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DSW Owner Capitalizes on Clearance Customer’s Comeback

Designer Brands Inc. (DBI) saw net sales increase 5.1 percent to $859.3 million on net income of $46.2 million.

Overall, the earnings beat has the footwear company confident about its prospects going into the back half of 2022. The DSW and Camuto Group parent raised its third-quarter earnings guidance to a range of $2.05 per share to $2.15 per share, up from the previous $1.90 per share to $2.00 per share range. Projected comparable sales growth remains in the mid-single digits.

In a Nutshell: Clearance is the name of the game for Designer Brands, as the company seeks to re-engage customers who haven’t shopped with the company in over a year, CEO Roger Rawlins told Wall Street analysts in a call Wednesday.

Despite its average customer having an annual household income of $100,000, and somewhat less impacted by inflation headwinds, the shift is working thus for the company. The company has reacquired approximately 2 million “clearance customers” year-to-date, resulting in clearance sales rising 5 percent in the quarter, compared to being down 5 percent in the first quarter of this year.

“We firmly believe that a consistent clearance assortment is a strategic differentiator and a critical part of our unique business model,” said Jared Poff, executive vice president and chief financial officer of Designer Brands Inc. “And we have been executing on plans to rebuild our clearance assortment and reacquire those clearance customers. This started in the second quarter and is building through the third quarter.”

DBI ended the quarter with “more normalized” inventory levels of $694 million, up 37.6 percent compared to $504.3 million at the same period last year with accelerated receipts to support fall season demand.

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DSW, in particular, is leaning into the elevated demand for the back-to-school season, which company president Doug Howell called “a new peak demand period” for the retailer. Upon shifting focus to the season last year, which it calls “Septober,” DSW modified its assortment to emphasize athletic and kids’ products.

According to NPD Group data, DSW outpaced the rest of the footwear market in sales by five percentage points in kids’ footwear in the second quarter. On a three-year basis, DSW’s second quarter growth outpaced the rest of the market in athletic and sport lifestyle by 12 percentage points.

“Even without the presence of Nike in our assortment, we’ve seen sales increases compared to 2021,” Howell said. “We are gaining market share, we are growing and we have no intention of taking our foot off the gas.”

As of the end of July, DSW engaged members were up 9 percent compared to the prior year, driven by strong reacquisition of pre-pandemic customers and the addition of new customers.

Gross profit increased to $295.7 million versus $284.7 million last year, and gross margin was 34.4 percent, down 40 basis points (0.4 percentage points) from 34.8 percent last year.

Higher freight costs continue to impact all of DBI’s segments, increasing roughly $12 million compared to the second quarter last year. Margins were also impacted by the strategic increase in clearance sales, as well as elevated costs related to the consolidation and optimization of its fulfillment centers.

As Designer Brands expects to see reacquired customers incrementally return to the business, it anticipates delivering a slightly lower year-over-year gross margin in the third quarter and 2022.

On the call, Rawlins said the company remains on track to deliver its commitment to doubling the sales of its owned brands by 2026. This includes labels like the recently added Le Tigre, as well as Vince Camuto, Kelly & Katie, Hush Puppies, Jessica Simpson, Crown Vintage, JLO Jennifer Lopez, Mix No. 6 and Lucky Brand.

Cash and cash equivalents totaled $50.8 million at the end of the second quarter, compared to $46.5 million at the end of the same period last year, with $157.7 million remaining available for borrowings under its credit facility. Debt totaled $387.4 million at the end of the quarter.

Net Sales: Net sales increased 5.1 percent to $859.3 million, from $817.3 million in the second quarter of 2021. Comparable sales increased 6.2 percent.

U.S. retail sales were $734.1 million, which represents 83.5 percent of the DBI business, jumping 1.5 percent from last year’s total of $723.1 million. Canada retail sales were $78.3 million, or 8.9 percent of total sales, up 35.9 percent from the $57.6 million taken in during the 2021 second quarter.

The company’s Brand Portfolio segment generated $66.4 million in sales, or 7.6 percent of total sales. The segment soared 31.3 percent from the $50.5 million in sales during the year-ago period.

Vince Camuto e-commerce sales increased 43.3 percent.

Net sales from DBI’s Owned Brands increased 40.4 percent over the same period last year to $194.8 million, up from $138.8 million. Owned Brands represented 23 percent of DBI’s revenue compared to 17 percent in the second quarter last year.

Net Earnings: Reported net income at Designer Brands was $46.2 million in the second quarter, an increase from the $42.9 million taken in during the prior-year period. The company reported diluted earnings per share (EPS) of 62 cents, up from 55 cents per share in 2021.

Adjusted net income was $46.1 million, up from adjusted net income of $43.4 million in the 2021 second quarter. Adjusted diluted EPS was 62 cents, an increase from the year-ago quarter’s 56 cents per share.

CEO’s Take: Rawlins discussed the “Warehouse Reimagined” DSW concept store that opened in May in Houston.

“We are only about 90 days into the concept, but the initial customer feedback that we’re getting from it is incredibly positive. As we shared, we opened this up as a laboratory, and we want to continue to watch and iterate,” Rawlins said. “There have definitely been some learnings that we’ll be able to scale. But again, we want to be mindful of just making sure that we really leverage those when we roll them out to the full fleet of stores. In particular, we’re really pleased with the shop-in-shop concepts that we’ve deployed there in partnership with some of our national brands. So again, it’s just an opportunity to get more storytelling in that store environment.”