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DSW Owner Will Make Much Less Product in China

Designer Brands Inc. (DBI) is planning to pull back on manufacturing in China as it looks to double owned brands sales by 2026, get products to consumers quicker and roll out a new digitally integrated store format.

At the company’s annual Investor Day on Friday, Bill Jordan, president and chief growth officer at DBI, said the company is committing to cut its percentage of China-sourced goods from 80 percent to 50 percent by 2024.

While its concentration in China benefitted DBI in 2021 as Vietnam factories shuttered to combat Covid-19 outbreaks, the DSW owner wants to continue to provide alternative factory options to protect against global events that could strain the supply chain. Alongside China and Vietnam, which produce more than 85 percent of product, the footwear giant also sources merchandise from Brazil.

“The reality is we don’t want to be that invested in one country,” Jordan said. “We want to be able to source every category of goods that we make in at least two countries. Doing that will diversify and limit our risk, but will also open up speed and cost opportunities for us.”

The move comes as the DSW parent is going full speed ahead with its direct-to-consumer ambitions, with the company aiming to double the sales of its owned brands by 2026. DBI also wants to increase its pairs of shoes manufactured by roughly 20 percent by 2024, with total pairs produced going from 19.4 million last year to an estimated 23.2 million.

DBI is already rising to the occasion, having taken two months off the footwear production cycle by expanding its “test-and-learn” capabilities in order to quickly capitalize on trends.

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“We can take a design and we can send it to a factory overseas and have 200-to-300 pairs made in a very short period of time,” Jordan said. “We air freight that product into the U.S., we put it into one of our 500 stores or in our digital channels, and we read it for just two weeks. At the end of two weeks, we know whether or not that is going to be a good seller…In November, if we test a sandal in a warm weather location, and we see a hit, we can be in stock at the end of February in a meaningful way in a product that we know customers want.”

As the Camuto Group owner produces more shoes and aims to get them to consumers more quickly, it is also looking to cut the average per-shoe production cost by 10 percent, and bring two-to-three day and same-day delivery to key markets.

Jordan said DBI is looking to achieve these goals by consolidating its fulfillment centers to one Columbus, Ohio location, upgrading its order management system, onboarding new regional carriers, establishing four new “hub facilities” or mini-distribution centers “stocked with key items that we’re buying in depth, locating them closer to the customer,” and building a new distribution center on the West Coast.

Jordan said the new West Coast facility open in partnership with a third-party logistics (3PL) partner to reduce capital expenditures.

Jordan also told investors that DBI’s shared inventory availability strategy across banners is helping cut costs, particularly in reverse logistics. In 2021, almost half of all returns from products bought on the Vince Camuto website were made at DSW store. DBI is rolling out the same process for the Hush Puppies brand so that customers can return shoes at DSW stores starting May 4.

Like many retail operations, DBI is also aiming to figure out what the best way to optimize its store operation going forward, with CEO Roger Rawlins previously saying “we need to get smaller in certain locations.”

Jordan confirmed during the investor presentation that over the next three years, the company will reduce total retail square footage by 14 percent.

He said there would be a “very small” number of store closures, but indicated that much of the cutbacks would instead come from remodeling select existing stores into a new concept called “Warehouse Reimagined.”

“We’ve got this Warehouse Reimagined prototype, which takes up less space without giving up the capacity that we need to offer that full assortment of footwear at that spot,” Jordan said. “This will help keep our expense base in check, while allowing us to continue to have a national footprint within 20 minutes of the majority of the population.”

Julie Roy, Designer Brands’ chief marketing officer, said during the presentation that Warehouse Reimagined will include curated shop-in-shops depending on which individual labels are more popular in each location. The concepts build off the company’s previous success with installing Vince Camuto shop-in-shops across 500 DSW stores. These mobile-friendly locations allow shoppers to scan QR codes to gain more insight into a brands’ larger assortment and find a product that’s not available in stores.

Five-year plan focuses on owned brand growth

Rawlins touted DBI’s strength as “brand builders” when outlining the company’s five-year growth strategy.

In 2021, DBI-owned brands, which include labels like Vince Camuto and Mix No. 6 as well as licensed partners like JLO Jennifer Lopez, Jessica Simpson, Hush Puppies and Lucky Brand, generated $613.5 million for 19 percent of total annual sales. By 2026, the company wants to boost that number to more than $1.2 billion, or 29 percent of the $4 billion sales target. In that time frame, sales made through DTC channels are expected to jump from 14 percent to 21 percent.

As many as 20 percent of shoes are purchased directly from a brand, Rawlins said. Top footwear brands like Nike, Adidas, Under Armour and Wolverine Worldwide have all discussed plans to grow their direct-to-consumer channels, further pushing the DSW parent to prioritize its own footwear products.

Sharing NPD Group data, Rawlins said that since 2011, direct brands have acquired 11.7 percent new market share in the footwear industry, whereas DSW has taken just 0.2 percent. Amazon, for context, had the biggest market share improvement over the past 10 years with 5.9 percent growth. Nordstrom and Nordstrom Rack grew their footwear share 1.5 percent, while Foot Locker/Champs and Dick’s Sporting Goods nabbed 0.7 percent apiece.

Meanwhile, DBI’s national brand partners are expected to see 3 percent sales growth between 2021 and 2026, reaching $2.4 billion by the end of the five-year period.

“We are not looking to grow our national brands. We’d love to just maintain them,” Rawlins said. “And so if we can grow them more aggressively, that’s fantastic, but we just want to ensure that we maintain those relationships, and we believe the infrastructure we have built layered on to those big national brands is a differentiator.”

The shift to direct sales is expected to grow earnings per share (EPS) and operating margin. DBI chief financial officer Jared Poff projects an EPS compound annual growth rate (CAGR) of 11 percent over the next five years, soaring from adjusted diluted EPS of $1.70 in 2021 to $2.75 and $2.85 per share in 2026. In that five-year stretch, operating margins are expected to increase from 6.4 percent in 2021 to 8.8 percent in 2026 thanks to the owned brand growth, sourcing cost reductions and store optimization initiatives.

Overall, the company expects to generate $1 billion in cash from operating activities in that time frame, Poff said.

Designer Brands also updated its fiscal 2022 outlook, increasing its guidance for the full year. EPS is now expected in the range of $1.80 to $1.90, up from the initial projected range of $1.75 to $1.85.

Designer Brands Inc. also reinstated its dividend of 5 cents per share and saw its stock climb nearly 6 percent on Friday as of press time.