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Designer Brands CEO: ‘We Need to Get Smaller in Certain Locations’

Designer Brands Inc. increased net sales 35 percent to $822.6 million on net income of $14.4 million in the fourth qurater. And like many other footwear industry players, the parent company of footwear retailer DSW and fashion footwear brand licensor-manufacturer Camuto Group is getting more bang for its buck in the direct-to-consumer (DTC) channel.

In a Nutshell: Sales of the company’s owned brands in its DTC channels DSW, Shoe Company and vincecamuto.com were up 98 percent year over year. In an earnings call, Designer Brands Inc. CEO Roger Rawlins said the DTC acceleration “is where our future growth lies.”

Within DSW, owned brands penetration of total sales reached 17 percent at the end of 2021, up from the prior year’s 11 percent share.

According to Rawlins, the banner’s athleisure investments are helping the company gain its footing in the athletic men’s and kids’ space, with athletic shoe sales up 35 percent compared to pre-pandemic levels and 14 percent year over year. The growth in the category complements the business’s core seasonal and dress products.

“We’re getting now our sandal and dress business back in a meaningful way,” Rawlins said. While he admitted the categories haven’t returned to 2019 levels, he noted that the percentage decrease in sales has steadily improved on a sequential basis over the past year. The categories saw a 54 percent downturn in last year’s first quarter, but that number has since leveled out to 19 percent.

Rawlins cited recent NPD Group data for the fourth quarter, saying that while fashion footwear revenue declined across the market, the DSW banner outpaced competitors with growth of 30 basis points in the quarter.

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Overall, when accounting for athleisure and fashion footwear, DSW gained 40 basis points of market share in the quarter. DSW also saw boot sales grow 12 percentage points faster than the rest of the market in the quarter.

“To meet the strong demand, we leaned heavily on our owned brands and shifted product orders to support our growth here, while also pulling forward goods that were initially slated for early spring,” said Jared Poff, executive vice president and chief financial officer of Designer Brands Inc.

Inventory increased 23.9 percent to $586.4 million from last year’s $473.2 million, but is flat to 2019 totals on a square footage basis. In the fourth quarter, Designer Brands had approximately $14 million in incremental freight expenses, and roughly $20 million for the full year.

Nearly 60 percent of online sales are fulfilled from the retailer’s 508 U.S. DSW stores. The retailer anticipates these stores to take on more of a fulfillment role as more shopping happens online.

Late in 2020, DSW said it expected to close 78 stores over the next few years, but the company has since adjusted the projected number due to the recovery from the Covid-19 pandemic. The store count has not yet been revealed, but the company still plans to shrink its overall square footage.

“We believe that to achieve some of our long-range plans to get the cost-per-square-foot that we need or the occupancy cost that we think we can get, we need to get smaller in certain locations,” Rawlins said. “We’ll either get smaller in the building we’re in or we will look to relocate. It’s really about efficiency of inventory as it relates to using those stores as fulfillment centers. We’ve had a lot of success with these hub stores, meaning we’re able to throw key items into a group of stores, have depth behind them, and take days and costs out of the fulfillment cycle.”

Gross margin as a percentage of net sales was 30.9 percent, soaring 8.7 percentage points from last year’s 22.2 percent margin, and up 6.1 percentage points from 24.8 percent on a two-year basis. Rawlins attributed the increase to the company’s focus on its owned brands and higher regular price sell-through of its product. DSW’s markdown rate shrunk to 10.8 percent in the fourth quarter, down from 13.2 percent to close 2020, and 14.5 percent two years ago.

For full-year 2022, Designer Brands, Inc. expects comparable sales growth in the high-single digits, and diluted earnings per share in the range of $1.75 to $1.85.

Cash and cash equivalents totaled $72.7 million at the end of 2021, compared to $59.6 million at the end of 2020, with $395.1 million available for borrowings under our senior secured asset-based revolving credit facility. Debt totaled $225.5 million at the end of 2021 compared to $334.8 million at the end of 2020.

Net Sales: Net sales increased 35 percent to $822.6 million over the fourth quarter totals last year, which were $609.4 million. Comparable sales increased by 36.9 percent.

U.S. retail, which represented 84 percent of total Designer Brands sales, jumped 35.8 percent to $716.3 million, up from $527.3 million in the 2020 fourth quarter. Digital sales in the U.S. increased 11 percent in the quarter.

Canada retail, which was 6.8 percent of the business, grew 46.7 percent to $61.8 million from $42.2 million last year. And the company’s Brand Portfolio segment, which took in 8.7 percent of Designer Brands’ sales, increased 42.1 percent to $74.1 million from $52.2 million.

Net sales increased 43 percent to $3.3 billion for the full year, up from the $2.2 billion generated in 2020. Comparable sales increased by 51.6 percent.

U.S. retail jumped 53.8 percent in 2021 to $2.8 billion, up from $1.8 billion a year ago. Canada retail grew 28.6 percent to $234.8 million from $182.7 million last year. Full-year sales within the Brand Portfolio segment increased 15 percent to $286 million, from 2020’s $248.6 million.

Net Earnings: Fourth quarter net income at Designer Brands was $14.4 million, or diluted EPS of 19 cents, a noteworthy turnaround from the $134 million loss, or diluted EPS losses of $1.85, the footwear company experienced the year prior.

Adjusted net income was $11.7 million, or diluted EPS of 15 cents, up from 2020’s fourth quarter loss of $38.6 million, a 53 cents-per-share loss.

For 2021, reported net income was $154.5 million, or diluted EPS of $2.00. Last year, Designer Brands incurred net losses of $488.7 million, or diluted EPS losses of $6.77.

Adjusted net income came in at $131.2 million, or diluted EPS of $1.70. In 2020, adjusted net losses totaled $281.7 million, or diluted EPS losses of $3.90.

CEO’s Take: Rawlins said the company will discuss its long-term store strategy in detail during the April 8 investor day event.

“At our investor day, we’re going to show you what our store of the future looks like, that allows us to get the same kind of capacity we would have been getting at 20,000-to-25,000 square feet into 15,000 and tell different stories with these brands,” Rawlins said. “That’s a real opportunity, and that could open all kinds of opportunities for us. We have competitors talking about opening stores. If we can we can get smaller and more efficient with inventory, that creates more opportunities.”