Q4 2021 Designer Brands Inc Earnings Call
Good morning, everyone and welcome to the designer brands incorporated reports fourth quarter and fiscal year 2021 results conference call.
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At this time I'd like to turn the conference call over to Stacey Turnoff with Edelman Ma'am. Please go ahead.
Good morning early with five.
The results of operations for the first week and 52 week, where are you on the January 29 2022.
And 52 week period, ending January 32021, please.
Please Marco.
<unk> made about correctly.
Plans and prospects of the company.
Yeah.
Results may differ materially through the various factors.
Today's press release.
<unk> public filings.
The company assumes no obligation to update them.
Joining us today are rocking and rolling.
I can give officer, Darren karst Chief Financial Officer, now, let me turn the call over to Roger.
Good morning, and thank you everyone for joining us today for designer brands fourth quarter and full year 'twenty 'twenty. One earnings call. We are extremely pleased with the strong into our fiscal year during which we set several records. Our team did an incredible job all year delivering results that exceeded our initial expectations, while strengthening the long term.
Fundamentals of our business as always we want to thank our associates for their dedication to the business because of their hard work T. B I exited 2021 and a position of strength. Despite the challenges in the operating environment. We've returned the business to a growth trajectory delivering our highest operating income since 2000.
14th and this growth is expected to continue as Jared will share with you a little later as we continue to lean into the pivots. We've made during the pandemic and returned to strategic growth in our owned brands and our direct to consumer or DTC business.
I'd take a moment to pause and reflect the pandemic created unprecedented changes in consumer behavior from the types of products. They buy how they shop prior to the onset of COVID-19, we had begun to evolve our strategy, but the market conditions of the past two years forced us to grow and change at an accelerated pace because of the actions.
We took we now believe that we are well positioned strategically and financially we have grown our market share in categories, where the consumer is demanding a broader selection such as athletic kids and mens we've retained our historic market leadership in dresses and fashion as these categories make their post COVID-19 recovery.
We've coupled these with our award winning digital and Omnichannel capabilities and we now see the ability to turn the engines of our in house design and sourcing capabilities backhaul it to be a builder of brands moving forward. We are already seeing aggressive growth in sales of our owned brands and our DTC channels of DSW both in <unk>.
Store and online shoe company, and Vince <unk> Dot Com and believe that this is where our future growth lies our future growth will be supported by our core competencies and initiatives that make up the three pillars, we've been talking about customer brand and speed, let's dive into how we capitalize on those in 2021 start.
With our focus on customers increasingly throughout 2021 we've seen our customers coming back to us for dress and seasonal product. This is where our brand building expertise lies where our historic retail dominance leads and we believe that we have on trend product and capabilities to meet this rebound in demand.
According to NPD, while the rest of the market experienced a revenue decline in fashion footwear, DSW outpaced with a growth of 30 basis points in the quarter ending in January compared to the same period in 2019, even with this rebound we haven't taken our foot off the gas in categories, where we've been gaining mark.
Sure in the last two years in 2021 over 60% of all shoes sold across North America in the footwear industry, where athleisure the gross national Athleisure, specifically provided us opportunities to grow our men's and kids categories within our U S retail business to new record levels. This year and we grew.
Sales across our enterprise and athleisure by 30% compared to pre pandemic levels. In fact, according to NPD group retail tracking service for the quarter DSW outpaced the remaining U S footwear market significantly and mens womens and kids, including both at leisure and fashion footwear compared to the same quarter.
In 2019, resulting in a market share revenue gain of 40 basis points Dsw's fourth quarter market share was the highest compared to the last two years.
Given we are still underpenetrated to that leisure category. We believe this growth will continue well into the future.
Also in our U S retail business in athletic specifically, we posted a comp of 14% in the fourth quarter of 2021 compared to 2020 kids Comped up 38% in the quarter compared to the same period in 2020, and total mens sales were up $40 million in the fourth quarter versus the same period in two.
'twenty, primarily due to increases in men's dress boots and athletic not.
Not only have we followed our customer style choices. We have also shifted our marketing investments to meet our customers where they are shopping as a result, we significantly reduced our spend and costly and less productive direct mail and frequent use of gift with purchase and replace those with more productive investments in digital media focusing on brand Bill.
<unk> and customer acquisition.
2021 we reduced our total cost of marketing and promotions in our U S retail business to 13.2% of sales from 25, 4% of sales in 2020, and 16, 1% of sales in 2019 of roughly $91 million improvement year over year, which was partially redeployed.
Floyd into investments to support growth. This strategy has yielded great success and an increased number of sales delivering an all time annual record of new member sign ups through our loyalty program and fueling further growth in our bottom line.
Turning to brands, we continue to lean into the best names in best styles, starting with our own brands, which include our exclusive brands and kabuto national owned and licensed brands to drive growth across our business, our commuter design and sourcing organization fueled the growth of our DTC sales as well as our selective growth.
In our third party wholesale business, our long term strategy is centered around growing our strength as a builder and grower of brands from our four major national brands to our top quality Comito produced France total D. B I sales of our owned brands grew 16, 9% in the fourth quarter of 2021 compared to <unk>.
'twenty and sales of our owned brands through our DTC channels, meaning DSW shoe convinced committed dot com grew by 98% in the fourth quarter of 2021 compared to 2020 gross profit D. B I earns on the D. T. C sales of our owned brands was a major growth driver in the quarter and will continue to aggressively.
Wrestling propel our growth into the future. Additionally, in 2021 the gross profit rate the four royalties that we earn selectively wholesaling our national brands was the highest we've generated since our acquisition of <unk>.
We are pleased with how our <unk> acquisition has been woven into the fabric of designer brands and expected to lead us through our next phase of growth.
In addition to our own brands. We also continue to prioritize our top 50 brand partners and our U S retail business. Our track record of success with brand partners continues to allow us to secure a strong assortment, even and constrained inventory environments for the full year. The top 50 brands, which includes some of our owned brands.
Represented 77% of our sales in 2021 compared to 72% in 2020 are focused on these top 50 brand partners also enabled us to achieve record gross margin rates at both DSW and Canada in the fourth quarter at DSW, Our top 10 brands within our top 50 brands. So.
Over $1 billion in sales for the full year 2021 contributing 40% of our total footwear sales.
Our third pillar speed as I just mentioned our team is continuing to find ways to secure strong levels of inventory despite industry wide supply chain issues in our inventory coming out of 'twenty 'twenty. One is flat on a square foot basis to 2019, a strong and competitive differentiator compared to our peers in the <unk>.
Fourth quarter of 2021 while we certainly saw the impact of supply chain pressures, we were able to pivot and lean on our own production and our strong relationships with vendor partners.
We will continue to pursue a strategy of going narrower and deeper in our inventory investments as the supply chain pressures ease and look forward to the even stronger anticipated benefits. This will bring in gross margin speed to customer and assortment differentiation.
Another component of our ability to deliver product faster to our customer is our industry, leading omnichannel capabilities. This is what got us through the darkest times of Covid and continued to be a game changer for us throughout 2021 as customer shopping behavior changed and evolved D. B I leveraged its customer facing touch points to meet our.
<unk>, where they were shopping in 2021 our DSW customer facing digital platform, well eclipsed $1 billion of demand for the first time digital demand that U S. Retail was up 11% for the fourth quarter of 2021 compared to 2020.
Additionally for the year VIP, New member acquisition at DSW was up 48% compared to 'twenty 'twenty and 2021 saw the highest amount of enrollments in the programs history.
Not only are we gaining new members. We're also retaining customers at a significantly higher rate than last year with retention rates, improving 13 basis points in 2021 compared to 2020.
You'll remember that last year, we moved our kabuto in Canadian brands onto the same omni channel platform that has been widely recognized as a leading platform for publicly traded footwear retailers in the U S.
This is further enhanced our ability to own customer relationships and analyze data, which we are utilizing to gain a deeper understanding of consumer preferences, our DTC sales through Vince Kabuto dock hub, where 27.9 billion for 2021 compared to $21 3 million in 2020 and only 50.
$18 5 million in 2019, and he Canada. We are now the fourth largest digital player in the footwear space with significant headroom to grow from here.
Finally, we continue to focus on driving higher profitability and productivity across our warehouse fleet in the U S. Retail business. These stores fulfilled nearly 60% of our total digital demand across our retail segments during the year.
Turning to Canada total comps were up 42, 3% in the fourth quarter versus down 27, 6% in the year prior and this continued our trend of quarter over quarter improvement as a result of the army crowd Spike Covid restrictions were reintroduced partway through the fourth quarter. This impacted store traffic, which was down.
23, 7% in the fourth quarter compared to the fourth quarter of 2019 slightly worse than what we saw in the third quarter, we saw improvement in our women's business in the fourth quarter versus the last quarter and as we shared in Q3, our boot business came back as weather turned digital demand had another strong quarter.
Up over 100% to 2019, and representing 32% of total Canadian sales again, almost twice that of 2019.
Before I turn it over to Jerry I'd like to briefly touch on our results our performance in the fourth quarter was consistent with our strengthening momentum throughout the year and allowed us to deliver growth over the fourth quarters of 2019 and 2020 across both our retail segments for the quarter total D. B I comps were up almost 37%.
Paired to the fourth quarter of 2020 gross margin was roughly 31% in Q4 up 870 basis points compared to the same period in 2020, as we leaned into our owned brands and saw strong sell through of our full priced products as we've transitioned into Q1, we've continued to see a recovery in our store.
Business with the momentum of our consumers returning to stores and we remain focused on maintaining our dominance in fashion and seasonal while retaining the wins and market share. We've gained in athletic and athleisure and recent history Jared will share more about our financial results in our 2022 guidance in a moment and I'm excited that we expect to see growth.
<unk> across our entire business to conclude we are enthusiastic about our ability to continue capitalizing on the strategic shifts we've made over the past several years. We are looking forward to sharing more details on the future of our strategic initiatives at our Investor day, which will be hosted in New York and virtually on April eight.
It is important to note that we will continue to focus on three things number one engaging customers with our brands. We will remain laser focused on understanding their preferences and delivering products and experiences across a wide range of channels that allow them to express themselves number two providing the best brands our ability.
To be a brand builder as well as to offer such a wide variety of assortment will continue to differentiate us from other retailers and three deliver a differentiated experience some products at speed, we are operationally aligned and continue to streamline our processes and our investments with that I will turn it over to Jared Jared.
Thank you Roger and good morning, everyone. We are incredibly pleased with our strong fourth quarter and year, which set more financial and operational records along the way we are exiting the year in a strong financial position and ready for the next phase of our growth. Please.
Please note that the financial results that 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.
Turning to our results for the fourth quarter sales increased 35% to $822 $6 million compared to the same quarter of 2020 for the full year sales increased 43% to $3 $2 billion.
For the fourth quarter total comps were up 36, 9% versus last years, 21% decline for the full year total comps were up 51, 6% compared to a 34, 2% decrease in 2020.
In U S retail comp sales were up 36, 3% during the fourth quarter versus down 19.7% during the same quarter last year and for the full year comps were up 35% compared to a decrease of 34, 9% in 2020.
These results have been driven by our near term strategic initiatives and our unique ability to quickly flex our assortment as customer habits and preferences shift.
Our U S retail store traffic continued a strong post COVID-19 recovery and was up 47% versus the same quarter last year.
We continue to see store traffic improve with February store traffic for our U S retail business up 46% compared to 2021.
Category comps continued impressive growth and an improved sequentially compared to both 2020 and 2019 athletic comps were up 35% compared to Q4, 2019 and up 14% compared to Q4 2020.
Also in the quarter Women's athletic was up 26% versus 2019 and men's athletic was up 53% compared to 2019 as we continue to capture market share.
Athleisure comps were up 21% in the quarter compared to Q4 of 2020 and up 26% compared to Q4 of 2019.
Athleisure, a sales penetration was 44% for the quarter compared to just 39% in the fourth quarter of 2019.
Our key category of seasonal was again impressive in the quarter with our boot category posting a comp of 7% driven by regular price sales comping at 14% for the fourth quarter versus 2019 last quarter. We had said November was our best boots selling comp of the season, thus far with regular price sales comp.
Being positive to 2019 as we saw boot demand shifting from Q3 to Q4. This continued to play out through the quarter and we grew boot sales revenue at DSW 12 percentage points faster than the rest of the market in the quarter ending January compared to the same period in 2019.
To meet the strong demand, we leaned heavily on our owned brands and shifted product orders to support our growth here. While also pulling forward. Good initially slated for early spring.
As Roger mentioned, we are very excited to see our dress category continued to recover with women's dress down 16% in the fourth quarter versus 19 and sequential improvement from down 34% in the third quarter down 40% in the second quarter and down 57% in the first quarter of 2021.
In each case compared to the same period in 2019.
When comparing to 2020 womens dress was up 118% in the fourth quarter men's dress also improved slightly to down 18% in the fourth quarter compared to down 19% in the third quarter and down 30% in the second quarter in each case compared to the same period of 2019.
To see these two categories dresses seasonal posts such strong sequential recoveries throughout the year as exciting as it as it aligns perfectly with our own vertical capabilities.
Therefore, we expect to continue to see strong growth in our DTC sales, which are our own brands sold in our own channels of DSW shoe company and dense kabuto dot com moving forward.
Kids was up 38% compared to Q4 of 2020 and up 44% compared to Q4 of 2019. Additionally, kids represented 8% of fourth quarter 2021 sales versus 6% in 2019.
Significantly even as we have seen demand in stores accelerating we did not see a slowdown in our digital growth in 2021 U S retail digital demand for the fourth quarter was up 39, 4% versus 2019 U S retail digital demand for the fourth quarter was also a 10, 8% compared to the fourth quarter of <unk>.
20.
For the full year U S retail digital demand was up 35, 2% compared to 2019 and up 12, 9% compared to 2020.
As we said last quarter, while Canada continues to be a few months behind the U S and their pandemic recovery, we have seen the improvement build especially in boots as cold weather has taken hold.
Total comps were up 42, 3% in the fourth quarter compared to down 27, 6% in Q4 of 2020.
Notably the fourth quarter of 2021 was the highest comping quarter of 2021 and posted an all time fourth quarter sales record for.
For the full year total comps were up 21% compared to down 26% last year and up seven 2% in 2019.
The boot category, which got off to a later start posted a 12.4% comp to 2019 in the fourth quarter digital demand also continues to be strong up 110% to the fourth quarter of 2019.
Turning to Komodo as we head into our next phase of growth in 2022, we expect to see the synergies of our vertical capabilities really start to deliver increasingly stronger growth in our DTC business.
This was noticeable in Q4, where we originally planned production to be up over 100% year over year and were able to meet and exceed this with actual production increasing by 111%.
Heading into spring, we will continue to push production up we expect 2022 spring production to increase in double digits I would like to note that 2021 marks the year, where a majority of the units that we produced in our <unk> group, where for designer brands own DTC sales through DSW shoe company and Vince can ludo Dot com.
Versus our third party wholesale sales. This includes shoes produce under our national brands, but even more so our DSW exclusive brands and while we are excited about and focused on selective growth of our wholesale business. The rationale for acquiring the expertise and infrastructure of our commercial organization has always been to support the growth of our DTC business.
And I Echo Roger satisfaction with how well this integration has gone to reach this milestone.
Total net sales for Komodo, including sales to DSW continued their improvement in the fourth quarter and posted the strongest dollar growth year over year of any quarter in 2021.
Sales were up $74 $1 million in the quarter up 42, 1% compared to the same period last year for the full year <unk> net sales were $286 million up 15% compared to 2020.
Wholesale sales were 58, 6% in the fourth quarter compared to 41, 3% last year, including sales to our retail segments, which totaled approximately $24 $9 million in the fourth quarter compared to $10 $1 million in the same period last year.
Ultimately, we are ending 2021 in a strong position as we continue to grow our DTC business, while also seeing growth in selective wholesale relationships.
In the fourth quarter DTC sales were up 3% compared to the fourth quarter of 2019 and up 98% compared to the fourth quarter of 2020 Jessica.
Jessica Simpson and sales in our own channels grew 82% in the fourth quarter compared to 2019, and Vince Kabuto grew 103% in the fourth quarter compared to 2019 with substantial growth coming from Vince <unk> men's and growth in DC Dot com.
Off of the successful refresh in Q3, Vince can ludo Dot com continued to grow in Q4 sales.
Sales in the fourth quarter were up 59% versus the same quarter last year and up 55, 5% versus 2019 Vince.
Vince can murdo dotcom ended the year up 84% for 2021 compared to 2019 and up 39% compared to 2020 with the highest Q4 and full year gross profit rates. It has ever seen due to one instilling planning and buying disciplines from DSW to help lower markdowns and reduced inventory and two.
Two leveraging a common infrastructure and digital platform to improve conversion.
Our consolidated gross profit increased 88, 3% to $254 $2 million in the fourth quarter versus $135 million in the prior year and up 23, 5% compared to fourth quarter of 19 benefited by gross margin rate expansion and occupancy leverage.
For the full year gross profit increased over 240% to $1 $1 billion compared to $311 million. In 2020. This was also an increase of six 9% compared to $999 $7 million in 2019 for.
For the first time in D. D. I history, we crossed the $1 billion Mark in gross profit dollars and are excited to see the continued growth in 2022 and beyond.
Our consolidated gross margin improved to 39% in the fourth quarter versus 22, 2% in the prior year driven by nearly a 100% increase in our DTC sales <unk>.
Selling the brands, we control through the channels, we control coupled with continued strength in our full price selling of product from the industry's leading brands helped us to achieve this.
Our 39% fourth quarter consolidated gross margin rate was also much stronger than even 2019, which was 24, 8%.
For the full year consolidated gross margin grew to 33, 4% compared to 13, 9% last year and 28, 6% in 2019.
Canada also contributed to this growth as we pulled back promotional activity tightened inventory management and placed opportunistic buys.
At our U S. Retail segment gross margin was 31, 5% in the fourth quarter compared to 22, 4% last year and 25, 4% in the fourth quarter of 2019, marking another record with the highest fourth quarter gross margin rate in Dsw's history for.
For the full year margin was 33, 7%, a sharp increase compared to 13, 5% last year and 28, 7% in 2019.
Merchandise margin of 48, 3% at DSW was also our highest fourth quarter ever.
We had delivered on strategic DTC growth plans with Komodo produced product that helped drive margin upside for DSW and therefore at all of DDI.
At DSW owned brand sales increase their penetration from 11% of total segment in Q4 of 2020% to 17% of sales in Q4 of 2021.
Additionally, regular price selling of all brands continued to drive margin with our markdown rate at DSW shrinking to 10, 8% in the fourth quarter compared to 13, 2% in 2020 and 14, 5% in the fourth quarter of 2019.
Canada gross margin in the fourth quarter was 30% compared to 15, 2% last year and 25, 5% in the fourth quarter of 2019 for.
For the full year gross margin was 32, 7% compared to 15, 7% last year and 32, 1% in 2019.
Komodo gross margin rate was 18, 9% in the fourth quarter versus 22, 6% last year and 22% in the fourth quarter of 2019 for the full year gross margin was 23, 3% compared to 14, 6% last year and 25, 5% in 2019.
Full year margin rates before royalties were the best since its acquisition.
However, due to the sales volume declines from exited brands fixed royalty dollars de levered. The overall gross margin rate.
As we move forward, we continue to see our inventory management as a strategic strength and a differentiator for us as our industry continues to chase limited inventory and suffer crippling supply shortages.
Our ability to self produced product as well as our scale and relationship with our vendor partners helps us secure inventory more effectively than most.
We ended the year with inventories up 21% to 2020 and flat to 2019 on a square footage basis.
Total inventory was $586 $4 million versus $473 $2 million last year and $632 $6 million in 2019 with a decrease to 2019, primarily driven by the elimination of our affiliated business group.
In the fourth quarter consolidated adjusted SG&A for all of our businesses was $232 $4 million up 19% last year and up 8% compared to Q4 of 2019.
For the full year adjusted consolidated SG&A for all of our businesses was $863 $5 million up 16% to 2020, but relatively flat to 2019.
As we have seen throughout 2021 marketing and employee compensation were up over $35 million to 2019, as we strategically redeployed a portion of our record gross profit into customer and employee acquisition and retention.
Our adjusted SG&A ratio for the fourth quarter was 28, 3% of sales well below last year's level of 32% and slightly above fourth quarter of 19 level of 26% for the full year. Our adjusted SG&A ratio was 27% below last year's 33, 3% and slightly above 2019 and 20.
Four 5%.
Depreciation and amortization totaled $18 $7 million for the fourth quarter compared to $21 $9 million in the prior year.
For the full year, depreciation and amortization totaled $77 $9 million compared to $88 million in the prior year.
Adjusted operating profit for designer brands was $24 $2 million in the fourth quarter compared to a loss of $57 million last year.
Additionally, this compared to an adjusted loss of $7 million in the fourth quarter of 2019 for the full year adjusted operating profit was $214 $2 million compared to an adjusted loss of $424 $1 million last year, and adjusted operating profit of $152 $8 million in 2019.
Yeah.
Adjusted operating margin was two 9% of sales in the fourth quarter compared to operating losses in the fourth quarter of both 2020 and 2019 for.
For the full year adjusted operating margin was six 7% compared to four 4% in 2019 and an operating loss in fiscal 2020. We are very proud that we continue to achieve such amazing levels of profitability and expect growth in 2022.
We had $7 $5 million of net interest expense during the fourth quarter compared to $8 $7 million in the prior year for the full year, we had $32 $1 million of net interest expense compared to $23 $7 million in the prior year.
Subsequent to the end of the year, we terminated our term loan and refinanced the outstanding balance with our ABL revolver with this we expect significantly lower interest expense in FY 'twenty two.
Our effective tax rate on our adjusted results was 29, 5% in the fourth quarter versus 41, 2% last year for the full year, our effective tax rate was 27, 9% compared to 37, 1% last year.
Total weighted average diluted shares for the quarter were $77 5 million compared to $72 4 million last year.
For the year total weighted average diluted shares were $77 3 million compared to 70 to $72 2 million last year.
Fourth quarter reported net income was $14 $4 million or <unk> 19 cents per diluted share, which included net after tax benefits of $2 $7 million. Excluding these benefits adjusted diluted EPS was <unk> 15 cents for the quarter.
For the full year reported net income was $154 $5 million or $2 per diluted share.
Which included after tax benefits of $23 $2 million. Excluding these benefits adjusted diluted EPS was $1 70.
We are very pleased with our liquidity position, which includes cash cash equivalents and availability under our revolver.
We are in a healthy position with total liquidity as of the end of the year at 467 $8 million versus $354 $3 million last year.
We had $225 $5 million of debt at the end of the year versus $334 $8 million last year at the end of the year, we had $72 $7 million of cash and cash equivalents versus $59 $6 million last year and had $395 $1 million available to draw on our revolver.
As I mentioned on February eight 2022 after the end of the fiscal year, we terminated our long term loan using the proceeds of a draw on our revolver. After paying back the term loan we had $235 million of outstanding borrowings and $160 million available to draw on our revolver.
Additionally, we have approximately $160 million in receivables on our balance sheet from the 2020 cares tax refund due to us from the IRS.
We are expecting the receipt of this receivable any day, which will be immediately used to pay down the vast majority of our ABL balance.
During the quarter, we had no new stores and we closed seven stores in the U S and four in Canada, resulting in a total of 508 U S stores and 140 Canadian stores.
Looking ahead to 2022, we are introducing the following guidance for the full year.
For full year 'twenty, two we expect diluted EPS to be in the range of $1 75 to $1 85 up from $1 70 for the full year of 2021 and.
And comps will be in the high single digits on top of an already strong comp of 51, 6% in 2021.
Comps at our retail segments are expected to be up 6% to 8% to full year 2021, and non DDI wholesale sales are anticipated to grow 20% to 30% versus 2021.
I'd like to take a moment to point out the year over year comparable will be a little varied throughout the year given the starts and stops that the post COVID-19 recovery took during 2021 and how each of our operating segments were impacted differently.
We are anticipating the strongest year over year operating income gains to be in the beginning and ending quarters of this year with the middle two quarters being more flattish to even slightly below last year.
Spring should be stronger growth in fall as Q1 last year was still heavily impacted by Covid for all segments. The recovery really didn't kick in until Q2 for DSW Q3 for Canada and later in the fall for Komodo, given product lead times and supply chain pressures in that segment.
We have assumed a slight increase in our clearance sales penetration as we move throughout the year and supply chain pressures across the industry start to thaw, although still holding total markdowns materially below 2019, and pre COVID-19 levels. We are also planning a relatively fully staffed store fleet throughout 2022, while we.
Against more pronounced store staffing challenges last year, especially during the fall.
Finally don't forget that with the termination of our term loan. We expect interest expense is expected to be materially materially lower than last year closer to $5 million to $10 million versus the $32 million incurred during the full year of 2021.
I want to Echo Roger that we are excited to be hosting our investor day in New York on April eight and look forward to providing you with more details.
With that we'll open the call for questions operator.
Okay.
Ladies and gentlemen at this time, we'll begin the question and answer session.
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At this time, we will pause momentarily to assemble the roster.
Once again that is star and then one to ask your question.
And our first question comes from Steve Marotta from CL King <unk> Associates. Please go ahead with your question.
Roger and Jared good morning.
Could you just talk a little bit about the current supply chain incremental costs that may have been incurred in the fourth quarter. What does incrementals will be you expect in say, the first and second quarter and maybe for the total year, how that could net on a net basis affect gross margin and also just the tiny.
Ming of flow of product into the stores in other words your ability to increase penetration of owned units and to the benefit of gross margin timing on that for the year. Thanks.
Hey, Steve Thank you good morning.
From a quantification standpoint in 2021, we had roughly just under $20 million of incremental freight expense versus 2020, and again almost versus 2019 as well.
And about.
$12 million to $14 million of that was in Q4.
<unk>, obviously has a lot of direct expenses. So we saw that that really materialize in that segment. We are anticipating a similar posture not really not really much incremental.
Two to that for the total year, but but we are assuming that as we get into the back half of the year, there's a little bit of relief on that.
And in total.
I also would would say from a receipt standpoint, you heard us say during the call.
My script that we were able to divert some of our wholesale sales that we had initially projected to external parties.
Into our own channels, because we saw the opportunity there and we saw an opportunity in Q1, and we wanted to have the inventory to be able to meet that and so that also is what drove the very very slight miss on the sales instead of being flat, we were down $7 million in sale.
On the 800.
Large $800 million quarter, so less than 1%, but that's because of the eliminations and because we strategically chose to take.
The product that was going to go in the wholesale channel and put it into our own DTC channels, especially as we get ready for Q1.
So that I'm actually really really excited about.
And then Steve as it relates to just general supply chain I think.
As we said in our statement that the fact that we have inventories flat to where we were in 2019, our strong position in our sandal business.
I feel pretty good about how our inventory is positioned and as you know every single day, it's fighting to get your inventory in and that's not really it's not any different than it's been for the last year, So feel pretty good about our ability to still obtain inventory.
That's very helpful and just a follow up.
I'm talking about two maybe related topics.
It is one of the reasons why.
Q2, and Q3, maybe flattish against a year ago from an operating income standpoint, the fact that.
Sales in the year ago periods materially benefited from stimulus or is there another dynamic going on there and then maybe you can talk about.
The benefits to the categories that are growing more rapidly to gross margin in other words, it's fantastic that you increased your exposure to athleisure, particularly considering how under indexed you were previously and now with our dress and seasonal becoming seemingly a little bit of the loss.
Your percentage of consumer wallet that should also be to the benefit of gross margin in the current year I would assume.
Yes, Steve I think I'll take that second part and let <unk> take the first but I think the exciting thing for US is we've grabbed share in the athletic Mids and kids' space are really driven by our S. Leisure investments and that's new market share for US is the N P data demonstrates but what's really exciting is that.
We're getting.
Now our sandal address business back in a meaningful way and it's not back to the 19 levels, but.
I think if you if you listen to the call. If you think about in Q1 of last year, we were down 57% compared to the prior year. In Q2, we were down 40% Q3 were down 34 and in Q.
Four we were only down 19. So you can see there's this continued progress that has been made and we're seeing that continue to step as we've headed into 2022, so being able to retain that share. We've created an athleisure, while now getting back after some of those other categories that is huge for us and as you as you know that is where.
Our bread is buttered with our <unk> acquisition is that's the product we can make and we can drive the significant margin enhancement that that we know that can get for us and on the first question. Steve you know, we we have looked every time from from the current macro situation to all the ones prior on what our correlation is.
As to our public stimulus, we don't see strong direct correlations we've got.
<unk> average income household and while there are sometimes some smaller correlations, especially maybe in our kids business and things like that we don't see extremely strong what's really driving the differences is just when the recovery started and how it impacted us across our segments youre seeing our year over year sales growth almost.
Double in the spring versus what we are anticipating in the fall and that's just because we had such strong strong recoveries in the fall and yet to come in in the spring. The the last thing I would add and I mentioned it in my script.
We have assumed that by fall, we have a little higher clearance penetration, which to be honest, there's actually a strategic advantage of ours. We have a clearance proposition that really if you look at and listen to our last few calls you hear how low that clearance penetration has gone.
That and in actuality could could turn out to be upside. If we continue to see the industry and massive chase mode, and really driving Reg price sales as soon as people get access to products. We may not hit those penetration levels, but that means that we're hitting it on the full price we're continuing to hit it on the full price side. So we could see upside in that fall.
A little stronger than what we're thinking.
Yes.
Got it. Thank you very much I'll take the balance offline.
Alright, Thanks, Steve.
Once again, if you would like to ask a question. Please press star and one.
Okay.
And ladies and gentlemen, it we do have an additional question. This comes from Gabby Carbone from Deutsche Bank. Please go with your question.
Hi, good morning, and thanks for taking my question.
So I believe you mentioned that traffic here in February I believe you said, 46% quite impressive.
Just wondering if you can provide us with any color on how you expect sales trends to play out through the year, particularly here in one queue. Thanks.
Yeah.
And as I mentioned in my script, we think and actually as I just answered with that with Steve We think sales year over year comparisons are a materially stronger in spring than they are in fall. They continue to be strong and positive as we go through the year in total, but certainly the strongest year over year growth.
In spring and in spring Q1 by far is the strongest and again that that is almost entirely because of just when the recovery really took hold and as I mentioned in the script DSW. It wasn't until Q2 in a big way, Canada wasn't until Q3 and Komodo. It really was as late Q3 and into Q4 and then.
They have supply chain challenges on that on top of that.
And Debbie I think one of the things that again that were really excited to see as the customer coming back to the physical location.
And.
We think that will.
Get that customer that has historically come to us through store only back into our brand, which is what we what we've experienced really in fourth quarter as we as well as as we've entered into 2022 and <unk>.
If you think about last year some of the things we were doing digitally with the large gucci by we had.
And obviously with a lot of promotional things we were doing with the swoosh at that time.
We see that there's going to be a more material shift toward our physical locations selling and.
And away from digital as we at least as we get into the first half of the year.
Got it that's very helpful. And then in the past you've mentioned you've identified the number of stores for closure just wondering how we should be thinking about that you know over the next few years.
Yeah, you know.
I think I mentioned on the last call that that that initial indication, which again, we run the models every single quarter and when we ran it and I put out that number of 65 that was before we really saw the recovery take hold once we saw that recovery take hold and those those longer range models get adjusted.
That number came down quite a bit what I would say is we're actually really excited to lay out our long range plan on April eight at the New York Stock Exchange and we'll have some color around our store fleet, what would I. What I would say is I think youre more going to see a reduction in square footage that is coming from stroke.
T J.
Shrinking of some of our stores, but still staying in neighborhoods because we do see the omni benefits that having a store locally provides not just for our DTC business, which is huge but also as we as we leverage that for some of our our branded partners like we're doing already with the Densimeter Dot com returns and we're getting ready to launch.
With a couple other external brands the ability to be there kind of omni omnichannel infrastructure in those local markets. So.
More to come on that and I certainly hope you can dial in on April eight yes. It would be great to see you in New York and I think we're going to at our Investor Day, We're going to show you what our store of the future looks like that allows us to get the same kind of capacity, we would have been getting in 20 to 25000 square feet into 15.
1000, and tell different stories with these brands because as Jared said, that's a real opportunity and you know that could open all kinds of opportunities for US is we have competitors talking about opening stores.
If we can if we can get smaller and more efficient with inventory that creates other opportunities.
Great. Thank you very much looking forward to it.
Thank you.
Okay.
Yeah.
And our next question comes from Dylan.
Dylan Carden from William Blair. Please go ahead with your question.
Thanks, and sorry for some background noise here.
I had a different question, but I want to stick with that question Roger.
Shrinking the store does that mean is that code for effectively taking some square footage and dedicating more to online element or what you'd actually be thinking or relocate some of these.
Yes, I'm guessing year to St Patty's day parties.
But.
It's a couple of things one is we believe that to achieve some of our long range plans to get the cost per square foot that we need or I should say the occupancy cost that we think we can get to we.
Need to get smaller in certain locations, which will either get smaller in the building we're in or we will look to relocate and.
And it's really about efficiency of inventory as it relates to using those stores as fulfillment centers. We've had a lot of success with these hub stores, meaning we're able to flow key items into a group of stores have depth behind them and take days out of the fulfillment cycle as well as cost out of the fulfillment cycles. So I think it's really.
A combination of things is what I would say.
Excellent and then my actual question was can you provide any detail around kind of how youre thinking about the category mix that underpins your guidance for the year.
As far as sort of the continued recovery of duress and as events theoretically come back this year.
But ultimately land the year at anything to kind of help us understand the environment that you see out there.
Yeah, No we think that.
With the recovery that we're seeing in let's just say non athleisure footwear.
Which as you know that that has been our core business for the last 25 years.
We might get back to more historical rates is what I think you would see.
But that doesn't mean that we still can't get after the athleisure business. So.
We're still anticipating we will grow athleisure as it relates to last year, but.
Real recovery and what we're excited about is what we're seeing in sandals and our plans we're putting in place for the boot fashion category as we go into the fall season, So we'd say it will be it would be closer to.
Levels that you would have seen in 2019 more than it was in 2020.
Got you.
And then Jared.
Modeling one here the deleverage on the Royals a dollar amount.
And the commercial business when do you lap that.
And how does that trend I guess.
Yeah.
We pretty much start lapping that in 'twenty, two because as I mentioned, our non wholesale or non DVI wholesale growth is expected to be up 20% to 30%. So we should start seeing leverage on those numbers as we go through 'twenty two.
I got a car buying with my name on it I'll talk to you guys later.
Alright, Thanks Budd.
Once again, if you'd like to ask a question. Please press star and then one.
Our next question.
Alright.
From.
Jay sole from UBS. Please go with your question.
Great. Thanks, so much and good morning.
Jared I was just wondering if you could talk a little bit about.
Some of the lines of the P&L that could be impacted by inflation freight for example is store labor rents and maybe you could talk about marketing you know what's your plan for marketing as a percent of sales as you know with it's baked into the guidance. Thank you.
Yep Yep happy to Jay.
Let me tell you what's already baked in and then where I see opportunity and where I see some some potential risk.
We are assuming a similar kind of percentage of sales and marketing baked already baked into the to the P&L now.
And again as we saw in 'twenty, one that's assuming we can fund that with the with the projected continuation of strong margin. If we're not seeing that play out the same way then we'll pull the levers and made some changes there but as of now we're not expecting leverage or deleverage on the marketing line on the store labor line and I Miss.
In this in the call we are expecting some deleverage primarily because so many of our stores weren't open or not fully opened for almost all of the hours in.
2021, as well as we just couldnt stack them the way, we wanted to especially in the fall when the labor market really really tightened and we're assuming that those are able to stay fully open and fully staffed as well as we've baked in what is now a relatively healthy increase in our average average hourly starting right.
So that's already baked in there.
On the other lines I would tell you we're pretty much holding the line. We do have some leverage on on incentive compensation, because we always start the year, assuming that we've got pretty much at par incentive compensation and.
Any anything above or below that is based on performance and what's actualizing, where where I see upside.
I I'm not sure we're going to see a massive.
Freeing up of the labor market. So while we budgeted to be fully staffed and have all of those hours fully accounted for I'm not sure we'll be able to place those for the whole year.
And as I mentioned I do think we've got some a lot of work to look at to make sure. We're still getting paid the same way on those marketing investments and that that could that could free up some dollars, but I hope it doesn't because we want to see the same kind of gross profit generation that those are those are delivering Jay I think the other piece too is when you think.
About channel shifts as I had mentioned that the recovery of the of the physical plant and how we're seeing customers come back to the store because you get that leverage the fixed cost.
Historically.
That is a much more profitable channel.
For us.
That that could create upside for us as we move throughout the year.
Got it understood. Thank you so much.
Thanks Chip.
And ladies and gentlemen at this time Im showing no additional questions I'd like to turn the floor back over to the management team for any closing remarks.
Yeah. Thanks, Thanks, everybody for listening in on St. Patrick's day and to all of our associates. We are greatly appreciate everything that you've done to to get us to this point and let's keep the momentum rolling into 2022, and we look forward to seeing all of our shareholders and interested parties at our Investor day coming up in early April .
Everybody have a great day.
Yes.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.
Okay.
Okay.