DSW’s owner said it will close up to 78 stores in the years ahead, pointing to ongoing foot traffic challenges that may not reverse course until a widely available Covid-19 vaccine quells consumer safety qualms.
In a Nutshell: Designer Brands Inc. opened four stores and closed two in the U.S., bringing the total doors operated at 524 locations in Q3. In Canada, the footwear firm opened one store and had no closures, ending the quarter with 145 stores. It expects to close stores as it negotiates lease concessions or exits from some locations.
“With the continued pressure we are seeing on store traffic and the material acceleration we have experienced in the transition of customers from store to digital, we continue to closely evaluate our existing store infrastructure. While we are making some progress on lease concessions, the fact remains that our fixed cost store infrastructure is not nearly as productive as it once was,” chief financial officer Jared Poff said during a call to Wall Street Thursday.
“We anticipate that we will likely open very few to no new stores for the foreseeable future,” he added. “And we will begin aggressively negotiating exits of our worst-performing store locations as lease terms and market conditions warrant. While this will be a gradual transition over time, it is likely we will look to close 10 percent to 15 percent of our store fleet, while still retaining a physical presence in most geographic markets, and of course, a strong digital presence.”
At the current base of 524 U.S. doors, a 10 to 15 percent reduction would mean 50 to 78 fewer locations.
For the fourth quarter-to-date, Poff said comps in the U.S. are down about 20 percent, and that the company will remain cautious in outlook given the second wave of infections sweeping the nation.
Designer Brands isn’t a big holiday destination, and January typically drives the year’s lowest sales, Poff said.
“On the sales front, we don’t expect a significant improvement from Q3 until late spring or back-to-school of 2021. While we saw the merchandise margin rate normalize in the third quarter, we may see some gross margin pressure in the fourth quarter as we may need to take some markdowns to clear through some boots that saw their demand dry up with the COVID resurgence. However, the anticipated markdowns will not be nearly as severe as what we saw last spring,” Poff said.
The expectation for sales improvement in late spring or back-to-school 2021 coincides with when a coronavirus vaccine is likely to be widely distributed.
Roger L. Rawlins, CEO of Designer Brands and interim president for the DSW brand, said the company has been able to pivot to carry more athletic and kids products in U.S. stores. Last year the firm began shifting the assortment into athletic fashion, particularly as vendors told Designer Brands that they “wanted to partner with retailers who have a strong market share with the female athlete,” he said. Historically, Designer Brands has been known as a dress and seasonal shoe company, although both categories remain challenged as consumer avoid gatherings and social occasions.
“In the short-term, we plan to keep pivoting our assortment to align with consumer preferences…. Looking ahead, we’re continuing our aggressive increases in athletic penetration and currently have access to the highest level of inventory possible based on the product made available to us so far by the top national brands. Recently, we finalized inventory decisions for our spring selling season and did so under the assumption that the world will look largely similar to the environment we are experiencing this fall season,” the CEO said. “Based on these dynamics, we are remaining conservative with our buys this spring as we continue to face significant challenges from COVID-19 and do not expect demand trends to change materially from the current environment. However, we are planning for athleisure comps to grow double-digits in the first half of 2021.”
He said comps in Canada, which already had a much higher penetrations of athleisure and kids products, were down 19 percent.
The Camuto business, which sells primarily in the traditional dress category, has struggled. “We continue to see a lack of customer demand for these products at our DSW stores as well as our wholesale businesses. As a result, we have taken steps to ensure inventory is aligned with that reality and decreased wholesale production at Camuto by 40 percent during the third quarter,” he said, adding that for the fourth quarter, production will be down 30 percent.
Digital has been a standout overall, driving 57 percent of demand over the Thanksgiving holiday, versus 38 percent a year ago. Rawlins said the company is in the process of hiring a chief digital officer who will help the company differentiate from competitors by elevating its online presence and capabilities.
Designer Brands lost digital sales during a two-week period during its “crucial September selling season,” thanks to a ransomware attack on a third-party vendor that impacted U.S. operations. The vendor routed digitally originating orders to stores for fulfillment. As of Nov. 2, Rawlins said the issue had been resolved and all fulfillment services are back online, with insurance likely covering any fallout.
Net Sales: For the quarter ended Oct. 31, net sales fell 30.1 percent to $652.9 million from $933.8 million.
Gross margin for the quarter fell to 25.4 percent from 29.3 percent in the year-ago period.
For the nine months, net sales fell 39.0 percent to $1.63 billion from $2.66 billion.
Earnings: The retailer posted a net loss of $40.6 million, or 56 cents a diluted share, against net income of $43.5 million, or 60 cents, a year ago. On an adjusted basis, excluding certain impairment charges, the net loss was $19.0 million, or 26 cents a diluted share.
For the nine months, the net loss was $354.7 million, or $4.92 a diluted share, against net income of $102.1 million, or $1.36, in the year-ago period.
CEO’s Take: “There is no doubt that 2020 has been a difficult year, and pressure will remain in the beginning of 2021 as well. We’ve seen positive news on the road to developing a vaccine, but widespread adoption is still far off as we enter the coldest months of the year. And we’re seeing a resurgence in cases as well as regionalized responses, including curfews, stay at home advisories, and in some cases, forced shutdowns. We have adapted both our product assortment and our omnichannel customer experiences and are prepared should we need to move to a digital-only operation again,” Rawlins said. “We will continue to lean into athleisure trends, and our liquidity position gives us the flexibility to continue operating in this difficult environment… We will continue to operate in the same manner we have been in order to align our business with the current realities of the industry.”