Designer Brands Inc. 10-K

ITEM 1. BUSINESS Overview Designer Brands Inc., originally founded as DSW Inc., is one of North America's largest designers, producers and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company, Shoe Warehouse, and DSW banners through its Canada stores and e-commerce sites. Together, the U.S. Retail and Canada Retail segments are referred to as the "retail segments." The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commission for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year, but occasionally will contain an additional week resulting in a 53-week fiscal year. Retail Segments Banners Our DSW banners, both in the U.S. and in Canada, are the destination for on-trend and fashion-forward footwear and accessory brands at a great value every single day. We offer a wide assortment of brand name dress, casual and athletic footwear and accessories for women, men and kids. The Shoe Company and Shoe Warehouse banners in Canada offer on-trend footwear and accessory brands that target every-day family styles at a great value every single day. We offer a select assortment of brand name dress, casual and athletic footwear and accessories for women, men and kids, with a significant number of our products geared towards athletic and kids. Our e-commerce platforms offer customers access from a variety of devices through the Internet, with mobile-optimized sites, and our mobile application. Our omni-channel capabilities allow customers to order a wide range of styles, sizes, widths and categories. Online orders in the U.S. and Canada can be fulfilled from any one of our stores. Online orders from the U.S. can also be fulfilled from our fulfillment center or directly from our suppliers (referred to as "drop ship"). Our order routing optimization system determines the best location to fulfill digitally demanded products, which allows us to optimize our operating profit. To further meet customer demand of how they receive products, we provide our customers options to Buy Online Pick Up in Store, Buy Online Ship to Store, and Curbside Pickup. Likewise, returns may be shipped to us or brought back to any of our locations. Assortment We sell a large assortment of brand name, designer and exclusive branded merchandise. During fiscal 2020, we experienced a shift in customer preferences from dress toward casual and athletic offerings (referred to as "athleisure"). We plan to continue to expand our athleisure and kids’ products, and offer customers stylish exclusive brands, including the Vince Camuto, Lucky, and Jessica Simpson brands. We believe that our increased penetration in the athletic market, coupled with our historical success in dress and seasonal with a fully integrated supply chain supported by our Brand Portfolio segment, position us to be a premier footwear retailer for the entire family's needs over the long term. We purchase directly from approximately 480 domestic and foreign vendors. During fiscal 2020, the retail segments purchased approximately 8% of our merchandise through the Brand Portfolio segment, including First Cost sourced exclusive branded products and wholesale purchases of licensed products. Our other vendors include suppliers who manufacture their own merchandise, or supply merchandise manufactured by others, or both. Our top three unrelated third-party vendors in the aggregate supply approximately 22% of our retail merchandise. We separate our merchandise into four primary categories: women’s footwear, men’s footwear, kids' footwear, and accessories and other. Refer to Note 3, Revenue , of the Consolidated Financial Statements of this Form 10-K for the U.S. Retail and Canada Retail segments' total net sales attributable to each merchandise category. 1 Loyalty Programs We invite customers to join our VIP rewards programs, where members in the U.S. and Canada earn points towards discounts on future purchases. As of January 30, 2021, we have approximately 30 million members enrolled in our loyalty programs who have made at least one purchase over the last two years. In fiscal 2020, shoppers in the loyalty programs generated approximately 84% of the combined U.S. Retail and Canada Retail segments' net sales. We believe that our VIP rewards programs continue to provide timely customer insights and create stronger customer engagement while driving a higher-than-average level of customer spend. Distribution and Fulfillment For our U.S. Retail segment operations, the majority of our inventory is shipped directly from suppliers to our distribution center in Columbus, Ohio and a West Coast facility operated by a third party, where the inventory is then processed, sorted and shipped to one of our pool locations located throughout the country and then on to the stores. Our inventory can also be shipped directly from our fulfillment center, also located in Columbus, Ohio, and supported by a third-party service provider, to our customers. For our Canada Retail segment, we engage a logistics service provider to receive purchases and distribute them to our stores. Through our ship-from-store capability, both in the U.S. and in Canada, inventory is shipped directly from our stores to customers. Through our drop ship program, inventory is shipped from the vendor's warehouse directly to the customer. Inventory management is important to our business as we manage our inventory levels based on anticipated sales and the delivery requirements of our customers. Our inventory strategy is focused on continuing to meet consumer demand while improving our efficiency over the long term by putting systems and processes in place. During fiscal 2020, we made significant efforts to reduce our inventory exposure and increase our focus on athletic, casual kids, and the top 50 brands in footwear. Brand Portfolio Segment Our Brand Portfolio segment designs, develops and sources in-season fashion footwear and accessories through Camuto LLC, a wholly owned subsidiary doing business as "Camuto Group," for the sale of wholesale merchandise to our retail segments and other retailer customers. Our First Cost model earns commission-based income for serving retailers as their design and buying agent while leveraging our overall design and sourcing infrastructure. In addition, we sell branded products on the direct-to-consumer e-commerce site at www.vincecamuto.com. Refer to Note 3, Revenue , of the Consolidated Financial Statements of this Form 10-K for the Brand Portfolio segments' total net sales attributable to each channel. Licensing Rights Through Camuto Group, we own footwear, and in some cases handbag, licensing rights of Jessica Simpson, Lucky Brand, and, through a joint venture, Jennifer Lopez. In partnership with Authentic Brands Group LLC, a global brand management and marketing company, we have a 40% stake in ABG-Camuto, LLC ("ABG-Camuto"), a joint venture that acquired several intellectual property rights, including Vince Camuto, Louise et Cie, and others. ABG-Camuto is responsible for the growth and marketing of the brands held by the joint venture. We have entered into a licensing agreement with ABG-Camuto whereby we pay royalties to ABG-Camuto, with the royalty expense included in our cost of sales on the consolidated statements of operations, based on the sales of footwear, handbags and jewelry, subject to guaranteed minimums. ABG-Camuto also earns royalties on sales from third parties that license the brand names to produce non-footwear product categories. Given our 40% ownership interest in ABG-Camuto, we recognize earnings under the equity method, which is included within the Brand Portfolio segment as ABG-Camuto and considered an integral part of the Brand Portfolio segment business. Sourcing and Distribution We source each of our product lines based on the individual design, style and quality specifications of the products. We do not own or operate manufacturing facilities; rather, we use our sourcing offices in China and Brazil to procure our products from third-party manufacturers. Prior to production, our sourcing offices inspect samples and prototypes of each style and monitor the quality of the production process. We manage our inventory levels based on existing orders and anticipated sales. During fiscal 2020, we adjusted production to be more aligned with customer demand as we saw a shift away from traditional dress and seasonal. 2 The manufacturers of our products are required to meet our quality, human rights, local compliance, safety and other standard requirements. These vendors are expected to respect local laws, rules and regulations of the countries in which they operate and have pledged to follow the standards set forth in the Company’s Vendor Code of Conduct, which details our dedication to human rights, labor rights, environmental responsibility, and workplace safety. The majority of our inventory is shipped directly from factories in foreign countries to our distribution center in Westampton, New Jersey, where our wholesale inventory is then processed, sorted and provided to our customers' shipping carriers. The following table presents the percentages of the Brand Portfolio segment's merchandise units sourced by country: Fiscal 2020 2019 China 73 % 83 % Vietnam 13 % 8 % Brazil 7 % 2 % All other foreign locations 7 % 7 % Competition The footwear market is highly competitive with few barriers to entry. We compete against a diverse group of manufacturers and retailers, including department stores, mall-based shoe stores, national chains, independent shoe retailers, single-brand specialty retailers, online shoe retailers, brand-oriented discounters, multi-channel specialty retailers and brand suppliers. In addition, our wholesale retailer customers sell shoes purchased from competing footwear suppliers with owned and licensed brands that are well known. Human Capital Resources We believe the strength of our workforce is critical to our success. Our associates strive every day to create a welcoming and inclusive environment for our customers. One of our core strategies is to invest in and support our associates to differentiate our products and experiences in the competitive footwear market, including the following areas of focus described below. Workforce Our key human capital management objectives are to attract, retain, and develop the highest quality talent. To support these objectives, our human resources programs are aimed to: • develop associates to prepare them for critical roles and leadership positions for the future; • reward and support associates through competitive pay, benefit, and perquisite programs; • enhance our culture through efforts aimed at making the workplace more engaging and inclusive; • acquire talent and facilitate internal talent mobility to create a high-performing, diverse workforce; • engage associates as brand ambassadors of our products and experiences; and • evolve and invest in technology, tools, and resources to support our associates at work. As of January 30, 2021, we employed approximately 11,400 people worldwide, including approximately 9,500 in the U.S. During fiscal 2020, the COVID-19 pandemic had a significant impact on our business, operations, and workforce and resulted in significant variances in our human capital metrics, such as headcount, compared to prior years. 3 Total Rewards To remain an employer of choice and maintain the strength of our workforce, we consistently assess the current business environment and labor market to refine our compensation practices, benefit programs and other associate resources. We have a history of investing in our workforce and offer comprehensive, relevant, and innovative benefits to eligible associates in the U.S. Compensation Related- • We provide market competitive wages and salaries, targeting the middle of the market in most cases. • We establish a minimum starting pay rate for each U.S. store that exceeds the federal minimum wage and typically exceeds the state minimum wage. • Our incentive plans provide additional cash compensation upon the achievement of results that exceed defined Company goals and are available to store management, distribution center, call center, and corporate support center associates. • We provide stock-based long-term incentives for leaders that align with the interests of shareholders. • We provide retirement benefits through our safe harbor 401(k) Plan, with employer matching contributions up to 4% of associate contributions. Health & Wellness Related- • For fiscal 2020, we adopted a special COVID-19 paid leave policy that provided up to two weeks of pay for associates who contracted the virus, were involuntarily quarantined because of the virus, or were without work due to changes in our store hours or production schedules as a result of the virus. • Subsidized backup childcare is provided to "front-line" associates who work in our stores, distribution centers, and the call center who need emergency childcare services, especially in light of the COVID-19 pandemic. • All associates are provided free access to a national network resource to locate babysitters and nannies, cleared by a background check, as well as discounts on tutoring, and day care centers. • Free counseling and support, including access to licensed counselors and work/life and bereavement specialists, is available to all associates and family members 24/7/365. In addition to telephonic access, virtual tools were added in fiscal 2020 to better meet the needs of our associates. • To better support our associates’ mental health and well-being, we conducted Mental Health First Aid training with our human resources personnel who support various associate populations through a program created by Mental Health America. • Comprehensive health insurance coverage is available to all full-time associates through multiple medical plans, which also include prescription and vision insurance. Other benefits provided to associates and their dependents who are enrolled in a medical plan include: ◦ Concierge care coordinators and nurses who provide assistance with all aspects of our health plan including clinical support for health conditions, locating high quality doctors, enrolling in benefit plans, advocating to resolve insurance billing issues, connecting to available community resources and answering member benefit questions. ◦ Unlimited telemedicine access to U.S. board-certified physicians, via phone or video conference, is available to all full-time associates for general medical, dermatology, and mental health services. ◦ Fertility services are available through a premier fertility partner who provides concierge support and access to leading fertility centers of excellence across the nation. Our medical plan covers up to two cycles of IVF or other fertility services in addition to necessary fertility medication and testing. ◦ Maternity and parenting tools to assist before, throughout, and beyond pregnancy are available to all full-time associates through a navigation application with capabilities to phone or text a nurse. The application helps associates discover tools and resources available throughout a maternity/paternity leave of absence, as well as the subsequent return to work. In addition, we welcome the arrival of new family members with an after-birth care package. • Paid leave time programs are available to all full-time associates and include short-term disability, paid parental leave, military pay, jury duty, and bereavement pay. • Free legal help is available to all associates in areas such as civil/criminal needs, family disputes, immigration law, landlord/tenant issues, and basic document preparation. • Free financial help, including debt counseling, lease/purchase guidance, taxes, financial planning, and college funding, is available to all associates. 4 • Adoption assistance is available to all full-time associates with reimbursement up to $10,000 of eligible expenses for each adoption. • Tuition reimbursement up to $5,250 per year is available to all full-time associates and matched tuition benefits are available through an accredited online university partner. • Discounts for all associates on DSW, American Eagle Outfitters/Aerie, and American Signature/Value City Furniture products. • Associate accomplishments and work anniversaries, starting with one year of service, are recognized and rewarded through our web based "Inspire Greatness" recognition program. Diversity, Equity, & Inclusion ("DE&I") We support diversity, equity, and inclusion. We believe: • Diversity is the celebration of the ways we are alike, as well as unique. • Equity compels us to be fair, while also recognizing the need to treat others differently in order to mitigate the risk of inadvertently perpetuating systemic barriers. • Inclusion is the act of ensuring our differences are not only acknowledged, but also welcomed and valued. We strive to inspire self-expression, authenticity, and empowerment to drive the best possible experiences for our associates, customers, and communities. Formal ways for associates to get involved and help advance our DE&I strategy include: • Business Resource Groups ("BRGs") are voluntary, associate-led groups organized around a common diversity dimension to foster an inclusive, engaging work environment for all. • Community Interest Groups ("CIGs") are voluntary, associate-led groups based on a common passion or interest to drive a sense of community and shared purpose. • Councils are voluntary, associate-led groups organized to create a sense of inclusion and belonging for those who work in our stores, distribution centers, and fulfillment centers. No group is exclusive; all groups are open to any associate who wants to join, and associates can be a member of one or more groups. Our BRGs, CIGs and Councils provide a unique strategic perspective of shared experience, background, and allyship, while promoting diversity in our workplace and community. Our DE&I principles are also reflected in our associate training programs, which address our policies against harassment, bullying, and bias in the workplace. In fiscal 2020, a Racism Matters webinar series was utilized to address systemic racism and ensure we continue to create an inclusive culture for all associates. Recognizing and respecting our customer base, we strive to maintain a diverse and inclusive workforce. In the U.S., over 80% of our associates are female and over 50% of the associate population is comprised of people of color. Additionally, women make up 40% of the Company’s Board of Directors. Mr. Rawlins, Designer Brands' Chief Executive Officer ("CEO"), is a proud signatory of the CEO Action for Diversity & Inclusion Pledge, the largest CEO-driven business commitment to advance diversity and inclusion in the workplace. This demonstrates our goals of cultivating open dialogue, expanding diversity training, sharing best practices with other companies, and engaging our Board of Directors in the evaluation of our progress. For the second year in a row, Designer Brands has been recognized for its LGBTQ+ inclusion efforts with a perfect score on the Human Rights Campaign’s ("HRC") Corporate Equality Index. A perfect score places us on HRC’s "Best Places to Work for LGBT Equality" list. We are on a journey to promote greater levels of DE&I in everything we do. While much progress has been made, we know there is still a long way to go. We will continue to challenge our own biases, initiate difficult conversations in meaningful ways, engage diverse perspectives to drive innovation, and intentionally evolve our operating strategies to advance this important work. Talent Development To help our associates succeed in their roles, we emphasize continuous learning and development opportunities. Training provided through our online learning platform includes a wide variety of topics and is designed to address the needs of our entire workforce, from entry-level associates to our most senior executives. We invest resources in professional development and growth as a means of improving associate performance, engagement, and retention. During fiscal 2020, over 11,000 associates took training courses via our online learning platform. We believe that our continued focus on frequent and constructive performance feedback, talent reviews, succession planning, and retention, have contributed to a strong internal promotion rate. 5 Associate Engagement We provide all associates with the opportunity to share their opinions and feedback on their employment experience through an engagement survey that is generally performed every two years across all business segments. Results of the survey are measured and analyzed with a goal of enhancing the associate experience, strengthen engagement and retention, and drive change. In addition to Company-led surveys, leaders are encouraged to conduct "skip level" touch bases, host round table chats, and conduct follow-up activities to better understand associate feedback. Also, upon exiting the Company, associates who voluntarily leave the business are provided an exit survey to help us measure satisfaction and engagement specific to what factors may have contributed to pursing another opportunity. DBI Gives We strive to give back and DBI Gives is our philanthropic program that has two main areas of focus: 1. Empowerment - Support organizations that prioritize empowerment and build self-confidence without discrimination. 2. Community - The places where we live and work mean everything to us. As a result, we support the organizations that put local communities first. DBI Gives has three primary areas of partnership: 1. SOLES4SOULS - Soles4Souls creates sustainable jobs and provides relief through the distribution of shoes and clothing around the world. Since 2006, Soles4Souls has distributed more than 30 million pairs of new and gently worn shoes. We are proud to have donated nearly four million of those pairs during our partnership. 2. Two Ten Footwear Foundation - Two Ten provides scholarships and financial aid to people working in the footwear industry, as well as free counseling and community resources. 3. Hometown Partnerships - We continually focus on what it means to be a good corporate citizen. From annual United Way fundraisers, American Red Cross blood drives, local nonprofit partnerships, and associate volunteering efforts, we always look for ways to help and better the communities in which we operate. Government Regulations Our business activities are global and subject to various federal, state, local, and foreign laws, rules and regulations. For example, substantially all of our import operations are subject to complex trade and customs laws, regulations and tax requirements such as sanctions orders or tariffs set by governments through mutual agreements or unilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Changes in tax policy or trade regulations, the disallowance of tax deductions on imported merchandise, or the imposition of new tariffs on imported products, could have an adverse effect on our business and results of operations. Compliance with these laws, rules and regulations has not had, and is not expected to have, a material effect on our capital expenditures, results of operations and competitive position as compared to prior periods. For more information on the potential impacts of government regulations affecting our business, see Item 1A. Risk Factors . Intellectual Property We have registered a number of trademarks, service marks and domain names in the U.S., Canada and internationally, including DSW®, DSW Shoe Warehouse® and DSW Designer Shoe Warehouse®. We also have a 40% interest in ABG-Camuto, which holds the intellectual property rights of Vince Camuto®, Louise et Cie®, and others. We believe our trademarks and service marks have significant value and are important to building our name recognition. We also hold patents related to our unique store fixtures, which gives us greater efficiency in stocking and operating those stores that currently have the fixtures. We vigorously protect our patented fixture designs, as well as our packaging, private brand names, store design elements, marketing slogans and graphics. Seasonality Our business is generally subject to seasonal 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. During fiscal 2020, we did not experience the typical seasonal trends due to customer behavior impacted by COVID-19. 6 Available Information Information about Designer Brands Inc., including its reports filed with or furnished to the Securities and Exchange Commission ("SEC"), is available through Designer Brands Inc.'s website at www.designerbrands.com. Such reports are accessible at no charge through Designer Brands Inc.'s website and are made available as soon as reasonably practicable after such material is filed with or furnished to the SEC. The SEC also maintains a website that contains reports, proxy statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We have included our website addresses throughout this report as inactive textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-K.