DESIGNER BRANDS INC. Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed onMarch 26, 2019 , and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, some important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements include, but are not limited to, the following: • our success in growing our store base and digital demand;
• our ability to successfully integrate recently acquired businesses or
realize the anticipated benefits of the acquisitions after we complete our
integration efforts;
• our ability to protect our reputation and to maintain the brands we license;
• maintaining strong relationships with our vendors, manufacturers and
wholesale customers;
• our ability to anticipate and respond to fashion trends, consumer
preferences and changing customer expectations;
• risks related to the loss or disruption of our distribution and/or
fulfillment operations;
• continuation of agreements with and our reliance on the financial
condition of Stein Mart;
• our ability to execute our strategies;
• fluctuation of our comparable sales and quarterly financial performance;
• risks related to the loss or disruption of our information systems and data;
• our ability to prevent or mitigate breaches of our information security
and the compromise of sensitive and confidential data;
• failure to retain our key executives or attract qualified new personnel;
• our reliance on our loyalty programs and marketing to drive traffic, sales
and customer loyalty;
• risks related to leases of our properties;
• our competitiveness with respect to style, price, brand availability and
customer service;
• our reliance on foreign sources for merchandise and risks inherent to
international trade;
• the imposition of new tariffs on our products;
• exposure to foreign tax contingencies;
• uncertainty related to future legislation, regulatory reform, policy
changes, or interpretive guidance on existing legislation;
• uncertain general economic conditions;
• risks related to holdings of cash and investments and access to liquidity; and
• fluctuations in foreign currency exchange rates.
If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results, performance or
achievements may vary materially from what we have projected. Furthermore, new
factors emerge from time to time and it is not possible for management to
predict all such factors, nor can management assess the impact of any such
factor on the business or the extent to which any factor, or combination of
factors, may cause results to differ materially from those contained in any
forward-looking statement. Any forward-looking statement speaks only as of the
date on which such statement is made, and, except as required by law, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
24
--------------------------------------------------------------------------------Executive Overview
Our long-term initiatives remain in place despite the recent headwinds. We continue to make meaningful progress against our strategic initiatives, and we are on our way to achieving our goals of growing market share, adding negotiating leverage through our scale and providing a unique offering of brands we produce. We are differentiated by our innovative services, our best-in-class loyalty programs, and our enhanced customer shopping experience, both in stores and online. During the third quarter, we faced several challenges that impacted our results, including weather, tariff impacts and system implementation issues. However, we continue to be pleased with the performance of our Canada Retail segment with continued positive comparable sales and further margin growth, benefiting from moving their digital offering to the platform we use in theU.S. and the launch of new loyalty programs for our Canadian customers. The Brand Portfolio segment gives us the capability to design, source and market differentiated product and better position us to grow private label brands at DSW in theU.S. 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.
Comparability
There are a number of items that affect comparability when reviewing our results of operations for the periods presented in this Quarterly Report on Form 10-Q. Significant items to consider include: • OnMay 10, 2018 , we acquired the remaining interest in TSL that we did not
previously own. TSL results were included in the condensed consolidated
results of operations as a wholly-owned subsidiary, beginning with the
second quarter of fiscal 2018. The loss from our equity investment
interest in TSL was included in our condensed consolidated results ofoperations for the first quarter of fiscal 2018. 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 the second quarter of fiscal 2018, as
a result of the remeasurement, we recorded a loss of $34.0 million to
non-operating income (expenses), net. Also during the second quarter of
fiscal 2018, we reclassified a net loss of $12.2 million of foreigncurrency translation adjustments related to the previously held balances
from accumulated other comprehensive loss to non-operating income
(expenses), net. In addition, 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, net of adjustments as a result of recording
adjustments to the preliminary purchase allocations, which resulted in
impairing all of TSL's goodwill.
• During the three and nine months ended
our decision to exit the
banner stores with remaining lease terms and recorded a lease exit charge
of
• On
Group's results were included in the condensed consolidated results of
operations as a wholly-owned subsidiary, beginning with the fourth quarter
of fiscal 2018.
• During the three and nine months ended
acquisition-related costs and target acquisition costs of
and
• During the three and nine months ended
integration and restructuring costs related to our prior year acquisition
activity of
primarily of severance, termination fees for terminating the JVs, and
professional fees and other integration costs. During the nine months
ended
severance, primarily related to changes in our store staffing model.
• During the three and nine months ended
impairment charges of
certain Brand Portfolio segment locations as part of our integration
efforts and under-performing stores in the Canada Retail segment.
• The first quarter of fiscal 2018 included the wind-down operations of
Ebuys , including incremental income tax expense of $2.3 million . In
addition, during the three and nine months ended November 3, 2018 , we
recorded lease exit and other termination costs of $2.7 million and $7.2
million , respectively.
25--------------------------------------------------------------------------------
Financial Summary
Total revenue increased to$936.3 million for the three months endedNovember 2, 2019 from$833.0 million for the three months endedNovember 3, 2018 . The 12.4% increase in total revenue was primarily driven by incremental revenue from the acquiredCamuto Group business and a 0.3% increase in comparable sales, partially offset by the impact of stores closed since the end of the third quarter of fiscal 2018, primarily theTown Shoes banner stores. During the three months endedNovember 2, 2019 , gross profit as a percentage of net sales was 28.9%, a decrease of 370 basis points from 32.6% in the previous year. The decrease in the gross profit rate was primarily driven by lower margins in theU.S. Retail segment due to being more promotional and higher shipping costs in the current year associated with higher digital penetration, partially offset by higher margins in the Canada Retail segment due to lower clearance activity and improved leverage in occupancy costs. Net income for the three months endedNovember 2, 2019 was$43.5 million , or$0.60 per diluted share, which included net after-tax charges of$5.1 million , or$0.07 per diluted share, primarily related to impairment charges and integration and restructuring expenses associated with the businesses acquired in fiscal 2018. Net income for the three months endedNovember 3, 2018 was$39.3 million , or$0.48 per diluted share, which included net after-tax charges of$18.6 million , or$0.22 per diluted share, primarily related to acquisition activity and the exit of theTown Shoes banner. We have continued making investments in our business that support our long-term growth objectives. During the nine months endedNovember 2, 2019 , we invested$59.6 million in capital expenditures compared to$48.5 million during the nine months endedNovember 3, 2018 . The increase in capital expenditures this year over last year was primarily driven by the investments in the acquired businesses and infrastructure necessary to integrate the businesses. Our capital expenditures during the nine months endedNovember 2, 2019 primarily related to 16 new store openings, multiple store remodels and investments in business infrastructure. 26 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months Ended
Three months ended
November 2, 2019 November 3, 2018 Change
(dollars in thousands, % of Total % of Total
except per share amounts) Amount Revenue Amount Revenue Amount %
Revenue:
Net sales $ 928,608 99.2 % $ 831,669 99.8 % $ 96,939 11.7 %
Commission, franchise and
other revenue 7,656 0.8 1,334 0.2 6,322 473.9 %
Total revenue 936,264 100.0 833,003 100.0 103,261 12.4 %
Cost of sales (660,518 ) (70.5 ) (560,586 ) (67.3 ) (99,932 ) 17.8 %
Operating expenses (217,476 ) (23.2 ) (226,491 ) (27.2 ) 9,015 (4.0 )%
Income from equity
investment in ABG-Camuto 2,662 0.3 - - 2,662 NM
Impairment adjustments
(charges) (4,824 ) (0.5 ) 7,163 0.9 (11,987 ) NM
Operating profit 56,108 6.1 53,089 6.4 3,019 5.7 %
Interest income (expense),
net (2,174 ) (0.3 ) 870 0.1 (3,044 ) NM
Non-operating income
(expenses), net 15 0.0 (108 ) (0.0 ) 123 NM
Income before income taxes 53,949 5.8 53,851 6.5 98 0.2 %
Income tax provision (10,489 ) (1.1 ) (14,532 ) (1.7 ) 4,043 (27.8 )%
Net income $ 43,460 4.7 % $ 39,319 4.8 % $ 4,141 10.5 %
Basic and diluted earnings
per share:
Basic earnings per share $ 0.60 $ 0.49 $ 0.11 22.4 %
Diluted earnings per share $ 0.60 $ 0.48 $ 0.12 25.0 %
Weighted average shares
used in per share
calculations:
Basic shares 72,123 80,321 (8,198 ) (10.2 )%
Diluted shares 72,947 82,287 (9,340 ) (11.4 )%
NM - Not meaningful
Net Sales - The following summarizes the changes in consolidated net sales from
the same period last year:
Three months ended
(in thousands) November 2, 2019
Consolidated net sales for the same period last year $ 831,669
Increase in comparable sales(1)
2,041
Net increase from non-comparable sales and other changes
1,956
Loss of net sales from closed stores (13,744 ) Incremental external net sales from Camuto Group 106,686 Consolidated net sales $ 928,608
(1) 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 in
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. 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.
27--------------------------------------------------------------------------------
The following summarizes net sales by segment:
Three months ended Change
(dollars in thousands) November 2, 2019 November 3, 2018 Amount % Comparable Sales % Segment net sales: U.S. Retail$ 716,775 $ 721,746$ (4,971 ) (0.7 )% -% Canada Retail 76,299 80,072 (3,773 ) (4.7 )% 4.4% Brand Portfolio 130,582 - 130,582 NM NA Other 28,848 29,851 (1,003 ) (3.4 )% (2.4)% Total segment net sales 952,504 831,669 120,835 14.5 % 0.3% Elimination of intersegment net sales (23,896 ) - (23,896 ) NM Consolidated net sales$ 928,608 $ 831,669$ 96,939 11.7 % NM - Not meaningful NA - Not applicable Within theU.S. Retail segment, comparable sales were flat due to higher comparable transactions with higher volume from digital orders offsetting lower store traffic, which was offset by a decline in comparable average dollar sales per transaction due to being more promotional. Within the Canada Retail segment, comparable sales increased due to higher comparable transactions, primarily as a result of the significant improvements to its digital platform.
Commission,
Three months ended Change
(dollars in thousands) November 2, 2019 November 3, 2018 Amount %
Commission income from Brand
Portfolio segment $ 6,914 $ - $ 6,914 NM
Franchise and other revenue 2,438 1,334 1,104 82.8 %
9,352 1,334 8,018 601.0 %
Elimination of intersegment
commission income (1,696 ) - (1,696 ) NM
Consolidated commission, franchise
and other revenue $ 7,656 $ 1,334 $ 6,322 473.9 %
Gross Profit- Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales, calculated as follows:
Three months ended
November 2, 2019 November 3, 2018 Change
(dollars in thousands) Amount % of Net Sales Amount % of Net Sales Amount % Basis Points
Net sales $ 928,608 100.0 % $ 831,669 100.0 %
Cost of sales (660,518 ) (71.1 ) (560,586 ) (67.4 )
Gross profit $ 268,090 28.9 % $ 271,083 32.6 % $ (2,993 ) (1.1 )% (370 )
28--------------------------------------------------------------------------------
The following summarizes gross profit by segment:
Three months ended
November 2, 2019 November 3, 2018 Change
(dollars in % of Segment % of Segment
thousands) Amount Net Sales Amount Net Sales Amount % Basis Points
Segment gross
profit:
U.S. Retail $ 201,409 28.1 % $ 239,650 33.2 % $ (38,241 ) (16.0 )% (510 )
Canada Retail 27,485 36.0 % 25,364 31.7 % $ 2,121 8.4 % 430
Brand Portfolio 33,936 26.0 % - - % $ 33,936 NM NM
Other 6,291 21.8 % 6,069 20.3 % $ 222 3.7 % 150
269,121 271,083
Elimination of
intersegment gross
profit (1,031 ) -
Consolidated gross
profit $ 268,090 $ 271,083
NM - Not meaningful
The U.S. Retail segment gross profit margin decreased primarily driven by being
more promotional than the prior year and higher shipping costs in the current
year associated with higher online orders, partially offset by an increase in
initial markups. 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.
Elimination of intersegment gross profit consisted of the following:
Three months ended
(in thousands) November 2, 2019 November 3, 2018
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (23,896 ) $ -
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 17,363 -
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
5,502 -
Gross profit $ (1,031 ) $ -
Operating Expenses- For the three months ended November 2, 2019 , operating
expenses as a percentage of total revenue decreased 400 basis points over the
same period last year primarily driven by lower incentive compensation, the
impact of lease exit charges, acquisition-related costs and restructuring
charges in the prior year, and lower marketing investments, partially offset by
the impact of including Camuto Group in the consolidated results.
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, primarily
due to our licensing with ABG-Camuto, which allows us to sell licensed branded
products to wholesale customers.
Impairment Adjustments (Charges)- For the three months ended November 2, 2019 ,
we recorded impairment charges primarily related to the planned consolidation of
certain locations as part of our integration efforts for the Brand Portfolio
segment. 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 the three months
ended November 3, 2018 , we recorded a goodwill impairment adjustment, as a
result of recording adjustments to the preliminary purchase allocations.
29
--------------------------------------------------------------------------------
Income Taxes- Our effective tax rate changed from 27.0% for the three months
ended November 3, 2018 to 19.4% for the three months ended November 2, 2019 .
During the three months ended November 2, 2019 , the effective tax rate was
impacted by the release of valuation allowances as a result of the improved
performance in Canada and other favorable discrete items.
Comparison of the Nine Months Ended November 2, 2019 with the Nine Months Ended
November 3, 2018
Nine months ended
November 2, 2019 November 3, 2018 Change
(dollars in thousands, % of Total % of Total
except per share amounts) Amount Revenue Amount Revenue Amount %
Revenue:
Net sales $ 2,648,240 99.0 % $ 2,335,841 99.8 % $ 312,399 13.4 %
Commission, franchise and
other revenue 26,737 1.0 4,532 0.2 22,205 490.0 %
Total revenue 2,674,977 100.0 2,340,373 100.0 334,604 14.3 %
Cost of sales (1,869,253 ) (69.9 ) (1,605,038 ) (68.6 ) (264,215 ) 16.5 %
Operating expenses (666,898 ) (24.9 ) (590,230 ) (25.2 ) (76,668 ) 13.0 %
Income from equity
investment in ABG-Camuto 7,354 0.3 - - 7,354 NM
Impairment charges (4,824 ) (0.2 ) (29,077 ) (1.2 ) 24,253 (83.4 )%
Operating profit 141,356 5.3 116,028 5.0 25,328 21.8 %
Interest income (expense),
net (5,947 ) (0.3 ) 2,339 0.1 (8,286 ) NM
Non-operating expenses, net (128 ) (0.0 ) (49,594 ) (2.1 ) 49,466 (99.7 )%
Income before income taxes
and loss from equity
investment in TSL 135,281 5.0 68,773 3.0 66,508 96.7 %
Income tax provision (33,220 ) (1.2 ) (42,203 ) (1.8 ) 8,983 (21.3 )%
Loss from equity investment
in TSL - - (1,310 ) (0.1 ) 1,310 NM
Net income $ 102,061 3.8 % $ 25,260 1.1 % $ 76,801 304.0 %
Basic and diluted earnings
per share:
Basic earnings per share $ 1.38 $ 0.31 $ 1.07 345.2 %
Diluted earnings per share $ 1.36 $ 0.31 $ 1.05 338.7 %
Weighted average shares
used in per share
calculations:
Basic shares 74,219 80,231 (6,012 ) (7.5 )%
Diluted shares 75,149 81,686 (6,537 ) (8.0 )%
NM - Not meaningful
Net Sales - The following summarizes the changes in consolidated net sales from
the same period last year:
Nine months ended
(in thousands) November 2, 2019
Consolidated net sales for the same period last year $ 2,335,841
Increase in comparable sales
18,199
Net increase from non-comparable sales and other changes
5,098
Loss of net sales from closed stores (33,431 ) Incremental external net sales from 2018 acquired businesses
328,165
Loss of net sales from the exit of Ebuys (5,632 ) Consolidated net sales$ 2,648,240 30
--------------------------------------------------------------------------------
The following summarizes net sales by segment:
Nine months ended Change
(dollars in
thousands) November 2, 2019 November 3, 2018 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 2,086,535 $ 2,083,287 $ 3,248 0.2 % 0.5%
Canada Retail 191,421 152,604 38,817 25.4 % 6.1%
Brand Portfolio 326,871 - 326,871 NM NA
Other 93,935 99,950 (6,015 ) (6.0 )% 0.9%
Total segment net
sales 2,698,762 2,335,841 362,921 15.5 % 0.8%
Elimination of
intersegment net
sales (50,522 ) - (50,522 ) NM
Consolidated net
sales $ 2,648,240 $ 2,335,841 $ 312,399 13.4 %
NM - Not meaningful
NA - Not applicable
Within the U.S. Retail segment, comparable sales increased due to higher
comparable transactions 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.
Commission,
Nine months ended Change
(dollars in thousands) November 2, 2019 November 3, 2018 Amount %
Commission income from Brand
Portfolio segment $ 18,118 $ - $ 18,118 NM
Franchise and other revenue 11,910 4,532 7,378 162.8 %
30,028 4,532 25,496 562.6 %
Elimination of intersegment
commission income (3,291 ) - (3,291 ) NM
Consolidated commission, franchise
and other revenue $ 26,737 $ 4,532 $ 22,205 490.0 %
Gross Profit- Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales, calculated as follows:
Nine months ended
November 2, 2019 November 3, 2018 Change
(dollars in thousands) Amount % of Net Sales Amount % of Net Sales Amount % Basis Points
Net sales $ 2,648,240 100.0 % $ 2,335,841 100.0 %
Cost of sales (1,869,253 ) (70.6 ) (1,605,038 ) (68.7 )
Gross profit $ 778,987 29.4 % $ 730,803 31.3 % $ 48,184 6.6 % (190 )
31--------------------------------------------------------------------------------
The following summarizes gross profit by segment:
Nine months ended
November 2, 2019 November 3, 2018 Change
(dollars in % of Segment % of Segment
thousands) Amount Net Sales Amount Net Sales Amount % Basis Points
Segment gross
profit:
U.S. Retail $ 619,356 29.7 % $ 667,595 32.0 % $ (48,239 ) (7.2 )% (230 )
Canada Retail 65,171 34.0 % 43,582 28.6 % $ 21,589 49.5 % 540
Brand Portfolio 75,191 23.0 % - - % $ 75,191 NM NM
Other 21,643 23.0 % 19,626 19.6 % $ 2,017 10.3 % 340
781,361 730,803
Elimination of
intersegment gross
profit (2,374 ) -
Consolidated gross
profit $ 778,987 $ 730,803
NM - Not meaningful
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 the second quarter of 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 inclusion of Camuto Group , which operates at a lower
gross profit rate, decreased the consolidated gross profit margin rate.
Elimination of intersegment gross profit consisted of the following:
Nine months ended
(in thousands) November 2, 2019 November 3, 2018
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (50,522 ) $ -
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 39,281 -
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
8,867 -
Gross profit $ (2,374 ) $ -
Operating Expenses- For the nine months ended November 2, 2019 , operating
expenses as a percentage of total revenue decreased 30 basis points over the
same period last year primarily driven by lower incentive compensation, the
impact of lease exit charges, acquisition-related costs and restructuring
charges in the prior year, and lower marketing investments, partially offset by
the impact of including Camuto Group in the consolidated results.
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, primarily
due to our licensing with ABG-Camuto, which allows us to sell licensed branded
products to wholesale customers.
Impairment Charges- For the nine months ended November 2, 2019 , we recorded
impairment charges primarily related to the planned consolidation of certain
locations as part of our integration efforts for the Brand Portfolio segment.
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 the nine months ended
November 3, 2018 , we recorded a goodwill impairment charge, net of adjustments,
as a result of recording adjustments to the preliminary purchase allocations,
which resulted in impairing all of TSL's goodwill.
32
--------------------------------------------------------------------------------
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 income (expenses), net. Also during the
second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of
foreign currency translation adjustments related to the previously held balances
from accumulated other comprehensive loss to non-operating income (expenses),
net.
Income Taxes- Our effective tax rate changed from 62.6% for the nine months
ended November 3, 2018 to 24.6% for the nine months ended November 2, 2019 . The
decrease in the effective tax rate was primarily driven by valuation allowances
and the goodwill impairment associated with the TSL acquisition during the nine
months ended November 3, 2018 .
Seasonality
Our business is subject to seasonal merchandise trends driven by the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter.
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.
During the nine months endedNovember 2, 2019 , we repurchased 7.1 million Class A common shares at a cost of$141.6 million , which was partially funded with borrowings on the revolving line of credit, with$334.9 million of Class A common shares that remain authorized under the program as ofNovember 2, 2019 . During the nine months endedNovember 3, 2018 , we did not repurchase any Class A common shares. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, to pursue our growth strategy and withstand unanticipated business volatility. We believe that cash generated from our operations, together with our current levels of cash and investments, as well as availability under our Credit Facility, are sufficient over the next 12 months and the foreseeable future to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and repurchase common shares under our share repurchase program.
Operating Cash Flows
For the nine months endedNovember 2, 2019 , net cash provided by operations was$118.1 million compared to$147.3 million for the nine months endedNovember 3, 2018 . The change was driven by a decrease in net income after adjusting for non-cash activity, including depreciation and amortization, stock-based compensation, impairment charges, the loss on previously held assets in TSL, loss on foreign currency reclassified from accumulated other comprehensive loss, the change in deferred income taxes, and lease exit charges, primarily due to lower performance for theU.S. Retail segment and including the net loss fromCamuto Group during fiscal 2019. In addition, we had an increased use of cash to fund working capital requirements during fiscal 2019 due to the addition of the acquired businesses as well as the impact of lower accruals for incentive compensation.
Investing Cash Flows
For the nine months endedNovember 2, 2019 , our net cash used in investing activities was$10.3 million , which was due to capital expenditures of$59.6 million exceeding the net liquidation of our available-for sale-securities. During the nine months endedNovember 3, 2018 , our net cash used in investing activities was$41.0 million , which was due to the acquisition of TSL, capital expenditures of$48.5 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 the nine months endedNovember 2, 2019 , our net cash used in financing activities was$120.6 million compared to$60.6 million for the nine months endedNovember 3, 2018 . The increase was primarily driven by the repurchase of Class A common shares under the share repurchase program during nine months endedNovember 2, 2019 , which was partially financed using our revolving line of credit, partially offset by lower dividends due to fewer outstanding Class A common shares. Debt Credit Facility- OnAugust 25, 2017 , we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date ofAugust 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. OnOctober 10, 2018 , the Credit Facility was amended to include the acquisition ofCamuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. OnNovember 5, 2018 , following the acquisition ofCamuto Group , the amended Credit Facility was increased with no change to the sub-limits. As ofNovember 2, 2019 , the Credit Facility provided 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 3.7% as ofNovember 2, 2019 . 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 ofNovember 2, 2019 . Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As ofNovember 2, 2019 , we had$235.0 million outstanding under the Credit Facility and$3.0 million in letters of credit issued, resulting in$162.0 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. As a result of the acquisition ofCamuto Group , we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. 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 ofNovember 2, 2019 , we were in compliance with all financial covenants. 33 --------------------------------------------------------------------------------
Capital Expenditure Plans
We expect to spend approximately$80.0 million for capital expenditures in fiscal 2019, of which we invested$59.6 million during the nine months endedNovember 2, 2019 . Our capital expenditures for the remainder of the year will depend primarily on the number of store projects as well as infrastructure and information technology projects that we undertake and the timing of these expenditures.
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.
We have included a summary of our contractual obligations as ofFebruary 2, 2019 in our Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 . There have been no material changes in contractual obligations outside the ordinary course of business sinceFebruary 2, 2019 .
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 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 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 disclosed in our Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 .
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