Designer Brands Q3 2024 Earnings Call Transcript

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December 5, 2023

There are 7 speakers on the call.

Operator

Morning, and welcome to the Designer Brands Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Ashley Furlan with Edelman Smithfield, please go ahead.

Speaker 1

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13 week period ending October 28, 2023 to the 13 week period ended October 29, 2022. Please note that the financial results that we will reference during the remainder of today's call For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. Additionally, please note that remarks made about the future expectations, plans and prospects of the company constitute forward looking statements. Results may differ materially due to various factors listed in today's press release and the company's public filings with the SEC.

Speaker 1

The company assumes no obligation to update any forward looking statements. Joining us today are Doug Howe, Chief Executive Officer Jared Poff, Chief Financial Officer and Laura Dink, President of DSW. I'll now turn the call over to Doug.

Speaker 2

Good morning, everyone. Thank you for joining us today. The Q3 was difficult for our business. Macro headwinds continue to impact us most acutely within our retail segment traffic as consumers remain under pressure and the overall footwear market contracted for the first time since the pandemic. Because our business is heavily weighted towards dress and seasonal, unseasonably warm weather also had an outsized impact on our top line.

Speaker 2

We also faced headwinds that we believe demonstrate our need to operate with even greater speed, while increasing the level of innovation, Newness and fashion in our assortments. To this end, we have made several strategic decisions regarding leadership across our organization, And we will be diligent as we embark on the journey of backfilling these rules in order to best position our business for the future. During our Q2 earnings call, we communicated that our full year guidance assumed we set at a key inflection point and a retail comp performance would need to meaningfully improve, supported by a strong septober throughout the balance of the year in order to meet our expectations. We also noted the possibility for headwinds to worsen further, something that could hamper the sequential improvement we required. During the Q3, we experienced a sales shortfall within the fall season, specifically SEPTEMBER, particularly related to broad based weakness in seasonal and dress.

Speaker 2

Conversely, The casual portion of our retail business continued to perform well, delivering comp sales growth in the mid single digits. We also see the retail customer continuing to lean into value and the intentional rebuild of our clearance business within our U. S. Retail segment helped to slightly offset broader declines. Clearance sales were down only 3%, significantly better than our total sales, which were down 9%.

Speaker 2

However, none of these were significant enough to offset the precipitous decreases we experienced in dress and more notably in boots. Within our retail segments, which include DSW Stores, Shoe Company and their related e commerce sites, Our top line fell short of our expectations driven by seasonal product demand, specifically boot demand falling meaningfully year over year. This was a dynamic felt industry wide. We have long been a market leader in seasonal footwear, which is boots and sandals, And this continued to represent a material portion of our sales in Q3. According to Turkana, 3rd quarter seasonal footwear was down 16% based on dollar sales over the last year in the total market, which was in line with our performance at DSW.

Speaker 2

However, while seasonal footwear represents about 20% of the total market in the 3rd quarter, It represented nearly 40% of DSW's business, resulting in disproportionate pressure on our performance. As we look across our entire assortment and continue to learn more about evolving consumer preferences in both category mix And shopping channels, we are adapting our own strategic approach. We know we can perform better across all categories, including non seasonal and get back to our roots of being a product led, data driven merchant organization, Quick to supply product that meets the trends the customer is leaning into. To that end, I'm excited by the skilled and experienced Merchant leadership we have brought to the business and Laura Denk, our newest President of DSW will speak to strategic Initiatives her team is pursuing shortly. We met our expectations in our brand portfolio segment with overall sales down 12.5% in line with our expectations.

Speaker 2

Declines in our legacy brands wholesale business were offset by the additions of Keds, Topo and Hush Puppies as well as strong performance at dc.com. We are building momentum and gaining traction across our brand portfolio as we continue to prioritize long term sustainable growth within this segment. At the beginning of our brand building journey, the portfolio We controlled with highly focused on Dress and Seasonal with significant white space opportunities in the casual and athleisure space, which drove us to make key acquisitions. Since that time, we have made notable progress growing our portfolio and doubling sales of our own brands across DBI's business Continues to be central to our growth story moving forward. At Topo specifically, we saw a sequential increase in the quarter A significant improvement in our DTC site throughput.

Speaker 2

In October, we launched 3 new shoes, including a new waterproof Trail Runner and new low top hiker. We also refreshed the ST5, which pairs the minimally cushion 0 drop platform with TOEFO's signature fit for a natural comfortable run experience and or workout session at the gym. I want to take a moment to thank our partners at REI, a key retail partner for us as we continue to expand our partnership and increase brand awareness for Topo. At Vince Camuto, the brand posted its highest demand day of 2023 in the quarter as well as the largest Full price non promotional day in dc.com history, spurred by the incredibly successful first ever influencer collaboration With Dress Up Buttercup, a lifestyle brand by Didi Rad, who has over 1,000,000 followers on Instagram. To celebrate the launch, influencers attended a brunch in Nashville, Tennessee, helping to drive significant publicity.

Speaker 2

As we look to expand our specialty size business, which Laura will speak to in a moment, this recent launch has given us yet another proof point The wide cap boots are in high demand. And given the limited options available that address this market, We will continue to provide new offerings to capture share, another way we are strategically evolving our assortment and listening to our customers. Year over year, vc.comcomp sales were up 7% for the quarter. Importantly, Vince Camuto remains in an excellent position to expand the total addressable market for our own brands with significant opportunity in both men's And women's wide width shoes. Before I hand it over to Laura, I want to thank our team for their dedicated execution in this very challenging environment.

Speaker 2

We are digging in. We will adapt and I'm confident in our ability to navigate this backdrop and make progress on our long term vision. Designer Brands is unlike any other company in the footwear industry, and I believe this unique model will allow us to grow our competitive edge. As we aim to write our business for the future, we continue to prioritize building out our leadership team with the right skill set to ensure our product focus aligns within our customers' preferences. As a first step, LoRa has hit the ground running and has begun laying the groundwork for key strategic updates.

Speaker 2

To elaborate on some of these priorities for DSW, please join me in welcoming DSW's President, Laura Denk. Laura?

Speaker 3

Thank you, Doug, and hello, everyone. It's an honor to speak with you all today. In my first 100 days, my priority has been to work closely with the management team and great associates at DBI to learn the ins and outs of the business. I've also talked with customers and national brand partners and visited many stores throughout the country. There's a universal passion for DSW and it's been exciting to witness As I boil this down, I believe that while DSW is certainly feeling the brunt of a very pressured industry, there are elements of our business where we can The Q1 that has seen a decline since Q4 of 2020, but DFW's performance also lagged the overall market.

Speaker 3

As I work to unpack why and what we need to prioritize, I am intently focused on 3 key areas in the near term to drive improvement: 1, reinvigorating our assortment 2, optimizing our market investments and 3, enhancing our in store and digital shopping experiences. First, our assortment. At DSW and across all of Designer Brands, it starts and ends with product. We can't lose sight of how important an optimal and differentiated assortment is. Our assortment, the size of which was historically unparalleled, Is what made DSW the dominant retailer it is today.

Speaker 3

And maintaining an energizing and trend right assortment is even more critical today when the customer has substantially more options from brands that are moving more quickly than ever. Over the last few years, Designer Brands has contended with a number of unforeseen events, not the least of which included the COVID pandemic and subsequent recovery demand, further complicated by global supply chain issues. Amidst these external challenges, we've also been focused on driving vertical integration internally. With a number of these challenges now behind us and an evolved business model, I believe we can turn more of our focus to accelerating the alignment of our overall assortment more closely to what customers are demanding. As it stands currently, we can do more to bring the hottest brands and the excitement that comes with them to DSW's assortment to reinforce a differentiated and relevant offering.

Speaker 3

My vision for DSW's assortment is Trend right shoes that align with consumer demand. We need to get back to our heritage with a relentless flow of newness, key designer finds and creating FOMO. In order to ensure we can maintain our position as a fashion footwear retailer, I've given our buyers a direction to maintain greater liquidity, Listen to our consumers and seize opportunistic buys. More tactically, I plan to leverage DSW's unique data and insights from our database of nearly 30,000,000 loyalty members to identify trends and dynamically adjust our offerings and our marketing to provide a selection that resonates with evolving consumer preferences. This product led data driven assortment strategy brings back the passion and creativity that good merchants thrive on, including building strong and growing relationships with our national brand partners.

Speaker 3

We remain a sought after partner for top national brands given our highly attractive customer base. With our unparalleled access to the female athlete And the growing demand for athletic and athleisure product, these brands continue to prioritize placement in our channels. For example, Nike products began coming back online in September and as of early November is fully rolled out in all DBI channels. Nike has instantly become one of our top national brands both in stores and through our e commerce site and we couldn't be happier with this relationship. We are also pleased to see other national brands returning to DSW.

Speaker 3

In the spring, we plan to bring Under Armour back into our collection of high quality offerings. We're also excited for our dominant and growing relationships with Birkenstock and Skechers. And while the assortment must be relevant, we need to remind We remain a leader in the industry, but in recent years have started to see DSW brand awareness erode. We are still leading the forward industry with our award winning VIP program, which boasts nearly 30,000,000 members. We have not been as diligent 1, driving awareness among potential new customers and 2, communicating our continuously refreshed and renewed assortment and convenient shopping experience to our existing loyalty members.

Speaker 3

As such, I've gained conviction that we must start investing again in top of funnel marketing and broad communications to grow the awareness that we are the best in shoes. As a first step in October, we significantly increased investment top of funnel marketing inclusive of an inspiring video campaign to reach over 75% of DSW's female target audience. While top of funnel marketing takes time to translate into tangible transactions, today early reads are encouraging. Said more simply, having the right assortment is only half the battle. GSW needs to continue to more loudly articulate the variety and quality of our assortment to emphasize our unique position in footwear and remind the customer why they should choose DSW for all of their footwear needs.

Speaker 3

Finally, I also feel strongly that we must always be investing in our customer experience, including our store fleet. The customer has more choices than ever as to where and how to shop for footwear and we must provide an experience that is frictionless and easy to navigate. In addition to constantly evolving our digital and omni capabilities to improve conversion and engagement, we are looking across our store footprint and evaluating opportunities to selectively invest in refreshing this experience to stay modern, relevant and provide an experience that Internet pure plays cannot. We have taken a thoughtful customer first approach asking what is important to them and subsequently testing new approaches to certain aspects of the shopping experience. We are analyzing feedback from test stores in Houston, Columbus and Oregon and prioritizing those aspects which will have the biggest impact.

Speaker 3

We are in the early stages on this, but the customer reaction has been encouraging and we are excited to continue testing and learning. As we move forward, our teams will continue to develop a holistic strategy that will lean into a fresh exciting assortment, new marketing initiatives and refreshed in store and digital experiences. Thank you again, Doug, for having me join the conversation today. And with this, I will turn the call over to Jared for an overview of our financial results. Jared?

Speaker 4

Thank you, Laura, and good morning, everyone. I want to reiterate Doug's comments as this is a difficult time for in the broader footwear industry. As he mentioned, the improvements that we were anticipating on both top and bottom line did not materialize And the net risk position that I had called out on our last earnings call came to fruition this quarter. The top line weakness ultimately flowed through leading to operating deleverage against a largely fixed expense base and resulted in an adjusted EPS of $0.24 Our team is aware of the factors that led to this situation and is making progress on sustainable improvements across all elements of the business. Based on what we have seen through the Q4 to date, we do not expect these sales pressures to alleviate as we wrap up this year, especially given the ongoing uncertainty in the macro environment.

Speaker 4

Let me provide a bit more detail on our Q3 financial results. For the Q3, sales decreased 9.1% from last year to $786,300,000 From a wholesale perspective, sales were down roughly 22.7% in line with expectations as we lap strong wholesale sales unlocked by pent up demand in that channel last year following supply chain disruptions. U. S. Retail Comp specifically were down 9.8% in the quarter, while Canada posted comps down 7.7% in the quarter.

Speaker 4

One bright spot was our vincamuto.combusiness, one of our premier DTC channels with comps up 7% in the quarter on Top of a 27% comp last year and up 26.3% for the month of October. This quarter's success was largely driven by the brand's decision to lean into strong consumer demand for wide and extra wide shaft boots. Consolidated gross margin was 32.6% in the 3rd quarter compared to 33% last year, a decrease of 40 basis points, driven primarily by an increase in promotional pricing and the deleverage of our fixed store occupancy costs offset by lower freight and shipping costs. That being said, our gross margin continues to be fundamentally stronger than pre pandemic with consolidated gross margin up 3.30 basis compared to the Q3 of 2019, and we will continue to look for ways to bring further efficiencies to our operating model. Our adjusted SG and A ratio for the Q3 was 28.9 percent of sales compared to 25.5% in the Q3 of 2022, driven primarily by deleverage from the top line pressures against an increasingly fixed expense base along with an increase in marketing expense as Laura mentioned.

Speaker 4

For the Q3, adjusted operating profit was 4% of sales compared to 7.8% for the prior year quarter. In the Q3, we had $8,800,000 of net interest expense and our effective tax rate on our adjusted results dollars or $0.24 diluted EPS versus $46,100,000 or $0.67 last year. We ended the Q3 with inventories of $601,500,000 down roughly 12% compared to $681,800,000 last year and down sequentially from $606,800,000 in the 2nd quarter. On a retail inventory per square footage basis, we ended down 11.5% versus the Q3 of 2022. Wholesale inventory ended the 3rd quarter up 2% and adjusted for the acquisition of Topo and Keds, Inventory would have been down roughly 20% when compared to last year.

Speaker 4

Headed into the fall, we were acutely aware of the net risk position we were facing And as such, we were very strategic with our inventory investments. We continue to remain nimble in our approach to our assortment. As we prioritize maintaining a healthy inventory position, we strategically deployed promotions for Black Friday and Cyber Monday, which helped to drive traffic in stores and online. While the current environment is operationally challenging, our strong and steady cash of net cash provided by operating activities compared to $38,000,000 during the same period last year. In the Q3 of fiscal 2023, we also returned $82,500,000 to shareholders through dividends and share repurchases.

Speaker 4

Year to date, that is a total of $111,500,000 In addition to generating meaningful cash flow from operating activities, We further bolstered our liquidity position by arranging for a term loan in the Q2. This action has given us Ample liquidity to manage through turbulent times like this, while also allowing us to return cash to shareholders in the form of dividends and opportunistic share repurchases, something that we believe showcases our conviction in DBI's long term strategy. We ended the quarter in a solid liquidity position of $267,900,000 As of the end of the quarter, we had $213,300,000 available to draw on our revolving credit facility. On October 31, 2023, we borrowed $25,000,000 of the $85,000,000 available under our new term loan with any remaining delayed draw loans to be taken by January 31, 2024. We remain well inside of all covenants and have strong relationships with all of our credit providers.

Speaker 4

Total debt outstanding was $375,500,000 as of the end of the quarter. We continue to await the receipt of our remaining $40,000,000 of our CARES Act tax refund due to us from the IRS. As a reminder, the IRS has formally closed our standard audit for which this refund applies with no adjustments. And as such, we are now simply waiting on the refund request to work its way through the appropriate approval channels at the IRS and Treasury Department for ultimate funding. Given the quarter's results, we are adjusting our full year outlook.

Speaker 4

We are now planning for DBI net sales to be down high single digits With retail comps also down high single digits for the year, implying DBI net sales to be flat to down low single digits for the 4th quarter when taking into account the 53rd week. While we don't anticipate we will see the demand that we lost in September boost sales materialize in the Q4, We will remain in a competitive posture to keep our inventory at an appropriate level. In order to do so, higher promotions will continue to be necessary. This all results in expected adjusted EPS for the full year in the range of $0.40 to $0.70 The change in this revised adjusted EPS expectation is a substantially larger percentage change than the change in top line expectations as a result of a highly fixed expense base, which is anticipated to come in as originally communicated. Our weighted average diluted shares outstanding Are anticipated to be approximately $57,000,000 for the 4th quarter and approximately $64,000,000 for the fiscal year, given the share repurchase activity that has occurred thus far throughout the year.

Speaker 4

With this, we are immediately taking Doug and Laura mentioned to address the top line issues that are unique to us and believe we have identified areas that will yield meaningful results in the future for DSW. We have also discussed the changes we are making in our brand portfolio segment, including finding an experienced and seasoned leader to run this business anticipate outsized growth from this part of our business as we look across our longer term horizon. And as always, We will be looking for ways to bring further efficiencies to our operating model moving forward, including efficiencies in operating expenses and interest expense. This will take time and we anticipate that our current fixed expense structure will continue to result in operating deleverage in Q4. As Doug noted, we are laser focused on accelerating our ongoing strategies that are working and tactically addressing areas of the business that are not performing as desired.

Speaker 4

While our results were disappointing, our team is more energized than ever to build solutions towards a more resilient and dynamic enterprise model. With that, I would like to turn to the operator for Q and A. Operator?

Operator

Before pressing the keys. The first question is from Gabby Carbone of Deutsche Bank. Please go ahead.

Speaker 5

Hi. Thanks so much for taking my question. So maybe you just wanted to dig in on your brand awareness comments. You mentioned that's eroded a Maybe can you dig a little further into the investments you're making to bring the customer back to the store? Do you think your target customer has changed at all?

Speaker 5

And then maybe how should we be thinking about the impact from the top of funnel marketing you mentioned on kind of SG and A moving ahead? Thank you.

Speaker 2

Good morning, Gabby. This is Doug. Thanks for your question. Yes, as we talked about, we invested in top of funnel marketing, which was episodic Video in the quarter. As you know, those take time to be able to measure the impact of that.

Speaker 2

We are encouraged by those initial results and it's Something that we'll continue to lean into, as we move into Q1 and beyond. I don't know that our customers changed dramatically Other than just the continued strength of the penetration of the casual and the athletic area, which we have been leaning into, obviously. But We wanted to do that just based on the fact that we did see an erosion in kind of our awareness. So we wanted to continue Make sure that we are increasing our overall customer file as we move forward. We're still working through next year with regard to balance of top of funnel marketing as well as performance marketing, Just knowing that there's a latency impact obviously with the top of funnel investments.

Speaker 5

Got it. And then just a follow-up, I wanted to dig into casual and I felt like I think you mentioned last quarter that Nike came in about a month earlier than you originally planned. Maybe just how does the flow of Nike product transpire? How is the customer And then has your other athletic kind of inventory composition changed at all with taking on more NIKE product?

Speaker 2

Yes, great question. Thank you. Obviously, we're very pleased with the initial NIKE results. To your comment, the did come in a little bit earlier than we originally anticipated, which was originally planned for Q4. So it was about midway through the quarter where it started to flow in.

Speaker 2

The initial reaction has been quite strong. Within the 1st few weeks, it's become one of our top 5 brands Handily. It still represented just a little over 1% of the sales for the quarter, obviously. So we're still ramping In historical times that was between 7% 8%. So, very encouraged by initial results.

Speaker 2

As we move through Q4, we continue to see really strong momentum in the overall athletic category, which again is part of our strategy as we try to de seasonalize our business moving forward.

Speaker 4

And Gabby, one thing I would add, and I think we've talked about this as well. In addition to the Nike product itself that we're very excited to see resonate with We also feel that the loss of Nike certainly impacted other brands that people would Find their way into DSW through Google searching or some other way of the Nike brand and ended up buying somewhere else. Hard to quantify the exact impact of that, but we definitely think That was a drag on our overall digital demand after we lost Nike across other brands. So being seeing that also come back, It'll take time. The algorithms have to pick it up and bring you back to the top, but we're excited for what that might mean as well.

Speaker 5

Great. Thank you so much.

Operator

The next question comes from Jay Sole of UBS. Please go ahead. Super.

Speaker 6

Thank you so much. You mentioned that you expect some of these macro to persist for a while. Obviously, we don't have a crystal ball, nobody expects that. But what would you think macro pressures might alleviate? Is this something that's going to last into The first half of next year or I mean, how do you think about it?

Speaker 2

Hey, Jay, this is Doug. Thanks for your question. Yes, your point, we don't have So, Bal, I would say kind of what we're seeing in Q4, which we've incorporated into our guidance is consistent with what we saw in Q3. There definitely was an outsized impact we saw obviously in seasonal, we think partially attributable to Warmer weather, as we move into spring and instead pivot into sandals, obviously, our assortment dramatically changes. We also are seeing, like I Buoyancy with the athletic trend, and we're being very opportunistic and chase into inventory there to take advantage of what the customers Having said that, I would say, the customers continue to be very choosy and very selective with regards to discretionary purchases.

Speaker 2

I think our clearance trend kind of indicates the fact that customers are still looking for value. That's always been a core strength of specifically DSW. We'll continue to lean to that, but we're conservatively planning it and we'll be in a position to react, and reacting to it real time.

Speaker 6

Got it. And maybe Doug, just to put a finer point on it, can you just talk a little bit about how the sales trended, say, the week before the Thanksgiving weekend? And then Obviously, through Cyber Monday, how sales trended and what you've seen sort of since then the week post that. I mean, did you see that spike? And then like in the last week, has it been like a normalization back to the sales growth rates You saw it 4 or if you give us maybe a little bit color around that, that would be helpful.

Speaker 2

Sure. Yes. Thanks for your question. We were very promotional, because we wanted to make sure that we didn't lose share specifically as we went into that Cyber Week. So we are very aggressive on promotions.

Speaker 2

We did See a nice performance there. So again, kind of mission accomplished with regard to not losing share. Having said that, there definitely has been a lull out of Cyber Monday and then even the continuation of those promos through Tuesday. So There's 4 weekends between Thanksgiving and Christmas. There's always historically been a bit of a lull between Black Friday and the holidays, and we're definitely Seeing that, but what we're seeing obviously for the quarter is still is obviously incorporated into our guidance.

Speaker 2

But, I think Customers are waiting to the very last minute. They're being very selective, as I said. We were pleased with what we saw coming out of Black Friday. But Again, we were very promotional and leaning into that.

Speaker 6

Okay. And then if I can ask one more, if you could just elaborate a little bit on the brand portfolio. Within the brand portfolio, which brands Did you see the most strength? Maybe which brands is there room for improvement? If you just touch on the brands within the portfolio, that'd be helpful.

Speaker 6

Thank you. Yes.

Speaker 2

And as Jared said in his comments, I mean, the brand portfolio largely performed within our expectations. We were up against a pretty strong comp last year as it relates to just some timing opportunities. But we're very encouraged with what we're seeing Certainly from the Keds business, we're very encouraged with what we're seeing from Topo. 2 acquisitions obviously that were part of our strategy To distort towards the casual and athletic space. So we're very encouraged by that.

Speaker 2

Again, small businesses overall, but We're definitely encouraged by what we saw and the plans that we have going forward for those brands in particular. And Latigra, we launched that at DSW as part of our opportunity obviously to expand encouraged by initial results there as well. So again, early days, going through obviously the integration, but we're optimistic about those.

Speaker 6

Got it. Okay. Thank you so much.

Operator

This concludes our question and answer session. I would like to turn Conference back over to Doug Howe for closing remarks.

Speaker 2

In closing, I would be Not to mention the terrible tragedies that have unfolded in Israel and Palestine over the past several months. Our hearts and prayers with those suffering and we recognize this is a very difficult and uncertain time for many of our associates, our partners and our customers. I'm proud of how our team cares for, supports and lifts those around us. We recognize the values that unite us have

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Designer Brands Q3 2024
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