Designer Brands Inc.

03/24/2025 | Press release | Distributed by Public on 03/24/2025 14:09

Annual Report for Fiscal Year Ending 02/01, 2024 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995on page ii 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 Dataof this 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 Factorsof this Form 10-K and included elsewhere in this Form 10-K.
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The following discussion includes a comparison of our results of operations and liquidity and capital resources for 2024 and 2023. Beginning in the fourth quarter of 2024, we changed our financial statement presentation related to expenses associated with distribution and fulfillment and store occupancy for the U.S. Retail and Canada Retail segments. These expenses were previously included within cost of sales and are now included within operating expenses in order to present all of our operating segments on a consistent basis. Also beginning in the fourth quarter of 2024, we changed the presentation of segment performance by including an operating profit measurement for our reportable segments. Prior period reclassifications were made to conform to the current period presentation in the consolidated statements of operations. For 2023 and 2022, the reclassifications resulted in a decrease to cost of sales and an increase to operating expenses. These reclassifications did not change operating profit, net income, or earnings per share attributable to Designer Brands Inc. As a result of the prior period reclassifications, we have included a discussion of the results of operations of 2023 compared with 2022. A discussion of 2022 liquidity and capital resources may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operationsof our Annual Report on Form 10-K for the year ended February 3, 2024, filed with the SEC on March 25, 2024.
EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS
For 2024, net sales decreased 2.1% with total comparable sales down 1.7% over last year. Gross profit as a percentage of net sales for 2024 was 40 basis points lower when compared to last year primarily due to a change in mix of products sold as we expanded our athletic and casual offerings, which have lower margins than the seasonal and dress categories.
During April 2024, we completed the acquisition of Rubino, which allowed our Canada Retail segment to expand into the province of Quebec. Beginning in 2024, we changed how the Brand Portfolio segment sources certain Owned Brands for the U.S. Retail segment by transacting using a wholesale model, where intersegment sales and cost of sales are recorded, whereas in 2023 and prior we transacted on a commission model, where intersegment sales were based on a percentage of product cost. This change resulted in an increase in Brand Portfolio intersegment net sales, cost of sales, gross profit, and gross profit as a percentage of net sales and a corresponding increase in the amount of eliminated intersegment net sales, cost of sales, and gross profit with no impact to consolidated net sales, cost of sales, and gross profit.
EFFECTS OF INFLATION AND GLOBAL ECONOMIC CONDITIONS
During 2024, our comparable sales declined as we experienced lower traffic, primarily in the U.S. Retail segment. Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence. We believe the decrease in comparable sales is a result of ongoing consumer concern of negative and/or uncertain economic conditions, most notably the concern of economic volatility, including an economic downturn, fluctuations in interest rates, inflationary pressures, and changes in employment levels. We are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business. These factors ultimately could require us to enact further mitigating operating efficiency measures that may not have the intended effect and could have a material adverse effect on our business, operations, and results of operations. Adverse global economic conditions and disruptions 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, equity investments, long-lived assets, intangibles, and goodwill, may not be recoverable.
In February and March 2025, the U.S. administration announced new tariffs on all imports from China. All of the products manufactured through the Brand Portfolio segment come from third-party facilities outside of the U.S., with 77% of units sourced from China during 2024. In addition to the merchandise sourced through our Brand Portfolio segment, our U.S. Retail and Canada Retail segments also source merchandise from domestic third-party suppliers with many of these suppliers importing a large portion of their merchandise from China. We are closely monitoring this situation and evaluating the actions we plan to take, which may include cost-mitigation measures, sourcing strategies, and price adjustments. However, there can be no assurance that we will be able to fully mitigate the impact of such tariffs or new tariffs in China or elsewhere. Future impacts are unknown at this time and could have a material adverse effect on our business, operations, and results of operations.
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FINANCIAL SUMMARY AND OTHER KEY METRICS
For 2024:
•Net sales decreased to $3.0 billion from $3.1 billion last year.
•Gross profit as a percentage of net sales was 42.7% compared to 43.1% in 2023 and 43.9% in 2022.
•Net loss attributable to Designer Brands Inc. was $10.5 million, or $0.20 loss per diluted share, compared to net income attributable to Designer Brands Inc. of $29.1 million, or $0.46 earnings per diluted share, last year.
Comparable Sales Performance Metric- The following table presents the percent change in comparable sales for each segment and in total:
2024 2023
Change in comparable sales:
U.S. Retail segment (1.4) % (9.5) %
Canada Retail segment (2.2) % (5.9) %
Brand Portfolio segment - direct-to-consumer channel (9.5) % 6.0 %
Total (1.7) % (9.0) %
We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses. We include in our comparable sales metric sales from stores in operation for at least 14 months at the beginning of the applicable year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include the e-commerce sales of the U.S. Retail and Canada Retail segments. For calculating comparable sales in 2024, periods in 2023 are shifted by one week to compare similar calendar weeks. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Stores added as a result of the Rubino acquisition that will have been in operation for at least 14 months at the beginning of 2025, along with its e-commerce sales, will be added to the comparable base for the Canada Retail segment beginning with the second quarter of 2025. Comparable sales include the e-commerce net sales of the Brand Portfolio segment from the direct-to-consumer e-commerce sites. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.
Number of Stores- At the end of the last two fiscal years, we had the following number of stores:
February 1, 2025 February 3, 2024
U.S. Retail segment - DSW stores 494 499
Canada Retail segment:
The Shoe Co. stores 121 118
Rubino stores 28 -
DSW stores 26 25
175 143
Total number of stores 669 642
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RESULTS OF OPERATIONS
2024 COMPARED WITH 2023
The following table presents our consolidated results of operations with associated percentages of net sales:
(amounts in thousands, except per share amounts) 2024 2023 Change
Amount % of Net Sales Amount % of Net Sales Amount %
Net sales $ 3,009,262 100.0 % $ 3,074,976 100.0 % $ (65,714) (2.1) %
Cost of sales (1,723,304) (57.3) (1,750,981) (56.9) 27,677 (1.6) %
Gross profit 1,285,958 42.7 1,323,995 43.1 (38,037) (2.9) %
Operating expenses (1,245,834) (41.4) (1,256,150) (40.8) 10,316 (0.8) %
Income from equity investments 13,145 0.5 9,390 0.3 3,755 40.0 %
Impairment charges (18,336) (0.6) (4,834) (0.2) (13,502) 279.3 %
Operating profit 34,933 1.2 72,401 2.4 (37,468) (51.8) %
Interest expense, net (45,291) (1.6) (32,171) (1.0) (13,120) 40.8 %
Non-operating expenses, net (372) - (33) - (339) 1,027.3 %
Income (loss) before income taxes (10,730) (0.4) 40,197 1.4 (50,927) NM
Income tax benefit (provision) 755 - (10,981) (0.4) 11,736 NM
Net income (loss) (9,975) (0.4) 29,216 1.0 (39,191) NM
Net income attributable to redeemable noncontrolling interest (574) - (154) - (420) 272.7 %
Net income (loss) attributable to Designer Brands Inc. $ (10,549) (0.4) % $ 29,062 1.0 % $ (39,611) NM
Earnings (loss) per share attributable to Designer Brands Inc.:
Basic earnings (loss) per share $ (0.20) $ 0.47 $ (0.67) NM
Diluted earnings (loss) per share $ (0.20) $ 0.46 $ (0.66) NM
Weighted average shares used in per share calculations:
Basic shares 53,657 61,296 (7,639) (12.5) %
Diluted shares 53,657 63,375 (9,718) (15.3) %
NM - Not meaningful
NET SALES
The following table summarizes net sales by segment:
(dollars in thousands) 2024 2023 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 2,466,101 78.3 % $ 2,533,849 80.5 % $ (67,748) (2.7) % (1.4)%
Canada Retail 283,023 9.0 % 264,229 8.4 % 18,794 7.1 % (2.2)%
Brand Portfolio 398,881 12.7 % 348,976 11.1 % 49,905 14.3 % (9.5)%
Total segment net sales 3,148,005 100.0 % 3,147,054 100.0 % 951 - % (1.7)%
Elimination of intersegment net sales (138,743) (72,078) (66,665) 92.5 %
Consolidated net sales $ 3,009,262 $ 3,074,976 $ (65,714) (2.1) %
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During 2024, net sales decreased in the U.S. Retail segment, primarily due to the decrease in comparable sales of $35.0 million and the additional week of sales during 2023. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions with lower traffic and a lower conversion rate. Net sales increased in the Canada Retail segment due to the addition of Rubino, with $24.6 million of net sales during the period, as well as $7.9 million from the net new stores opened since the end of 2023, partially offset by the decrease in comparable sales of $5.7 million due to lower average sales amounts per transaction, the unfavorable impact from foreign currency translation of $5.0 million, and the additional week of sales in 2023. The increase in net sales for the Brand Portfolio segment was primarily due to the change in how we source certain Owned Brands for the U.S. Retail segment from a commission model, where sales are based on a percentage of product cost, to a wholesale model, where sales and cost of sales are recorded, which added approximately $70.0 million in net sales and also resulted in the increase in intersegment net sales that are eliminated. This increase in the Brand Portfolio segment was partially offset by lower sales to external customers as retail customers pulled back on orders during 2024.
GROSS PROFIT
The following table summarizes gross profit by segment:
(dollars in thousands)
2024 2023 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment gross profit:
U.S. Retail $ 1,060,198 43.0 % $ 1,109,002 43.8 % $ (48,804) (4.4) % (80)
Canada Retail 126,030 44.5 % 119,167 45.1 % 6,863 5.8 % (60)
Brand Portfolio 109,814 27.5 % 92,545 26.5 % 17,269 18.7 % 100
Total segment gross profit 1,296,042 41.2 % 1,320,714 42.0 % (24,672) (1.9) % (80)
Net recognition (elimination) of intersegment gross profit (10,084) 3,281 (13,365)
Consolidated gross profit $ 1,285,958 42.7 % $ 1,323,995 43.1 % $ (38,037) (2.9) % (40)
The decrease in gross profit for the U.S. Retail segment was primarily driven by the decrease in net sales during 2024 over last year and at lower margin rates. Gross profit as a percentage of net sales decreased for the U.S. Retail segment when compared to last year primarily due to a change in mix of products sold as we expanded our athletic and casual offerings, which have lower margins than the seasonal and dress categories. The increase in gross profit for the Canada Retail segment was primarily driven by the increase in net sales during 2024 over last year. Gross profit as a percentage of net sales decreased for the Canada Retail segment alsodue to a change in mix of products sold and a lower margin rate for Rubino as we worked through elevated inventory from the acquisition. The increase in gross profit for the Brand Portfolio segment was primarily driven by the transition of certain Owned Brands sourced for the U.S. Retail segment under a wholesale model, as discussed above, which also resulted in the net elimination of intersegment gross profit during 2024 as compared to the net recognition of intersegment gross profit last year (refer to the table below). Gross profit as a percentage of net sales increased for the Brand Portfolio segment primarily due to the transition of certain Owned Brands sourced for the U.S. Retail segment under a wholesale model, partially offset by higher freight costs as we rerouted supply chain lanes in order to avoid potential disruptions.
The net recognition (elimination) of intersegment gross profit consisted of the following:
(in thousands) 2024 2023
Intersegment recognition and elimination activity:
Elimination of net sales recognized by Brand Portfolio segment $ (138,743) $ (72,078)
Cost of sales:
Elimination of cost of sales recognized by Brand Portfolio segment 95,138 51,213
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 33,521 24,146
$ (10,084) $ 3,281
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OPERATING EXPENSES
The following table summarizes operating expenses by segment:
(dollars in thousands)
2024 2023 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment operating expenses:
U.S. Retail $ 834,687 33.8 % $ 847,327 33.4 % $ (12,640) (1.5) % 40
Canada Retail 102,099 36.1 % 94,535 35.8 % 7,564 8.0 % 30
Brand Portfolio 119,734 30.0 % 128,658 36.9 % (8,924) (6.9) % (690)
Total segment operating expenses 1,056,520 33.6 % 1,070,520 34.0 % (14,000) (1.3) % (40)
Corporate 189,314 185,630 3,684 2.0 %
Consolidated operating expenses $ 1,245,834 41.4 % $ 1,256,150 40.8 % $ (10,316) (0.8) % 60
During 2024, operating expenses decreased in the U.S. Retail segment primarily due to a $7.1 million decrease in personnel overhead costs with a lower headcount and lower store selling expenses of $4.9 million and distribution costs of $2.6 million in line with lower net sales. Operating expenses increased in the Canada Retail segment primarily driven by the addition of Rubino. Operating expenses decreased in the Brand Portfolio segment primarily due to a $4.7 million decrease in marketing expenses and lower distribution costs of $1.9 million with the decline in external customer wholesale activity. Operating expenses increased for corporate shared services primarily due to higher professional fees and costs for cloud computing arrangements, partially offset by approximately $5.0 million lower stock compensation expense as a result of the CEO transition costs incurred last year. The increase in consolidated operating expenses as a percentage of consolidated net sales over last year was due to the deleverage of our costs on lower net sales.
IMPAIRMENT CHARGES
Impairment charges are not attributed to any of our segments for segment presentation purposes. During 2024, we recorded impairment charges of $9.4 million due to a vacated leased corporate office and other corporate assets, $7.0 million of our equity investment in Le Tigre due to the inability of Le Tigre to generate earnings with expected future losses, $1.3 million due to two underperforming Canada Retail segment stores, and $0.6 million due to an underperforming U.S. Retail segment store. During 2023, we recorded impairment charges of $4.8 million, primarily related to a vacated leased space.
OPERATING PROFIT
The following table summarizes operating profit (loss) by segment:
(dollars in thousands)
2024 2023 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment operating profit (loss):
U.S. Retail $ 225,511 9.1 % $ 261,675 10.3 % $ (36,164) (13.8) % (120)
Canada Retail 23,931 8.5 % 24,632 9.3 % (701) (2.8) % (80)
Brand Portfolio 3,225 0.8 % (26,723) (7.7) % 29,948 NM NM
Total segment operating profit 252,667 8.0 % 259,584 8.2 % (6,917) (2.7) % (20)
Corporate/eliminations (217,734) (187,183) (30,551) 16.3 %
Consolidated operating profit $ 34,933 1.2 % $ 72,401 2.4 % $ (37,468) (51.8) % (120)
NM - Not meaningful
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During 2024, operating profit for the U.S. Retail segment decreased due to lower gross profit partially offset by lower operating expenses. For the Brand Portfolio segment, the improvement in operating results was the result of the increase in gross profit and lower operating expenses. Corporate/eliminations increased, which lowers consolidated operating profit, due to an increase in impairments in 2024 and higher eliminations of Brand Portfolio intercompany activity. These changes led to lower consolidated operating profit as a percent of consolidated net sales.
INTEREST EXPENSE, NET
For 2024, interest expense, net, increased by $13.1 million over last year, primarily driven by a higher debt balance.
INCOME TAXES
The effective tax rate was 7.0% for 2024, as compared to 27.3% for 2023. The effective tax rate for 2024 differed from the statutory rate primarily due to non-deductible compensation and other adjustments partially offset by discrete tax benefits recognized, primarily related to the release of tax reserves no longer deemed necessary and state tax planning initiatives. The effective tax rate for 2023 differed from the statutory rate primarily due to non-deductible compensation offset by other permanent adjustments.
2023 COMPARED WITH 2022
The following table presents our consolidated results of operations with associated percentages of net sales:
(amounts in thousands, except per share amounts) 2023 2022 Change
Amount % of Net Sales Amount % of Net Sales Amount %
Net sales $ 3,074,976 100.0 % $ 3,315,428 100.0 % $ (240,452) (7.3) %
Cost of sales (1,750,981) (56.9) (1,860,731) (56.1) 109,750 (5.9) %
Gross profit 1,323,995 43.1 1,454,697 43.9 (130,702) (9.0) %
Operating expenses (1,256,150) (40.8) (1,271,854) (38.4) 15,704 (1.2) %
Income from equity investments 9,390 0.3 8,864 0.3 526 5.9 %
Impairment charges (4,834) (0.2) (4,317) (0.1) (517) 12.0 %
Operating profit 72,401 2.4 187,390 5.7 (114,989) (61.4) %
Interest expense, net (32,171) (1.0) (14,874) (0.5) (17,297) 116.3 %
Loss on extinguishment of debt and write-off of debt issuance costs - - (12,862) (0.4) 12,862 NM
Non-operating expenses, net (33) - (130) - 97 (74.6) %
Income before income taxes 40,197 1.4 159,524 4.8 (119,327) (74.8) %
Income tax benefit (provision) (10,981) (0.4) 3,142 0.1 (14,123) NM
Net income 29,216 1.0 162,666 4.9 (133,450) (82.0) %
Net loss (income) attributable to redeemable noncontrolling interest (154) - 10 - (164) NM
Net income attributable to Designer Brands Inc. $ 29,062 1.0 % $ 162,676 4.9 % $ (133,614) (82.1) %
Earnings per share attributable to Designer Brands Inc.:
Basic earnings per share $ 0.47 $ 2.41 $ (1.94) (80.5) %
Diluted earnings per share $ 0.46 $ 2.26 $ (1.80) (79.6) %
Weighted average shares used in per share calculations:
Basic shares 61,296 67,603 (6,307) (9.3) %
Diluted shares 63,375 72,101 (8,726) (12.1) %
NM - Not meaningful
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NET SALES
The following table summarizes net sales by segment:
(dollars in thousands) 2023 2022 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 2,533,849 80.5 % $ 2,791,513 82.0 % $ (257,664) (9.2) % (9.5)%
Canada Retail 264,229 8.4 % 283,241 8.3 % (19,012) (6.7) % (5.9)%
Brand Portfolio 348,976 11.1 % 327,715 9.7 % 21,261 6.5 % 6.0%
Total segment net sales 3,147,054 100.0 % 3,402,469 100.0 % (255,415) (7.5) % (9.0)%
Elimination of intersegment net sales (72,078) (87,041) 14,963 (17.2) %
Consolidated net sales $ 3,074,976 $ 3,315,428 $ (240,452) (7.3) %
During 2023, net sales decreased inthe U.S. Retail segment, primarily due to the decrease in comparable sales of $260.3 million, with the additional week of sales during 2023 offset by the impact of net store closures since the end of 2022. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions of approximately 5%, driven by lower traffic, and a decrease in the comparable average sales amounts per transaction of approximately 5% as we were more promotional than we were during 2022. Net sales decreased in the Canada Retail segment due to the decrease in comparable sales of $16.6 million, with the majority of the remaining decrease due to the unfavorable impact from foreign currency translation, partially offset by the additional week of sales in 2023. The decrease in comparable sales for the Canada Retail segment was impacted primarily by lower comparable average sales amount per transaction. Net sales for the Brand Portfolio segment increased due to the net sales added from the acquired Topo and Keds businesses partially offset by lower wholesale sales as retail customers pulled back on orders.
GROSS PROFIT
The following table summarizes gross profit by segment:
(dollars in thousands)
2023 2022 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment gross profit:
U.S. Retail $ 1,109,002 43.8 % $ 1,246,884 44.7 % $ (137,882) (11.1) % (90)
Canada Retail 119,167 45.1 % 132,292 46.7 % (13,125) (9.9) % (160)
Brand Portfolio 92,545 26.5 % 72,006 22.0 % 20,539 28.5 % 450
Total segment gross profit 1,320,714 42.0 % 1,451,182 42.7 % (130,468) (9.0) % (70)
Net recognition of intersegment gross profit 3,281 3,515 (234)
Consolidated gross profit $ 1,323,995 43.1 % $ 1,454,697 43.9 % $ (130,702) (9.0) % (80)
The decrease in consolidated gross profit was primarily driven by the decrease in consolidated net sales during 2023 over 2022, partially offset by lower freight and shipping costs. Gross profit as a percentage of net sales decreased 90 basis points for the U.S. Retail segment when compared to 2022, primarily due to being more promotional, partially offset by lower logistics costs including freight and shipping. Gross profit as a percentage of net sales decreased 160 basis points for the Canada Retail segment in 2023 when compared to 2022, primarily due to a mix shift in sales towards lower margin products. Gross profit as a percentage of net sales increased 450 basis points for the Brand Portfolio segment in 2023 when compared to 2022, primarily due to the change in mix of products sold, improved inventory positions, lower freight costs, and the leverage of higher sales on royalty expense since the acquired businesses do not have any royalty obligations.
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The net recognition of intersegment gross profit consisted of the following:
(in thousands) 2023 2022
Intersegment recognition and elimination activity:
Net sales recognized by Brand Portfolio segment $ (72,078) $ (87,041)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 51,213 58,234
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 24,146 32,322
$ 3,281 $ 3,515
OPERATING EXPENSES
The following table summarizes operating expenses by segment:
(dollars in thousands)
2023 2022 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment operating expenses:
U.S. Retail $ 847,327 33.4 % $ 896,374 32.1 % $ (49,047) (5.5) % 130
Canada Retail 94,535 35.8 % 96,583 34.1 % (2,048) (2.1) % 170
Brand Portfolio 128,658 36.9 % 103,766 31.7 % 24,892 24.0 % 520
Total segment operating expenses 1,070,520 34.0 % 1,096,723 32.2 % (26,203) (2.4) % 180
Corporate 185,630 175,131 10,499 6.0 %
Consolidated operating expenses $ 1,256,150 40.8 % $ 1,271,854 38.4 % $ (15,704) (1.2) % 240
During 2023, operating expenses decreased in the U.S. Retail segment primarily due to a decrease of $17.9 million in depreciation and amortization expense and $8.4 million distribution costs as we realized the benefit of moving our digital fulfillment activities from our Ohio location to our New Jersey location and a decrease of $12.8 million in store selling expenses and the remaining decrease primarily in lower incentive compensation in line with lower net sales. Operating expenses increased in the Brand Portfolio segment primarily due to an increase of $8.2 million in marketing expenses as we invested more in brand awareness and the remaining increase primarily due to the additional expenses from the acquired Keds and Topo businesses. Operating expenses also increased for corporate shared services due to higher professional fees and costs for cloud computing arrangements. The increases in consolidated operating expenses as a percentage of consolidated net sales over 2022 was due to the deleverage of our costs on lower net sales.
IMPAIRMENT CHARGES
Impairment charges are not attributed to any of our segments for segment presentation purposes. During 2023, we recorded impairment charges of $4.8 million, primarily due to a vacated leased space. During 2022, we recorded impairment charges of $4.3 million, primarily due to subleases of vacated leased spaces.
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OPERATING PROFIT
The following table summarizes operating profit (loss) by segment:
(dollars in thousands)
2023 2022 Change
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment operating profit (loss):
U.S. Retail $ 261,675 10.3 % $ 350,510 12.6 % $ (88,835) (25.3) % (230)
Canada Retail 24,632 9.3 % 35,709 12.6 % (11,077) (31.0) % (330)
Brand Portfolio (26,723) (7.7) % (22,896) (7.0) % (3,827) 16.7 % (70)
Total segment operating profit 259,584 8.2 % 363,323 10.7 % (103,739) (28.6) % (250)
Corporate/eliminations (187,183) (175,933) (11,250) 6.4 %
Consolidated operating profit $ 72,401 2.4 % $ 187,390 5.7 % $ (114,989) (61.4) % (330)
During 2023, operating profit for the U.S. Retail and Canada Retail segments decreased due to lower gross profit partially offset by lower operating expenses. For the Brand Portfolio segment, the increase in operating loss was due to the increase in gross profit being more than offset by higher operating expenses. These factors led to lower operating profit (higher operating loss) as a percentage of net sales for all segments and in total.
INTEREST EXPENSE, NET
For 2023, interest expense, net, increased by $17.3 million over 2022, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over 2022 and the addition of the Term Loan, and a higher average debt balance during 2023.
LOSS ON EXTINGUISHMENT OF DEBT AND WRITE-OFF OF DEBT ISSUANCE COSTS
In connection with the settlement of our previous senior secured term loan agreement on February 8, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs. As a result of the replacement of the ABL Revolver during 2022, we also wrote off $0.2 million of debt issuance costs.
INCOME TAXES
The effective tax rate was a positive 27.3% for 2023, as compared to a negative 2.0% for 2022. The effective tax rate for 2023 differed from the statutory rate primarily due to non-deductible compensation offset by other permanent adjustments. The effective tax rate for 2022 differed from the statutory rate as a result of releasing $55.7 million of the valuation allowance partially offset by the permanent tax adjustments, primarily non-deductible compensation.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally. On April 8, 2024, we acquired Rubino for $16.1 million in cash, funded with available cash and borrowings on the ABL Revolver. During 2024, we repurchased 10.3 million Class A common shares at an aggregate cost of $68.6 million. As of February 1, 2025, $19.7 million of Class A common shares remained available for repurchase under the share repurchase program.
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The following table summarizes our material undiscounted cash requirementsfor 2025and future fiscal years thereafter, and provides reference for each item to the relevant note of the consolidated financial statements of this Form 10-K:
(in thousands) Note Reference 2025 Future Fiscal Years Thereafter Total
Debt maturities Note 12 $ 6,750 $ 489,715 $ 496,465
Fixed minimum lease payments
Note 13 $ 198,646 $ 755,304 $ 953,950
Noncancelable purchase obligations
Note 14 $ 12,715 $ 6,113 $ 18,828
Guaranteed minimum royalty payments
Note 14 $ 36,409 $ 107,240 $ 143,649
In addition to the above, we have an exclusive call option and the noncontrolling interest holders have a put option with respect to our purchase of the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of three years following the close of the transaction, which was December 13, 2022. The redemption price is defined in the operating agreement and is based primarily on a fixed multiple of Topo's trailing 12 months of adjusted earnings before interest, taxes, depreciation, amortization, and other agreed upon adjustments.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy, and withstand unanticipated business volatility, including the impacts of the global economic conditions on our results of operations. We believe that cash generated from our operations, together with our current levels of cash, as well as the availability under our ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund acquisitions and capital expenditures, repurchase common shares under our share repurchase program, and meet our debt service obligations over the next 12 months and beyond.
The following table presents the key categories of our consolidated statements of cash flows:
(in thousands) 2024 2023 Change
Net cash provided by operating activities $ 82,236 $ 162,399 $ (80,163)
Net cash used in investing activities (62,673) (182,493) 119,820
Net cash provided by (used in) financing activities (22,094) 10,479 (32,573)
Effect of exchange rate changes on cash balances (1,890) 22 (1,912)
Net decrease in cash and cash equivalents $ (4,421) $ (9,593) $ 5,172
OPERATING CASH FLOWS
The decrease in net cash provided by operations was largely driven by the decrease in net income recognized after adjusting for non-cash activity, including depreciation and amortization, stock-based compensation expense, changes in deferred income taxes and impairment charges, and higher spend on working capital. The increased spend on working capital was the result of an increased investment in inventories and the timing of payments on current liabilities, partially offset by the receipt of income tax refunds of $61.9 million compared to cash paid for income taxes of $17.1 million last year, timing of payments on lease obligations, and no incentive compensation for 2023 being paid in the first quarter of 2024 whereas we did pay incentive compensation for 2022 in the first quarter of 2023.
INVESTING CASH FLOWS

For 2024, net cash used in investing activities was primarily due to capital expenditures of $50.9 million relating to infrastructure and IT projects and new stores, including relocations, and the acquisition of Rubino for $16.1 million. For 2023, net cash used in investing activities was primarily due to the acquisition of Keds for $127.3 million and capital expenditures of $55.0 million relating to infrastructure and IT projects, new stores, and store improvements.
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FINANCING CASH FLOWS
For 2024, net cash used in financing activities was due to the repurchase of 10.3 million Class A common shares at an aggregate cost of $68.6 million, payments of dividends of $10.5 million, and payments on the Term Loan of $6.8 million, partially offset by the net receipts of $69.0 million from our ABL Revolver. For 2023, net cash provided by financing activities was due to proceeds from the issuance of the Term Loan of $135.0 million and the net receipts of $20.0 million from our ABL Revolver, partially offset by the repurchase of 9.7 million Class A common shares at an aggregate cost of $102.2 million, payments of $17.5 million for taxes for stock-based compensation shares withheld, payments of dividends of $12.2 million, and payments of debt issuance costs of $10.7 million.
DEBT
ABL Revolver- The ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a first-in last-out term loan ("FILO Term Loan") of up to $30.0 million. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. The ABL Revolver, which matures in 2027, may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of February 1, 2025, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $471.4 million, with $340.1 million in outstanding borrowings and $4.0 million in letters of credit issued, resulting in $127.3 million available for borrowings.
Term Loan- On June 23, 2023, we entered into the Term Loan and have since borrowed the maximum aggregate amount of $135.0 million. The Term Loan matures at the earliest of the date the ABL Revolver matures (currently March 2027) or five years from closing of the Term Loan (June 2028).
Debt Covenants- The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $47.3 million or 10.0% of the maximum borrowing amount. At any time that liquidity is less than $100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month of 2.50 to 1.00, calculated on a trailing twelve-month basis. Testing of the consolidated net leverage ratio ends after liquidity has been greater than or equal to $100.0 million for a period of 45 consecutive days. The ABL Revolver and the Term Loan also contain customary covenants restricting certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. As of February 1, 2025, we were in compliance with all financial covenants contained in the ABL Revolver and the Term Loan.
Refer to Note 12, Debt, of the consolidated financial statements of this Form 10-K for further information about our debt arrangements.
PLANS FOR CAPITALIZED COSTS
During 2025, we expect to spend approximately $45.0 million to $55.0 million that will be capitalized for property and equipment and implementation costs for cloud computing arrangements accounted for as service contracts. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The information related to recently issued accounting pronouncements as set forth in Note 1, Description of Business and Significant Accounting Policies - Recently Issued Accounting Pronouncements, of the consolidated financial statements included in this Form 10-K is incorporated herein by reference.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As discussed in Note 1, Description of Business and Significant Accounting Policies, of the consolidated financial statements included in this Form 10-K,the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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 valuation techniques. We constantly reevaluate 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.
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:
Policy Judgments and Estimates Effect if Actual Results
Differ from Assumptions
Inventories- The U.S. Retail segment inventory is accounted for using the retail inventory method, which is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories at cost and the resulting gross profits are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. The cost basis of inventories reflected on the balance sheet is decreased by charges to cost of sales at the time that the retail value of the inventory is lowered by markdowns. The Canada Retail and Brand Portfolio segments account for inventory using the moving average cost method and is stated at the lower of cost or net realizable value. For all inventories, we also monitor excess and obsolete inventories that may need to be liquidated at amounts below cost. 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 shrink between physical inventory counts, based on historical experience and recent results, less amounts realized.
Inherent in the calculation of inventories are certain significant judgments and estimates, including setting the original merchandise retail value, markdowns, shrink, and liquidation values. The shrink reserve is calculated as a percentage of net sales from the last physical inventory date, based on both historical experience and recent physical inventory results, less amounts realized. Aged inventory may be written down using estimated liquidation values and cost of disposal based on historical experience.
If the reduction to inventories for markdowns, shrink, and aged inventories were to increase by 10%, cost of sales would increase by approximately $4.0 million.
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Policy Judgments and Estimates Effect if Actual Results
Differ from Assumptions
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets- We evaluate goodwill and other indefinite-lived intangible assets for impairment annually during our fourth quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant and sustained decline in our stock price, that would indicate that impairment may exist. When evaluating for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that there is an impairment. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the carrying value exceeds its fair value, we will calculate the estimated fair value. Fair value is the price a willing buyer would pay and is typically calculated using a discounted cash flow analysis. Where deemed appropriate, we may also utilize a market approach for estimating fair value. Impairment charges are calculated as the amount by which the carrying amount exceeds its fair value, but not to exceed the carrying value.
When assessing goodwill and other indefinite-lived intangible assets for impairment, our decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the estimated fair value over carrying value at the last assessment date and the amount of time since the last quantitative fair value assessments. Our quantitative impairment calculations contain uncertainties, as we are required to make assumptions and to apply judgment when estimating future cash flows, including projected revenue and operating results, as well as selecting appropriate discount rates and an assumed royalty rate. Estimates of revenue and operating results are based on internal projections considering past performance and forecasted changes, strategic initiatives, and the business environment impacting performance. Discount rates and a royalty rate are selected based on market participant assumptions. These estimates are highly subjective, and our ability to realize the future cash 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.
As of February 1, 2025, we had goodwill of $93.7 million, $25.8 million, $6.6 million, and $4.3 million for the U.S. Retail, Keds, Rubino, and Topo reporting units, respectively. As of the fourth quarter measurement date, we determined for each of the reporting units that the fair value was in excess of their carrying value and a 10% decrease in fair value would not result in an impairment charge.
As of February 1, 2025, we had indefinite-lived tradenames of $46.9 million and $18.5 million within the Brand Portfolio segment and Canada Retail segment, respectively. The Brand Portfolio segment includes the indefinite-lived tradename of Keds and the Canada Retail segment includes the indefinite-lived tradenames of The Shoe Co. and Rubino. We have determined that the fair value of each of the indefinite-lived tradenames was in excess of the carrying value and a 10% decrease in fair value would not result in an impairment charge.
As we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.
Asset Impairment of Long-Lived Assets-We periodically evaluate the carrying amount of our long-lived assets, primarily property and equipment and operating lease assets, when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future 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.
Our reviews are conducted at the lowest identifiable level, which typically is at the store level for the majority of our long-lived assets. Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. We also review construction-in-progress projects, including internal-use software under development, for recoverability when we have a strategic shift in our plans. A 10% change in our projected cash flows for our store fleet would not result in a material amount of additional impairment charges. To the extent that these future projections or our strategies change, the conclusion regarding impairment may differ from our current estimates.
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Policy Judgments and Estimates Effect if Actual Results
Differ from Assumptions
Income Taxes-We determine the aggregate amount of income tax provision or benefit to accrue and the amount that will be currently receivable or payable based upon tax statutes of each jurisdiction in which we do business. Deferred tax assets and liabilities, as a result of these timing differences, are reflected on our balance sheet for temporary differences that are expected to reverse in subsequent years. A valuation allowance is established against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. We review and update our tax positions as necessary to add any new uncertain tax positions taken, or to remove previously identified uncertain positions that have been adequately resolved. Additionally, uncertain positions may be remeasured as warranted by changes in facts or law.
Our ability to recover deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. In addition, tax laws, regulations, and policies in various jurisdictions may be subject to significant change due to economic, political and other conditions, and significant judgment is required in estimating amounts for income taxes. There may be transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of tax laws, regulations, and policies will be applied or otherwise administered that is different from our interpretation. In addition, state, local or foreign jurisdictions may enact tax laws that could result in further changes to taxation and materially affect our financial position and results of operations.
As of February 1, 2025, our deferred tax assets were reserved with a valuation allowance of $12.5 million. We also had gross unrecognized tax benefits of $10.2 million. However, we may have material adjustments in the future that may impact our income tax amounts based on additional information, additional guidance or revised interpretations.
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