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Designer Brands CEO: ‘Our Assortment Is Vastly Different Than Pre-Covid’

Designer Brands Inc. saw net sales jump 30.7 percent year over year to $853.5 million in the third quarter, up from $652.9 million in 2020 on net income of $80.2 million and record gross margins. Stock surged more than 18 percent in morning trading Tuesday on the better-than-expected earnings report.

In a Nutshell: During the earnings call, CEO Roger Rawlins emphasized how the company has doubled down on its best-selling brands. The DSW owner’s top 50 brands account for 77 percent of sales, as compared to 65 percent of sales in 2019. Rawlins said the top-selling item in the quarter was a top 50 national brand boot at a price point of $144.

“Our assortment is vastly different than pre-Covid, when we were carrying 500-plus labels and had to heavily market our portfolio of labels,” Rawlins said. “Our increased penetration of the top 50 brands now carries more weight with the consumer, and allows us to have more regular-price selling as many of these brands prohibit bulk discounting and require fewer marketing dollars for conversion.”

Rawlins also began the call by revealing that the footwear company set an all-time record for demand, both in a single day in a single week, on Black Friday and Black Friday week.

The rebound in sales and the narrowing of its selection has come in a year when it lost one of its biggest brands, Nike, which has been undergoing a significant direct-to-consumer (DTC) shift.

The company ended the quarter with inventories of $602.1 million, up 10.3 percent from $546 million for the same period last year. On a sequential basis, the footwear giant increased its retail inventory from down 19 percent over 2019 totals at the end of the second quarter, to flat at the end of the third quarter.

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The company increased its inventory by bringing in product ahead of the season, over-ordering in anticipation of inventory cuts and accelerating orders of its owned brands, Rawlins said.

Gross margin as a percentage of net sales was a record 36.7 percent, as compared to 25.4 percent for the same period last year and 29.3 percent for the third quarter of fiscal 2019. The margin increase was credited to huge growth in Vince Camuto product sales and DSW’s own vertical brand sales.

Also significantly helping margins: Regular-price demand at DSW accounted for 88 percent of total demand in the quarter, according to Designer Brands’ chief financial officer, Jared Poff. That’s 5 percentage points ahead of the 83 percent of full-price sales from the same period in 2019.

Across categories, dress shoes skyrocketed for the DSW parent from a year ago, when shoppers weren’t purchasing footwear for going out, with women’s dress shoes up 58 percent and men’s shoes up 87 percent in the quarter. Seasonal footwear sales including boots climbed 61 percent, while men’s jumped 53 percent and kids’ increased 45 percent. Sales of athleisure footwear, composed of sneakers and running shoes, grew 38 percent year over year.

Poff cited a study from NPD Group illustrating DSW’s growth in kids’ and athleisure market share since the start of the Covid-19 pandemic. In the peak back-to-school season, defined as July through August 2021, DSW “significantly” outpaced the remaining U.S. footwear market in kids and athleisure compared to the same quarter in 2019.

The NPD report highlighted that DSW’s kids’ dollar-volume growth jumped more than seven times over in the July-to-August timeframe on a two-year basis, with penetration now reaching 50 percent. And athleisure footwear sales grew 26 percentage points faster than the rest of the market in the same time frame compared to the same period in 2019, resulting in an overall market share gain of 30 basis points.

Athleisure penetration was 50 percent in the third quarter, versus 38 percent in 2019, indicating that the company’s plans to expand the category’s footprint across DSW are clearly working.

Active members of DSW are up 29 percent from where they were at the start of the fiscal year, Rawlins said.

Cash and cash equivalents totaled $83.1 million at the end of the third quarter of fiscal 2021, with $394.7 million available for borrowings under a senior secured asset-based revolving credit facility. Debt totaled $227.9 million at the end of the third quarter of fiscal 2021.

Designer Brands also posted new guidance for the fourth quarter, now expecting consolidated net sales to be flat to up low-single digits compared to two years ago, and retail sales to be up to mid-single digits. Wholesale is expected to be flat to down low-single digits due to its strategic exit from select brands starting in 2020.

The Vince Camuto parent expects the quarter to result in diluted EPS in the range of 10 cents to 15 cents.

Net sales: Third-quarter net sales increased 30.7 percent to $853.5 million, from $652.9 million in 2020. Comparable sales increased 40.8 percent for the third quarter.

The U.S. retail segment, composed of the DSW banner, including its stores and e-commerce site, jumped 41.4 percent to $709.6 million in the quarter. The Canada retail segment, which includes DSW, The Shoe Company and Shoe Warehouse stores, as well as their e-commerce sites, increased sales 21.4 percent to $74.8 million. DBI’s Brand Portfolio segment sales, which encompass the Camuto Group category, improved 23.9 percent to $103.9 million.

Net earnings: Net income was $80.2 million, or $1.04 diluted earnings per share (EPS), up from the $40.6 million loss from the year-ago quarter on a diluted EPS loss of 56 cents.

Adjusted net income in the quarter totaled $66.6 million, or 86 cents diluted EPS, compared to an adjusted net loss of $18.6 million, or 26 cents loss per diluted share, for the third quarter of fiscal 2020. Adjusted operating income came in at $102.2 million.

CEO’s Take: Rawlins called the strategy to “go narrower and deeper” with its inventory investments a game changer for Designer Brands.

“First, it allows us to see higher conversion as we’re in stock with sizes more frequently. Second, we are more relevant to these key brands, giving us opportunities for priority access to exclusive items and ensuring we are placed at the top of the food chain when supply chain issues occur,” Rawlins said during the call. “Third, we can now consistently tell marketing stories to consumers about brands we have available across our entire fleet of warehouses. Four, finally, it increases our ability to engage in full-price selling with fewer fringe items in sizes going into clearance, improving gross profit.”