Designer Manufacturers (DBI) Q3 2024 Earnings Name Transcript

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Now, let me flip the decision over to Doug.

Doug Howe — Chief Government Officer

Thanks, everybody, for becoming a member of us this morning. We had been happy with our robust begin to the third quarter, anchored on the success of back-to-school season, which was fueled by our athletic and athleisure choices and led to optimistic comps in August. This gave us confidence that we had reached the inflection level in our enterprise that we had been working towards. Nonetheless, we noticed a troublesome transition into the autumn seasonal enterprise because of unseasonably heat climate.

This was exacerbated by an ongoing pullback in client discretionary spending attributable to sustained uncertainty within the macro atmosphere. Whereas we noticed demand beneath expectations throughout most of our classes, our boot enterprise, whereas already deliberate down roughly 15%, was down 27%. Nonetheless, in accordance with Circana, for Q3, footwear gross sales, excluding boots, remained flat to prior 12 months within the footwear market, whereas DSW footwear gross sales, excluding boots, grew 8% versus prior 12 months, outpacing the footwear market outcomes. This was largely attributable to our athletic class persevering with to comp optimistic all through the quarter.

Moreover, in U.S. retail, we noticed progress throughout key classes within the quarter like girls’s gown, luxurious, athletic, and children. And our high eight manufacturers, seven of which had been athleisure, continued to paved the way. As we navigate by the rest of the 12 months, we’re aware that pressures are prone to proceed.

As such, we are going to proceed to concentrate on these initiatives inside our management and lean into areas the place we’re profitable and the client is procuring. I’ll get into the technique in a second, however I need to prolong a honest thanks to our staff for his or her diligence and dedication in making use of our refresh technique. Let me first contact on our consolidated outcomes. Within the third quarter, our gross sales had been down 1.2% in comparison with final 12 months and our comps had been down 3.1% at a consolidated stage.

This was primarily pushed by a damaging 2.8% comp in our U.S. retail phase, pushed by the dynamics I mentioned earlier. Regardless of these exterior pressures, we proceed to see our strategic priorities yielding robust outcomes. Based on Circana, for Q3, DSW footwear gross sales had been consistent with the footwear market versus final 12 months, outpacing the market in efficiency and leisure footwear, in addition to in gown event footwear.

This helped to offset damaging boot efficiency at DSW. Importantly, our adjusted working revenue improved roughly 40% in comparison with final 12 months, taking us to 43.6 million. Our profitability additionally improved sequentially because of ongoing expense optimization and the reversal of incentive compensation acknowledged in earlier quarters following softer-than-expected efficiency. Turning to our retail enterprise.

U.S. retail gross sales had been down 2.6% in comparison with final 12 months. Comp gross sales had been down 2.8% within the quarter, pushed by continued progress in athletic and athleisure, which was greater than offset by weaknesses in seasonal. We aren’t the one ones who felt this weak spot.

Based on Circana, each DSW and the footwear market had been down double digits in boot gross sales for Q3. As we proceed to evolve our assortment, seasonal nonetheless stays an space the place we’re considerably penetrated, due to this fact overly affecting our consolidated outcomes. We famous to you final quarter that we had taken unprecedented materials actions to cut back our seasonal assortment into the autumn. On account of the continued weak spot we have seen, we’ve got proactively pulled again even additional on fourth quarter receipts in seasonal as a part of our efforts to make sure we’re shifting ahead with a wholesome stock place by the top of the 12 months.

Our goal for the top of This fall is to have stock flat to up low single digits in comparison with final 12 months. It’s clear, extra decisive actions are wanted to lower seasonal penetration on an ongoing foundation. And as such, we’re planning accordingly for 2025. We’re dedicated to extra aggressively leveraging client insights to lean into our best areas of differentiation.

This contains prioritizing investments and specializing in areas the place we all know we differentiate ourselves, together with our shops. As we proceed to concentrate on executing on these issues inside our management, I’ll briefly stroll by our efforts in opposition to DSW’s three strategic pillars within the third quarter: reinvigorating our assortment, elevating our advertising and marketing, and enhancing our omnichannel procuring expertise. Beginning with our assortment. Our high eight manufacturers proceed to be a major driver of optimistic efficiency, with gross sales up 27% in comparison with the third quarter final 12 months.

As anticipated, we noticed continued energy in athletic with each adults and children rising double digits. Our athletic penetration elevated by practically 5 factors versus the prior 12 months, and we see remaining whitespace on this class. Athletic socks additionally continued to carry out properly, up triple digits. Excitingly, we additionally noticed a optimistic mid-single-digit comp in girls’s gown.

As we head into the vacation season, we’ve got additionally made investments in extremely giftable manufacturers, together with a number of that will likely be merchandised in our cozy store on the entrance of our shops. As I will element shortly, we’re leaning into vacation like by no means earlier than at DSW, partnering with key nationwide model companions to be loud, thrilling, and, most significantly, in inventory on essentially the most fascinating manufacturers for this time of 12 months. Shifting to advertising and marketing. Our skill to amplify our developed assortment is extra crucial than ever, and our new chief advertising and marketing officer has hit the bottom working.

We have had numerous successes within the third quarter, together with beginning off robust with back-to-school season, deploying celebrities and influencers to share their picks for the season and a curated on-line back-to-school procuring information to cater to the wants of scholars, mother and father, and lecturers of all ages. The method drove 26.1 billion media impressions, in comparison with 15 billion final 12 months on the identical time. Kicking off the autumn with an omnichannel marketing campaign titled Fall Developments that guided clients towards the trendiest kinds, from over-the-knee boots to the colour purple to fierce animal prints and heavy metallic particulars. The outcomes of those efforts included 67 billion earned media impressions, the equal of 4 billion in promoting worth, from top-tier retailers, together with The In the present day Present, U.S.

Weekly, and PureWow. Enhancing and enhancing our social media channels and engagement. September was a top-performing month, and we’re seeing general channel engagement up 500%, month-to-month engagement up 4%, and a brand new follower charge of practically 7%. Paired with our enhanced influencer and content material methods, this resulted in a median of 15 million views throughout our social content material month-to-month, serving to our DSW model to rise within the ranks of strategic goal audiences, particularly males’s and children footwear customers, and has improved our model consciousness rating with these key audiences.

Whereas we imagine we’re early on in our journey and have extra room to enhance, these early indicators are encouraging. And at last, bringing on a world-class model company, Crispin, as our new model technique associate, initiating sturdy work aimed toward elevating and reenergizing DSW model and enhancing general consciousness. To that finish, our efforts round our third pillar, to boost our omnichannel procuring expertise for DBI clients, stay a core strategic precedence. We all know that roughly 70% of our clients begin their search on-line and nonetheless go to the shops.

Our shops additionally stay our largest supply of internet new buyer acquisition. To totally reap the benefits of our omnichannel platform within the quarter, DSW leaned into being a back-to-school vacation spot, each on-line and, particularly, in shops, the place we established a big and impactful visible presence, with spectacular and attention-grabbing collateral. So, with these new learnings, let’s speak about what we’re doing within the U.S. to mitigate headwinds as we transfer by the fourth quarter.

Our staff has recognized that we had a big alternative to execute a gifting technique this vacation. That is largely pushed out of our equipment space and encompasses socks, tights, hats, and cold-weather put on. It is going to embody a very reimagined queue line and a number of other updates to our gifting and impulse product choices that may solely be present in shops. This will likely be accompanied by inventive collateral to help a present information, key developments, prioritized manufacturers, and different related vacation messaging.

We’ve an action-packed client engagement plan that can showcase nice worth, high developments, and the season’s greatest giftable. And we’re amplifying this with a 360-degree vacation marketing campaign that evolves with the client’s wants all through the prolonged interval. Whereas gross sales have been comparatively consistent with projections, we have seen an uptick in margins as we have turn out to be much less promotional in comparison with final 12 months. Turning to our Canadian enterprise.

In Canada, boots are much more impactful to our fall enterprise, particularly tactical and cold-weather boots. Extraordinarily unseasonably heat climate led to a break within the traditional third quarter developments, with boots down double digits and sandal gross sales up practically 40%. Provided that typical boot-buying developments within the Canadian market are so distinctive and traditionally haven’t been impacted by climate, we didn’t plan stock down on this geography for the quarter as we did within the U.S. Due to this fact, we felt an outsized impression.

Just like the U.S., athletic and informal proceed to submit optimistic efficiency. Regardless of the break within the traditional seasonality, the third quarter marked 9 straight months of market share positive factors in Canada, pushed by energy in youngsters. This quarter, we opened two new Shoe Firm shops in Canada, bringing us to a internet eight new retailer 12 months to this point, on high of the 28 Rubino shops. Now, to our model portfolio phase.

As referenced on prior earnings calls, our efforts to cut back prices, rightsize the group, increase margins, streamline and simplify the best way we work stay the highest priorities in 2024. To this finish, we proceed to judge our sampling and design course of to enhance SKU productiveness and drive margin enchancment. Traditionally, our adoption charge of design proposals was roughly 20%, and we’re energized by the numerous enchancment we have seen, with a 50% adoption charge for our spring ’25 assortment, a quantity we plan to take even greater over the long run. Successes in these areas led to a significant enchancment in earnings contribution from the phase.

As we glance ahead, we’re positioned for continued progress as we construct upon this basis. We proceed to be excited in regards to the progress we’re seeing in our Topo Athletic and Jessica Simpson manufacturers particularly. Topo Athletic, up 66% in internet gross sales for the quarter, continues to construct momentum as we increase our distribution and lift product consciousness, supported by our improve in advertising and marketing investments. Moreover, there’s a whole lot of buzz across the working class, and Topo is entrance and heart, driving the joy and providing clients extra consolation.

Jessica Simpson did properly as we noticed energy in our special day put on, with gross sales up 14%. As I conclude, I’m happy with the best way our enterprise has continued to execute efficiently on our strategic priorities. We stay centered on persevering with to create the fitting self-discipline and efficiency inside our retail and types companies and are enthusiastic about our long-term path to worthwhile progress. I’m assured the steps we’re taking will set us up for improved efficiency over the long run as these headwinds abate.

With that, I will flip it over to Jared. Jared.

Jared A. Poff — Government Vice President, Chief Monetary Officer, and Chief Administrative Officer

Thanks, Doug, and good morning, everybody. We proceed to be happy with the outcomes of our funding areas that we imagine will help our outperformance versus the market in these areas, even whereas challenges persist. Let me present a bit extra element on our monetary outcomes from the third quarter, adopted by an replace to our annual steerage. For the third quarter of fiscal 2024, internet gross sales of $777 million had been down 1.2% versus the prior-year interval as reported and had been down 3.1% on a 13-week comparable foundation.

In our U.S. retail phase, comps had been down 2.8% within the third quarter. As talked about, our efficiency was bolstered by our back-to-school season, which noticed double-digit comps in athletic and children. Sadly, this robust efficiency was greater than offset by damaging comps in seasonal classes.

Our Canada retail phase comps had been down 4.6% within the third quarter, pushed by unseasonably heat climate throughout what’s often a heavy boot gross sales season, in addition to continued macro challenges which have led to a discount in general client discretionary spending exercise. Whole gross sales had been up double digits because of the addition of Rubino areas to our retailer base. Lastly, in our model portfolio phase, gross sales had been up 18.5% within the third quarter. As a reminder, beginning this fiscal 12 months, we’ve got harmonized our method to how we transact enterprise between our model portfolio phase and our retail segments.

This transformation resulted in roughly $15 million of year-over-year further gross sales for our model phase within the quarter that will get eradicated in consolidation. We noticed notable energy in our DTC websites, the place we’ve got been investing. Particularly, Topo.com delivered a triple-digit comp. The energy of Topo, nevertheless, was offset by a discount at VC.com, resulting in a complete comp decline of seven.5% for our model’s DTC websites.

Consolidated gross margin of 31.8% within the third quarter decreased 80 foundation factors versus the prior 12 months, primarily pushed by decrease IMU because of our continued penetration shifts into nationwide manufacturers and particularly extra athletic and athleisure footwear. Our adjusted SG&A was 26.7% of gross sales, a 220-basis-point enchancment from the third quarter of final 12 months. This was pushed by expense cuts made in response to the challenged high line, together with the reversal of administration incentive compensation accrual within the quarter, which was barely offset by expense deleverage because of top-line decline in gross sales. As famous final quarter, we’re endeavor an expense effectivity initiative with exterior consultants.

Our companions have recognized numerous alternatives to spend extra successfully, and we now have an in depth expense financial savings street map that we are going to start executing in 2025, and we stay up for sharing extra with you within the coming quarters. For the third quarter, adjusted working revenue was $43.6 million, an enchancment over $31.4 million final 12 months and the primary quarterly year-over-year enchancment within the final two years. Within the third quarter of 2024, we had $11.6 million of internet curiosity expense, in comparison with $8.8 million final 12 months. Increased curiosity expense is a direct results of the time period mortgage we put in final 12 months, in addition to greater rates of interest on our ABL.

We drew on our ABL within the third quarter as our staff and the board deemed it prudent to proceed our share repurchase exercise as proof of our conviction in our long-term technique. To that finish, we repurchased $50.6 million price of DBI shares at a median worth of $6.59 in Q3, our greatest share repurchase of the 12 months. Our efficient tax charge within the third quarter on an adjusted outcomes was 54.8%, in comparison with 34.6% final 12 months. Our third quarter adjusted internet revenue was $14.5 million, versus $14.8 million final 12 months, or $0.27 in diluted earnings per share, versus $0.24 final 12 months.

Turning to our stock. We ended the third quarter with inventories up 6% versus the prior 12 months, principally pushed by the numerous lack of demand for seasonal footwear. Consequently, Doug famous that we’ve got pulled again additional on fourth quarter receipts for seasonal product to make sure we’re shifting right into a wholesome stock place by the top of the 12 months. We ended the third quarter with $36.2 million of money, and our complete liquidity, which incorporates money and availability below our ABL revolver, was $154.5 million.

Whole debt excellent was $536.3 million as of the top of the third quarter. Earlier than I conclude, I need to take a minute to debate our fiscal 2024 steerage. By the primary half of the 12 months, we had been signaling our confidence in an inflection level within the third quarter, a sentiment bolstered by the optimistic comps we noticed in August because of our profitable back-to-school efforts. Nonetheless, the unseasonably heat climate within the September and October interval, coupled with sustained client strain, considerably dampened efficiency within the final two months of the quarter.

As we glance forward, we really feel it’s prudent to provide you an replace on our expectations for the complete 2024 outcomes. As a reminder, our steerage contains the headwind of the gross sales recorded within the 53rd week of fiscal 2023, in addition to the lapping of Nike’s return to our assortment within the fourth quarter of 2023. Importantly, we do nonetheless proceed to venture our fourth quarter as our strongest comp progress quarter. Ought to macro circumstances stay constant to what we’re seeing now, we might anticipate internet gross sales progress for the 12 months to be down low single digits, which includes the impression of the lack of the 53rd week, in comparison with prior steerage of flat to up barely.

We’d count on exterior wholesale gross sales in our model portfolio to be down low single digits, versus prior steerage of flattish. Moreover, regardless of depressed gross sales ranges, we’ve got been producing bigger income, and the midpoint of our steerage, excluding the impression of the 53rd week, would ponder the second consecutive quarter of year-over-year adjusted working revenue progress, resulting in an annual diluted earnings per share outlook within the vary of $0.10 to $0.30, versus our prior steerage of $0.50 to $0.60. Our weighted common diluted shares excellent are anticipated to be roughly 53.5 million for the third quarter and roughly 55.4 million for the complete 12 months given the share repurchase exercise that has occurred to date all year long. Right now, we wish to reaffirm our expectations for capital expenditures to be within the vary of $60 million to $65 million for the 12 months.

Our estimates additionally assume an efficient tax charge of roughly 32%. I stay assured that our outlined initiatives will proceed to ship improved efficiency over time. Remaining centered on our core enterprise technique all through the vacations will place us for stronger efficiency over the long run as these exterior challenges ease. With that, we are going to open the decision for questions.

Operator.

Questions & Solutions:

Operator

Women and gents, we are going to now start the question-and-answer session. [Operator instructions] Our first query in the present day comes from Dylan Carden from William Blair. Please go forward together with your query.

Dylan Carden — Analyst

Thanks. Jared, sorry in the event you talked about this, November developments or simply developments typically as soon as the climate sort of cooperated, did you present that?

Jared A. Poff — Government Vice President, Chief Monetary Officer, and Chief Administrative Officer

Yeah. What we stated is what we’re — what the midpoint of our steerage implies. And to be completely sincere, I’d, you recognize, say it is indicated or knowledgeable by the November developments we’re seeing. And on the — on sort of by the vacation, what we noticed was general demand barely beneath final 12 months, nevertheless it was distorted.

Shops had been truly optimistic, digital, as a result of we weren’t chasing extra boot stock like we had been final 12 months. So, very totally different focused promotions was beneath final 12 months. However gross margin {dollars} and charge, clearly, had been properly above final 12 months, and we’re seeing that pattern proceed. So, our midpoint of the steerage sort of incorporates all of that.

Dylan Carden — Analyst

Nice. Thanks. After which sort of associated to that, are you dropping share in boots? I imply, you recognize, the business was additionally down double digits. You had been down I believe you stated 27%.

And also you care. And I assume kind of the implied query in that’s, you recognize, is it kind of a waterbed impact at this level the place you are sort of seeing positive factors elsewhere however losses in different places and sort of retaining you at a internet drawback place till you get the assortment in a greater kind of combine?

Doug Howe — Chief Government Officer

Yeah. That is Doug, Dylan. Thanks in your query. , we consciously deliberate the class down, as we talked about, 15%.

It was virtually double that lower. I imply, we’re going to be very strategic about persevering with to sort of de-weatherize the enterprise clearly. So, you recognize, we’re nonetheless working by the extent of what that may appear to be. Fourth quarter is definitely even a better % of our enterprise within the boot class, clearly, than Q3.

And, you recognize, we’ve got seen a little bit of a rebound with the climate as we transfer by the quarter. After which as Jared stated, we have been significantly happy with how we have seen that present up in our shops. I believe the assortment work that the groups are doing, I’d give credit score to that, in addition to the advertising and marketing and messaging. We actually confirmed up for vacation with messaging in our shops.

So, that is been favorable as properly. However once more, we’ll proceed to be conservative on the seasonal classes, as we have acknowledged.

Dylan Carden — Analyst

After which to that time, you are not leaving cash on the desk right here by kind of overcorrecting for boots because the climate has turned I assume could be one thought.

Doug Howe — Chief Government Officer

No, we do not imagine so in any respect. I imply, we nonetheless noticed a slight lower in site visitors, proper? So, that is why we’re excited in regards to the advertising and marketing that we’ll be leaning into in a extra aggressive method for subsequent 12 months almost about simply driving that site visitors, however not leaving enterprise on the desk in any respect.

Dylan Carden — Analyst

Superior. Thanks.

Doug Howe — Chief Government Officer

Thanks.

Operator

[Operator instructions] Our subsequent query comes from Mauricio Serna from UBS. Please go forward together with your query.

Mauricio Serna — Analyst

Nice. Good morning. Thanks for taking my query. I simply wished to listen to as a result of — sorry if I missed it.

Did you speak about what was your efficiency in — throughout your high eight nationwide manufacturers, what are you seeing there? And likewise, in the event you talked about what was your quarter-to-date pattern? And likewise — and alternatively, on the stability sheet, you noticed — you recognize, in money circulation, you noticed like — you talked about you probably did your greatest share repurchase of the 12 months. How are you fascinated about, you recognize, debt ranges administration contemplating that, you recognize, I assume, like, the enterprise has been a little bit bit extra challenged than anticipated?

Doug Howe — Chief Government Officer

Hello, Mauricio. That is Doug. Thanks in your query. I will take the primary two on the model efficiency after which quarter to this point, after which I will flip it over to Jared for the debt.

Yeah, we did share the efficiency of the highest eight manufacturers. They had been up 27% in Q3. It was roughly about 40% of the entire. Actually pleased with the work the staff has performed on actually going out to the relationships with these high manufacturers.

Being aware additionally that we’re not changing into overly reliant on any of them. Take into consideration 40% penetration on eight manufacturers. None of them are, you recognize, near 10% of the enterprise. So, we predict that is a really considerate method.

Quarter to this point, as Jared stated a few moments in the past, is consistent with the steerage that we’re offering. Once more, we noticed a little bit little bit of softness in Black Friday and Cyber Monday, however we’re seeing an enlargement in margin {dollars}, and that is persevering with as we transfer by December as properly, largely attributable to the truth that we’re not as promotional as we had been final 12 months as a result of we’re in a significantly better place on stock.

Jared A. Poff — Government Vice President, Chief Monetary Officer, and Chief Administrative Officer

And on sort of debt stage administration, you recognize, what we at all times have a look at is extra of a liquidity administration. We have got two massive working capital cycles a 12 months. We’re truly on the money technology aspect of a kind of cycles taking place proper now, very, very typical and cyclical. We’re comfy with our general debt ranges and, extra importantly, comfy with our liquidity ranges.

, I’d say, clearly, we need to stay cautious as we simply have a look at the patron atmosphere out sooner or later. So, you recognize, we really feel like we have got our capital construction in the fitting place proper now however at all times have an eye fixed on that. And positively, additionally an eye fixed on to the curiosity load that it brings.

Mauricio Serna — Analyst

Obtained it. Very useful. After which simply may you present any particulars on what you have seen with Nike? I keep in mind, like, you had been very enthusiastic about, you recognize, new — simply having extra product obtainable from that model this 12 months than even if you had the model, you recognize, just a few years earlier than.

Doug Howe — Chief Government Officer

Yeah. That is Doug. I imply, we proceed to be more than happy with the Nike efficiency. They could not be higher companions.

Actually inspired. I imply, nonetheless a internet new optimistic for us. We’ve now lapped once they got here again to DSW particularly. However once more, could not be extra happy with the enterprise and the connection.

They have been nice companions.

Mauricio Serna — Analyst

Obtained it. Thanks very a lot.

Doug Howe — Chief Government Officer

Thanks.

Operator

And girls and gents, presently, in displaying no further questions, I would like to show the ground again over to Doug Howe for closing remarks.

Doug Howe — Chief Government Officer

I would prefer to thank everybody for becoming a member of us in the present day, and we stay up for updating you as we proceed to make progress on our strategic priorities going ahead. Thanks once more for becoming a member of us.

Operator

[Operator signoff]

Length: 0 minutes

Name contributors:

Dustin Hauenstein — Senior Vice President, Finance

Doug Howe — Chief Government Officer

Jared A. Poff — Government Vice President, Chief Monetary Officer, and Chief Administrative Officer

Dylan Carden — Analyst

Jared Poff — Government Vice President, Chief Monetary Officer, and Chief Administrative Officer

Mauricio Serna — Analyst

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