Designer Brands Inc. is reaping both the benefits and consequences of a broader industry shift toward direct-to-consumer business.
Continued success in athleisure and strengthening sales in seasonal returned the DSW owner to profitability this past quarter for the first time since the pandemic began. Meanwhile, dress footwear—down from 22 percent of the company’s business in the first quarter of 2019 to now 10 percent—remained depressed.
In a Nutshell: Ever since the coronavirus outbreak, Designer Brands has made a central focus of growing DSW’s athleisure assortment. Previously accounting for 30 percent of its products, athletic footwear climbed to 46 percent penetration in the fall. This spring, the retailer expects it to reach close to 55 percent, well above its prior goal of simply surpassing 50 percent.
DSW’s work to establish itself in athletic footwear will hit a notable speed bump next year, however, when the retailer loses Nike.
In March, a report emerged claiming the footwear heavyweight planned to stopping wholesaling product to DSW and five other retailers. A Designer Brands spokesperson confirmed the news at the time. CEO Roger Rawlins addressed the split Wednesday on the company’s first-quarter earnings call.
According to Rawlins, Nike will cease taking further orders from DSW beginning in September, though the retailer will continue to offer the brand’s products in stores and online through the remainder of the year. Rawlins noted that the brand—DSW’s “largest athletic vendor”—accounted for less than 5 percent of total sales in 2019. This past year, it surpassed 7 percent “as a result of the mix shift as dress and seasonal dropped off significantly during the pandemic,” he added.
Since learning of Nike’s decision to cut ties, Rawlins said Designer Brands has spoken with the leaders of every major athleisure brand it works with. “They see this news as an opportunity for growth and we couldn’t be more excited about the work ahead with these brands,” he said.
Moving forward, the CEO said DSW is looking to grow into categories it hasn’t traditionally carried, such as trail, hiking and technical running. To support these efforts, the retailer plans to launch in-store shop-in-shops, as well as amplify the new categories’ presence on its online channels.
“We will take every action necessary to ensure we retain and grow our customer base in athleisure,” Rawlins said.
Nike’s continued pivot to a more direct-to-consumer model is not dissimilar from Designer Brands’ own strategy, Rawlins acknowledged. This shift in focus, he said, will center the company’s owned brands, including exclusive brands only available at DSW like Kelly & Katie and Mix No. 6, as well as labels it has an ownership stake in, such as JLo, Vince Camuto, Lucky and Jessica Simpson. In the first quarter, Rawlins said 15 of the company’s top 25 selling items were designed and sourced vertically by Designer Brands.
“Having the ability to design and source the majority of this product through Camuto and having full control of the supply chain enables us to move these brands faster through our DSW channel when demand increases,” Rawlins said.
This advantage appears to have paid off in the first quarter. Designer Brands’ seasonal- and dress-focused Camuto Group, though still challenged, beat the company’s internal expectations after the company decided to accelerate production early in the quarter in response to increased demand.
As a result of this pivot, Camuto ended the quarter with production up 3 percent year-over-year, but down 19 percent compared to 2019, chief financial officer Jared Poff said. In the second quarter, Designer Brands expects Camuto to be up 64 percent compared to the prior-year period. Though Poff didn’t offer any numbers for the second half of the year, he said the company expects production to continue to build, primarily driven by a recovery in seasonal footwear demand.
Designer Brands ended the quarter with inventory up 1 percent compared to last year, though down 25 percent on a unit basis. Compared to 2019, inventory was down 16 percent in total and 19 percent on a unit basis.
Net Sales: Designer Brands saw net sales grow 45.6 percent in the quarter ended May 1 to a pandemic high of $703.2 million. Comparable sales, meanwhile, climbed 52.2 percent as they lapped last year’s 42.3 percent decline. U.S. retail comparable sales rose 56.3 percent versus last year’s 42.4 percent drop.
Designer Brands saw significant growth in athletic and kids’ footwear, with comparable sales up 87 percent and more than 78 percent, respectively. Athleisure, which the company defines as including athletic and casual, grew 92 percent versus last year. Meanwhile, seasonal footwear climbed 58 percent and dress declined 10 percent.
Digital demand represented 35 percent of total demand in the first quarter, Poff said. Though down from last year’s 49 percent, this was well above the 2019 level of 22 percent.
Designer Brands’ Camuto Group recorded total net sales, including sales to DSW, of $57.4 million in the first quarter, down 30.1 percent from the same period last year. Wholesale sales totaled $48.6 million versus last year’s $67.5 million.
Earnings: Designer Brands reported net income of $17 million, or $0.22 per diluted share, in the first quarter. This included net benefits of $0.10 per diluted share from adjusted items, primarily the change in the valuation allowance on deferred tax assets, the company said.
Adjusted net income totaled $9.5 million, or $0.12 per diluted share.
CEO’s Take: “As we look forward, we believe the positive trends in the first quarter will continue, and we are optimistic that the industry will recover more fully as we head into the fall,” Rawlins said. “We’ve been aggressively going after athleisure market share and growing penetration with the most popular brands…. The second half of the year, we will continue to follow the customer recovery and make selective inventory investments that mirror demand growth, while maintaining flexibility and liquidity to deploy as appropriate.