Q3 2020 Designer Brands Inc Earnings Call
Good day and welcome to the designer brands, Inc. Third quarter, two girls on 20 <unk> earnings Conference call.
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Should you need of Sicily, historically always sort of specialist for proceeds of starchy.
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After todays presentation, there will be an opportunity to ask questions.
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Please note today's event is being recorded.
I would now like to turn the conference over to Stacy girls with total.
Please go ahead.
Good morning earlier today, the company issued a press release comparing results of operations for the three months and at October 31st 2023.
Three months ended November 2nd 2019. Please note that the remarks made about the future expectations plans and prospects of the company at company constitute forward looking statements results may differ materially due to various factors listed in today's press release on the company's public filings with the FCC The company assumes no out.
Good day Shannon to update any forward looking statements joining us today are Roger Rawlins, Chief Executive Officer, and Jerry POS Chief Financial Officer, Let me now turn the call over to Roger.
Good morning, and welcome to designer brands third quarter of fiscal 2020 earnings call. Thanks.
Thanks for joining us we hope everyone of staying healthy end safe I'd like to begin by expressing my gratitude to our employees and customers for their continued devotion to designer brands. During these very difficult times at.
Scope of cases rise across North America, we continue to prioritize the health and safety of our employees and customers through our stringent standardization protocols anyone entering the stores reminded at mass are required inside.
This has enabled us to continue operating without interruption since the gradual reopening number stores that was completed this summer.
We're also cognizant of the impact this pandemic has had on our communities as discussed in previous quarters, we partnered up with Reebok consoles for soles end of donated over 3 million shoes as of <unk> ended the third quarter end of provided over 130000 pairs of footwear to a central workers impacted by the pandemic.
We've also spoken to you in recent quarters about our plans to increase our focus on diversity equity end inclusion within our organization. We're proud to say we brought in a new leader of this area in early October and she is already hard at work on everything from recruiting and training to employee engagement and building the foundation.
Question for a cultural assessment that we will launch in early 2021, we look forward to providing more detail on needs of efforts in the coming year.
Turning to our business performance and uncertain economic environment continues and we remain focused on stabilizing our operations to align with current consumer demand of behaviors. Historically designer brands is known as a dressing seasonal house. However, as most people are still working from home income.
Just sleep at boarding gatherings and social occasions. These two categories remain very challenged as such we continued our aggressive shift toward the categories and brands our customers are buying.
We have been successful with our pivot to carry more athletic and kids product in the U.S. and today, we're more deeply penetrated in the top 50 brands in footwear as our customers continue to favour buying products from names They trust.
During this time top brands are not just winning they're outperforming.
Because of the success, we are optimistic about the future and the short term we plan to keep pivoting our assortment to align with consumer preferences long term there will be a day that our customers feel comfortable going out to shows church and social events. When that time comes we believe designer brands will be positioned to serve their new.
Needs better than any other footwear reseller.
As we lean into the flexibility of our business model and assortment and adapt to the new environment in the near term I'd like to address our assortment strategy for DSW in more detail of cross athletic and Athleisure Kids and the top 50 brands in footwear as well as what we have achieved to date.
We've also detailed our efforts to pivot our assortment and the infographic. They can be found on our Investor Relations site.
At leisure product is dominant in the footwear space. This year by our definition at leisure includes all athletic product as well as footwear inspired by athletic looks that is suitable for wearing outside of the gym and even at the office and.
End 2019, 52% of all footwear sold across the industry and the U.S. was women's and men's athleisure in that same time period, 32% of DSW is U.S. sales were women's and men's athleisure, even prior to the onset of the pandemic. We saw this as an opportunity and b.
And shifting our assortment accordingly towards at leisure in the U.S. over.
Over the past few years, our athletic vendors have expressed to us that desire to partner with retailers, who have a strong market share with the female athlete.
Leading omnichannel capabilities and the ability to sell both footwear and apparel.
When we met with these partners back in 2019, we emphasized our market share position and award winning Omnichannel capabilities, They listen and we began our move towards including more athletic fashion at our assortment.
When the pandemic kit the consumers' desire for this type of product accelerated at our competitors, who have a history of playing more heavily in the space of reap the benefits likewise as consumer so focused on this at leisure look our pivot is paying off by the end of the third quarter, we had grown the at leisure.
Department to 49% at DSW, well above our seasonal penetration of 28%, which has historically been a much larger part of our business.
According to NPD data. We are currently the second largest retailer of women's athleisure and the U.S. trailing only one small company called Nike our.
Our performance metrics in the U.S. retail support the increased penetration in athletic with athletic comps up five per cent for the quarter significantly better than non athletic comps that were down 40% during the same timeframe.
And even stronger than last year's level of 4%.
Margins on the category, our strong up roughly 300 basis points versus last year on margins a non athletic are down over 600 basis points.
We are proud of the fact that we can sell the best athletic brands at regular price without all the promotional activities that damaged the reputation of athletic brands and we make it clear to our partners that our strategies and margins.
We will improve the long term health of their brands versus selling through these promotional at focused retailers.
Kits also has been a bright spot for our business earlier in our history, we began selling kids shoes, because we saw an opportunity to better grow our female customer spend once they had children today kids represent 10 per cent of sales above last year's level of 7%.
This category has been climbing fast and performing well.
During the third quarter kids comps were roughly flat well above the total company comp with healthy margins up 117 basis points versus last year end.
In 2017 Athletic and kids combined represented only 21 per cent of our assortment that grew to 22% at 2018 and 24% in 2019. It now sits at 36% at the end of through our third quarter 2020, a significant increase from three prior year.
Yes.
Pandemic has had a lesser impact on the kids category Kids continue to grow and replacing shoes is more of a necessity. This has helped drive the overall strength of the kids category.
So turning to the top 50 brands, our strong partnership with key supplier partners is a strategic differentiator for designer brands.
50 brands on footwear recognize our nimble business model command of over $30 million rewards members and our status as one of the largest retailers in footwear.
We have honed our focus within the top 50 brands and specifically the top 10 brands over the past year.
Based on our research we continue to see consumer searching for brand first and then a specific type of shoe customers are buying products from brands, They know and trust.
The top 50 brands of footwear comprised 73% of our total assortment in Q3 compared to 65% last year within those at the top 10 brands represented 38% of our total assortment in the quarter compared to 32% last year, we continue to build relationships with these key footwear vendors, including.
On luxury brands and wanted to highlight work, we did with Gucci during the quarter for a limited period of time, we offered over 100 skews with a focus on sneakers. This resulted in 13 million of incremental demand in Q3, and we're selling products at over 10 times our normal at you are.
Importantly in total our efforts to reduce inventory exposure and focus on athletic kids in the top 50 brands and footwear contributed to our overall merchandise gross margin rate for U.S. retail improving on 100 basis points when compared to the same period in 2019.
Clearly additional opportunity exists as we increase our mens and womens athletic penetration.
Even further and drive incremental purchases for children and other family members.
Looking ahead, we're continuing our aggressive increases in athletic penetration and currently have access to the highest level of inventory possible based on the product made available to us so far but at the top national brands recently, we finalized inventory decisions for our spring selling season and did so under the assumption.
At that the World will look largely similar to the environment. We are experiencing this fall season.
Based on these dynamics, we're remaining conservative with their buys this spring as we continue to face significant challenges from covered 19th and do not expect demand trends to change materially from the current environment.
However, we are planning for at leisure comps to grow double digits in the first half of 2021 Weve.
We've also been putting into place new measures to increase flexibility, we've adjusted our partnerships with key suppliers in order to get first access to more product in the event at the market normalizes quicker than expected and the demand for dress and seasonal footwear ramps up compared to our current assumptions.
This coupled with our ability to source of dress and seasonal product ourselves through our coming at US segment means we can get product in our stores at a shorter run time of four to six weeks rather than the nine months it can take to get fresh branded product.
Turning to our Canadian operations candidate continues to deliver a relatively better performance with comps down 19% for the quarter.
As we have stated in the past our Canadian operations already have a much higher penetration of athleisure end kids product.
Which has provided a buffer for the business throughout 2020, we are using best practices and learnings from our Canadian business to understand consumer behavior during the pandemic and inform the successful pivots, we are making in the U.S.
Now I'd like to discuss our commuter business, which remains challenged as the majority of our product produced by Camuto falls into a traditional dress or seasonal category. We.
We continue to see a lack of customer demand for these products that are DSW stores as well as our wholesale businesses.
As a result, we have taken steps to ensure inventory is aligned with that reality and decreased wholesale production at cumulus by 40% during the third quarter.
Looking towards the fourth quarter, we plan for production to be down 30% versus last year based on the trends that we experienced this period.
We know eventually the market will turn when our customers are able to return to social activities and all will need dress in seasonal shoes, we must be patient and understand this impact is temporary but we will be ready when the market changes and given the work we've done to increase our speed to market, we expect to be able to jump on day.
Man, even faster once we see at materialize.
So while we continue to anticipate similar pressures end consumer sentiment during the next two to three quarters of returned to normal will inevitably come on we will be ready to gain market share with our commanding lead in dress and seasonal product. In addition to our increased market share position at the end at leisure and as such we see a very exciting future.
For designer brands.
And finally, turning to digital digital will continue to be an incredibly important part of our business and we remain committed to investing in these capabilities. We continue to offer the digital services our customers appreciate including buy online pickup in store end curbside pickup and are proud of the fact that we were once again.
Named the number one omnichannel footwear retailer for the third year in a row.
It's not a surprise that the dynamics. We are seeing on line are very similar to end store digitally athleisure continues to drive significant increases to last year, while the balance of our assortment remains challenged.
While we continue to be very proud of the digital capabilities. We've built we have a great deal of opportunity to build out more digital centric experiences for our customers. Let me share just a few points about the success of digital in recent weeks at the beginning of the fourth quarter, we surpassed 50 per cent digital penetration and over the thing.
Thanks, giving holiday week, 57% of our demand was digital compared to 38% last year with athletic hubs of 18% over the course of the week.
This highlights the strong infrastructure, we have in place to support customers desire to shop on like a trend. We think will continue even when shoppers feel more comfortable shopping physically in stores now.
Now we have to turn our attention to differentiating ourselves even further from our competitors by continuing to elevate our online presence and capabilities. We are currently in the process of hiring a chief digital officer, who will help us do exactly that.
In relation to digital I'd like to mention an unforeseen incident that occurred during the quarter with one of our third party vendors. These systems, we use to route digitally demanded orders to our stores for fulfillment.
The vendor experienced a ransomware attack that impacted at U.S. operations and subsequently shutdown at systems voluntarily this shutdown impacted services to designer brands in the U.S. and we effectively lost a portion of our digital sales capabilities for two weeks during our crucial step tobar selling season.
As of November 2nd the issue has been resolved in all fulfillment services are back on line. However, the loss demand. During these two weeks was certainly felt and we are not anticipating it will be replaced which is likely to lead to some unplanned markdowns in the fourth quarter on.
Well plans are not finalized we do expect the event to be covered by insurance and we're working through that process. Now we will update you at a later date once that portion of the process is resolved.
Overall results in the third quarter, notably improved from the second quarter, our comps were down 30% compared to a decline of 43% last quarter and an increase of 5.3% last year.
It's important to note that back in May and June when we talked about seeing eight to 10 points of improvement weekly and traffic trends, we were making decisions about our fall assortment during.
During that time period, we were also seeing early indications of some boot demand.
We accordingly made the decision to invest slightly more into the seasonal inventory that was resonating with our customers instead of bringing boot inventory down 30% as originally planned we increased our boot buys to align with the sales decline in the teens.
On August and September while we were continuing to see the steady improvement in consumer confidence in store traffic. We also saw sales specifically seasonal product significantly outpacing inventory and aligning with our expectations.
However, we have since seen significant reversals in consumer demand and traffic as the covert resurgence has taken hold across nearly the entire country.
Many major metropolitan areas, our understate at home advisories in the number of new cases weighs heavily on consumers' minds store traffic has returned to roughly down in the 40% range as we experience of covert impact similar to what we are hearing across the industry.
This has been particularly severe in our top markets located in major urban centers. These key geographies that represent roughly 15% of store sales realized a negative 51% comp with traffic down 46% in the quarter.
Given the trends that we're seeing at the store level. We are focused on leveraging our digital channel to drive demand and utilizing our local warehouses to fulfill that demand and avoid markdowns. We are aggressively managing inventory to align product on hand with current demand trends.
However, if the cobot resurgence hold steady or worsens as we move through the fourth quarter, we will likely need to take further markdowns on some of the seasonal boot product that we bought following the initial signs of demand we discussed earlier.
Finally, although we are not typically a holiday retailer we have leaned into the consumer is giftgiving mindset instead of gifting shops in all of our stores that includes slippers, socs blankets and scars we of position toy sections adjacent to the kids area and included upped shops in 100 locations that bring accessories.
Handbags and footwear together in the same section.
There is no doubt that 2020 has been a difficult year end pressure will remain in the beginning of 2021 as well we've seen positive news on the road to developing of vaccine, but widespread adoption is still far off as we enter the coldest months of the year end, we're seeing a resurgence in KOVA cases, as well as region.
Realized responses, including curfews stay at home advisories end in some cases force of shutdowns, we have adapted both our product assortment and our omnichannel customer experiences in our prepared should we need to move to a digital only operation again.
We will continue to lean into at leisure trends.
And our liquidity position gives us the flexibility to continue operating in this difficult environment.
We do remain hopeful based on the latest information surrounding vaccine trials, but given it will take time for broader distribution, we do not estimate of returned to normalized customer behavior or profitability for our company until the back to school season of 2021, we.
We will continue to operate in the same manner, we have been in order to align our business with the current realities of the industry. We know we can make progress and have seen some of the fruits of that labor this quarter with that I will turn it over to Jarrett Jarrett. Thank you Roger and good morning, everyone on.
Our third quarter saw a sequential improvement across the business as we posted our strongest quarter year to date.
We are pleased with our progress, but cautious as we look to the rest of 2020 at the beginning of 2021 with macro headwinds specifically at resurgence in the virus already impacting our company.
I want to take some time to walk through our third quarter performance, then I'd like to briefly discuss how we're thinking about the remainder of 2020 and 2021.
Please also note at the financial results of we will reference during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise.
For a complete reconciliation of GAAP to adjusted earnings Please reference our press release.
This quarter was still challenging but we saw notable improvement on a sequential basis across all key metrics, including comps revenue margins and expenses day improvement was led by our ability to navigate through this environment focusing on increasing our penetration of athletic at leisure and kits product as well as our actions to.
Right size, our expense structure and manage our inventory assortment.
We mentioned on the previous earnings call that we were being conservative on inventory and waiting to see demand growth and dress on seasonal in the meantime, our efforts to lean into digital as well as athletic and kids product helped us return to a more normalized merchandise margin rate.
Additionally, we saw some demand return on the seasonal front, but unfortunately that was temporary at the cobot resurgence has been both swift and widespread.
Moving to our results for the third quarter sales decreased 30.1% to $652.9 million, which included $20 million to $21.6 million and inner segment revenue that is eliminated in consolidation.
This was in line with our inventory position coming out of the second quarter overall revenue improved notably on a sequential basis compared to the second quarter.
In the quarter total comps were down 30.4% vs up 0.3% in the same period last year, but a significant improvement sequentially from the down 42.7% in the second quarter.
In the U.S. retail segment comp sales were down 31.9% during the third quarter versus flat last year and also sequentially improved from the down 44.9% in the second quarter we.
We are pleased with the sales improvements that we saw at during the quarter driven by our initiatives to pivot towards the at leisure category and in line with our inventory position coming out of Q2.
At the end of the third quarter end use at retail our athletic business represented 26% versus 17% and 29 team at.
At leisure, which is inclusive of athletic represent at 49% versus 34% end dress and seasonal together represented 35% versus 48% end the same period in 2019.
And as Roger mentioned athletic end, the broader athleisure categories produced positive comps during the quarter well above our overall company performance and store traffic, which was down 38%.
Conversely dress on seasonal comp negative, 60% and negative 44%, respectively, reflecting the continuation of depressed consumer demand.
We anticipate at leisure comps will grow in the double digits in the first half of 2021, and we are looking to add product as aggressively as possible during.
During the quarter, we did see some pressure on our results as we were impacted by issues outside of our control, namely the resurgence end cobot across the country and the ransomware attack experienced by our third party vendor.
Digital digital demand continues to be strong for dbi at.
In us retail digital demand comps improved through August and September, which increase with increases of 16% and 22% respectively.
The rapid and strong resurgence of cobot across the country and the issue with our vendor at during the last two weeks of the quarter resulted in a decline in digital demand comps of 22% for October bringing the full quarter us retail performance to up 3% on top of a 45% increase last year still well above our store performance.
In total we saw at digitally demanded sales comp up 7% for all of Dbi, which represented 35% of total demand versus 23% last year.
And Canada comps were down 18.7 per cent for the quarter. This.
This was a sequential improvement from down 27.9% in the second quarter. Despite.
Despite the decline of stores results were slightly offset by strong web growth, which was up 121 per cent compared to the same period last year.
As Roger mentioned, our Canadian operations were already more penetrated towards athletic and kids prior to the pandemic, which is helping that business performed better than our U.S. locations.
Canada did experienced unseasonably warm weather to start their critically important winter boot season, but at the end of the quarter. The weather started to turn cooler.
As favorable weather along with prescriptive promotional activity will allow our Canadian operations to work through our boot inventory without taking significant discounts.
Looking at casual and dress. These category sales were below expectations and we anticipate some margin pressure as we work to clear through those skews.
On a positive note, Canada has partnered with some big cold weather brands to expand assortment through the set up of cosy, PJ shops, and outdoor snow apparel areas in our stores and online.
This is providing us with some incremental revenue.
Let's turn to our Komodo group, which is nearly exclusively a seasonal on dress business and thus remains in a very challenged physician.
Total net sales were komodo, including sales at DSW were $83.9 million in the third quarter down 39% versus last year end sequentially improved from down 70.4% in the second quarter gross.
Sales sales were $73.7 million in the third quarter versus $117.4 million last year, including sales to our retail segments, which totaled approximately $21 million versus $23.9 million last year.
Commission income decreased 43.8%, including income earnings from our own retail segments on exclusive brand business, which totaled zero point $6 million in the quarter.
At ABG, we were able to take advantage of liquidation sales at Stein Mart declare other inventory at a higher price than previously anticipated.
Stein Mart is now completely shut down as of the end of Q3 and beginning in Q4, we will no longer report activity in our other segment.
We generated $165.7 million end gross profit in the third quarter, our strongest quarter year to date versus $273.3 million in the prior year. This.
This decline was a direct result of significantly reduced customer traffic in our stores due to the continuing impact of COVID-19.
As mentioned last quarter with the inventory actions taken in the spring we generated a 100 basis points of higher merchandise gross margin rate in Q3 compared to last year at DSW. However.
However, our consolidated gross profit margin contribute continued to be impacted by COVID-19, decreasing 390 basis points to 25.4% in the third quarter versus 29.3% in the prior year.
Sequential improvement from the prior two quarters, though.
We are still experiencing elevated shipping costs, given our strong digital growth and de leverage and fixed occupancy supply chain and royalty costs as we posted cobot impact at negative sales comps.
At our US retail segment, we saw continued pressure on the retail gross margin, but an improvement over the second quarter margins were 23.4% in the third quarter versus 10.5% in the second quarter.
Similar to the U.S. business, Canada gross margin in the third quarter was 30.7% a decline of 530 basis points versus last year, but a sequential improvement over the second quarter coming.
Some of those gross margin rate was 26.4% in the third quarter versus 29.7% last year and also improved sequentially from negative 31.6% in the second quarter as we reduced production to align with demand and cleared through the markdowns taken in previous quarters.
Gross profit rates are traditionally lower in Q4 than Q3, as we deliver on various concessions with our wholesale customers.
I want to spend a few minutes talking about our focus on inventory and the steps we are taking as we plan for the early part of 2021.
We ended the quarter end solid shape as a result of strong inventory controls our consolidated inventory was down 19% in total versus last year on a unit basis inventory was down 17% compared to last year.
Although we saw sequential improvement across our business demand remain depressed.
I want to Echo is roger's comments that we are being as aggressive as possible and increasing our penetration to athletic and athleisure product and managing our inventory assortment as a result.
We are also planning spring 2021, assuming that the macro environment looks largely largely the same as it does today, we're not anticipating a return end demand for address our seasonal product, but are taking steps to ensure we have maximum flexibility if the demand environment changes, we are working with our supplier partners, particularly.
Our top 10 to obtain first access to additional inventory should demand levels recover earlier than anticipated and we have komodo at the ready to ramp up production for us as soon as we see demand materialize.
Moving to operating expenses in the third quarter consolidated adjusted EPS, DNA was down 8% to $196.1 million versus last year.
Given the significantly lower sales base, our SGN a rate was 30% of sales above last year's level of 22.8%.
In total we reduced operating expenses by $16.8 million in the third quarter. In addition to the $43.9 million reduction in the second quarter a low.
Large driver was our recent head count reduction, partially offset by a bonus accrual reversal in Q3 of 2019 and increased marketing expenses compared to last year.
Depreciation and amortization totaled $66 million in the quarter compared to $64 million in the prior year.
Adjusted operating profit for designer brands was a loss of $28.6 million in the third quarter versus a gain of $63 million last year.
Interest expense was $9 million during the third quarter versus $2.2 million in the prior year.
Moving to taxes, our effective tax rate for the quarter was 49.4% compared to 20.2% last year. The significant increase in our effective tax rate as a result of the cares Act, which allows us to apply at this year's losses against prior year's income, which was at higher tax rates.
We expect to see a notable cash tax benefit in 2021 as a result of the cares Act low.
Looking forward, we expect our tax rate to remain extremely volatile as cares act impact will be felt as well as potential valuation allowances being placed on expected future tax benefits until such time as we return to consistent profitability.
Total weighted average diluted shares during the quarter were $72.3 million compared to $72.9 million last year.
We reported a net loss of $40.6 million or 56 cents per diluted share, which included store impairment charges of $30.1 million primarily related to stores located in urban areas.
Excluding the impairment charges and other adjustments adjusted EPS was a loss of 26 cents per diluted share for the quarter.
We have taken a number of steps over the year to bolster our liquidity position and flexibility.
We are comfortable with our balance sheet and ended the quarter with total liquidity over $400 million. This is comprised of $114.5 million of cash versus $87.8 million last year end $295 million available to draw on our revolving credit facility our outstanding debt at the end of the.
Period was $347 million versus $235 million last year.
Well cobalt has had a material impact on our operating performance. We remain pleased with our liquidity given the measures we have taken over the past year.
We successfully refinanced our $400 million bank revolver, and raised $250 million and incremental liquidity. This quarter, we generated significant liquidity through working capital management expense management and reduction in all non essential capital expenditures today, we actually have more liquidity on hand.
End of than we had at the end of fiscal 2019.
Finally at the end of last quarter as a backstop, we installed an at the market equity facility of up to $100 million, which could be deployed should conditions demand.
We believe that designer brands has sufficient liquidity and access to incremental liquidity to weather the storm until we see consumer demand return to something normal.
During the quarter, we opened four stores and closed two in the U.S., resulting in a total of 524 US stores in Canada, We opened one store with no closures ending the quarter with 145 stores.
With continued pressure, we're seeing on store traffic and the material acceleration, we have experienced in the transition of customers from store to digital we continue to closely evaluate our existing store infrastructure well.
While we are making some progress on lease concessions. The fact remains at our fixed cost store infrastructure is not nearly as productive as at once was.
We anticipate that we will likely opened very few to no new stores for the sales for the foreseeable future and we will begin aggressively negotiating exits of our worst performing store locations as lease terms and market conditions warrant.
While this will be a gradual transition over time. It is likely we will look to close to 10% of 15% of our store fleet, while still retaining a physical presence in most geographic markets and of course, a strong digital presence more to come at this work continues.
I would now like to turn to our outlook. We are pleased with the sequential improvement we saw on the third quarter, but we're cautious as we look ahead as we are seeing the impact of a strong end wide spread cove at resurgence on.
Year to date, our comps on the U.S. are down roughly 20% given the resurgence of cobot end the impact we have seen on store traffic. It is difficult to assess the trends keep in mind that we are not a big holiday destination destination and at seasonally January is typically our smallest sales month of the year.
Ultimately, we expect the balance of the year end spring, we'll look largely the same as what we are currently experiencing in terms of consumer demand on.
On the sales front, we don't expect a significant improvement from Q3 until late spring or back to school of 2021.
Well, we saw the merchandise margin rate normalized in the third quarter, we may see some gross margin pressure in the fourth quarter as we may need to take some markdowns to clear through some boost to solve their demand dry up with the covert resurgence. However, the anticipated markdowns will not be nearly as severe as what we saw last spring.
Additionally, if that traction and boost returns than these markdowns may not be necessary.
We are monitoring cobot cases daily by market and allocate product. Accordingly, So we have the right shoes in the right places to capitalize on demand our focus is to manage inventory levels to align with sales trends. So we are in good shape as we head into the first quarter we.
We will be reading demand results closely over the next few weeks.
Given there is still a great deal of uncertainty we are not providing official guidance at this time overall as we look ahead, we anticipate our business will remain challenged until a vaccine is more widely distributed which will not likely be until back to school season of 2021.
We remain confident in our long term strategy and our liquidity and flexibility that will help us whether this challenging time.
With that we will open the call for questions operator.
Thank you we will now begin the question and answer session.
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One question on a single flow.
Today's first question comes from Sam Poser with Susquehanna. Please go ahead.
Good morning, everybody. Thanks for taking my questions I got a handful on on funding limits my questions as much as you want.
Of the holidays as well.
Well just a quick one on on the conversation about the trends versus the first half of next year, you really talking about trends versus 19, I mean, how should we think about that it's it's kind of complicated because.
Yes, same I think as we're much as we're running the business, it's really looking at the trend versus fall of.
And comparing that to last years at that same kind of run rate that we're experiencing this fall at sort of how we are.
Expecting spring to play out if you think about at our businesses typically 50, 50 spring fall I mean at.
It might be 49, or 48, but it's in that kind of ballpark. So that's the lens, we're using to operate the business again until there is some real.
Real clarity that that we can see where the customer is going back out and engaging in the so social activities that that we saw before this that's the way we're going to run the business.
And then so we should think about spring down like 20% to 30% vs.
Spring 19.
Or or I mean, that's on trying to figure out.
Directionally, yes, Okay and then.
Secondly.
Youre athletic inventory versus.
Like where is your athletic inventory now relative to your sales of your total inventory is in pretty good shape out of the athletic inventory look.
Relative to the rest of it.
Yes, I think.
Athletic the assortment in athletic.
Let me say on manager at let me, let me say at leisure Okay. No that's great yes.
We have consistently seen sales outpacing inventory.
And that's why we feel very confident that we've got to continue to pursue this kind of opportunity and as I said in the market share I mean, we were 20 points below the market and penetration in this category and you know it's been two years ago, I think that Jim and Debbie now I had this conversation about we've got to go.
We're giving market share to people, we got to go get this and Thats exactly the approach we're doing so that's why I really really believe we're positioned uniquely from everyone else in footwear, but we've been out there getting this ath leisure customer, which is a current customer but also a lot of new customers end when they go back to social occasion.
And we will go jump on the business and that's why I'm. So excited about the work we've done in this space.
Thanks, and then lastly on the can you talk about the use of your CRM vis-a-vis the emails that you're sending out to your customers in your loyalty program.
And I'm, just sorry to say I mean, what are you doing to target those emails.
And rather than.
Bombard customers would just lots of emails.
I mean, we segment.
E mails by others groups of folks to get different communications and right now obviously its about boots boots boots.
But but our team has been able to identify obviously of a male consumer from of female consumer from a family consumer.
Those are all the approaches that we take but right now pretty much across the board. We're very very focused on boots is roughly half of our business. We've got to go we're going to drive the boot business.
Gotcha Alright.
Thank you very much on spec thing else.
Art, but.
At our next question comes from Steve Marotta with sales.
Please go ahead.
Good morning, Roger end Jared.
No major expectations for changes in consumer demand in the first half can you talk a little bit about your expense strategies in order to manage centrally the the expense structure downward as much as possible in order to offset.
Partially offset that decline of demand.
Yes, Steve what I would say is that the posture, we have taken in fall certainly we'll continue where we.
We had some I would say de leverage in the fall was was really only around marketing as it related to preopening at.
And then letting peaks not preopening reopening letting people know that our stores were reopened I don't see that level of deleverage on me.
Maintaining into the spring all stores have been opened.
Then obviously, we had some bonus accrual reversal noise happening in the third quarter that all else being equal would not would not be there everything else.
I see us maintaining that the posture that were at in addition to the benefit of the the day breadth that we unfortunately had to do at the end of July. So you know I think that when you look at Q4, specifically on what comes out of there versus ly from a expense dollar standpoint is going to be somewhat similar to Q.
One and two for next year.
That's very helpful and can you elaborate a tiny bit on the digital issues around the vendor in October.
Can you talk a little bit about maybe magnitude quantify at a little bit did your digital operations.
For two weeks or was it in one particular very specific segment of the entire digital strategy.
Yes, Steve.
Thanks for the question, so I think you're aware that that Sep tobar window.
That is our holiday season and.
It was really during the last couple of weeks of that that season, where we essentially lost access to the goods that were in our space in our stores, which we call our warehouses.
We lost visibility to those as at from a customer perspective.
To give you a sense of normal business, we had of about 13.
Oh, My goodness about 13 million units that are available visibly to the consumer through our digital channel that number dipped to roughly about 1 million three during those two weeks. So that gives you a perspective of.
When you lose access to that of any units digitally that's a that's a big deal for us, but it wasn't material to the to the third quarter end as Jerry had mentioned.
We're going to go take every action, we can to recover through our insurance policies, but the loss that we incurred.
I just wanted to follow up on that really quickly how long do you think that that process will take.
That's a great question, Steve we are we are aggressively pursuing at so we are knee deep right now and the on negotiation in the claims adjustment process with our with our carrier end our excess carrier.
You bet, but as as you may know at the most complicated part as the apart around the lost business like the added expenses pretty cut and dry this lost business part.
So we're really hoping to get as much of that negotiated by the end of this year, but to be perfectly on if I could see some of that slipping into the into next quarter.
Helpful. Thank you so much.
Thanks, Steve.
And on this question.
On Jay So yes. Please go ahead.
Great. Thank you so much.
Roger how.
So as you think about the athletic business today and just the business is continuing focus on the top 10 at 50 brands how high can the mix of one brand go within the store are you willing to let one brand become six 710% of total sales how are you thinking about that right now.
Yes, great Great question, Jay and I do think of.
Looking at those those top 10 brands seen one or two of them that can can you get up into that 5% or or greater penetration I think is okay for us.
If the customer wants to go there we've got to go with him and her and give you. An example of the.
Biggest brands in the athletic space have been dropping department stores, and grocers and online read online only retailers left and right and the more relevant we can become to a brands to brands like that and become a bigger player within their organization given that the consumer is in that brand is in.
Hi demand of the consumer we're okay with that and that's.
That's the approach we get to take of our customer wants to go here. We've got to go there with them at I think we had not taken that approach frankly over the last.
Few years as the consumer has clearly gone to the athleisure space again with over 50% of the market in that space and we were playing around roughly 30% and we've got to think differently as merchants and design team and that's the approach we're taking.
Okay got it okay. Thank you so much.
Good day.
And our next question today comes from Gabby Carbone Deutsche Bank. Please go ahead.
Hi, Good morning, Thanks for taking my question. So you mentioned how customers are kind of more comfortable selling brands. They know how does that kind of change your private label strategy in the long term you know do you still see the opportunity to reach.
On 25% to 30% penetration PEM on data produced brands.
Hi, Debbie great Great question, So I think.
We still see significant upside of.
To be a vertical we tailor and finding what that right mix is.
I think we still got to define that but is it still north of 20% I think absolutely.
And when you you take out at sort of the athletic piece you take out of some of the iconic brands. There is a still a large chunk of our business and again I'm talking post pandemic.
Kind of at Lids, there's still a ton of business that we do outside of those two buckets that we have an organization that knows how to design and build the best dress and non athletic footwear in the industry and we've got to unleash that machine.
On that part of our assortment and we will get after that but we've got to do it at the right time and I feel very confident at our team's ability of koodo to deliver on that.
Net Debbie working in that area, who is in the shoe Hall of Fame and will deliver because she has a history of doing that on her X number of years that you wouldn't want me to share at DSW of but.
But I still feel very very confident that be any vertical retailer end. This climate to differentiate your assortment is critical to the long term health of our business.
Got it. Thanks, just a quick follow up I'm on I'm wondering if you can dig into gross margin on a more in kind of how you view that to play out in the fourth quarter, you know sounds like Mark Downs on could be of argued headway on you know, but where on the other side you kind of see opportunities for improved.
Yes, So you know at the.
Depending on what we ultimately have to take in markdowns you know our arm our merchandise margin could be flat at flattish to L y or down I would say probably four to 500 basis points. So that's kind of the swing on that it really is coming down to these next I'd say three to four weeks on which is still very.
Big boot demand and especially if there was any of that was was waiting on the sidelines. So we'll see on that front I still see.
There is no model on Earth, where I'm seeing positive comps for Q4 and by nature of that's going to drive some pretty significant de leverage on the <unk>.
Gross profit per on the occupancy and.
End of fixed costs and the FC DC low.
Lyne said all of that flows through to gross profit and then obviously as long as our digital demand continues to to really be the channel of choice. We will continue to see some at some pressures there on the shifting as well. So net net I think it's still some headwinds, but that markdown volatility is really what what's the big unknown.
Right now and I think the other piece as it relates to margin go forward as you think of first half of next year.
I think our team has done a really nice job of managing inventories to tie back to sales and so I think continuing those kind of disciplines. As we go through the spring season, primarily in the seasonal area, where we do not want to be out there beyond our skis on on some of those items, which we.
We have the ability to chase in a in a bigger way than we than we probably have pursued in the past based on the work our merchants of done.
That's the area, where I think again continuing to improve margins as we move forward from where we had been that's where the opportunity lies.
Got it they get their much best of luck.
Yep. Thanks Debbie.
At our next question comes from Chris was low.
Bush. Please go ahead.
Good morning, everyone. Thanks for taking my question.
Well I guess first just to clarify when we distill all the puts and takes you see it for Q4, not getting too nitty gritty, but is it fair to say the operating loss of the earnings loss could be greater than Q3, just given Q4 seasonally low margin quarter to begin with and just sort of your comments about it.
Store exposure et cetera, my thinking about that correctly.
Yes, I mean at a.
Again, Chris I think I think potentially we've we've really got to see what happens on on the markdown front, but but overall I think you're thinking about the calendarization, the right way, where where I would comment where we're probably a little different than last year or historical years is.
I think our topline might be a little more even between the two quarters. This year. We just we just didnt have that same type of seasonal demand that we normally have in the September frame that really pushes that Q3 much much higher so that's going to be a little more equalized, but but overall, yes, I do think you're you're going to see a bigger op loss in Q.
[music] four than you did in Q3, okay. Thanks, Jarrett and just on end just on that topic. When you think about first half.
I think Roger you mentioned that I'm not sure about first half of 2021, youre expecting still all else being equal to generate operating losses and profitability. I think you mentioned back to school. So that's probably meeting at the Q3 am I thinking about that correctly all else equal.
Yeah, that's right, Chris and again.
We are hoping that.
That social occasioning accelerates and we will be positioned in our position to jump on that if it happens but.
But that's the approach we're taking because as you know it's all about how do you buy the inventory and so we'd rather maintain that kind of lens through the first half and as you know historically Q2 for US is has not been as strong as Q1 in the spring season, and that's more of a window of when we are clearing the seasonal goods.
So that is that's the lens that we've applied to the business for 2021 understood. One last quick thing here just on on.
Non athletic categories, you mentioned at leisure being up and at double digits from a comp perspective for first half of 21, just the other category.
Probably no no change based on what you're seeing now and what the Packaway if anything that you have.
On your stores at that point that you will bring back out of four.
For spring 2021.
Yes so.
Chris the approach that we've been taking its.
In the non athletic space.
The trend on.
Pumps dress any of those kind of items has really not materially changed since the pandemic started at.
And those have been in the down 50, 60, 70% range and we're anticipating that kind of performance to continue in that non athletic space and as it relates to sort of the approach. We're taking on Packaways. Yes, we do have some from last year that we can pull out but not at.
Not a significant amount as it relates to spring, but some of the work. We're doing is if you take a look at let's just use of simple black pump. That's on the Florida day, there's no need to take a mark down on that pump and try and get out of that so that we can go buy another black pulp because the consumer hasn't bought it at nine months, so that we're literally looking item by.
Item to decide what are the things that makes sense to take a mark on now that we know can draw reaction from the consumer versus things that will allow to live for a longer period of time, knowing that it will come back at a later time did that hopefully that answers your question.
That does thank you and and all the best and happy holidays.
Yeah happy holidays, Chris Thank you.
And our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.
Good morning, everyone. As you think about the pivot with store closures and potentially more store closures. How do you think about the integration with omni channel initiatives, whether its curbside or bopis, what kind of store portfolio do you need and also on the digital side. What are you seeing on the margins there.
And how you pivoting customer isn't digital to become multichannel customer is that happening. Thank you, yes, oh, thanks, Dana So one of the biggest cash.
Competitive advantages, we have is having 520 some in the U.S.
The fulfillment centers within 20 minutes of 70% of the U.S. population and.
That is the preference is I I love. The fact that we have the ability to deliver product to our consumer faster than anyone Weve got two we've got to bring that to life from a customer experience standpoint, and that's what the team is working on at 2021 at my team is listening to this call. So I want them to fill at a reinforced to them that.
As a strategic differentiator for us.
And that's that's opened approach we've got to take as we look at its a digital experience I think you know as I had mentioned in the call that hiring a new chief Digital officer, a position that we haven't really held in the company in the past is great going to be great for us in bringing to life differentiated experience.
Yes, it's happening into that emotional connection that we can create through our digital lens, which is trending to be north of 50% of our demand. We've got to continue to lean into that and then as far as digital margins.
There really is no such thing as digital margin versus a store margin anymore, because roughly 50% to 60% of all of our digital demand is fulfilled out of that local fulfillment center again, why it's so important to have have stores that are within 20 minutes of the U.S. consumer so that's.
That's the approach that we've taken and we're going to continue to lean into that because it differentiates us from the competition.
Got it and when you think of the brands of getting like you mentioned about the GE will that be ongoing was at one time in nature and how does that type of a margin different relative to your corporate average.
Great question Dana end, we are working hard our merchant team to to go build relationships with brands.
To create differentiated products. So it's not just finding a gucci. It's also going to those top 10 or 50 brands insane.
We know we're selling the same product you carry but as the largest.
Women's adult branded footwear retailer you got to give a give us differentiated product and that's part of being in our portfolio of being our partner is you've got to build product that you can only find exclusively within DSW or within shoe company as we grow our business. So that's.
That's the approach that we're trying to take with all the brands as it relates to specifically luxury.
We're continuing to work with Gucci and other partners like that to bring product to life on our site that will attract a different customer and give our current customer of book into product that they've never seen before and from a margin standpoint, I'm really proud of the fact that the product that we brought to life in that space is margin at rates that are comparable to our.
Normal or margin and that's amazing given that you are selling at an eight you are 10 times, what we sell the normal shoe for.
And I think you get that day. So that's that's remarkable in our space.
Thank you.
Thanks, Dan.
And our next question today comes from Tom Mockridge with Wells Fargo. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
On the topic.
Jared I wanted to ask about the.
The planned store closures.
50% fleet.
The quick clarification is that us only or does that include Canada.
The it right now its us on label, we are absolutely looking at the at the same analysis in Canada. The store economics by units are very different when you are talking about much much smaller stores with much much lower rent structures and fixed cost structures shoe company versus DSW. So I don't know that.
The same type of of results will pop out, but what we talked about right now is just us DSW stores.
Got it okay on it.
And.
The situation, where you would look to do those closures like with natural lease.
Net lease expirations or would you kind of sort of rip the band aid off and be a little bit more.
Aggressive and proactive.
Making those closures.
Yeah, it's all going to be at.
At negotiation on on each and every one what I would tell you is that the list that we have today is not going to be the less that ultimately makes it through.
To give you just a little bit of color as you know we work with all of our landlords on the lease deferrals had great success. There. We're in the middle of our of our actual lease concessions on right now and it really is pretty binary if weve got leverage because of a lease date, we are getting a pretty nice reduction not.
Exactly to the same extent of traffic declines, but pretty vague on close at the end rent on those ones for that for the rest of on even with the ask on we're not making a lot of traction until you at until you have that that critical date come into your your discussion so on that.
And that's very similar to what we're seeing from some of our other retail peers. So as we look at it.
One were using were using future assumptions at of store level that will be different. So some stores will fall off just based on performance and some stores I get added on and more importantly, as our discussions move into the lease term natural dates that are coming up I end certain there will be much more traction made on the discussions.
At the landlords that will not require us to close necessarily every single store thats on that list right now so.
So it's very much a moving target, but it is more going to be along the lease life, which as you know for our entire portfolio right. Now average is four and a half years. So I'd kind of use that as a benchmark of what it would take us to work our way through that.
Understood very helpful. Thanks, very much on happy holidays guys.
Thanks, Tom Happy holidays.
Ladies and gentlemen, this concludes the question and answer session.
On the conference back over to the management team for any final remarks.
Thanks, everybody for joining us today on the call and wish everybody happy holidays continue stay safe and healthy and.
We will talk to you soon thank you.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.