Designer Brands Inc.: Form 10-Q for the period ended May 3, 2025

EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS

For the first quarter of 2025, net sales decreased 8.0% with a decrease in total comparable sales of 7.8% when compared to the same period last year. Gross profit as a percentage of net sales for the first quarter of 2025 was 43.0%, a decrease of 120 basis points when compared to the same period last year as margin rates were down for all segments.

EFFECTS OF MACROECONOMIC CONDITIONS AND TARIFFS

Macroeconomic conditions influenced by growing concerns of a potential recession, uncertain tariff policies, volatility in stock market indices, elevated interest rates, inflationary pressures, changes in employment levels, and geopolitical unrest continue to create a complex and challenging retail environment. 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. These macroeconomic conditions have had a negative impact on our operating results and liquidity during the three months ended May 3, 2025 and we may continue to experience the impact of decreased consumer demand for our products. We have enacted certain mitigating actions, including alignment of inventory with current demand levels, expense and capital expenditure reductions, and accelerating sourcing diversification efforts. 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 further mitigating operating efficiency measures that could have a material adverse effect on our business, results of operations, and liquidity.

Following its January 2025 inauguration, the U.S. administration has taken action to increase tariffs assessed on most products imported into the U.S. along with additional reciprocal tariffs on imports from certain countries, including China, Vietnam, Indonesia, India, and Cambodia. Subsequent to these announcements, the U.S. administration announced a 90-day pause on the reciprocal tariffs for goods sourced from certain countries other than China and further increased tariffs on goods sourced from China, which were later paused for a separate 90-day period. The numerous announcements of new and then paused tariffs introduces more uncertainty regarding the future of global trade. All of the products manufactured through the Brand Portfolio segment come from third-party facilities outside of the U.S., with the majority of our units sourced from Asia. In addition to the merchandise sourced through our Brand Portfolio segment, our U.S. Retail and Canada Retail segments also source merchandise from domestic third-party suppliers, with many of these suppliers importing a large portion of their merchandise from Asia. We are closely monitoring this situation and evaluating the actions we plan to take, which may include cost mitigation measures and price adjustments. For our Brand Portfolio segment, we have accelerated our sourcing diversification efforts by rebalancing and optimizing where we source from to mitigate the risk, maximize flexibility, and decrease costs. However, there can be no assurance that we will be able to fully mitigate the impact of such tariffs or new tariffs in China or elsewhere.

Future impacts from macroeconomic conditions and tariffs are unknown at this time and could have a material adverse effect on our business, results of operations, and liquidity. Unfavorable developments may result in future write-downs or adjustments to inventories, receivables, the valuation allowance on deferred tax assets, and may also negatively impact the fair value of our reporting units, indefinite-lived tradenames, and long-lived assets, which could result in us recording impairment charges for amounts below their carrying value.

FINANCIAL SUMMARY AND OTHER KEY METRICS

For the three months ended May 3, 2025:

• Net sales decreased to $686.9 million from $746.6 million for the same period last year.
• Gross profit as a percentage of net sales was 43.0% compared to 44.2% for the same period last year.
• Net loss attributable to Designer Brands Inc. was $17.4 million, or $0.36 loss per diluted share, which included net after-tax charges of $4.9 million, or $0.10 per diluted share, primarily related to restructuring, integration, and impairment costs. For the three months ended May 4, 2024, 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.

Comparable Sales Performance Metric- The following table presents the percent change in comparable sales for each segment and in total:

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. 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. 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. Comparable sales include the e-commerce net sales of the Brand Portfolio segment from the direct-to-consumer e-commerce sites. 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.

Number of Stores- As of May 3, 2025 and May 4, 2024, we had the following number of stores:

19

RESULTS OF OPERATIONS

FIRST QUARTER OF 2025 COMPARED WITH FIRST QUARTER OF 2024

(amounts in thousands, except per share amounts)

NM - Not meaningful

NET SALES

The following table summarizes net sales by segment:

(dollars in thousands)

For the three months ended May 3, 2025, net sales decreased in the U.S. Retail segment primarily driven by the decrease in comparable sales of $44.9 million with the remaining decrease primarily from store closures since the end of the first quarter of 2024. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions of approximately 10% due to lower traffic, partially offset by an increase in comparable average sales amounts per transaction. Net sales decreased in the Canada Retail segment driven by the decline in comparable sales of $5.1 million, also due to lower traffic, and the unfavorable impact from foreign currency translation of $2.2 million, partially offset by an increase in net sales with the addition of Rubino. The decrease in net sales for the Brand Portfolio segment was primarily due to lower revenue from wholesale activity of $4.2 million as retail customers pulled back on orders with the remaining decrease from direct-to-consumer sales, primarily from our Vince Camuto e-commerce site.

GROSS PROFIT

The following table summarizes gross profit by segment:

(dollars in thousands)

The decrease in gross profit for the U.S. Retail segment was primarily driven by the decrease in net sales during the three months ended May 3, 2025 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 and an increase in promotional activity. The decrease in gross profit for the Canada Retail segment was primarily driven by the decline in net sales from our legacy banners more than offsetting the contribution from the addition of the Rubino banner. Gross profit as a percentage of net sales decreased for the Canada Retail segment for the three months ended May 3, 2025 over the same period last year primarily due to the Rubino banner, which has lower margins. The decrease in gross profit for the Brand Portfolio segment was primarily due to the lower net sales and higher freight costs as we rerouted supply chain lanes in order to avoid potential disruptions. Gross profit as a percentage of net sales decreased for the Brand Portfolio segment primarily due to unfavorable customer mix and the higher freight costs.

The net recognition (elimination) of intersegment gross profit consisted of the following:

(in thousands)

OPERATING EXPENSES

The following table summarizes operating expenses by segment:

(dollars in thousands)

For the three months ended May 3, 2025, operating expenses decreased in the U.S. Retail segment primarily due to lower store selling expenses of $3.4 million and marketing expenses of $1.6 million in line with lower net sales, with the remaining decrease primarily in personnel overhead costs driven by a decrease in incentive compensation. Operating expenses as a percentage of net sales increased in the U.S. Retail segment due to the deleverage impact of lower net sales. Operating expenses increased in the Canada Retail segment primarily due to the addition of Rubino. Operating expenses as a percentage of net sales in the Canada Retail segment increased due to lower net sales on higher operating expenses. Operating expenses decreased in the Brand Portfolio segment primarily due to a $4.6 million decrease in marketing expenses in line with lower net sales with the remaining decrease primarily due to lower personnel overhead costs with a decrease in incentive compensation. Operating expenses as a percentage of net sales in the Brand Portfolio segment decreased as the decline in operating expenses leveraged even with lower net sales. Operating expenses decreased for corporate shared services primarily due to lower professional fees as well as a decrease in incentive compensation. The increase in consolidated operating expenses as a percentage of consolidated net sales over the same period last year was due to the deleverage of our costs on lower net sales.

IMPAIRMENT CHARGES

During the three months ended May 3, 2025, we recorded impairment charges of $1.0 million of long-lived assets due to underperforming stores in Canada. Also during the three months ended May 3, 2025, we recorded a $2.0 million impairment charge for an interest in an equity security without a readily determinable fair value held at cost, which resulted in no remaining value due to the lack of liquidity and the deterioration in the business prospects of the investee. There were no impairment charges for the same period last year.

OPERATING PROFIT

The following table summarizes operating profit by segment:

(dollars in thousands)

NM - Not meaningful

For the three months ended May 3, 2025, operating profit for the U.S. Retail segment decreased due to lower gross profit partially offset by lower operating expenses whereas operating profit for the Canada Retail segment decreased due to lower gross profit and higher operating expenses. Operating profit for the Brand Portfolio segment increased due to the decrease in gross profit being more than offset by lower operating expenses. For the three months ended May 3, 2025, corporate/eliminations were favorable to consolidated operating profit (loss) due to lower corporate operating expenses and favorable intersegment activity, partially offset by higher impairment charges when compared to the same period last year. These factors led to a consolidated operating loss for the three months ended May 3, 2025 as compared to an operating profit for the same period last year.

INCOME TAXES

For the three months ended May 3, 2025 and May 4, 2024, our effective tax rate was 10.4% and 138.1%, respectively. The effective tax rate for the three months ended May 3, 2025 differed from the statutory rate primarily due to state minimum tax expense on quarterly pre-tax loss and permanent non-deductible compensation. 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.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

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. 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, including the impacts of the current macroeconomic conditions on our results of operations. We believe that cash generated from our operations, together with our current levels of cash, as well as the availability under our ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and meet our debt service obligations over the next 12 months. As discussed above in the "Executive Overview and Trends in Our Business" section under the heading "Effects of Macroeconomic Conditions and Tariffs," current macroeconomic conditions have had a negative impact on our operating results and liquidity during the three months ended May 3, 2025 and we may continue to experience the impact of decreased consumer demand for our products. Future impacts are unknown at this time and could have a material adverse effect on our business, operations, results of operations, and liquidity.

The following table presents the key categories of our condensed consolidated statements of cash flows:

(in thousands)

OPERATING CASH FLOWS

The slight increase in net cash used in operating activities was due to the net loss recognized in the three months ended May 3, 2025 as compared to the net income recognized in the same period last year, partially offset by improved working capital management as we adjusted inventories in line with the decline in operating results and the impact of adjusting for noncash charges included in net income (loss) for both years.

INVESTING CASH FLOWS

The decrease in net cash used in investing activities for the three months ended May 3, 2025 as compared to the same period last year was primarily due to the reduction in capital expenditures of $8.7 million in line with the decline in operating results along with the impact of the acquisition of Rubino of over $16.0 million during the three months ended May 4, 2024.

FINANCING CASH FLOWS

For the three months ended May 3, 2025, net cash provided by financing activities was primarily due to the net receipts of $33.2 million from our ABL Revolver, partially offset by the payment of dividends of $2.4 million, principal payments on the Term Loan of $1.7 million, and taxes for stock-based compensation shares withheld of $1.3 million. 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 for taxes for stock-based compensation shares withheld of $3.3 million, dividends of $2.9 million, and principal payments on the Term Loan of $1.7 million.

DEBT

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 borrowings of $30.0 million under a FILO Term Loan, which 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 3, 2025, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $502.8 million, with $373.3 million in outstanding borrowings and $4.0 million in letters of credit issued, resulting in $125.5 million available for borrowings.

Term Loan- On June 23, 2023, we entered into a Term Loan, which matures at the earliest of the date the ABL Revolver matures (currently March 2027) or five years from closing of the Term Loan (June 2028). As of May 3, 2025, the Term Loan had an outstanding balance of $124.7 million.

Debt Covenants- The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $47.3 million or 10.0% of the maximum borrowing amount. At any time that liquidity is less than $100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month of 2.50 to 1.00, calculated on a trailing twelve-month basis. Testing of the consolidated net leverage ratio ends after liquidity has been greater than or equal to $100.0 million for a period of 45 consecutive days. The ABL Revolver and the Term Loan also contain customary covenants restricting certain activities, including limitations on our 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, in some cases, upon satisfying specified payment conditions based on availability. As of May 3, 2025, we were in compliance with all financial covenants contained in the ABL Revolver and the Term Loan.

Refer to Note 11, Debt, of the condensed consolidated financial statements of this Form 10-Q for further information about our debt arrangements.

PLANS FOR CAPITALIZED COSTS

During 2025, we expect to spend approximately $35.0 million to $45.0 million that will be capitalized for property and equipment and implementation costs for cloud computing arrangements accounted for as service contracts, $9.6 million of which was spent during the three months ended May 3, 2025. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The information related to recent accounting pronouncements as set forth in Note 1, Description of Business and Significant Accounting Policies - Recently Issued Accounting Pronouncements, of the condensed consolidated financial statements included in this 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 revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation 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. Except as noted below, there have been no material changes to the application of critical accounting policies and estimates disclosed in our 2024 Form 10-K.

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets- In 2024, we performed a quantitative impairment test for the goodwill assigned to the U.S. Retail, Keds, Rubino, and Topo reporting units as of our fourth quarter measurement date. We determined for each of the reporting units that the fair value was in excess of their carrying value and a 10% decrease in fair value would not result in an impairment. Also in 2024, we performed a quantitative impairment test of our indefinite-lived tradenames for Keds, The Shoe Co., and Rubino as of our fourth quarter measurement date. We determined that the fair value of each of the indefinite-lived tradenames was in excess of the carrying value and a 10% decrease in fair value would not result in an impairment charge. Due to the current macroeconomic conditions with the continued softness in consumer demand, growing concerns of a potential recession, the evolving trade policies and volatility in our stock price, there is a higher level of uncertainty associated with the assumptions used in our impairment tests. Although we do not believe it is more likely than not that we have an impairment of goodwill or other indefinite-lived tradenames as of May 3, 2025, we will continue to monitor these macroeconomic conditions, including the potential impacts from new tariffs or trade restrictions, which could adversely affect the financial performance and valuation of our reporting units and indefinite-lived intangible tradename assets. Should these conditions lead to a significant decline in projected financial results, there could be material impairment charges related to these assets in future periods.

We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2024 Form 10-K.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("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 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.

Except as noted below, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 2024 Form 10-K.

Recently announced changes to U.S. trade policy, including recently announced tariffs, could have a material adverse effect on our business, results of operations, and liquidity.

Following its January 2025 inauguration, the U.S. administration has taken action to increase tariffs assessed on most products imported into the U.S. along with additional reciprocal tariffs on imports from certain countries, including China, Vietnam, Indonesia, India, and Cambodia. Subsequent to these announcements, the U.S. administration announced a 90-day pause on the reciprocal tariffs for goods sourced from certain countries other than China and further increased tariffs on goods sourced from China, which were later paused for a separate 90-day period. The numerous announcements of new and then paused tariffs introduces more uncertainty regarding the future of global trade. All of the products manufactured through the Brand Portfolio segment come from third-party facilities outside of the U.S., with the majority of our units sourced from Asia. In addition to the merchandise sourced through our Brand Portfolio segment, our U.S. Retail and Canada Retail segments also source merchandise from domestic third-party suppliers, with many of these suppliers importing a large portion of their merchandise from Asia. We are closely monitoring this situation and evaluating the actions we plan to take, which may include cost mitigation measures and price adjustments. For our Brand Portfolio segment, we have accelerated our sourcing diversification efforts by rebalancing and optimizing where we source from to mitigate the risk, maximize flexibility, and decrease costs. However, there can be no assurance that we will be able to fully mitigate the impact of such tariffs or new tariffs in China or elsewhere. Future impacts are unknown at this time and could have a material adverse effect on our business, results of operations, and liquidity. Unfavorable developments may result in future write-downs or adjustments to inventories, receivables, the valuation allowance on deferred tax assets, and may also negatively impact the fair value of our reporting units, indefinite-lived tradenames, and long-lived assets, which could result in us recording impairment charges for amounts below their carrying value.