Q3 2022 Designer Brands Inc Earnings Call
Yeah.
Good morning, and welcome to the designer brands incorporated third quarter 2022 earnings call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Jessie Miller. Please go ahead.
Good morning earlier today, the company issued a press release containing results in preparation for the 13 week period ended October 29, 2022, 13 week period ended October 32020.
Please note that remarks made about the future expectations plans and prospects of the company constitute forward looking statements.
Results may differ materially due to various factors listed in today's press release and the company's public filings with the SEC. The company assumes no obligation to update any forward looking statements.
Joining us today are Roger Rawlins, Chief Executive Officer, Gerry Cox, Chief Financial Officer, and Doug How President's DSW now, let me turn the call over to Roger.
Good morning, and thank you everyone for joining us today, we posted another consecutive quarter of solid results and made material progress on our brand building journey, we ended the quarter with comparable sales up 3% compared to the third quarter of 2021 which was on top of strong Cup net sales growth last year of 41% we are.
Readily proud of these results as we lapped a record third quarter in 2021 and invite you to review our earnings Infographic on our Investor Relations site did highlight some of these accomplishments, notably we made tangible progress against our long term plan of doubling sales of our own brands by 2026, while also maintaining our sales levels.
National brands as we continue to strengthen relationships with our top partners.
As you know our owned brand strategy will continue to be the key driver of our growth over the next five years as we have unique ability to intimately understand our customers. So we can design source and sell the products. They love we're excited to share that in the third quarter owned branch sales grew 25% compared to the same.
Period last year, our direct to consumer sales through our retail stores and websites delivered a 33% increase to last year and wholesale distribution also grew at 8%.
What makes this even more impressive this growth is coming at a time when the industry is flooded with inventory.
And while we see this inventory pressure across the industry, our ability to self liquidate excess product through our own retail clearance section is a key differentiator of our unique business model that gives us confidence in our ability to continue to build our own brand penetration and extract as much margin as possible along the way Doug will dive more.
Our into our own brand strategy in just a few moments.
As we've been transforming into a brand builder, we'd been making strategic investments in talent and experience to that end over the last two years, we have created new positions and teams inside of designer brands, including a chief supply chain and sourcing office brand level leadership and international sourcing groups and new parts of the world.
Additionally, we just announced last week the appointment of two New Board members Rich, Paul CEO and founder of clutch Sports group. The powerhouse agency, representing some of the biggest athletes across major professional sports and Sami first go chief operations and supply chain manager of centric brands, a leading global lifestyle brand collective.
He brings strong leadership in this space, including past executive roles at sourcing and branding leaders lien fun and the Jones group, both rich and Tammy bring extensive brand building expertise and knowledge of the footwear industry and we look forward to their input on our strategy.
As we've been calling out since the introduction of our initial fiscal 2022 guidance. The third quarter was planned to be the quarter in which our strategic efforts to bring back our clearance shopper were expected to be running on all cylinders and I'm happy to report we were wildly successful our clearance sales were up 28% compared to the third.
Quarter of 2021.
We were pleased to see this critical part of our business model returned to full strength, especially at a time when the industry faces large inventory challenges and more consumers are looking to cut back on discretionary spending.
Given the material success, we have had in growing our own brands and given the structural changes we have made in our overall retail business. We have seen our gross margin rates materially and substantially improved from legacy levels and while we will always be subject to the impacts of macro condition and consumer sentiment. These structural changes should keep.
Our margin profile consistently above legacy levels, we delivered in 2019 and Pryor.
In the third quarter, specifically, we saw some of those pressures take whole first many of the largest footwear industry players, especially athletic brands are massively over inventoried and have become very aggressive in their own DTC businesses, including exact styles that we carry in our retail Assortments we noted.
Last quarter that this was an area of potential risk as the effects of competitors lowering price impacts the entire industry. Additionally, as you've heard many other brands in big box retailers discussed we saw a drop in discretionary demand starting in the last two weeks of October . This drop came on very suddenly and appears to be widespread.
Fred and continuing across much of the consumer market.
With these impacts we are returning back to a range within our original 2022 EPS guidance. Our revised guidance still includes mid single digit retail comp sales growth in full year adjusted EPS in the range of $1 75 to $1 80, Theres still puts our EPS significantly above 2019.
Given our structurally improved gross margin profile.
Ed will go into more details around some of the numbers and efforts we are implementing across the business to minimize the impact of this uncertainty as much as possible.
In closing I want to take this opportunity to thank our associates for remaining nimble and continuing to support designer brands I'll now turn it over to Doug how president of DSW Doug.
Thank you Roger and good morning, everyone.
I wanted to talk first about the incredibly exciting developments and milestones we achieved in this third quarter our journey as a brand builder is continuing at an exciting clip and we continue to deliver against our long term strategy of <unk>.
<unk> own brands net sales by 2026 and maintaining national brands.
Designer Brands' strategic differentiator is a unique synergies between the brands, we build and our best in class retail infrastructure, we have a unique ability to connect with our customers and identify their needs and present them with the widest assortment of brands they love across the highly developed and in place on the infrastructure.
In the quarter, our own brands represented 27% of DVI revenue compared to 22% in the third quarter last year. This puts us well on our way to our goal of making our own brands approximately one third of our total revenue by 2026.
That is a huge accomplishment on our path to elevating D. B I status as a brand builder.
I want to specifically highlight two of these owned brands and some exciting progress that was made in the quarter.
We are very enthusiastic about the momentum we are seeing with crown vintage a brand that is vintage inspired at its core and free spirited and it's all with shoes and accessories that invite customers to embrace their individuality.
In the quarter, we launched a collaboration partnership with Emma Roberts for Crown Vintage brand, which included a robust marketing campaign across national and social media channels.
His campaign received over 6 billion press impressions, and 120 million social media impressions and was the strongest social celebrity content, we have ever had.
You can see some of the beautiful campaign imagery on our Q3 22 info graphic.
As part of this launch we hosted pop up shops in both Los Angeles, and Nashville that generated over 1 billion impressions include.
Including $25 million organic social media impressions.
Crown vintage searches on Google had been up significantly with index scores trending up over last year in the same period by 43%.
Indicating the consumer interests were generating beyond DSW channels.
Additionally, as we move through the fall and winter. We are proud that cram vintage was the number one demanded brand in women's do at DSW During September and can sit comfortably in the neighborhood with other brand partners, such as Doug Lucky brand and Vince <unk>.
Similarly, Kelly <unk> Katie met some incredible milestones in the past few months in the third quarter Kelly <unk> Katie grew in the triple digits as it continues to resonate with our customers and in fact, it was one of our top three brands. So will the DSW with two styles in the top 10 styles at DSW for.
The third quarter.
We are excited about the progress we are making in our own brands portfolio and look forward to continuing our brand building journey with the official launch of our first athleisure brand Le Tigre.
You can expect more exciting upcoming announcements in the near future.
We continue to hold true to our goal of having the best possible assortment available both in stores and online, which is allowing us to attract a broader customer base.
Specifically as it relates to clearance, we have reactivated 2 million shoppers, who had not shopped with us since the pandemic due our lack of clearance product.
At D V. I, we have a long standing history of rich customer data, we know how to best leverage that data to design and market to our customers and effective ways to meet them with the products they demand and the way they want to engage.
Our warehouse re imagine store in Houston is another example of how we are meeting our customers' needs across the board.
We have received overwhelmingly positive feedback from customers relative to how light and bright the historic deals with customers, describing the store as warm and welcoming with a better shopping experience our.
Our warehouse re imagine store allows for increased capacity and smaller square footage, which has resulted in a double digit sales productivity increase.
The expanded Kid's section has also increased customer engagement.
Also brand new to our shopping experience, we have listened to our customer and have launched scan and go self checkout at this location customer.
Customers have responded and we have seen nearly a third of transactions run through these kiosk.
Intimately, knowing our customer and regularly speaking with them is such a vitally important tool for us as we continuously evolve our brands and our shopping experience and is a massive competitive advantage for all part of designer brands business.
Yeah.
Turning to the seasonal focus in the third quarter, we mentioned on our last earnings call our increased attention to back to school during the third quarter as we lean into this newest season forgive me I, which.
Which we only started capitalizing on in earnest in 2021.
Overall demand increased 4% on top of a 2% increase last year compared to 2019, and we were especially pleased with our kids business that delivered a 2% increase in sales on top of a 40% increase last year compared to 2019.
Let me turn to September which as you all know is an incredibly important season for us our.
Our own brands performed exceptionally well during this time period.
And our women's boots category five at the top 10 brands sold were own brands with Crown vintage holding the spot as the number one demanded brand during September .
As was mentioned earlier.
Additionally, it was five women's boots brands posted 28% growth compared to the same period last year.
We did see some unplanned softness in the rest of our assortment as temperatures were much warmer than normal across most of the September period.
Additionally, as Roger referenced we saw a sudden drop off in consumer traffic and demand that most of the consumer discretionary market saw.
Starting in the back half of October .
If we look to historical built for the balance of the year and apply that trend to where we ended October we feel there is pressure to the original plan for Q4.
This coupled with the continued massively competitive promotional posture of the branded athletic business right. Now is what is giving us reason to be cautious and bring down balance of year expectations.
Before I pass it over to Jared I want to thank the team for their hard work throughout the quarter.
I was really impressed with how they came stepped up time and time again to read react and adapt as necessary.
With that I'll pass it over to Jared Jared Thank.
Thank you, Doug and good morning, everyone.
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.
I want to Echo Roger and Doug's comments around the pride, we have in our third quarter results, we delivered on our strategic goals of own brand growth and the reestablishment of our critically important clearance business and customer while also seeing the fruits of our changed and diversified business model come to bear we've put up numbers that demonstrated the power of this evolve.
Designer brands and I couldn't be prouder of what the teams continue to accomplish.
Yeah.
Let's first review our results for the third quarter sales increased one 4% to $865 million compared to the same quarter of 2021.
For the third quarter total comps were up 3% on top of a strong 48% comp last year.
Within this growth we saw positive sales across all of our segments.
Retail comps for the third quarter were up one 1% compared to up 43, 9% in the prior year V.
D C dot com comps were up 27% compared to a gain of 50, 54% in the prior year.
In Canada continues to see strong growth and posted comps of 18, 8% for the quarter on top of 15, 2% in the same quarter of 2021.
Gross profit for the quarter was $285 $8 million as planned and as previously communicated our consolidated gross profit rate for the quarter decreased to last year, as we strategically and intentionally reestablished our clearance business and one back that lapsed clearance shopper, while coming in meaningfully.
About 2019, given the structural changes we've made in our business our gross profit rate for the quarter came in at 33% 370 basis points above 2019 as rate of 29, 3%.
In the third quarter consolidated adjusted SG&A was $221 million given our sales increase in the expense mitigation tactics, we implemented as soon as we saw some of the macro pressures surface, we were able to hold our adjusted SG&A ratio relatively in line with last year at 25, 5% of sales in the third quarter.
Compared to 25, 1% of sales last year.
Adjusted operating profit in the third quarter was $67 $1 million and seven 8% of sales 340 basis points above 2019 operating profit rate.
We had $4 $8 million of net interest expense during the third quarter compared to $7 $7 million in the prior year our.
Our effective tax rate on adjusted results was 25, 9% in the third quarter.
Third quarter, adjusted net income was $46 $1 million or <unk> 67 per diluted share.
Turning to our inventory we ended the third quarter with inventories of $681.8 million compared to $602 $1 million last year.
As planned and as previously communicated we continue to decline in our inventory comp versus last year and expect for this to continue as we round out the year.
Inventory levels were elevated at the end of the second quarter, and we flagged that they would be coming down throughout the year.
Accordingly, we ended the quarter with retail inventories up 14% on a square footage basis compared to the third quarter of 2021 materially down from up 33% at the end of the second quarter, we expect to end the year much closer to last year's inventory levels.
Unlike other large brands, who have had to turn to liquidate or just part of their solution to slow moving inventory, we have a self liquidating machine through our DSW clearance business that allows us to perform better than others when needing to clear through inventory.
As a brand builder. This is a massive differentiator to our model and is why we needed to reestablish our clearance business, which we did.
Importantly, as we move into the fourth quarter, our liquidity position remains strong.
During the quarter, we repurchased one 3 million shares repurchases year to date through Q3 were $10 7 million, which is equivalent to roughly 15% of our 73 million shares outstanding at the beginning of the year.
We ended the quarter with $62 $5 million of cash and our total liquidity, which includes cash and availability under our revolver was $193 $4 million, we had $139 million available to draw on our revolving credit facility.
In addition, we are pleased to share that we received a $120 million of the $160 million Cares Act tax refund due to us from the IRS in November which was immediately used to pay down debt and we ended November with well over $300 million of total liquidity.
We continue to await the receipt of the remaining $40 million, which we expect as soon as the standard audits of the applicable prior tax years conclude.
As mentioned, we could not be more pleased with the success, we've had with our strategic initiatives, however, macro pressures, including a constrained consumer and an excess of inventory in the industry resulted in a drop in demand in the last two weeks of October we expect.
Similar dynamics to persist and therefore, we feel it is prudent to revise our full year guidance.
Given the challenging macro environment, we continue to closely manage our business and our costs in a strategic and effective manner. We are cutting investments we're prudent in the near term to better assess the longevity of this macro pressure, but also want to remain cognizant of the critical growth, we want to continue and our own brands business and retaining our <unk>.
<unk> talent in this hyper competitive labor market.
With all of this as a backdrop, we are revising our full year guidance as follows.
Retail comp sales growth is still anticipated to come in in the mid single digits, but is now projected at the lower end of that range. Non DVI wholesale growth is expected to be 20% to 30% over last year and adjusted EPS is now expected to be $1 75 to $1 80 for the full year actually squarely in.
In line with our initial 2022 guidance of $1 75 to $1 85, we issued at the beginning of the year.
We continue to be very proud of the structural changes we have made in our business that allow us to better perform even when these macro pressures arise as a comparison 2019 saw sales actually a bit higher for total D. B. I then what this revised guidance would imply but adjusted EPS in 2019 was only a $1 47 with them.
Meaningful growth in our own brand sales the growth in athletic and top 50 national brands, which require less discounting and are digitally focused and targeted approach to marketing at our retail business, replacing the broad based direct mail discounts of the past we continue to see sustained leverage in our gross profit rate versus 2019.
Yeah.
And this sustained margin profile change along with our more strategically diversified revenue or profit streams across more meaningful business segments keeps me excited about what this means for designer brands as we move past these macro issues and continue to make meaningful progress towards our long term strategic plans.
As we navigate this challenging environment, we will continue to lean on our strategic pillars, being adaptable nimble and utilizing our DTC infrastructure to move inventory and grow our own brands.
With that we will open the call for questions operator.
Operator.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up at.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jay sole from UBS. Please go ahead.
Great. Thank you so much Roger if you could just talk about the change that you've seen in the competitive environment consumer behavior into.
Into the fourth quarter, maybe just tell us a little bit more about sort of like the gross margin change in pork you that's leading to the change in the guidance for the full year and sort of what you.
I expect in the fourth quarter relative to third where do you think the fourth quarter will be a bit more competitive than what you've seen so far or do you see about the same or do you see maybe getting a little bit better. Thank you so much.
No. Thanks Jay.
No I think there are two major macro trends that that we've experienced throughout Q3 that we are clearly.
I think with our guidance showing that that's our expectation that those trends will continue into Q4 and that is when you look at how the consumers responding they were looking for value and obviously inflation has a been a big driver of that and Doug can talk to this but our DSW clearance business, which was planned to be up in a material way.
They posted a 28% comp.
The customer is voting that they they want value past. So you know that's that's number one and then the second one is just the amount of excess inventory that we see again, what's out in the market and the amount of items being sold into the secondary goods market and obviously you know we play there and try and sell things to some of those people and when.
You see what offers are being given on product you have it's clear there is excess inventory in.
I'm quoting I'm not quoting them directionally from the things that we get when you look at the three big Athletic players are the swoosh folks up 60 over 60% catches up over 40, Adidas up over 50 in inventory.
Those goods are being pumped into the market and with their direct to consumer plays that puts pressure on that athletic category. In particular, so those are the two big things that we have seen happened and we don't see that slowing down as we go through Q4.
Got it and then maybe if you can just talk about the slowdown that happened in the second half of October and the first half of November you know theres.
There's some discussion that there was weather related maybe the election was distracting to people. Perhaps the compares are pretty tough from from last year because of the pull forward that you know that happened because of supply chain issues.
You know do you think that that's been that's really the reason that we've seen a slowdown or is it more of the consumer is weakening because of inflation I mean, where do you where do you stand on that.
I think you know.
We don't really allow our team to talk about weather.
But.
Whenever you look at at how our business performed in our sandal business was really strong in Q3 boots achieved our goals.
But it was still a negative comp for the for the quarter. So you know our our sandal business was really good. So there was some weather, but at the end of the day. It comes back to those two things I've mentioned the customer is clearly voting, they're looking for value and we're seeing it in how they're buying what they are buying from us and then the second pieces. There is just a lot of inventory that's a.
That's out in the market that as you know.
Frankly competitive because those brands are competing with us through their DTC channels.
Got it okay. Thank you so much.
Yep, you're welcome thanks.
Again, if you have a question. Please press Star then one.
Our next question comes from Gabby Carbone from Deutsche Bank. Please go ahead.
Hi, Good morning, I. Thank you for taking my question. So just wanted to circle back to that clearance customer again, that's been coming back into your stores. Just curious if you can dig into how that's impacting traffic and units per transaction. Thank you.
Yeah, Hey, Kevin. This is Doug again, you know we had talked about the fact that this is an opportunity for us obviously with regards to regaining that clearance customer back.
And as we said in the transcript 28, we had a 20% increase in clearance sales in the quarter. So again, that's actually a model that we can lean into them. We definitely saw that accelerating as we moved throughout the quarter. So to Roger's point customers definitely migrating more towards value. So their favorability, obviously you know in our model with.
Regardless of the clearance customer and then the other thing that is a key differentiator as you know, which I couldn't be more proud of is the results that we have with our own brands. So obviously does.
Significant value.
And does generate a 22% of our overall volume at DSW in the quarter and it was over a 30% increase so those two factors. We believe are gonna be differentiators for us as we move forward because again that customer is clearly.
Focusing on on a value.
I think this is Roger and I think you even said Gees question you can think about what it is we do and how we respond to this.
As Doug said, the big thing for US is leaned into that clearance prop. So knowing that our customer comes to us that sort of rooted in who we are from day. One I think it's one more opportunity for us to pivot assortment in our thinking and leverage that as a way to.
To compete and grow share and then you know obviously leveraging all of our own brands that are especially the ones that are exclusive to DSW as a way to continue to pass value to the customer and to Doug's point in the script, where you were talking about our own brands growing at 25% year over year I mean, that's that's.
Just remarkable in that that's been our game plan for the last three years and it's continuing to work.
But the competitive landscape is different in that we're going to keep leaning into those things that that we've been doing now for the last three years.
Got it I just have a quick follow up I. Just was wondering if you can discuss how youre planning maybe your brand portfolio outside of DSW over the next couple of quarters. You guys were continuing to see you know retail retailer inventory pretty conservatively for next year.
Yeah, I mean, I don't I don't want to get into the forward facing view until we give you some guidance for next year, but yeah.
Yeah, I mean, we.
What we do know is that if if you're more conservative in your inventory plans you always have the ability to chase upside and are right.
Right now we're dealing with the pain of the industry being over inventoried and we will not let that happens and I think we have a history and tradition of of our managing.
Our inventories in a pretty tight manner and that's our approach as we move forward as we will be much more conservative I would say in how we're approaching our inventory positions specifically as we look at what we're going to sell outside of our core DSW business and shoe company businesses.
Okay, well, thank you very much for back haul here.
Thanks, Kevin.
This concludes our question and answer session I would like to turn the conference back over to Roger Rawlins for any closing remarks.
Thanks, everybody for listening and I know, we have a lot of associates and I just want to recap. If you think about the big things you accomplished this quarter of growing your your topline by 3% and that's on top of remember last year, we grew our business by 41%. So theres not a lot of folks I see out there in our space that had those kind of.
Results for.
For the third quarter, you grew our owned brands, meaning the things that we own and control by 25% penetrated at 27% versus 22 last year remarkable then you add into that our direct to consumer channels that grew by 33% our gross margin rate up 370 bps to where we were in 2019.
And then just the amazing progress that Mary Jo and Nancy and the whole team up in Canada have demonstrated growing 19% and grabbing huge market share the strategies, we've put in place over the last four or five years are working.
And just just keep doing what you're doing and I can't Thank you enough and hope everybody has a fantastic holidays talk to you soon thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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