Shares of Designer Brands, Inc., the parent of the DSW, surged 22 percent Thursday after reporting second-quarter results that topped Wall Street targets with both sales and gross margins improving sequentially versus the first quarter. Company CEO Doug Howe said sales were helped by “increasing strength in our casual offerings,” including a strong launch of Le Tigre footwear, and he remains enthused about the return this month of Nike to DSW’s selling floor.
“We continue to be very optimistic about that elevated partnership with Nike,” said Howe on a conference call with analysts. He said Nike products will arrive in DSW locations in September, a month earlier than expected.
“We actually have some products available on our site, and we’ll have a significant amount of units rolling out to our stores in the next couple of weeks,” said Howe. He added, “That is definitely a tailwind. So, we feel good about that.”
In June, Designer Brands reported that Nike would return to DSW’s selling floors following its exit from the retail chain in fall 2021 as part of Nike’s move to focus on DTC selling and select key wholesale accounts. The move to restart sales to DSW followed Nike’s moves to repair relationships with Macy’s and Foot Locker.
The return of Nike builds on Designer Brands’ broader push into athletics and casual offerings, marked by the recent acquisitions of Keds, Le Tigre and Topo Athletic. Designer Brands also recently reached an agreement with Wolverine Worldwide to become the exclusive licensee in the U.S. and Canada, including new DTC channels and international expansion.
“We continue to see buoyancy in the casual category,” said Howe on call. “Obviously, the casualization trend just continues to gain momentum. Our team did a nice job of reacting to that by managing the inventory. So, again, we feel really good about that business in particular.”
Companywide, the improving sales and margin trends sequentially in the second quarter prompted the company to maintain its guidance for the year despite the macroeconomic headwinds in the marketplace.
Shares closed Thursday at $12.66, up $2.28, or 22.0 percent, on the day.
Howe said, “I am pleased with our team’s efforts to continue reading and reacting to a highly promotional environment while simultaneously managing our inventory to an appropriate healthy level in both our retail and brand segments. We are also showcasing consistent operational progress.”
Overall sales in the second quarter decreased 7.8 percent to $792.2 million. Jared Poff, CFO, said, “The continued pressure on consumers, high inventory across the industry, and an extremely promotional retail environment all contributed to this decrease.”
Sales still topped analysts’ consensus estimate of $787.94 million with the rate of decline improving versus the 10.7 percent decline in the 2023 first quarter.
Wholesale sales were up roughly 20 percent, driven by the acquisition of Keds and Topo Athletic as well as the launch during the quarter of Le Tigre footwear. Wholesale footwear brands also include Lucky Brand, Crown Vintage, Vince Camuto, Topo Athletic, and Jessica Simpson.
In retail segments, total comps were down 8.9 percent compared to last year but improved sequentially versus the 10.4 percent decline in the first quarter. U.S. retail comps, consisting of the DSW chain, were down 9.2 percent in the quarter but also sequentially improved against the 12 percent first-quarter drop. Same-store sales at Canadian operations, including DSW stores in Canada and The Shoe Company banner, were down 7.3 percent in the quarter but were up against a 47 percent gain in the year-ago quarter as part of a strong post-COVID recovery phase.
On an adjusted basis, earnings were down 26.6 percent to $39.4 million, or 59 cents a share, topping analysts’ consensus estimate of 44 cents. Including charges related to a CEO transition, restructuring, and integration costs tied to acquisitions, reported earnings in the quarter were $37.2 million, or 56 cents a share, against $48.6 million, or 73 cents, a year ago.
Gross margins in the quarter were 34.5 percent in the second quarter, improving 10 percent year over year and 250 basis points versus the first quarter. The gross margin rate marked the second-highest Q2 level over the past decade and is up 400 basis points compared to the second quarter of 2019.
Gross margins were helped by the consolidation of fulfillment centers and significantly lower logistics costs, including freight, shipping, and distribution expenses that helped offset increased promotions, the continued rebuilding of its clearance business, and the deleveraging of fixed store occupancy costs. The adjusted SG&A ratio for the quarter was 26.9 percent of sales, compared to 26.5 percent a year ago.
Adjusted operating profit was 7.9 percent of sales, compared to 8.2 percent in the prior year and sequentially improved from 3.5 percent in the first quarter of 2023.
Highlighting progress in the quarter, Howe noted that with the integration of Keds and Topo Athletic as well as the Le Tigre footwear launch, Designer Brands remains on track to double sales of its own brands from 2021 to 2026. In the year-to-date period, owned brand penetration, including wholesale sales, increased year over year by 60 basis points to 25 percent of total DBI revenue.
He said the company was “thrilled” with the launch of Le Tigre at DSW. Howe noted that People magazine ranked the Le Tigre footwear launch as the fifth “hottest fashion” launch of the summer. He added, “I couldn’t be more excited about the work and the strategic approach that has gone into this launch, our first launch of a new national brand.”
Howe added, “We are equally proud that Topo Athletic has seen steady growth and continues to meet our expectations in terms of performance.”
Regarding Hush Puppies, Howe noted that becoming the exclusive licensee of the brand in the U.S. and Canada follows the company’s exclusive U.S. distribution deal. Designer Brands takes over the hushpuppies.com business, marking the company’s sixth independent e-commerce site, and gains wholesale distribution rights in North America. Howe said, “Hush Puppies growth within DSW has been robust, up nearly 60 percent of the quarter versus last year, driven by men’s with growth across casual, dress, and boots. Excitingly, our first product expression is anticipated for spring of 2024.”
The Keds’ integration is advancing as expected and brand collaborations around court sneakers with Recreational Habits and Staud were executed. Howe said, “Our Staud launch is designed to cater to the latest pickleball craze and court sports enthusiasts,” and includes an exclusive with Saks Fifth Avenue.
Among its other brands, Crown Vintage launched actress Emma Roberts’ first curated collection, during the quarter while Vince Camuto introduced its first men’s franchise shoe line. Vince Camuto’s men’s sales are up 95 percent on the brand’s website.
Howe said growing the men’s business across all DBI “remains one of our largest white space opportunities and we believe represents a significant growth lever over the long term. We believe that our new offerings from Vince Camuto and Le Tigre will help us gain traction with male customers who are increasingly prioritizing the unification of comfort and style.”
Howe said the Nike relaunch shows Designer Brands’ commitment to elevating its positioning around national brands.
He noted that DSW is able to leverage its strong vendor partnerships to provide “increased value to our customers” by taking advantage of opportunistic closeout buys with large national brands. He added, “As part of our long-term relationship with Wolverine, we executed an advantageous buy that provided us with an opportunity to offer compelling savings to our customers on Sperry, Saucony, Merrell, and Chaco products in the quarter.”
Howe, who formerly ran the DSW chain before his promotion to CEO earlier this year, also called out the hiring of Laura Denk as president of DSW. She has merchant experience at Macy’s, Claire’s and Michaels Stores.
“Laura will bring her extensive merchandising background, ability to forge strong vendor partnerships, knowledge of augmenting customer experiences, and, importantly, positioning and elevating owned and national brands within our DSW-specific channels,” said Howe. “With her leadership, we’ll be growing our credibility as an on-trend brand builder and retailer. This will help us drive the next phase of growth and will allow me more time to focus on DBI’s overall strategic priorities, including driving our brand’s performance, both inside and outside of DSW.”
He noted that Denk’s hire followed organizational realignments to support accelerated growth and that continues with Bill Jordan’s plans to step down as president of Designer Brands Inc. and Camuto LLC, its wholesale subsidiary. Howe said, “With this change, we intend to hire a seasoned brand builder to help lead our growing brand’s business.”
Designer Brands ended the second quarter with inventories down about 13 percent year over year and off 4.8 percent since the first quarter’s end. On a retail inventory square footage basis, inventory was down 10 percent versus the second quarter of 2022 and down 4 percent compared to Q1 of 2023.
For the year, Designer Brands continues to expect sales growth, excluding Keds, to be down mid- to high-single digits. EPS, excluding Keds, is expected in the range of $1.20 to $1.50 a share, down 27.0 percent from $1.85 on an adjusted basis in 2022.
Photo courtesy DSW
