The company’s net income fell short of analyst expectations, primarily due to a decline in sales. The decline in sales was attributed to a combination of factors, including a challenging retail environment, increased competition, and supply chain disruptions. **Key Takeaways:**
* **Earnings Miss:** Designer Brands Inc.
This press release provides a detailed analysis of the company’s financial performance, including revenue, expenses, and profitability. The company’s financial performance in the 13-week period ended August 3, 2024, was significantly impacted by several factors, including:
We’ve seen strong performance in our core brands, particularly in the footwear category. Doug Howe: We’ve also made significant progress in our strategic initiatives, including the expansion of our online presence and the development of our new loyalty program. These initiatives are driving growth and enhancing customer experience. Doug Howe: Looking ahead, we remain confident in our ability to deliver on our long-term growth plan.
We’ve been particularly pleased with our back-to-school business, which has carried its momentum into the third quarter supported by our expanded athletic and athleisure offerings. Turning to our results, in the second quarter our sales were down approximately 3% versus last year. We saw a roughly 1% decline in comparable sales versus last year, a sequential improvement as our efforts to reinforce and grow relationships with our key national partners are paying dividends. Our top eight brands, all in the athletic and athleisure categories, continued to generate outsized growth in the second quarter, up over 30%, which was in line with the growth that we saw from them in Q1 and showcases the benefits of developing deeper relationships with key brand partners.
* Top eight partners contributed 39% of sales in the quarter, a significant increase from the prior year. * Assortment pivot is gaining traction, but over-penetration in dress and seasonal items continues to pressure results. **Detailed Text:**
The company’s strategic partnership model is proving to be a powerful driver of growth, with the top eight partners contributing a substantial portion of sales.
This strategy is based on the company’s commitment to long-term growth and sustainability. This commitment is reflected in the disciplined inventory management practices, which are designed to optimize inventory levels and minimize waste. This approach ensures that the company can respond to changing market demands and capitalize on emerging opportunities. The company’s commitment to long-term growth and sustainability is also evident in its focus on product innovation and development.
Allow me to briefly provide an update on the progress that we are seeing across DSW’s three strategic pillars: reinvigorating our assortment, elevating our marketing, and enhancing our omnichannel shopping experience. Beginning with our assortment, since the pandemic, the footwear market has undergone a structural shift to footwear more appropriate for everyday use, and we’ve made an effort to capture that shift by pivoting our assortment. Prior to the pandemic, our penetration of dress and seasonal went as high as 60% in 2017 compared to roughly 49% today. Conversely, athletic and casual was only 32% of our assortment in 2017 versus 42% today, a key driver in our improving overall performance. Being able to offer a robust selection from Nike, the largest kids athletic brand, is also a notable tailwind for us.
The strength in athletic this quarter was robust with our adult athletic comps up 15% versus last year, along with kids athletic growing over 25% versus the prior year period. At this time, we expect kids and athletic comparable results to continue to strengthen in the third quarter, bolstered by the majority of our back-to-school efforts falling during this time period. As a result of the success in athleisure, we’re also taking a new look at our strategy in adjacent categories. One new initiative we implemented was an increase of inventory in athletic socks. As we leaned into this newer area, we saw a 52% increase in athletic sock sales in the quarter and expect sock growth trajectory to climb further in the back half of the year as we continue to lean into this offering.
This statement highlights the importance of balancing the need for differentiation and profitability in a retail environment. Let’s delve deeper into the concept of affordable luxury and its implications for retailers. Affordable luxury is a marketing strategy that aims to appeal to a broader customer base by offering high-quality products at a lower price point than traditional luxury brands.
We need to ensure that our marketing efforts are aligned with our evolving assortment, and that we are reaching the right customers with the right message. This requires a deep understanding of our target audience, their needs, and their evolving preferences. To achieve this, we need to invest in market research and data analytics.
**Building a Brand: Partnerships, Social Media, and Identity**
We are also focusing on building a strong brand identity and a loyal customer base. This summary highlights three key strategies for a company’s marketing efforts: leveraging a brand partnership, expanding social media presence, and building a strong brand identity. Let’s delve deeper into each of these strategies.
The company is focusing on three strategic pillars to enhance its customer experience. These pillars are:
1. **Personalization:** The company is investing in personalization to improve customer experience and engagement. 2.
A. Designer Brands: Expanding into Quebec
B.
* Designer Brands is entering the Quebec market. * They will be operating 28 existing Rubino’s stores. * The company aims to expand its reach to another corner of Canada’s population. * Designer Brands is a new territory for them.
The company is focusing on developing best-in-class brands and leveraging scalability to achieve significant returns. They are also revamping their product ideation process to improve adoption rates and profitability. **Detailed Text:**
The company’s strategic focus is on building a portfolio of best-in-class brands.
Jessica Simpson also sustained the momentum it saw in the first quarter with high double-digit sales increases as the brand continues to appeal to customers for its colorful and unique style. We’re embracing the Jessica Simpson brand momentum and have capitalized on this excitement with expanded wholesale distribution up 70% in the quarter. I want to reinforce our message from last quarter that this year is all about execution and discipline within our brands business, and we’ve right-sized our inventories and are implementing new ways of working amongst our teams. Looking to the future, both Jared and I are working closely with our brand portfolio team to identify and pursue prudent investments where we can deliver the highest returns.
The summary provided focuses on the company’s positive outlook for the 2024 fiscal year. It highlights the company’s turnaround efforts, specifically the positive performance of the U.S. retail business.
Accordingly, we are repositioning our full-year earnings guidance at $0.50 to $0.60. As we shared last quarter, we continue to expect comp sales from the fall to be materially stronger than in the spring and in fact remain positive. Notably, as mentioned earlier, we have already seen positive comps to start the third quarter as our assortment evolution continues to take hold. We expect this to produce an improved EPS in the back half of 2024 versus the back half of 2023, while helping forge a recovery from last year’s lackluster boot season. We are in a transitional period for Designer Brands as our refreshed leadership team implements thoughtful strategic and operational improvements, and we are excited by the initiatives that have been put in place by our new leaders and look forward to updating you on our continued progress.
We saw strong growth in our footwear and apparel categories, particularly in the athletic footwear segment. Jared Poff: We’re also seeing strong growth in our digital channels, particularly in our online store. Our digital strategy is driving significant customer engagement and conversion rates. Our online store is now the primary channel for many customers, surpassing our brick-and-mortar stores in terms of sales.
This decline was primarily driven by a decrease in demand for our core products, particularly in the North American market. This decline was partially offset by growth in our cloud services and subscription revenue. The company’s operating margin was 18.5%, which is in line with the prior year.
Canada continues to invest in branding and geographic expansion. This investment is expected to drive improvements in results. The company’s brands portfolio segment saw a 14% sales increase in the second quarter.
The company’s focus on national athletic brands has led to a shift in its product mix, with a higher proportion of these brands now being sold. This shift has resulted in a decrease in the average selling price (ASP) of products sold. The company’s strategy of prioritizing national athletic brands has also led to a decrease in the average selling price (ASP) of products sold.
The company is focusing on deleveraging and optimizing its cost structure. This is being done through a multi-year execution plan. The company’s second quarter adjusted operating income was $32.5 million, a significant decrease from the prior year’s $62.6 million.
Higher operating expenses, driven by increased labor costs and higher energy prices, impacted profitability. Increased interest expense, primarily due to higher debt levels, also contributed to the company’s lower profitability. The company’s financial performance was negatively impacted by a decline in sales.
A. Strong Liquidity Position Despite High Debt**
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The company ended the second quarter with $38.8 million of cash and a total liquidity of $193.9 million. This liquidity was comprised of cash and availability under its ABL revolver. Total debt outstanding was $465.8 million as of the end of the second quarter.
The company expects its performance to improve throughout the year, with a positive inflection point in Q3 and a bottom line growth in the Q4. **Detailed Text:**
The company’s outlook for the year is characterized by a clear expectation of improvement across all aspects of its operations. This optimism is reflected in the anticipated positive inflection point in the third quarter (Q3), signifying a shift from a period of decline to one of growth.
The revised guidance reflects a strong focus on profitability and cash generation. This strategy prioritizes cost optimization and streamlining operations to enhance efficiency. This strategy is expected to improve the company’s profitability and cash flow. In addition to cost optimization, the company is implementing a customer-centric approach.
This statement highlights a key strategic shift in the company’s approach to sales. Let’s break down the meaning of this statement and its implications:
**1. Flattish External Sales:** This means that the company expects its sales from external channels, such as retail stores and online marketplaces, to remain relatively stable in the future. This contrasts with the previous expectation of strong growth, suggesting a potential shift in focus or market conditions. **2.
Our weighted average diluted shares outstanding are anticipated to be approximately $57.8 million for the third quarter and approximately $58.3 million for the year, given the share repurchase activity that has occurred thus far throughout the year. I remain energized by our plans to return Designer Brands to earnings growth in the back half of the year, including what is implied with this revised guidance of meaningful growth in EPS over last year. Importantly, the third quarter will mark the first quarter of positive comps since the third quarter of 2022, a testament to the fact that our strategies are working. At this time, we would also like to re-affirm our expectations for capital expenditures to be in the range of $65 million to $75 million for this year.
The company is confident in its ability to adapt to the evolving footwear industry and position itself for growth. This confidence stems from strategic investments in key areas such as talent, relationships, and infrastructure. **Detailed Text:**
The company’s commitment to adapting to the dynamic footwear industry is evident in its strategic investments. These investments are not merely reactive measures but rather proactive steps aimed at securing a future of growth.
Alex Faske, on behalf of Dylan, addressed the risk in the guide for the back half of the year. He acknowledged that the company had previously mentioned inflecting positive in comparison to the previous year, with a double-digit growth rate on easier compares. This growth rate was considered relatively de-risked.
The questioner is asking about how to adjust the branded portfolio to reflect current business trends. They are specifically interested in the company’s strategy of de-emphasizing dress and seasonal products. The questioner wants to know if it’s possible to buy or get rid of existing brands as part of this re-working process.
This is a great example of how a brand can leverage its celebrity endorsement to drive sales. Jessica Simpson’s brand has been successful because of her strong personal brand and her ability to connect with her audience. Let’s talk about the importance of celebrity endorsements.
The summary provided is a transcript of a phone call. It details a customer service interaction where a customer, Alex Faske, is speaking with an operator. The customer is seeking information about a product or service.
Doug Howe, a renowned expert in the field of artificial intelligence, has been working on the development of a new type of AI that is designed to be more human-like. Doug Howe’s AI is not just about mimicking human behavior; it’s about understanding and responding to the nuances of human communication. This is a significant departure from traditional AI, which often focuses on specific tasks or narrow applications.
I’m pleased with how the team has evolved the product portfolio assortment. There is a little bit of caution out there just with regards to the macro environment, but again really focusing on what we can control, [indiscernible] the categories that are working, and we’re positioned in a very good place because of how we planned seasonal. Jared Poff: I would add, Mauricio, to answer the end of your question, we do anticipate positive comps throughout the fall. But to your point, we do lose the 53rd week in the fourth quarter – that was about a little over $40 million in total sales. While we still feel pretty strongly even at the lower end of our guidance around Q4 positive comps, depending on where within that guidance we lie, you could see flattish or a bit more pressure on the sales side, just given we’re losing that $42 million week.
On the one hand, we expect some pressure from commodity prices, commodity inputs, and that’s impacting our margins. On the the other hand, we expect to see some benefit from our pricing strategies and our volume growth. So, the net effect is that we expect a slight improvement in gross margins year-over-year. What are the factors that are expected to drive the improvement in gross margins?
Dana Telsey: I’m curious about the company’s strategy for addressing the current economic climate.
This is a very positive sign. **Doug Howe:** We’re seeing a significant increase in digital revenue, which is a key indicator of our long-term growth strategy. This is a trend that we’re seeing across the industry, but we’re confident that our focus on digital will continue to drive growth.
Dana Telsey: Okay, so it’s more of a brand-specific impact, rather than a company-wide impact. Jared Poff: That’s right. Dana Telsey: And what are the key drivers of that? Jared Poff: Well, the key drivers are really the supply chain disruptions, the increased costs of shipping, and the overall inflationary pressures.
Dana Telsey: Thank you. Operator: We have a follow-up from Mauricio Serna with UBS. Please go ahead. Mauricio Serna: Hey, just wanted to follow up on SG&A. I want to understand, given that you lowered the [indiscernible] sales guidance, is there any change on the SG&A front, just because of lower sales expectations, or is that really essentially what is driving the–I just want to understand if that is what is essentially driving the lower guidance on the EPS level. Jared Poff: Yes, we’ve kind of talked a little bit about we’ve got a relatively fixed expense structure, especially when you look across our segments and the way that those businesses are organized. I would say, however, that should we start to see performance come in a little more challenged, start to pivot towards the lower end of our guidance, we do have a bit of flexibility – I’d call it probably between $5 million and $10 million of SG&A dollars to flex with that, but overall not a lot of wiggle room. That is why, as I mentioned in my prepared remarks, we have engaged an outside consultant to really look at our overall expense structure in what I’m calling physical therapy, just kind of looking to say how should we be wired a little bit differently.
Our expense structure has been dramatically changed over the last few years as we have added new brands that came with entirely existing infrastructures, like Topo, like Keds, and so we are looking at that and anticipate putting together a pretty robust multi-year execution plan to really get more efficient and look at how we should be wired for SG&A. Mauricio Serna: Got it, and then just lastly, what are your expectations for interest expenses? Jared Poff: Our interest is relatively in line. You know, right now we’re projecting just under $40 million of full year interest expense for ’24.
**Doug Howe:** Thank you, operator. Good morning, everyone. I’m Doug Howe, CEO of the company. I’m here today to thank you all for joining us. We appreciate your interest in our company and our progress. We’ve had a very productive Q3, and we’re excited about the momentum we’re building.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
