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Watch Out, Foot Locker: DSW Parent Wants to Be ‘Go-To Sneaker Headquarters’

DSW parent company Designer Brands Inc. is rearranging its operations in line with current sales and shopping trends and says it has managed its inventory in order to “chase” Fall trends as it pivots towards the ongoing athleisure movement.

In a Nutshell: Like many in fashion and footwear, the shoe seller is tapping into the consumer craze for “comfort and cozy.”

“Although the Covid-19 pandemic continues to impact consumer behavior and our business, I am confident in Designer Brands’ playbook to navigate this ever-changing environment,” CEO Roger Rawlins said. “We believe our recent actions to right size our expense structure and obtain additional liquidity, our strategic digital investments, flexible business model, and strong vendor partnerships as well as our status as one of the largest footwear retailers have firmly positioned Designer Brands to weather the road ahead.”

Designer Brands has narrowed its focus to the top-50 brands in footwear and reduced distribution points for Camuto-produced brands, Rawins said during Thursday’s Wall Street conference call. The company, he added, is “getting access to national brands that we have never had before. We’re securing product in every style, color and size as these brands recognize our command of over 30 million rewards members and are positioned as a strong go-forward customer as other retailers are slowly disappearing.”

Rawlins said the footwear firm is being given “more product choices and all major brands are expanding the breadth of assortment we can sell through. Some are even providing us with special makeup and closeouts in addition to their full line of goods, which we can offer to our customers at compelling price points. Customers will see a noticeable difference in our assortment and penetration within these top-50 brands in footwear starting this fall.”

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Rawlins acknowledged challenges with the Camuto business, citing its focus on dressy styles—the reason for its acquisition in the first place. While the integration remains on track, Rawlins said Designer Brands has decided to shut down Sole Society and focus on Vince Camuto, Jessica Simpson and Lucky.

The pandemic could give the shoe company a chance to expand. “We see a large market share opportunity ahead of us,” Rawlins said, describing the firm as under penetrated in the athleisure space. “Designer Brands has the flexibility and the necessary vendor relationships to become a go-to sneaker headquarters during this time,” Rawlins said. “In particular, we have had conversations with the top-five athletic brands in North America, who are excited about leveraging our platform to build their customer base. Our primary female customer base is a highly desirable audience for these brands, and we are currently under-penetrated in men’s athletic footwear. So, all parties have much to gain from these potential partnerships.”

He said that in its U.S. retail business, the athletic business represented 24 percent versus 17 percent a year ago. “In the second quarter, we saw athletic comping down 24 percent, stronger than our overall store traffic, which was down 59 percent. Conversely, dress and seasonal are comping negative 66 percent and negative 47 percent respectively, reflecting changing consumer demand. In the fall season, we continue to plan for an increase in athletic penetration relative to normal levels to north of 25 percent of our assortment,” he said.

For now, the pandemic continues to pose nothing but unknowns. “According to data insights from Sense360 in an ongoing study, the percent of Americans believing the pandemic would last longer than six months has risen from just 9 percent in early April to just under 50 percent at the end of Q2,” Rawlins said. “The environment remains incredibly fluid and it is critical that we adapt. We’re taking our learnings over the past six months, particularly related to consumer behavior changes, and adjusting our actions accordingly to better serve our customers’ needs.”

The DSW owner has also made good on rent, reaching an agreement “with nearly all major vendors and landlords on past-due amounts.” The company continues to work with landlords on lease terms that better align that the reality of sales and consumer behavior. “While we are still in the early stages of these discussions, the majority of our landlords have agreed to more flexible terms, helping to mitigate top line impacts from Covid,” he said.

In addition, Designer Brands has “aligned with vendors on new payment terms and are expecting them to strictly adhere to these going forward,” he added.

Net Sales: The company said net sales fell 42.8 percent to $489.7 million from $856.0 million, with comparable sale falling 42.7 percent in the quarter, versus just a 0.6 percent decrease in the same year-ago period.

By segment, U.S. retail net sales was down 41.9 percent to $394.0 million from $678.0 million. The Canada Retail business declined 21.7 percent to $49.6 million from $63.3 million and the Brand Portfolio component fell 70.4 percent to $30.5 million from $102.9 million. The company also reported a 24.5 percent decrease in its “other” category to $22.3 million from $29.5 million. The reporting of its $489.7 million net sales figure includes the elimination of intersegment net sales in the final tally.

Gross margin as a percentage of sales was 7.6 percent, or 8.2 percent on an adjusted basis, versus 30.5 percent a year ago on a reported and adjusted basis. The company said the decrease was due to the impacts of the coronavirus outbreak, such as temporary store closures and reduced customer traffic upon store reopenings. The company also said it posted increased shipping costs in the quarter in line with higher digital orders.

Inventory for the quarter was down 37 percent and in-line with the 42.8 percent decline in sales, the company said, noting that it is “well-positioned to chase into developing Fall trends.”

For the six months, net sales fell 43.8 percent to $972.5 million from $1.73 billion.

Earnings: The net loss for the quarter was $98.2 million, or $1.36 a diluted share, against net income of $27.4 million, or 37 cents, a year ago. On an adjusted basis, the loss per diluted share was $1.28.

The company said cash and investments totaled $2.06.7 million at the end of the quarter, versus $77.3 million for the same year-ago period. Debt increased to $393.0 million versus $235.0 million last year, with Designer Brands noting that was due to net borrowings from its revolving credit facility as a precautionary measure to preserve financial flexibility in the current Covid-19 environment. Last month, the company also replaced its existing revolving credit facility with a new $400.0 million asset-based revolver and completed a five-year $250.0 million Secured Term Loan.

For the six months, the net loss was $314.1 million, or $4.36 a diluted share, against net income of $58.6 million, or 77 cents, a year ago.

CEO’s Take: “In order to serve our customers in the near-term, we are flexing fall inventory receipts away from seasonal and dress products and towards our highest-performing category, athleisure, with an emphasis on comfortable and cozy products. We have the unique ability to pivot inventory quickly and follow the customer as needs and preferences change in the future. We are confident that we know what the customer wants, and we know how to deliver it to them, be it digitally or in-person and socially distanced, and we will be prepared in any situation,” Rawlins said.