731)

Net income (loss) $ (98,214) $ 27,407 $ (314,072) $ 58,601

Diluted earnings (loss) per share $ (1.36) $ 0.37 $ (4.36) $ 0.77

Weighted average diluted shares 72,142 74,316 72,028 76,281

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

August 1, 2020 February 1, 2020 August 3, 2019

Assets

Cash and cash equivalents $ 206,720 $ 86,564 $ 51,762

Investments - 24,974 25,504

Accounts receivable, net 49,240 89,151 85,162

Inventories 445,044 632,587 706,168

Prepaid expenses and other current assets 69,456 67,534 55,561

Total current assets 770,460 900,810 924,157

Property and equipment, net 332,730 395,009 402,779

Operating lease assets 797,413 918,801 975,963

Goodwill 93,655 113,644 116,280

Intangible assets 15,663 22,846 21,112

Deferred tax assets 182,866 31,863 29,515

Equity investment 56,690 57,760 55,033

Other assets 23,780 24,337 32,407

Total assets $ 2,273,257 $ 2,465,070 $ 2,557,246

Liabilities and shareholders' equity

Accounts payable $ 224,693 $ 299,072 $ 289,457

Accrued expenses 202,831 194,264 173,437

Current operating lease liabilities 241,694 186,695 185,969

Total current liabilities 669,218 680,031 648,863

Debt 393,000 190,000 235,000

Non-current operating lease liabilities 778,826 846,584 905,546

Other non-current liabilities 25,586 27,541 38,590

Total liabilities 1,866,630 1,744,156 1,827,999

Total shareholders' equity 406,627 720,914 729,247

Total liabilities and shareholders' equity $ 2,273,257 $ 2,465,070 $ 2,557,246

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

Three months ended Six months ended

August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Reported net income (loss) $ (98,214) $ 27,407 $ (314,072) $ 58,601

Pre-tax adjustments:

Included in cost of sales:

COVID-19 incremental costs 3,257 - 3,676 -

Included in operating expenses:

COVID-19 incremental costs (credits), net (306) - (3,468) -

Integration and restructuring expenses 8,455 9,621 10,203 12,109

Amortization of intangible assets 110 (271) 469 47

Impairment charges 6,735 - 119,282 -

Gain on settlement (8,990) - (8,990) -

Included in non-operating expenses, net:

Foreign currency transaction losses (743) (223) (343) 207

Total pre-tax adjustments 8,518 9,127 120,829 12,363

Tax effect of adjustments (2,295) (780) (30,518) (1,605)

Total adjustments, after tax 6,223 8,347 90,311 10,758

Adjusted net income (loss) $ (91,991) $ 35,754 $ (223,761) $ 69,359

Reported diluted earnings (loss) per share $ (1.36) $ 0.37 $ (4.36) $ 0.77

Adjusted diluted earnings (loss) per share $ (1.28) $ 0.48 $ (3.11) $ 0.91

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; 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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SOURCE Designer Brands Inc.