At its Investor Meeting on Tuesday, DSW officials unveiled a new name change, Designer Brands, to herald their extensive efforts to reinvent the company’s business model with last November’s acquisition of Camuto Group. At the event, Roger Rawlins, CEO, cited competition from vendors going direct-to-consumer (DTC) as a main reason for the change, even bigger than any threat from Amazon.

At the event held in New York City, Rawlins, who was promoted to CEO in 2015, gave a brief tour of the history of DSW, which started 50 years with a focus on servicing leased footwear locations for other retailers before developing the DSW off-price concept, going public in 2005, and rolling out its digital strategy during the last decade. Rawlins led the digital business from 2008 to 2013.

In 2014, DSW, then led by CEO Mike McDonald, recognized the retail landscape was changing dramatically and created an innovation team to drive necessary changes. The move led to significant investments in its digital infrastructure to support its online and mobile capabilities. That helped DSW come in first last year in Total Retail’s 2018 Top 100 Omnichannel Retailers report in a tie with Ugg and Lids.

Other accomplishments inspired by the 2014 reset was the introduction of kids in 2016, testing services such as nail bars in 2017, introducing a redesigned website and improved mobile experience also in 2017, and the re-launching of its rewards program for the first time in 10 ten years in 2018.

But DSW officials still recognized that the vision set forth in 2014 didn’t go far enough.

Rawlins said the first reason DSW recognized it had to radically change its business model was because technology had changed consumer behavior. Due to the spread of mobile phones, consumers now have access to information at their fingertips that they’ve never had before. Said Rawlins, “They have the ability to have price transparency so our model was being challenged because our everyday-value model was being offset by people discounting in the online space. So we had to think differently.”

During the process, management would regularly reference the electronics space, which was one of the early channels disrupted by the shift to online selling. Said Rawlins, “We talked a lot about this with our board and said we are not going to stand on the sidelines and be HH Gregg, RadioShack or Circuit City. We are going to be Best Buy of our space. That’s the approach we took when we were looking at how to evolve our business.”

A second factor driving its transformation was brands going direct-to-consumer (DTC), according to Rawlins.

One shocking finding was research on the five “companies or segments” that grew market share in the footwear space by 20 percentage points between 2011 to 2017.

Of the five, one was DSW, which grew its share from 3.1 percent to 3.3 percent – or 0.2 percent – although the company had to do it by investing about $1 billion opening new stores. The athletic space, led by Foot Locker and Dick’s, increased share by 0.8 percent with the segment benefiting as more consumers are wearing sneakers. Largely due to Nordstrom Rack’s growth, Nordstrom increased its footwear share from 2011 to 2017 by 1.5 percent.

Not so surprisingly, Amazon was among the two major gainers, increasing its footwear share by 5.9 percent. The more surprising one was the finding that vendors, going DTC through online as well as with their own stores for many, saw their footwear share surge by 11.7 percent. Rawlins remarked, “These are the people we are representing in our box.”

Finally, a third factor driving its business-model evolution was the consolidation among footwear brands. Allen Edmonds, Jimmy Choo, Rockport, Tory Burch, Kurt Gender and Stuart Weitzman are among the brands that have been acquired. Many of the acquirers, such as Caleres and Steve Madden, not only gain leverage in wholesale buys against DSW but also accelerate DTC pushes for the acquired brands.

As a result, Rawlins said management and DSW’s board decided it had to “take control of our destiny.” The shift was marked by last year’s acquisition of Camuto Group and The Shoe Company.

The biggest benefit with the change is capitalizing on Camuto’s world-class design and sourcing capabilities as well as reach.

Rawlins noted that under the former model with a focus on the shoe chain space, DSW was only addressing 20 percent of the North American market. With Camuto’s vast wholesale reach as well as its entry into Canada with The Shoe Company acquisition, DSW has a reach into 80 percent of the North American market.

Camuto’s business includes licensed footwear brands such as Jessica Simpson and Lucky, its Vince Camuto in-house brand and private-label shoe operations.

DSW expects to expand Camuto’s brand’s at DSW with the benefit of higher margins but also more differentiation. A major payback from Camuto’s production expertise will be increasing private brands at DSW from about 10 percent currently to a goal of 25 to 30 percent within the next three years.

Rawlins noted that DSW has ample opportunities for private brand growth because the bulk of the brands it sells are better classified as “labels” and largely irrelevant to consumers.

Of the 800 brands DSW carries, the top 25, citing Nike, Skechers and Steve Madden as examples, are core brands that the consumer expects DSW to have and they make up 40 percent of DSW’s sales, according to Rawlins. The next 75 brands, citing Hunter Boots as an example, are items the consumer also expects DSW to carry and they account for 30 percent of sales, he added. As such, the private-label push would aim to replace many of the remaining 700 less-relevant brands that make up the remaining 30 percent.

Camuto’s design and sourcing expertise and infrastructure will also help bring down costs versus the various suppliers DSW had sourced through previously. The DSW model also previously had limited visibility into product costs and would typically not ask for markdown money if an item underperformed on the selling floor. DSW recognized in its due diligence in exploring acquiring Camuto as well as Nine West that DSW was both of their most profitable accounts. Rawlins said that with better visibility into the manufacturing process, DSW expects to gain better deals from vendors. Vendors will also have to compete against DSW’s private label push to likely also help drive better terms.

Specific growth plans for the DSW chain include further expanding kids and expanding services, including DSW’s partnership with the W Nail Bar, as well as custom insoles, shoe repair and shoe concierge. New features are being added to DSW’s VIP loyalty program this spring as well as later in the year. The program’s 26 million members account for 90 percent of transactions.

For Camuto, DSW’s digital expertise and infrastructure is expected to substantially accelerate DTC efforts as less than 1 percent of Camuto’s sales came from its own websites. DSW also plans to further strengthen relationships with and enhance the performance of Camuto’s retail partners, even planning to bring insights into DSW’s successful rewards program to some wholesale partners.

The acquisition of The Shoe Company provides DSW entry into Canada. The purchase also may open up access to smaller markets as The Shoe Company has found success with stores around 20,000 feet to as small as 4,000 square feet. DSW sees such smaller stores as potentially supporting a “last-mile solution” with DSW’s website offering a much broader range of styles. The Shoe Company will also likewise benefit by adding Camuto-produced brands and DSW’s digital expertise.

Overall, DSW provided its financial expectations for 2021:

  • Achieve adjusted EPS in the range of $2.65 to $2.75, which compares to an adjusted $1.66 in 2018;
  • Achieve approximately 5.5 percent revenue CAGR;
  • Generate consistent low single-digit comparable store sales growth;
  • Improve gross profit by 240 basis points from 2018 level;
  • 13 percent operating income three-year CAGR at DSW;
  • 19 percent operating income three-year CAGR at The Shoe Company;
  • $26 million operating income growth at Camuto Group over the next three years;
  • Target $800 million cumulative cash flow over the next three years.

For fiscal 2019, which is the 52-week period ending February 1, 2020, the company expects to achieve low double-digit revenue growth as compared to fiscal 2018 revenue of $3.2 billion, which included a $189 million contribution from the Canada Retail segment and a $96 million contribution from the new Brand Portfolio segment. The company anticipates increasing comparable store sales in the low single-digit range.

Fiscal 2019 adjusted EPS is expected to range between $1.80 to $1.90. This represents year-over-year earnings growth of 5 percent to 11 percent excluding fiscal 2018 losses from the wind-down of operations of exited business and including fiscal 2018 estimated losses for the first quarter of the Canada Retail segment and three-quarters of the Branded Portfolio segment. The company’s outlook assumes a tax rate of approximately 27 percent and approximately 81 million shares outstanding.

Effective on Tuesday, the parent company, DSW Inc. became Designer Brands. In conjunction with its corporate name change, Designer Brands will change the company’s ticker symbol from “DSW” to “DBI,” effective April 2.

Image courtesy DSW