GENERAL OVERVIEW AND TRENDS IN OUR BUSINESS
For the first quarter of 2022, consolidated net sales increased 18.1% and comparable sales increased 15.3% over the same period last year with each of our three segments contributing to these increases. Net sales during the first quarter of 2022 from our Owned Brands increased 68.3% over the same period last year and Owned Brands representing 25.4% of consolidated net sales as compared to 17.8% for the same period last year. This growth came despite volatile market conditions, including increased freight costs and supply chain disruptions. We continue to make progress on our initiatives centered on our three pillars - Customer, Brand, and Speed - as we work towards our long-term strategic plans.
IMPACT OF THE COVID-19 PANDEMIC ON OUR OPERATING RESULTS
The COVID-19 pandemic continues to impact the global economy and has created supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. While we experienced continued improvement in our performance during the first quarter of 2022, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends in our business will continue.
FINANCIAL SUMMARY AND OTHER KEY INDICATORS
For the three months ended
• Net sales increased to
•Gross margin as a percentage of net sales was 33.2% compared to 30.7% for the same period last year.
•Net income was
$26.2 million, or $0.34per diluted share, which included net after-tax charge of $10.5 million, or $0.14per diluted share, primarily related to the loss on extinguishment of debt and write-off of debt issuance costs. Net income for the three months ended May 1, 2021was $17.0 million, or $0.22per diluted share, which included net after-tax benefits of $7.6 million, or $0.10per diluted share, primarily related to the change in the valuation allowance on deferred tax assets.
Comparable sales performance indicator – The following table presents the evolution of comparable sales for each segment and in total:
Three months completed
April 30, 2022 May 1, 2021 Change in comparable sales: U.S. Retail segment 13.6 % 56.3 % Canada Retail segment 41.4 % 10.0 % Brand Portfolio segment - direct-to-consumer channel 19.7 % 6.8 % Total 15.3 % 52.2 % We consider the change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses. We include in our comparable sales metric stores in operation for at least 14 months at the beginning of the fiscal 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 stores temporarily closed as a result of the COVID-19 pandemic as management continues to believe that this metric is meaningful to monitor our performance. Comparable sales also include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site www.vincecamuto.com. 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. 16 --------------------------------------------------------------------------------
Number of Stores – As of
April 30, 2022 May 1, 2021 U.S. Retail segment - DSW stores 510 516 Canada Retail segment: The Shoe Company stores 115 118 DSW stores 25 27 140 145 Total number of stores 650 661 RESULTS OF OPERATIONS
FIRST QUARTER 2022 COMPARED TO FIRST QUARTER 2021
Three months ended (dollars in thousands, except per share amounts) April 30, 2022 May 1, 2021 Change
Amount % of Net Sales Amount % of Net Sales Amount % Net sales
$ 830,543100.0 % $ 703,155100.0 % $ 127,38818.1 % Cost of sales (554,798) (66.8) (487,044) (69.3) (67,754) 13.9 % Gross profit 275,745 33.2 216,111 30.7 59,634 27.6 % Operating expenses (223,426) (26.9) (200,814) (28.5) (22,612) 11.3 % Income from equity investment 1,945 0.2 1,708 0.2 237 13.9 % Impairment charges (1,072) (0.1) - - (1,072) NM Operating profit 53,192 6.4 17,005 2.4 36,187 212.8% Interest expense, net (2,952) (0.4) (8,814) (1.2) 5,862 (66.5) % Loss on extinguishment of debt and write-off of debt issuance costs (12,862) (1.5) - - (12,862) NM Non-operating income, net 6 0.0 806 0.1 (800) (99.3) % Income before income taxes 37,384 4.5 8,997 1.3 28,387 315.5% Income tax benefit (provision) (11,202) (1.3) 8,029 1.1 (19,231) NM Net income $ 26,1823.2 % $ 17,0262.4 % $ 9,15653.8% Basic and diluted earnings per share: Basic earnings per share $ 0.36 $ 0.23 $ 0.1356.5% Diluted earnings per share $ 0.34 $ 0.22 $ 0.1254.5% Weighted average shares used in per share calculations: Basic shares 72,923 72,613 310 0.4 % Diluted shares 76,924 76,976 (52) (0.1) % NM - Not meaningful 17
Three months ended (dollars in thousands) April 30, 2022 May 1, 2021 Change % of Segment % of Segment Amount Net Sale Amount Net Sale Amount % Segment net sales: U.S. Retail
$ 702,74582.0 % $ 620,65886.4 % $ 82,08713.2 % Canada Retail 56,315 6.6 % 40,604 5.6 % 15,711 38.7 % Brand Portfolio 97,456 11.4 % 57,427 8.0 % 40,029 69.7 % Total segment net sales 856,516 100.0 % 718,689 100.0 % 137,827 19.2 % Elimination of intersegment net sales (25,973) (15,534) (10,439) 67.2 % Consolidated net sales $ 830,543 $ 703,155 $ 127,38818.1 % The improvement in sales during the three months ended April 30, 2022over the same period last year was primarily due to the increase in comparable sales across all segments, primarily driven by the fact that during the three months ended May 1, 2021, the prolonged COVID-19 pandemic resulted in significantly reduced customer traffic in the U.S.Retail and Canada Retail segments, with the Canada Retail segment also impacted by continued mandated closures and restrictions in certain key markets. In addition, wholesale sales in the Brand Portfolio segment were higher in the first quarter of 2022 as compared to the same period last year due to increased orders as our retailer customers continue to recover.
Gross profit – The following summarizes gross profit by segment:
Three months ended (dollars in thousands) April 30, 2022 May 1, 2021 Change % of Segment % of Segment Amount Net Sales Amount Net Sales Amount % Basis Points Segment gross profit: U.S. Retail
$ 233,06733.2 % $ 193,11331.1 % $ 39,95420.7 % 210 Canada Retail 18,873 33.5 % 10,835 26.7 % 8,038 74.2 % 680 Brand Portfolio 23,842 24.5 % 11,926 20.8 % 11,916 99.9 % 370 Total segment gross profit 275,782 32.2 % 215,874 30.0 % 59,908 27.8 % 220 Net recognition (elimination) of intersegment gross profit (37) 237 (274) Gross profit $ 275,74533.2 % $ 216,11130.7 % $ 59,63427.6 % 250 The improvement in gross profit was primarily driven by increased sales during the first quarter of 2022 over the same period last year and being less promotional, partially offset by higher freight costs. Gross profit as a percentage of net sales for the U.S.Retail and Canada Retail segments increased due to being less promotional and improved leverage on occupancy costs, partially offset by higher freight costs. The improvement in gross profit as a percentage of net sales for the Brand Portfolio segment was primarily driven by the leverage of royalty expenses on higher sales volume. The net recognition (elimination) of intersegment gross profit consisted of the following: Three months ended (in thousands) April 30, 2022 May 1, 2021
Recognition (elimination) of inter-segment activity: net sales recognized by segment of the brand portfolio
$ (25,973) $ (15,534)Cost of sales: Cost of sales recognized by Brand Portfolio segment 18,169 10,935
Recognition of intersegment gross margin for previously purchased inventory that was subsequently sold to external customers in the current period
7,767 4,836 $ (37) $ 237 18
-------------------------------------------------------------------------------- Operating Expenses- For the three months ended
April 30, 2022, operating expenses increased by $22.6 millionover the same period last year, primarily driven by an increase in store payroll and marketing expenses in line with the increase in net sales. Operating expenses as a percentage of sales improved to 26.9% compared to 28.5% in the same period last year due to the improvement in net sales year over year as we leveraged our fixed costs. Loss on extinguishment of debt and write-off of deferred debt issuance costs- In connection with the settlement of our Term Loan on February 8, 2022, during the three months ended April 30, 2022we incurred a $12.7 millionloss on extinguishment of debt, composed of a $6.9 millionprepayment premium and a $5.7 millionwrite-off of unamortized debt issuance costs. As a result of the replacement of the 2020 ABL Revolver during the three months ended April 30, 2022, we also wrote-off $0.2 millionof debt issuance costs. Income Taxes- For the three months ended April 30, 2022and May 1, 2021, our effective tax rate was 30.0% and negative 89.2%, respectively. The rate for three months ended April 30, 2022was impacted by permanent tax adjustments, primarily non-deductible compensation. The negative rate for the three months ended May 1, 2021was the result of maintaining a full valuation allowance on deferred tax assets along with net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies.
Our business consists of two principal selling seasons; the spring season, which includes the first and second fiscal quarters, and the fall season, which includes the third and fourth fiscal quarters. Generally, net sales in the fall season have been slightly higher than the spring season. Our seasonal results of operations may fluctuate based on the change in weather conditions and our customers' interest in new seasonal styles. Due to the COVID-19 pandemic, we did not experience the typical seasonal trends during 2021 given the changes in customer behavior.
CASH AND CAPITAL RESOURCES
Our main current operating cash needs relate to inventory purchases, payments on lease obligations and license royalty commitments, other working capital requirements and capital expenditures. Our working capital and inventory levels fluctuate seasonally.
During the three months ended
April 30, 2022, we repurchased 1.7 million Class A common shares at an aggregate cost of $22.7 million, with $312.2 millionof Class A common shares that remain authorized under the program as of April 30, 2022. During the three months ended May 1, 2021, we did not repurchase any Class A common shares. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including any ongoing impacts of the COVID-19 pandemic. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our 2022 ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and repurchase common shares under our share repurchase program over the next 12 months and beyond. The following table presents the key categories of our condensed consolidated statements of cash flows: Three months ended (in thousands) April 30, 2022 May 1, 2021 Change Net cash used in operating activities $ (40,672) $ (1,356) $ (39,316)Net cash used in investing activities (17,101) (5,641) (11,460) Net cash provided by (used in) financing activities 39,768 (3,589) 43,357 Effect of exchange rate changes on cash balances 115 306 (191) Net decrease in cash, cash equivalents, and restricted cash $ (17,890) $ (10,280) $ (7,610)19
CASH FLOW FROM OPERATIONS
The increase in net cash used in operations was driven by higher spend on working capital as our business continues to recover from the impacts of the COVID-19 pandemic with increases in consolidated inventories, increases in receivables on wholesale sales, and timing of payments to vendors. This was partially offset by the increase in net income recognized in the three months ended
April 30, 2022over the same period last year, after adjusting for non-cash activity including the loss from extinguishment of debt and write-off of debt issuance costs and the changes in deferred income taxes.
INVESTING CASH FLOW
For the three months ended
April 30, 2022, net cash used in investing activities was primarily due to capital expenditures relating to infrastructure and information technology ("IT") projects and store improvements. During the three months ended May 1, 2021, the net cash used in investing activities was due to capital expenditures relating to IT projects and store improvements.
CASH FLOW FINANCING
For the three months ended
April 30, 2022, net cash provided by financing activities was due to net receipts of $306.9 millionfrom our revolving lines of credit offset by the payments of $238.2 milliondue to the settlement of the Term Loan and the repurchase of 1.7 million Class A common shares at an aggregate cost of $22.7 million. During the three months ended May 1, 2021, we had net borrowings of $4.8 millionfrom our revolving lines of credit with payments on the Term Loan of $3.1 million.
2022 ABL Revolver- On
March 30, 2022, we replaced our 2020 ABL Revolver with our current 2022 ABL Revolver, which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 millionsub-limit for the issuance of letters of credit, a $55.0 millionsub-limit for swing loan advances for U.S.borrowings, and a $5.5 millionsub-limit for swing loan advances for Canadian borrowings. Our 2022 ABL Revolver matures in March 2027and is secured by a first priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The 2022 ABL Revolver 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 April 30, 2022, the 2022 ABL Revolver had a borrowing base of $550.0 million, with $306.9 millionoutstanding borrowings and $4.9 millionin letters of credit issued, resulting in $238.2 millionavailable for borrowings. Debt Covenants- The 2022 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 $41.3 millionand 10.0% of the maximum borrowing amount. The 2022 ABL Revolver also contains customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. As of April 30, 2022, we were in compliance with all financial covenants. Termination of Term Loan - On February 8, 2022, we settled in full the $231.3 millionprincipal amount outstanding on that date under our Term Loan. In connection with this settlement, we incurred a $12.7 millionloss on extinguishment of debt, composed of a $6.9 millionprepayment premium and a $5.7 millionwrite-off of unamortized debt issuance costs.
Refer to Note 9, Debt, to the condensed consolidated financial statements of this Form 10-Q for more information on our debt arrangements.
CAPITAL EXPENDITURE PLANS
We expect to spend approximately
$70.0 millionto $80.0 millionfor capital expenditures in 2022, of which we invested $12.2 millionduring the three months ended April 30, 2022. 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. 20 --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
No recent accounting pronouncement is expected to have a material impact on our consolidated financial statements when adopted.
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. There have been no material changes to the application of critical accounting policies and estimates disclosed in our 2021 Form 10-K.
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