Designer Brands Inc

Previous wording

For the first quarter of 2024, net sales increased 0.6% and total comparable sales decreased 2.5% compared to the same period last year. During the first quarter of 2024, net sales from Owned Brands represented 24.5% of consolidated net sales, down from 27.8% for the same period last year. Gross profit as a percentage of net sales for the first quarter of 2024 was 80 basis points higher when compared to the same period last year, primarily due to improvements from the Brand Portfolio segment as we achieved significant improvements in product costing and did not have the same level of closeout sales as we did in the first quarter of 2023 as we were managing through excess inventory from last year's acquired brands.

Current wording

For the second quarter of 2024, net sales decreased 2.6% and total comparable sales decreased 1.4% compared to the same period last year. During the second quarter of 2024, net sales from Owned Brands represented 21.2% of consolidated net sales, down from 23.9% for the same period last year. Gross profit as a percentage of net sales for the second quarter of 2024 was 32.8%, which was flat to the first quarter of 2024 and 170 basis points lower when compared to the same period last year, primarily from the U.S. Retail segment due to changes in the mix of products sold, as we expanded our athletic and casual offering, which have lower margins than the seasonal and dress categories, and an increase in promotional pricing.

Previous wording

Beginning in 2024, we changed how the Brand Portfolio segment sources certain Owned Brands for the U.S. Retail segment by transacting using a wholesale model, where intersegment sales and cost of sales are recorded, whereas in 2023 and prior we transacted on a commission model, where intersegment sales were based on a percentage of product cost. This change results in an increase in Brand Portfolio intersegment net sales, cost of sales, gross profit, and gross profit as a percentage of net sales and a corresponding increase in the amount of eliminated intersegment net sales, cost of sales, and gross profit with no impact to consolidated net sales and cost of sales.

Current wording

Beginning in 2024, we changed how the Brand Portfolio segment sources certain Owned Brands for the U.S. Retail segment by transacting using a wholesale model, where intersegment sales and cost of sales are recorded, whereas in 2023 and prior we transacted on a commission model, where intersegment sales were based on a percentage of product cost. This change results in an increase in Brand Portfolio intersegment net sales, cost of sales, gross profit, and gross profit as a percentage of net sales and a corresponding increase in the amount of eliminated intersegment net sales, cost of sales, and gross profit with no impact to consolidated net sales, cost of sales, and gross profit.

Previous wording

During the first quarter of 2024, our comparable sales declined as we experienced lower traffic and a decrease in the number of units per transaction. We believe this is a result of ongoing concern among consumers of negative and/or uncertain economic conditions, most notably the growing concerns of a potential recession, fluctuations in interest rates, inflationary pressures, changes in employment levels, and significant foreign currency volatility. Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence. We are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business. These factors ultimately could require us to enact mitigating operating efficiency measures that could have a material adverse effect on our business, operations, and results of operations.

Current wording

During the second quarter of 2024, we were encouraged by the increase in comparable traffic despite the decrease in total comparable sales as we experienced a decrease in comparable average sales amounts per transaction due to lower units per transaction. Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence. We believe the decrease in comparable sales is a result of ongoing consumer concern of negative and/or uncertain economic conditions, most notably the growing concerns of a potential recession, fluctuations in interest rates, inflationary pressures, and changes in employment levels. We are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business. These factors ultimately could require us to enact mitigating operating efficiency measures that could have a material adverse effect on our business, operations, and results of operations.

Previous wording

•Gross profit as a percentage of net sales was 32.8% compared to 32.0% for the same period last year.

Current wording

•Gross profit as a percentage of net sales was 32.8% compared to 34.5% for the same period last year.

Previous wording

•Net income attributable to Designer Brands Inc. was $0.8 million, or $0.01 per diluted share, which included net after-tax charges of $4.0 million, or $0.07 per diluted share, primarily related to restructuring and integration costs. For the three months ended April 29, 2023, net income attributable to Designer Brands Inc. was $11.4 million, or $0.17 per diluted share, which included net after-tax charges of $2.8 million, or $0.04, primarily related to the CEO transition, restructuring, integration, and acquisition costs, partially offset by the valuation change on deferred tax assets.

Current wording

•Net income attributable to Designer Brands Inc. was $13.8 million, or $0.24 per diluted share, which included net after-tax charges of $3.2 million, or $0.05 per diluted share, primarily related to restructuring, integration, and acquisition costs. For the three months ended July 29, 2023, net income attributable to Designer Brands Inc. was $37.2 million, or $0.56 per diluted share, which included net after-tax charges of $2.2 million, or $0.03, primarily related to restructuring and integration costs and discrete and permanent tax on non-deductible CEO transition costs.

Previous wording

We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses. We include in our comparable sales metric sales from stores in operation for at least 14 months at the beginning of the applicable year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include the e-commerce sales of the U.S. Retail and Canada Retail segments. For calculating comparable sales in 2024, periods in 2023 are shifted by one week to compare similar calendar weeks. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales include the e-commerce net sales of the Brand Portfolio segment from the direct-to-consumer e-commerce sites for Vince Camuto and Topo. Net sales from the direct-to-consumer e-commerce sites for Keds and Hush Puppies will be added to the comparable base for the Brand Portfolio segment beginning with the second quarter of 2024 and the third quarter of 2024, respectively. Stores added as a result of the Rubino acquisition that will have been in operation for at least 14 months at the beginning of 2025, along with its e-commerce sales, will be added to the comparable base beginning with the second quarter of 2025. 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.

Current wording

We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses. We include in our comparable sales metric sales from stores in operation for at least 14 months at the beginning of the applicable year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include the e-commerce sales of the U.S. Retail and Canada Retail segments. For calculating comparable sales in 2024, periods in 2023 are shifted by one week to compare similar calendar weeks. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales include the e-commerce net sales of the Brand Portfolio segment from the direct-to-consumer e-commerce sites for Vince Camuto, Keds, and Topo. Net sales from the direct-to-consumer e-commerce sites for Hush Puppies will be added to the comparable base for the Brand Portfolio segment beginning with the third quarter of 2024. Stores added as a result of the Rubino acquisition that will have been in operation for at least 14 months at the beginning of 2025, along with its e-commerce sales, will be added to the comparable base for the Canada Retail segment beginning with the second quarter of 2025. 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.

Previous wording

FIRST QUARTER OF 2024 COMPARED WITH FIRST QUARTER OF 2023

Current wording

SECOND QUARTER OF 2024 COMPARED WITH SECOND QUARTER OF 2023

Previous wording

For the three months ended May 4, 2024, operating expenses increased by $18.4 million over the same period last year, primarily driven by an increase in incentive compensation as we did not recognize incentive compensation last year based on the performance of the business, an increase in marketing expense as we invested more in brand awareness for the newly acquired brands in the Brand Portfolio segment, and higher store selling expenses in line with the increase in retail sales. Operating expenses, as a percentage of net sales, increased 240 basis points over the same period last year due to the increase in operating expenses being greater than the increase in net sales.

Current wording

For the three months ended August 3, 2024, operating expenses increased by $12.4 million over the same period last year, driven by an increase in marketing expense of $4.2 million as we invested more in brand awareness and an increase in incentive compensation of $2.7 million as we did not recognize incentive compensation last year based on the performance of the business relative to our targets with the remaining increase primarily due to restructuring and integration costs and professional fees related to certain strategic initiative work. Operating expenses, as a percentage of net sales, increased 230 basis points over the same period last year due to an increase in operating expenses on lower sales.

Previous wording

For the three months ended May 4, 2024, interest expense, net, increased by $5.0 million over the same period last year, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over the same period last year, and the addition of the Term Loan.

Current wording

For the three months ended August 3, 2024, interest expense, net, increased by $4.1 million over the same period last year primarily driven by a higher average debt balance.

Previous wording

For the three months ended May 4, 2024 and April 29, 2023, our effective tax rate was 138.1% and 10.3%, respectively. The high effective tax rate for the three months ended May 4, 2024 was due to discrete tax benefits, primarily state tax planning initiatives and release of federal tax reserves no longer deemed necessary, that approximated the amount of loss before income taxes and the impact of permanent non-deductible compensation. The low effective tax rate for the three months ended April 29, 2023 was primarily due to net discrete tax benefits, including federal and state valuation allowance adjustments, partially offset by permanent non-deductible compensation.

Current wording

For the three months ended August 3, 2024 and July 29, 2023, our effective tax rate was 19.3% and 31.4%, respectively. The lower effective tax rate for the three months ended August 3, 2024 was due to discrete tax benefits recognized, primarily the release of tax reserves no longer deemed necessary and state tax planning initiatives, partially offset by the impact of permanent non-deductible compensation. The higher effective tax rate for the three months ended July 29, 2023 was due to the impact of permanent non-deductible compensation partially offset by federal and state valuation allowance adjustments.

Previous wording

For the three months ended May 4, 2024, net sales increased in the U.S. Retail segment primarily due to added net sales of $23.3 million due to the calendar shift as a result of 2023 containing an additional week, offset by the decrease in comparable sales. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable average sales amounts per transaction of 3% due to lower units per transaction, partially offset by an increase in comparable transactions of approximately 1% as conversion rates more than offset lower traffic. Net sales increased in the Canada Retail segment also due to the calendar shift as well as the impact of new stores opened since the end of the first quarter of 2023, partially offset by a decrease in comparable sales. The increase in net sales for the Brand Portfolio segment was primarily due to a change in how we source certain Owned Brands for the U.S. Retail segment from a commission model, where sales are based on a percentage of product cost, to a wholesale model, where sales and cost of sales are recorded. This change also resulted in the increase in intersegment net sales that are eliminated.

Current wording

For the six months ended August 3, 2024, net sales decreased in the U.S. Retail segment primarily driven by the decrease in comparable sales of $21.5 million, partially offset by the added net sales due to the calendar shift as a result of 2023 containing an additional week. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable average sales amounts per transaction of approximately 3%, partially offset by an increase in comparable transactions of approximately 1%. The decrease in comparable average sales amounts per transaction was due to lower units per transaction, whereas the increase in comparable transactions was due to higher traffic, partially offset by lower conversion rates. Net sales increased in the Canada Retail segment due to the addition of Rubino, with $7.5 million of net sales during the period, as well as $3.8 million from the net new stores opened since the end of the second quarter of 2023, partially offset by the decrease in comparable sales. The increase in net sales for the Brand Portfolio segment was primarily due to a change in how we source certain Owned Brands for the U.S. Retail segment from a commission model, where sales are based on a percentage of product cost, to a wholesale model, where sales and cost of sales are recorded, which contributed $33.9 million in sales andalso resulted in the increase in intersegment net sales that are eliminated. This increase in the Brand Portfolio segment was partially offset by lower sales to external customers as retail customers pulled back on orders during the first half of 2024.

Previous wording

The increase in gross profit for the U.S. Retail and Canada Retail segments was primarily driven by the increase in net sales during the three months ended May 4, 2024 over the same period last year. Gross profit as a percentage of net sales decreased for the U.S. Retail segment when compared to the same period last year primarily due to a change in mix of products sold, whereas the decrease for the Canada Retail segment was primarily due to the increase in store occupancy costs with new stores and renewed leases resulting in slight increases in rent. The increase in gross profit for the Brand Portfolio segment was primarily driven by higher margin rates on wholesale sales as well as the transition of certain Owned Brands sourced for the U.S. Retail segment under a wholesale model as discussed above, which also resulted in the net elimination of intersegment gross profit during the first quarter of 2024 as compared to the net recognition of intersegment gross profit for the same period last year (refer to the table below). Gross profit as a percentage of net sales increased for the Brand Portfolio segment with the transition of certain Owned Brands sourced for the U.S. Retail segment under a wholesale model, as well as significant improvements we achieved in product costing and a lower level of closeout sales than the first quarter of 2023 as we managed through excess inventory from last year's acquired brands.

Current wording

The decrease in gross profit for the U.S. Retail segment was primarily driven by the decrease in net sales during the six months ended August 3, 2024 over the same period last year and at lower margin rates. Gross profit as a percentage of net sales decreased for the U.S. Retail segment when compared to the same period last year primarily due to a change in mix of products sold as we expanded our athletic and casual offerings, which have lower margins than the seasonal and dress categories. The increase in gross profit for the Canada Retail segment was primarily driven by the increase in net sales during the six months ended August 3, 2024 over the same period last year. The increase in gross profit for the Brand Portfolio segment was primarily driven by the transition of certain Owned Brands sourced for the U.S. Retail segment under a wholesale model as discussed above, which also resulted in the net elimination of intersegment gross profit during 2024 as compared to the net recognition of intersegment gross profit for the same period last year (refer to the table below). Gross profit as a percentage of net sales increased primarily due to the transition of certain Owned Brands sourced for the U.S. Retail segment under a wholesale model.

Previous wording

Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally. On April 8, 2024, we acquired Rubino for $16.7 million in cash, funded with available cash and borrowings on the ABL Revolver. On June 3, 2024, we received $46.9 million from the Internal Revenue Service representing the final amount due, plus interest, as a result of the Coronavirus Aid, Relief, and Economic Security Act. We intend to use these proceeds to pay down debt.

Current wording

Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally. On April 8, 2024, we acquired Rubino for $16.4 million in cash, funded with available cash and borrowings on the ABL Revolver. During the six months ended August 3, 2024, we repurchased 2.7 million Class A common shares at an aggregate cost of $18.0 million. As of August 3, 2024, $69.7 million of Class A common shares remained available for repurchase under the share repurchase program.

Previous wording

For the three months ended May 4, 2024, we had net cash used in operations as compared to net cash provided by operations for the same period last year. This change was largely driven by higher spend on working capital as we increased our investment in inventories, partially offset by no incentive compensation for 2023 being paid in the first quarter of 2024 whereas we did pay incentive compensation for 2022 in the first quarter of 2023, and the decrease in net income recognized in the three months ended May 4, 2024 over the same period last year after adjusting for non-cash activity, including depreciation and amortization and stock-based compensation activity. As of May 4, 2024, our inventories remain below the amount as of April 29, 2023. Also, during the first quarter of 2023, much of the inventory buildup came from the acquisition of Keds, which is included in investing cash flows. Other changes in working capital were the result of timing of payments with the calendar shift.

Current wording

The decrease in net cash provided by operations was largely driven by higher spend on working capital as we increased our investment in inventories and the decrease in net income recognized, partially offset by the receipt of income tax refunds of over $40.0 million and no incentive compensation for 2023 being paid in the first quarter of 2024 whereas we did pay incentive compensation for 2022 in the first quarter of 2023. Other changes in working capital were the result of timing of payments with the calendar shift.

Previous wording

For the three months ended May 4, 2024, net cash used in investing activities was primarily due to the acquisition of the Rubino business for $16.7 million and capital expenditures of $15.9 million relating to infrastructure and IT projects and new stores, including relocations. For the three months ended April 29, 2023, net cash used in investing activities was primarily due to the acquisition of the Keds business of $109.4 million and capital expenditures of $14.4 million relating to infrastructure and IT projects and store relocation and improvements.

Current wording

For the six months ended August 3, 2024, net cash used in investing activities was primarily due to the acquisition of the Rubino business for $16.4 million and capital expenditures of $29.5 million relating to infrastructure and IT projects and new stores, including relocations. For the six months ended July 29, 2023, net cash used in investing activities was primarily due to the acquisition of the Keds business of $127.3 million and capital expenditures of $25.1 million relating to infrastructure and IT projects and store relocations and improvements.

Previous wording

For the three months ended May 4, 2024, net cash provided by financing activities was primarily due to the net receipts of $50.2 million from our ABL Revolver, which was primarily used to fund our working capital investments and the acquisition of Rubino, partially offset by payments of $3.3 million for taxes for stock-based compensation shares withheld and $2.9 million for dividends. For the three months ended April 29, 2023, net cash provided by financing activities was primarily due to net receipts of $109.4 million from our ABL Revolver, which was used primarily to fund the Keds business acquisition, partially offset by payments of $11.8 million for taxes for stock-based compensation shares withheld.

Current wording

For the six months ended August 3, 2024, net cash provided by financing activities was primarily due to the net receipts of $41.2 million from our ABL Revolver, partially offset by the repurchase of 2.7 million Class A common shares at an aggregate cost of $18.0 million, and payments of $5.7 million for dividends and $4.1 million for taxes for stock-based compensation shares withheld. For the six months ended July 29, 2023, net cash provided by financing activities was primarily due to proceeds from the issuance of the Term Loan of $50.0 million, partially offset by the repurchase of 2.1 million Class A common shares at an aggregate cost of $22.4 million, including transaction costs, payments of $12.2 million for taxes for stock-based compensation shares withheld, and payments of dividends of $6.5 million.

Previous wording

ABL Revolver-The ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a FILO Term Loan of up to $30.0 million. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. The ABL Revolver, which matures in 2027, may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. 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 reserves. As of May 4, 2024, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $514.0 million, with $321.3 million in outstanding borrowings and $4.9 million in letters of credit issued, resulting in $187.8 million available for borrowings.

Current wording

ABL Revolver-The ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a FILO Term Loan of up to $30.0 million. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. The ABL Revolver, which matures in 2027, may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. 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 reserves. As of August 3, 2024, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $471.8 million, with $312.3 million in outstanding borrowings and $4.4 million in letters of credit issued, resulting in $155.1 million available for borrowings.

Previous wording

During 2024, we expect to spend approximately $65.0 million to $75.0 million that will be capitalized for property and equipment and implementation costs for cloud computing arrangements accounted for as service contracts, $17.4 million of which was spent during the three months ended May 4, 2024. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.

Current wording

During 2024, we expect to spend approximately $65.0 million to $75.0 million that will be capitalized for property and equipment and implementation costs for cloud computing arrangements accounted for as service contracts, $34.4 million of which was spent during the six months ended August 3, 2024. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.