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DSW Owner Talks Store Closures, Athleisure and JLo Reboot

With dress footwear continuing to face challenges, DSW owner Designer Brands Inc. continued to lean into the athleisure segment and invest in building up its younger-leaning digital customer base in the fourth quarter.

In a Nutshell: Speaking to investors Tuesday, CEO Roger Rawlins said DSW is currently focusing on three categories: athleisure, kids’ and seasonal.

DSW has moved to embrace athletic footwear as dress shoes continue to suffer in a work-from-home business world. Historically underpenetrated in the category—Rawlins pointed to NPD data from 2019 that placed overall market penetration of athleisure footwear at 55 percent compared to the brand’s 30 percent—DSW has seen sales continue to rise. In the fall of 2020, the CEO said, athleisure represented 46 percent of its sales. In the fourth quarter, the category was up 13 percent year-on-year.

DSW plans to continue its investment in athleisure in spring 2021, Rawlins said, aiming for the category to make up 50 percent of its assortment during the period.

DSW’s kids’ business saw year-over-year growth in the fourth quarter, with sales up 4 percent, outpacing the market’s 0.5 percent growth rate, as measured by NPD, Rawlins said. Seasonal footwear also performed well in the fourth quarter, with DSW managing to sell through its boot inventory without taking the markdowns it had anticipated would be necessary a quarter ago.

“The historical success of our dress and seasonal businesses, coupled with our newfound market share in athleisure sets the foundation for us to be a stronger player in footwear,” Rawlins said. “It will enable us to reach an even broader customer base as a one-stop shop.”

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DSW plans to lean into its top 50 brands moving forward, Rawlins said. In the fourth quarter, this group accounted for 71 percent of sales and posted a decline of 8 percent, outperforming the total chain, which saw a 20 percent slump. Brands outside this group dropped 35 percent. In the spring, Rawlins said, DSW anticipates growing these 50 brands by more than 50 percent compared to 2020.

Designer Brands’ dress footwear business remained challenged in the fourth quarter. The company saw the segment decline 61 percent in the United States compared to last year as digital demand fell 41 percent and U.S. sales penetration fell from 16 percent a year ago to 8 percent.

Given the tough environment Designer Brands’ Camuto Group is facing, the formal footwear business decreased its headcount across three geographies in the fourth quarter, reducing overall headcount by 25 percent, according to Rawlins. As it focuses on its top brands, it has also reduced the total number of labels that it will include in its assortment moving forward.

While the company waits for demand to return, Rawlins said, Camuto is taking the opportunity to focus on three owned brands: Vince Camuto, relaunching in the fall “with an elevated design, materials and aesthetic,” Lucky and Jessica Simpson. The business also plans to relaunch its JLo Jennifer Lopez line, he added.

With customers increasingly buying online, Designer Brands has been leaning into its digital marketing “more heavily than ever before,” Rawlins said. In locations where the company made these investments, digital demand grew double digits and store traffic saw notable improvement as well, he added.

According to Rawlins, this digital push has helped the company gain more than 900,000 new customers. “As we look at that customer base, it skews significantly younger and is a different consumer than the one we had pre-pandemic,” he noted.

During fiscal 2020, Designer Brands opened six stores and closed eight in the U.S., resulting in a total of 519 U.S. stores. In Canada, it opened two and closed three, resulting in 144 Canadian stores.

Given continued constraints in store traffic and the success of the company’s digital business, chief financial officer Jared Poff said Designer Brands is evaluating its store fleet “on a preliminary basis,” identifying approximately 65 U.S. locations “that would make sense to close upon their natural lease expirations, primarily over the next four years.” This includes about 24 stores that Poff said the company views as eligible for closure in 2021. These numbers and the stores being considered for closure, he noted, will inevitably change over time, depending on how sales recover and landlord lease negotiations shake out.

Designer Brands plans to open eight U.S. DSW stores in the U.S. in 2021 that it was contractually committed to prior to the pandemic. In Canada, the company expects to close three stores and open three more in 2021. The country could see additional closures, even in 2021, as leases come up for renewal, Poff said.

The company ended fiscal 2020 with inventories of $473.2 million, down 25.2 percent from last year. Looking to the current year, Poff indicated that Designer Brands doesn’t anticipate inventory returning to historic levels soon and that is positioning itself so that the spring inventory will look similar to fall of 2020.

“We are not planning for materially increased demand in dress or seasonal footwear, but have taken the necessary steps to ensure we have maximum flexibility to lean into those categories if demands return earlier, especially with our Camuto Group being at the ready,” Poff said.

Designer Brands’ cash and investments totaled $59.6 million at the end of the fiscal 2020 compared to $111.5 million a year earlier, with $294.7 million available for borrowings under a senior secured asset-based revolving credit facility. The company reported debt of $334.8 million, compared to $190 million debt outstanding at the same point last year.

Net sales: Net sales totaled $609.4 million in the fourth quarter ended Jan. 30, down 26.6 percent compared to the same period last year. Comparable sales performed slightly better, falling just 20.1 percent.

Gross profit decreased to $135 million in the fourth quarter, down from $205.9 million last year. Gross margin as a percentage of sales was 22.2 percent in the fourth quarter, compared to 24.8 percent a year earlier. Designer Brands primarily attributed the decrease in gross profit rate to the significant reduction in customer traffic and resulting lower sales volume.

In fiscal 2020, net sales decreased 36 percent compared to the prior year to $2.2 billion. Comparable sales declined 32.4 percent.

Gross profit dropped from $999.7 million in fiscal 2019 to $311.2 million this past fiscal year as a result of elevated markdown activity, increased shipping expenses due to higher digital penetration and deleverage on occupancy, fixed distribution costs and royalty expense related to the decline in net sales, Designer Brands said. Gross margin as a percentage of net sales fell from 28.6 percent to 13.9 percent over the same period.

Earnings: Designer Brands recorded a net loss of $134 million, or $1.85 per diluted share, in the fourth quarter. This included net charges of $1.32 per diluted share from adjusted items primarily related to impairment and restructuring charges and the valuation allowance established against deferred tax assets, it said.

Adjusted net loss totaled $38.6 million, or $0.53 per diluted share, in the fourth quarter.

The company reported a net loss of $488.7 million, or $6.77 per diluted share, in fiscal 2020, including net charges of $2.87 per diluted share from adjusted items primarily related to impairment and restructuring charges, a settlement gain with a vendor and the valuation allowance established against deferred tax assets.

Designer Brands reported an adjusted net loss of $281.7 million, or $3.90 per diluted share, for full fiscal year.

CEO’s Take: “First, we have worked hard to stabilize our business, as demonstrated by the sequential improvement we saw throughout 2020,” Rawlins said. “Ultimately, we believe that fashion is going to come back in a bigger way than ever before once our customers are able to more safely move forward with their social activities. Second, our approach of being nimble on our feet to pivot our assortment has enabled us to gain market share in athletic and grow with our top 50 brands. And finally, our newfound market share in athletic, coupled with the historical success of our dress and seasonal businesses positions us to be an even stronger player as the market recovers.”