DESIGNER BRANDS INC. This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve various risks and uncertainties. See Cautionary Statement on page iii for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion is best read in conjunction with our Consolidated Financial Statements, including the notes thereto, set forth in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under Item 1A. Risk Factors of this Annual Report on Form 10-K and included elsewhere in this Annual Report on Form 10-K. The following discussion includes a comparison of our results of operations and liquidity and capital resources for fiscal 2019 and 2018. A discussion of a comparison of our results of operations and liquidity and capital resources for fiscal 2018 and 2017 has been omitted from this Form 10-K but may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 , filed with theSEC onMarch 26, 2019 . 20
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Executive Overview
InMarch 2020 , theWorld Health Organization declared the coronavirus ("COVID-19") outbreak a pandemic, which continues to spread throughoutNorth America and worldwide. The health and safety of our customers and employees remain our top priority as we continue to make decisions during this rapidly evolving situation. We have taken decisive actions across our businesses to help protect employees, customers and others in the communities we serve. As a measure to limit the spread of the virus, effectiveMarch 18, 2020 , we temporarily closed all of our stores in theU.S. andCanada . Our e-commerce business will continue to be available to customers and our stores will be used in the fulfillment of online orders to be shipped to customers or available for curbside pickup. During this unprecedented period of uncertainty, we have in place business continuity plans involving adjustments to operational plans, inventory disciplines, liquidity management, and reductions to our expense and capital expenditure plans. Such measures include implementing temporary leaves of absence for over 80% of our workforce without direct pay and pay reductions for nearly all employees not placed on temporary leave. The COVID-19 outbreak and the temporary closure of all of our stores has had a material adverse impact on our business, liquidity, financial condition, and results of operations. While we cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact, based on our current understanding of governmental mandates and maintaining the health and safety of our customers and employees, we believe our stores will primarily begin re-opening in the second quarter of fiscal 2020 with a gradual return of store traffic through the remainder of fiscal 2020. As such, the impacts of COVID-19 to our businesses are highly uncertain and we will continue to assess the financial impacts. The disruption to the global economy and to our business, along with a sustained decline in our stock price, may lead to triggering events that may indicate that the carrying value of certain assets, including inventories, accounts receivables, long-lived assets, intangibles, and goodwill, may not be recoverable. In support of our long-term vision to become the leading footwear retailer in theU.S. , we continue to invest in our differentiators. These include private labels, exclusive partnerships, our best in class loyalty programs, and customer experiences. We continually explore new ways to expand our audience and gain market share. We were pleased with the performance of our Canada Retail segment during fiscal 2019 with continued positive comparable sales and further margin growth, benefiting from moving their digital offering to the platform we use in theU.S. Following the first full year of operating theCamuto Group business, we remain on track to convert the production of the majority of our DSW private label to the Brand Portfolio segment in fiscal 2020. At that time, we expect to realize the benefits of having greater exclusivity in product offerings at higher margins. We were faced with challenges both internally and externally in fiscal 2019, primarily during the second half of the year. During our fourth quarter, we were focused on stabilizing the business through remedying several issues within our control. Following the holidays, we instituted a patch for our new POS system that, combined with the discontinued practice of allowing multiple promotions for a single transaction, has positively impacted both net sales and gross profits. In addition, we adjusted our inventory positions and investments in marketing.
Comparable Sales Performance Metric
We consider comparable sales to be an important indicator of the performance of our retail and direct-to-consumer businesses, and investors may find it useful as such. Comparable sales is a primary metric commonly used throughout the retail industry. A store is considered comparable when 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 they are closed. Comparable sales include e-commerce sales. Stores inCanada from the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, were added to the comparable base beginning with the second quarter of fiscal 2019. 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 in the prior year. For the Brand Portfolio segment, sales from the direct-to-consumer www.vincecamuto.com e-commerce site were added to the comparable base beginning with the fourth quarter of fiscal 2019. 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. 21
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Comparability
There are a number of items that affect comparability when reviewing our results
of operations for fiscal 2019 and 2018. Significant items to consider include:
• During fiscal 2019, we incurred integration and restructuring costs
related to our prior year acquisition activity of $17.7 million , whichconsisted primarily of severance, fees for terminating joint ventures, and
professional fees and other integration costs. Also during fiscal 2019, we
recorded impairment charges of $7.8 million , including $4.8 million for
operating lease assets and other property and equipment in the Brand
Portfolio segment related to the planned consolidation of certain
locations as part of our integration efforts and
for operating lease assets related to under-performing stores.
• During fiscal 2018, we recorded impairment charges of long-lived assets of
that was under development and leasehold improvements related to
under-performing stores, and as a result of our decision to exit the Town
Shoes banner, we closed or re-branded all Town Shoes banner stores and
recorded lease exit and other termination costs of $16.4 million . Also
during fiscal 2018, we incurred restructuring costs of $5.6 million in
severance, primarily related to changes in our store labor model and the
exit of the Town Shoes banner, and we incurred acquisition-related costs
and target acquisition costs of $27.9 million . In addition, fiscal 2018
included the wind-down operations of
other termination costs of
of
• On
previously own. TSL results were included in the consolidated results of
operations as a wholly owned subsidiary beginning with the second quarter
of fiscal 2018. For the first quarter of fiscal 2018, the loss from our
equity investment interest in TSL was included in our consolidated results
of operations. Due to the acquisition of the remaining interest in TSL, we
remeasured to fair value our previously held assets, which included our
equity investment in TSL and notes and accounts receivable from TSL.
During fiscal 2018, as a result of the remeasurement, we recorded a loss
of $34.0 million to non-operating expenses, net. Also during fiscal 2018,
we reclassified a net loss of $12.2 million of foreign currency
translation related to the previously held balances from accumulated other
comprehensive loss to non-operating expenses, net. In addition, with theTSL acquisition being accounted for as a step acquisition, the purchase
price included the fair value of our previously held assets, which
considered the valuation of the TSL enterprise. This valuation identified
that the resulting goodwill was not supportable as the value of the
acquired net assets exceeded the enterprise fair value. As a result,
during fiscal 2018, we recorded a goodwill impairment charge of
million, which resulted in impairing all of TSL's goodwill.
• On
Group's results were included in the consolidated results of operations as
a wholly owned subsidiary beginning with the fourth quarter of fiscal
2018. During fiscal 2018, we recognized
sales related to an inventory valuation step-up recorded as part of the
acquisition.
Financial Summary
Net sales increased to $3.5 billion for fiscal 2019 from $3.2 billion for fiscal
2018. The 9.9% increase in net sales was driven by incremental net sales from
acquired businesses prior to the anniversary of their acquisitions, a 0.8%
increase in comparable sales, and an increase for non-comparable store sales,
partially offset by the impact of stores closed, primarily the Town Shoes banner
stores, the decrease in Brand Portfolio sales after the anniversary of the
acquisition, and the loss of sales from the exit of Ebuys .
In fiscal 2019, gross profit as a percentage of net sales was 28.6%, a decrease
of 90 basis points from 29.5% in the previous year. The decrease in the gross
profit rate was primarily due to the decline in the U.S. Retail segment
primarily driven by higher shipping costs in the current year associated with
higher digital penetration and a benefit recognized in fiscal 2018 as a result
of adjusting our loyalty programs deferred revenue due to the relaunch of the
DSW VIP rewards program. The Canada Retail segment gross profit margin improved
primarily due to lower clearance activity with improvements in the inventory
position and improved leverage in occupancy costs with the exit of the Town
Shoes banner last year.
Net income for fiscal 2019 was $94.5 million , or $1.27 per diluted share, which
included net after-tax charges of $19.8 million , or $0.26 per diluted share,
primarily related to integration and restructuring expenses associated with the
businesses acquired in fiscal 2018 and impairment charges. Net loss for fiscal
2018 was $20.5 million , or $0.26 loss per diluted share, which included net
after-tax charges of $155.3 million , or $1.92 per diluted share, primarily
related to impairment charges, acquisition-related activities, the exit of the
Town Shoes banner, other restructuring costs, and the net tax expense impact of
finalizing the U.S. Tax Reform implementation assessment.
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We continue making investments in our business that support our long-term growth objectives. During fiscal 2019, we invested$77.8 million in capital expenditures compared to$65.4 million during fiscal 2018. Our capital expenditures during fiscal 2019 were primarily related to 16 new store openings, store remodels and business infrastructure.
Results of Operations
The following represents selected components of our consolidated results of operations, with associated percentages of net sales:
Fiscal
2019 2018 Change
(dollars in thousands,
except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount % Net sales(1)$ 3,492,687 100.0 %$ 3,177,918 100.0 %$ 314,769 9.9 % Cost of sales (2,493,017 ) (71.4 ) (2,239,229 ) (70.5 ) (253,788 ) 11.3 % Gross profit(1) 999,670 28.6 938,689 29.5 60,981 6.5 %
Operating expenses(1) (874,749 ) (25.1 ) (820,222 )
(25.7 ) (54,527 ) 6.6 %
Income from equity
investment in ABG-Camuto 10,149 0.3 1,298 0.0 8,851 681.9 %
Impairment charges (7,771 ) (0.2 ) (60,760 ) (1.9 ) 52,989 (87.2 )%
Operating profit 127,299 3.6 59,005 1.9 68,294 115.7 %
Interest income (expense),
net (7,355 ) (0.2 ) 1,288 0.0 (8,643 ) NM
Non-operating expenses,
net (170 ) (0.0 ) (49,616 ) (1.6 ) 49,446 (99.7 )%
Income before income taxes
and loss from equity
investment in TSL 119,774 3.4 10,677 0.3 109,097 1,021.8 %
Income tax provision (25,277 ) (0.7 ) (29,833 ) (0.9 ) 4,556 (15.3 )%
Loss from equity
investment in TSL - - (1,310 ) 0.0 1,310 NM
Net income (loss) $ 94,497 2.7 % $ (20,466 ) (0.6 )% $ 114,963 NM
Basic and diluted earnings
(loss) per share:
Basic earnings (loss) per
share $ 1.28 $ (0.26 ) $ 1.54 NM
Diluted earnings (loss)
per share $ 1.27 $ (0.26 ) $ 1.53 NM
Weighted average shares
used in per share
calculations:
Basic shares 73,602 80,026 (6,424 ) (8.0 )%
Diluted shares 74,605 80,026 (5,421 ) (6.8 )%
NM - Not meaningful (1) We changed our presentation of net sales and gross profit for all periods
presented to include commission income. Previously reported other revenue,
which primarily included operating sublease income, was reclassified to
operating expenses.
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The following summarizes the change in consolidated net sales from the previous
fiscal year:
Fiscal
(in thousands) 2019 2018
Consolidated net sales for the previous fiscal year
23,518 158,225
Net increase from non-comparable store sales and other changes
11,920 55,474
Loss of net sales from closed stores (50,342 )
(11,707 ) Decrease in Brand Portfolio segment net sales after anniversary of acquisition
(7,687 ) -
Incremental external net sales from 2018 acquired businesses prior to the anniversary of their acquisitions 342,992
309,961
Loss of net sales from the exit of
(103,964 ) Net sales during the 53rd week in fiscal 2017 - (35,626 ) Consolidated net sales$ 3,492,687 $ 3,177,918
The following summarizes net sales by segment:
Fiscal Change
(dollars in thousands) 2019 2018 Amount % Comparable Sales %(1) Segment net sales: U.S. Retail$ 2,745,395 $ 2,738,989 $ 6,406 0.2 % 0.3% Canada Retail 249,017 220,325 28,692 13.0 % 7.2% Brand Portfolio 448,285 99,812 348,473 349.1 % 98.8% Other 122,090 128,968 (6,878 ) (5.3 )% 0.3%
Total segment net sales 3,564,787 3,188,094 376,693 11.8 %
0.8%
Elimination of
intersegment net sales (72,100 ) (10,176 ) (61,924 ) 608.5 %
Consolidated net sales $ 3,492,687 $ 3,177,918 $ 314,769 9.9 %
(1) For the Canada Retail segment, stores from the TSL acquisition that were in
operation for at least 14 months at the beginning of fiscal 2019, along with
its e-commerce sales, were added to the comparable base beginning with the
second quarter of fiscal 2019. For the Brand Portfolio segment, sales from
the direct-to-consumer www.vincecamuto.com e-commerce site were added to the
comparable base beginning with the fourth quarter of fiscal 2019.
The increase in net sales was driven by incremental net sales from acquired businesses prior to the anniversary of their acquisitions, a 0.8% increase in comparable sales, and an increase for non-comparable store sales, partially offset by the impact of stores closed, primarily theTown Shoes banner stores, the decrease in Brand Portfolio sales after the anniversary of the acquisition, and the loss of sales from the exit ofEbuys . Within theU.S. Retail segment, comparable sales increased primarily due to higher comparable transactions driven by an increase in traffic, partially offset by a decline in comparable average dollar sales per transaction. Within the Canada Retail segment, comparable sales increased due to higher comparable average dollar sales per transaction, primarily as a result of the significant improvements to its digital platform and lower clearance inventory. 24
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The following summarizes gross profit by segment:
Fiscal
2019 2018 Change
(dollars in % of Segment % of Segment
thousands) Amount
Amount % Basis Points Segment gross profit: U.S. Retail$ 786,976 28.7 %$ 840,174 30.7 %$ (53,198 ) (6.3 )% (200 ) Canada Retail 79,850 32.1 % 55,937 25.4 % 23,913 42.7 % 670 Brand Portfolio 114,170 25.5 % 18,920 19.0 % 95,250 503.4 % 650 Other 26,065 21.3 % 25,252 19.6 %
813 3.2 % 170
1,007,061 940,283
Elimination of
intersegment
gross profit (7,391 ) (1,594 )
Consolidated
gross profit $ 999,670 28.6 % $ 938,689 29.5 % $ 60,981 6.5 % (90 )
The U.S. Retail segment gross profit margin declined primarily driven by higher
shipping costs in the current year associated with higher digital penetration
and a benefit recognized in fiscal 2018 as a result of adjusting our loyalty
programs deferred revenue due to the relaunch of the DSW VIP rewards program.
The Canada Retail segment gross profit margin improved primarily due to lower
clearance activity with improvements in the inventory position and improved
leverage in occupancy costs with the exit of the Town Shoes banner last year.
The Brand Portfolio segment gross profit for fiscal 2018 includes only the
fourth quarter of activity following the acquisition whereas fiscal 2019
includes a full year of activity. The gross profit margin of the Brand Portfolio
segment in fiscal 2018 was negatively impacted by the recognition to cost of
sales of $5.3 million of inventory step-up value related to the valuation of
inventory at acquisition.
Elimination of intersegment gross profit consisted of the following:
Fiscal Change
(dollars in thousands) 2019 2018 Amount % Elimination of intersegment activity - Net sales recognized by Brand Portfolio segment$ (72,100 ) $ (10,176 ) $ (61,924 ) 608.5 % Cost of sales: Cost of sales recognized by Brand Portfolio segment 51,068 8,098 42,970 530.6 % Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 13,641 484 13,157 2,718.4 % Gross profit$ (7,391 ) $ (1,594 ) $ (5,797 ) 363.7 % Operating Expenses Operating expenses as a percentage of net sales were 25.1% and 25.7% for fiscal 2019 and fiscal 2018, respectively. The decrease as a percentage of net sales over the prior year was primarily driven by lower incentive compensation and marketing investments in fiscal 2019, and the impact of lease exit charges and acquisition-related costs in fiscal 2018, partially offset by the impact of includingCamuto Group in the consolidated results and higher integration and restructuring charges in fiscal 2019.
Income from equity investment in ABG-Camuto
We account for our equity investment in ABG-Camuto using the equity method of
accounting, with the net earnings attributable to our 40% investment being
classified within operating profit. ABG-Camuto is an integral part of the Brand
Portfolio segment given the licensing agreement between us and ABG-Camuto, which
allows us to sell licensed branded products to wholesale customers. Income from
equity investment in ABG-Camuto for fiscal 2018 includes only the fourth quarter
of activity whereas fiscal 2019 includes a full year of activity.
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Impairment charges
During fiscal 2019, we recorded impairment charges of$7.8 million , including$4.8 million for operating lease assets and other property and equipment in the Brand Portfolio segment related to the planned consolidation of certain locations as part of our integration efforts and$3.0 million primarily for operating lease assets related to under-performing stores ($2.3 million and$0.7 million for theU.S. Retail and Canada Retail segments, respectively). During fiscal 2018, we recorded impairment charges of$60.8 million , including$41.8 million for Canada Retail segment goodwill,$13.9 million for an abandoned corporate internal-use software that was under development and$5.1 million primarily for leasehold improvements related to under-performing stores. With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during fiscal 2018, we recorded a goodwill impairment charge that resulted in impairing all of the Canada Retail segment's goodwill.
Non-operating Expenses, net
Due to the acquisition of the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. As a result of the remeasurement, we recorded a loss of$34.0 million to non-operating expenses, net. Also during fiscal 2018, we reclassified a net loss of$12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.
Income Taxes
The effective tax rate for fiscal 2019 was 21.1% compared to 318.5% for fiscal 2018. The effective tax rates reflect the impact of federal, state and local, and foreign taxes. During fiscal 2019, we had$3.9 million valuation allowance release primarily related to the net operating loss utilization for our legal entity inCanada . During fiscal 2018, we had$2.1 million of tax expense due to finalizing theU.S. Tax Reform implementation and we had additional tax provision expense of approximately$20.0 million due to recording an additional valuation allowance and nondeductible discrete items, primarily related to the charges recorded as a result of the acquisition of TSL.
Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. 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 impact of the outbreak of COVID-19. We believe that cash generated from our operations and the business continuity plans put in place, together with our current levels of cash and investments, as well as the use of our Credit Facility, as subsequently amended, are sufficient over the next 12 months to maintain our ongoing operations, support working capital requirements, and fund capital expenditures. The cash generated from operations is based on our expectation of re-opening our stores beginning primarily in the second quarter of fiscal 2020 with a gradual return of store traffic throughout the remainder of fiscal 2020. If additional liquidity is needed, we may take additional actions including adjusting our marketing spend, implement further employee furloughs, reducing the store labor requirements when stores open, and forego additional capital expenditures and other discretionary expenses.
Operating Cash Flows
For fiscal 2019, our net cash provided by operations was$196.7 million compared to$175.3 million for fiscal 2018. The increase in net cash provided by operating activities was driven by distributions received from our equity investment in ABG-Camuto and improved use of working capital over fiscal 2018, as fiscal 2018 had an increased use of cash to fund working capital requirements due to the addition of the acquired businesses. 26
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Investing Cash Flows
For fiscal 2019, net cash used in investing activities was$27.4 million , which was due to capital expenditures of$77.8 million , partially offset by the net liquidation of our available-for-sale securities. For fiscal 2018, net cash used in investing activities was$282.0 million , which was due to the acquisitions ofTSL andCamuto Group , capital expenditures of$65.4 million and$16.0 million of additional borrowings by TSL prior to the acquisition, partially offset by the net liquidation of our available-for-sale securities.
Financing Cash Flows
For fiscal 2019, net cash used in financing activities was$183.4 million , which was due to the payment of dividends and the repurchase of Class A common shares under the share repurchase program, offset by the additional borrowings on our revolving line of credit, net of payments made, of$30.0 million . During fiscal 2019, we repurchased 7.1 million Class A common shares at a cost of$141.6 million . For fiscal 2018, net cash provided by financing activities was$30.0 million , which was due to borrowings on our revolving line of credit of$160.0 million , offset primarily by the payment of dividends and the repurchase of Class A common shares under the share repurchase program. During fiscal 2018, we repurchased 2.0 million Class A common shares at a cost of$47.5 million .
Debt
Credit Facility- Our Credit Facility, with a maturity date ofAugust 25, 2022 , provides a revolving line of credit up to$400 million , with sub-limits for the issuance of up to$50 million in letters of credit, swing loan advances of up to$15 million , and the issuance of up to$75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility. Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.4% as ofFebruary 1, 2020 . Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.8% as ofFebruary 1, 2020 . Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As ofFebruary 1, 2020 andFebruary 2, 2019 , we had$190.0 million and$160.0 million , respectively, outstanding under the Credit Facility. As ofFebruary 1, 2020 , with the amount outstanding under the Credit Facility and$3.0 million in letters of credit issued, we had$207.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs. Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As ofFebruary 1, 2020 , we were in compliance with all financial covenants. Subsequent Events- Subsequent toFebruary 1, 2020 , we borrowed$205.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in theU.S. and global markets resulting from COVID-19, resulting in$2.0 million of available for borrowing. OnApril 30, 2020 , the Credit Facility was amended, which resulted in various changes including: • Provides for a lien on all of the Company's assets;
• Reduces the borrowing availability to
• Redefines the components for calculating the leverage ratio and fixed
charge coverage ratio to adjust for certain temporary impacts due to
COVID-19;
• Changes the maximum leverage ratio covenant to 3.50:1 as of
4.00:1 as of
of
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• Changes the minimum fixed charge coverage ratio to 1.25:1 as of
2020 and 1.05:1 as of
quarter thereafter; and
• Restricts the Company from paying dividends, making share repurchases, and
making certain acquisitions.
Capital Expenditure Plans
We expect to significantly reduce capital expenditures in fiscal 2020 in response to the COVID-19 outbreak. For fiscal 2020, we had started working on new stores and we are reevaluating those plans. Our future investments will depend primarily on the number of stores we will be required to open based on commitments previously made.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any material off-balance sheet arrangements as defined by Item
303(a)(4) of Regulation S-K. The following table presents a summary of our
minimum contractual commitments and obligations as of
Payments due by Period
Less Than 1 - 3 3 -5 More Than
(in thousands) Total 1 Year Years Years 5 Years
Operating lease liabilities $ 1,165,894 $ 223,107 $ 428,585 $ 270,205 $ 243,997
Debt, including estimated
interest payments(1) 206,881 6,565 200,316 - -
Minimum license
commitments(2) 276,131 33,659 67,318 68,618 106,536
Purchase obligations(3) 11,709 9,838 1,871 - -
Total $ 1,660,615 $ 273,169 $ 698,090 $ 338,823 $ 350,533 (1) Interest payments on our revolving line of credit were estimated using the
effective interest rate as of
on
(2) Minimum license commitments include guaranteed minimum royalties, including
amounts due to the ABG-Camuto joint venture, and fixed licensing and other
fees due to other parties.
(3) Purchase obligations include commitments where we would not be able to cancel
such obligations without payment or penalty, including items to be purchased
for projects that were under construction or for which a lease has been
signed.
Recent Accounting Pronouncements
The information related to recent accounting pronouncements as set forth in Note 1, Significant Accounting Policies, of the Consolidated Financial Statements included in this Annual Report on Form 10-K is incorporated herein by reference.
Critical Accounting Policies and Estimates
As discussed in Note 1, Significant Accounting Policies, of the Consolidated Financial Statements included in this Annual Report on Form 10-K, the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in theU.S. ("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 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 appraisal 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 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 consolidated financial statements. 28
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We believe the following represent the most significant accounting policies,
critical estimates and assumptions, among others, used in the preparation of our
consolidated financial statements:
Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Business Combinations. We The fair values for We allocated$67.8 account for business property and equipment were million of the goodwill combinations using the determined using the cost to the U.S. Retail acquisition method of and market approaches. The segment based primarily accounting, which requires fair value of inventories, on a discounted cash flow that once control is which is made up of of the sourcing benefit. obtained, all the assets finished goods, was The remaining$20.0 acquired and liabilities determined based on market million of goodwill was assumed be recorded at assumptions for realizing a allocated to the First their respective fair reasonable profit after Cost reporting unit values at the date of selling costs. For within the Brand acquisition. The intangible assets, we Portfolio segment based determination of fair generally use an income on the fair value of the values of assets and approach to determine fair reporting unit over the liabilities acquired value. The income approach fair value of the net requires estimates and the requires management to make assets allocated to the use of valuation techniques significant estimates and reporting unit. Although when market value is not assumptions. These we believe our estimates readily available. Any estimates and assumptions of fair value are excess of purchase price may include the use of reasonable, actual over the fair value of net discount rates, growth financial results could tangible and intangible rates, customer attrition differ from those assets acquired is rates, royalty rates, and estimates due to the allocated to goodwill. forecasts of net sales and inherent uncertainty operating income. The involved in making such discount rates applied to estimates. Changes in the projections reflect the assumptions concerning risk factors associated future financial results with those projections. We or other underlying determined that goodwill assumptions could result should be allocated to in future impairment reporting units within the charges of long-lived U.S. Retail and Brand assets and goodwill and Portfolio segments based on other indefinite lived each reporting unit's intangible assets, estimated benefit from the discussed in more detail expected synergies from the below. Camuto Group acquisition. Impairment ofGoodwill and When assessing goodwill and As ofFebruary 1, 2020 , Other Indefinite Lived other indefinite lived we had$93.7 million in Intangible Assets. We intangible assets for goodwill within the U.S. evaluate goodwill and other impairment, our decision to Retail segment, which is indefinite lived intangible perform a qualitative also the reporting unit, assets for impairment impairment assessment is and$20.0 million within annually during our fourth influenced by a number of the Brand Portfolio quarter, or more frequently factors, including the segment for the First if an event occurs or significance of the excess Cost reporting unit, and circumstances change, such of the estimated fair value$15.5 million in as material deterioration over carrying value at the indefinite-lived in performance or a last assessment date and trademarks and significant and sustained the amount of time since tradenames. We determined decline in our stock price, the last quantitative fair the fair value of the that would indicate that value assessments. Our reporting units and of impairment may exist. When impairment calculations the indefinite-lived evaluating for impairment, contain uncertainties as we intangibles was we may first perform a are required to make significantly in excess qualitative assessment to assumptions and to apply of their carrying value determine whether it is judgment when estimating and a 10% decrease in more likely than not that future cash flows, fair value would not there is an impairment. If including projected revenue result in an impairment we do not perform a growth and operating charge. Accordingly, we qualitative assessment, or income, as well as did not recognize an if we determine that it is selecting an appropriate impairment charge during more likely than not that discount rate and assumed fiscal 2019. However, as the carrying value exceeds royalty rate. Estimates of we periodically reassess its fair value, we will revenue growth and estimated future cash calculate the estimated operating income are based flows and asset fair fair value. Fair value is on internal projections values, changes in our the price a willing buyer considering past estimates and
assumptions
would pay and is typically performance and forecasted may cause us to realize
calculated using a growth, strategic material impairment
discounted cash flow initiatives, and the charges in the future.
analysis. Where deemed business environment
appropriate, we may also impacting performance. The
utilize a market approach discount rate and royalty
for estimating fair value. rate are selected based on
Impairment charges are market participant
calculated as the amount by assumptions. These
which the carrying amount estimates are highly
exceeds its fair value, but subjective, and our ability
not to exceed the carrying to realize the future cash
value for goodwill. flows used in our fair
value calculations is
affected by factors such as
the success of strategic
initiatives, changes in
economic conditions,
changes in our operating
performance and changes in
our business strategies.
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Table of Contents
Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Asset Impairment of Our reviews are conducted A 10% change in our
Long-lived Assets. We at the lowest identifiable projected cash flows for
periodically evaluate the level, which typically is our store fleet would not
carrying amount of our at the store level for the result in a material
long-lived assets, majority of our long-lived amount of additional
primarily property and assets. Fair value at the impairment charges. To
equipment and operating store level is typically the extent these future
lease assets, when events based on projected projections or our
and circumstances warrant discounted cash flows using strategies change, the
such a review to ascertain a discount rate determined conclusion regarding
if any assets have been by management. We also impairment may differ
impaired. The carrying review construction in from our current
amount of a long-lived progress projects, estimates.
asset or asset group is including internal-use
considered impaired when software under development,
the carrying value of the for recoverability when we
asset or asset group have a strategic shift in
exceeds the expected future our plans.
cash flows from the asset
or asset group. The
impairment loss recognized
is the excess of the
carrying value of the asset
or asset group over its
fair value.
Inventories. The U.S. Inherent in the calculation If the reduction to
Retail segment accounts for of inventories are certain inventories for
inventory using the retail significant judgments and markdowns, shrinkage, and
inventory method and is estimates, including aged inventories were to
stated at the lower of cost setting the original change by 10%, cost of
or market. Under the retail merchandise retail value, sales would increase by
inventory method, the markdowns, shrinkage, and approximately $4.3
valuation of inventories at liquidation values. million.
cost and the resulting Shrinkage is calculated as
gross profits are a percentage of sales from
determined by applying a the last physical inventory
calculated cost-to-retail date based on both
ratio to the retail value historical experience as
of inventories. The cost well as recent physical
basis of inventories inventory results. Aged
reflected on the balance inventory may be written
sheet is decreased by down using estimated
charges to cost of sales at liquidation values and cost
the time the retail value of disposal based on
of the inventory is lowered historical experience.
by markdowns. The Canada
Retail and Brand Portfolio
segments account for
inventory using the
weighted average cost
method and is stated at the
lower of cost or net
realizable value. We
monitor aged inventory for
obsolete and slow-moving
inventory that may need to
be liquidated at amounts
below cost. Reductions to
inventory values establish
a new cost basis. Favorable
changes in facts or
circumstances do not result
in an increase in the newly
established cost basis.
We perform physical
inventory counts or cycle
counts on all inventory on
hand throughout the year
and adjust the recorded
balance to reflect the
results. We record
estimated shrinkage between
physical inventory counts
based on historical
experience and recent
results.
Customer Allowances and Customer allowances are As of February 1, 2020,
Discounts. We reduce net provided to our wholesale the reserve for customer
sales by the amount of customers for margin allowances and discounts
actual and remaining assistance, co-op was $11.5 million .
expected customer advertising support, and
allowances and discounts. various other deductions.
We estimate the reserves
needed for margin
assistance by reviewing
inventory levels held by
retailers, expected
markdowns, gross margins
realized, and other
performance indicators.
Other customer deductions
are estimated using
historical experience and
anticipated future trends.
Co-op advertising
allowances are estimated
based on arrangements with
customers. We continually
track the customer
allowances and discounts
provided to support our
estimated reserves and
adjust accordingly.
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Table of Contents
Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Leases. We recognize lease We determine the discount As of February 1, 2020, a
liabilities based on the rate for each lease by change in our discount
present value of the future estimating the rate that we rate of 100 basis points
fixed lease commitments would be required to pay on would have changed the
over the lease term with a secured borrowing for an recorded operating lease
corresponding lease assets. amount equal to the lease assets and liabilities by
The majority of our real payments over the lease $31.0 million .
estate leases provide for term.
renewal options, which are
typically not included in
the lease term used for
measuring the lease assets
and lease liabilities as it
is not reasonably certain
we will exercise options.
Foreign Tax We developed an initial As of February 1, 2020,
Contingencies. During the estimate of the range of our liability for foreign
due diligence procedures outcomes related to these tax contingencies was
performed related to the obligations and have since $28.1 million with an
acquisition of Camuto refined our estimates with estimated range of
Group, we identified additional analysis. Our outcomes of $28.1 million
probable contingent current estimate of the to $40.0 million for
liabilities associated with range of outcomes is now obligations we are aware
unpaid foreign payroll and $28.1 million to $40.0 of at this time.
other taxes that could also million for obligations we
result in assessed are aware of at this time.
penalties and interest. We recorded a contingent
liability for the low end
of the range and an
indemnification asset of
$24.5 million representing
the estimated amount we
expect to collect under the
terms of the securities
purchase agreement with the
Sellers. We are continuing
to assess the exposure,
which may result in
material changes to these
estimates, and we may
identify additional
contingent liabilities. We
believe that the Sellers
are obligated to indemnify
us for any payments to
foreign taxing authorities
for the periods up to the
acquisition date. Although
a portion of the purchase
price is held in escrow and
another portion is held in
a restricted bank account,
there can be no assurance
that we will successfully
collect all amounts that we
may be obligated to settle
with the foreign taxing
authorities.
Income Taxes. We determine Tax laws, regulations, and As of February 1, 2020 ,
the aggregate amount of policies in various we had a valuation
income tax expense to jurisdictions may be allowance of $9.5 million
accrue and the amount which subject to significant and gross unrecognized
will be currently payable change due to economic, tax benefits of $10.8
based upon tax statutes of political and other million. However, we may
each jurisdiction we do conditions, and significant be required to make
business in. Deferred tax judgment is required in adjustments that may
assets and liabilities, as estimating our provision materially impact our
a result of these timing and accruals for taxes. provision for income
differences, are reflected There may be transactions taxes in the period in
on our balance sheet for that occur during the which the adjustments are
temporary differences that ordinary course of business made based on additional
will reverse in subsequent for which the ultimate tax information, additional
years. A valuation determination is uncertain. guidance or revised
allowance is established The U.S. Treasury interpretations.
against deferred tax assets Department, the U.S.
when it is more likely than Internal Revenue Service,
not that some or all of the and other standard-setting
deferred tax assets will bodies could interpret or
not be realized. We review issue guidance on how
and update our tax provisions of tax laws,
positions as necessary to regulations, and policies
add any new uncertain tax will be applied or
positions taken, or to otherwise administered that
remove previously is different from our
identified uncertain interpretation. In positions that have been addition, state, local or adequately resolved. foreign jurisdictions may Additionally, uncertain enact tax laws that could positions may be remeasured result in further changes as warranted by changes in to taxation and materially facts or law.
affect our financial
position and results of
operations.
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