Designer Brands Inc. (DBI) is a leading designer, producer, and retailer of footwear and accessories, operating a diverse portfolio of retail and wholesale brands. With a rich history spanning over three decades, the company has carved out a significant presence in the dynamic footwear industry, adapting to changing consumer preferences and market conditions.

Company History and Evolution

Founded in 1969 as a single store in Columbus, Ohio, Designer Brands has grown to become one of the world's largest footwear and accessories companies. The company's roots trace back to its first DSW (Designer Shoe Warehouse) store, which opened in 1991, offering a wide selection of designer and name-brand shoes at discounted prices. This innovative format resonated with consumers and fueled rapid expansion over the next two decades.

Throughout the 2000s, Designer Brands diversified its business model by acquiring and integrating several footwear brands into its Brand Portfolio segment. Notable acquisitions include Camuto Group in 2018 and Keds in 2023, which significantly expanded the company's design, sourcing, and distribution capabilities. These strategic moves have transformed Designer Brands from a single-store footwear retailer into a diversified, vertically-integrated footwear and accessories company.

Business Segments

Designer Brands operates in three reportable segments:

1. The U.S. Retail segment, which encompasses the DSW Designer Shoe Warehouse brand, remains the company's core business, contributing 79% of total net sales in the latest quarter. This segment operates a network of over 500 direct-to-consumer stores across the United States, complemented by a robust e-commerce platform. In Q2 2024, this segment generated net sales of $641.69 million.

2. The Canada Retail segment, which includes The Shoe Company, DSW, and the recently acquired Rubino banner, accounts for 9.2% of net sales and provides Designer Brands a growing presence in the Canadian market. This segment generated net sales of $74.80 million in Q2 2024.

3. The Brand Portfolio segment, representing 11.8% of net sales, focuses on the wholesale distribution of products to retailers and international distributors, as well as the direct-to-consumer sales of the company's owned brands, such as Vince Camuto, Keds, Hush Puppies, and Topo. This segment also includes the company's equity investments in joint ventures that own and manage brands, such as ABG-Camuto and Le Tigre. In Q2 2024, this segment generated net sales of $95.99 million.

Financials

For the fiscal year 2024, Designer Brands reported revenue of $3.07 billion, net income of $29.06 million, operating cash flow of $162.40 million, and free cash flow of $107.40 million.

In the second quarter of fiscal 2024, Designer Brands reported net sales of $771.9 million, a 2.6% decrease compared to the prior-year period. This decline was primarily driven by a 1.1% decrease in comparable sales in the U.S. Retail segment and a 3.1% decrease in the Canada Retail segment, as the company navigated a challenging macroeconomic environment and shifting consumer preferences.

Gross profit margin for the quarter contracted by 170 basis points to 32.8%, reflecting lower merchandise margins as the company prioritized growing its penetration of athletic and athleisure products, which typically have lower margins than the seasonal and dress categories. The company also experienced pressure from increased promotional activity to clear through seasonal inventory.

Operating expenses increased by 5.8% year-over-year, driven by higher marketing investments, incentive compensation, and costs related to restructuring and strategic initiatives. These factors, combined with higher interest expenses, resulted in adjusted net income of $17.1 million, or $0.29 per diluted share, compared to $39.4 million, or $0.59 per diluted share, in the prior-year period.

Compared to Q2 2023, revenue decreased 2.6%, net income decreased 62.8%, operating cash flow decreased 79.2%, and free cash flow decreased 29.1%. The decreases were primarily due to lower comparable sales in the U.S. Retail segment driven by reduced demand for dress and seasonal products, partially offset by growth in the athletic and athleisure categories.

Strategic Initiatives and Performance

Despite the challenges faced in the second quarter, Designer Brands has made significant strides in executing its strategic initiatives. The company has successfully pivoted its assortment to capture the shift in consumer demand towards more casual and athletic footwear, with the penetration of these categories now accounting for 42% of the total assortment, up from 32% in 2017.

Moreover, the company's investments in marketing and enhancing the omnichannel shopping experience have shown promising results, with the digital channel delivering mid-single-digit growth for the third consecutive quarter. The addition of the Rubino banner in Canada has also expanded Designer Brands' geographic footprint and provided a new growth avenue.

Outlook and Guidance

Looking ahead, the company has revised its full-year guidance for fiscal 2024. Designer Brands now expects net sales growth to be flat to up slightly, compared to prior guidance of a low single-digit increase. Adjusted earnings per share are now expected to be in the range of $0.50 to $0.60, compared to prior guidance of $0.70 to $0.80.

The company expects its SG&A for the full year to be flat to slightly deleverage, and its effective tax rate for fiscal 2024 to be around 30%. Capital expenditures are expected to be in the range of $65 million to $75 million for the year.

This revised outlook reflects the ongoing macroeconomic uncertainties and the continued pressure on the seasonal and dress categories, which the company expects to be partially offset by the strength in its athletic and athleisure offerings.

Industry Trends and Geographic Performance

The footwear retail industry has seen a compound annual growth rate (CAGR) of approximately 3-5% over the past 5 years, driven by growing demand for athletic and athleisure footwear. However, the industry has also faced headwinds from macroeconomic uncertainty and changing consumer preferences.

Designer Brands operates primarily in the U.S. and Canada. The U.S. Retail segment accounted for 79.0% of total net sales in Q2 2024, while the Canada Retail segment accounted for 9.2% of total net sales. The company does not have a significant international presence outside of North America.

Liquidity

As of Q2 2024, Designer Brands had $38.83 million in cash and cash equivalents, and $193.9 million in total liquidity including available borrowing capacity under its $600 million ABL Revolver. The company's debt-to-equity ratio stands at 3.59x, while its current ratio is 1.29x and quick ratio is 0.25x.

Management Changes

In January 2023, the company announced a CEO transition, where former CEO Roger Rawlins stepped down and was replaced by Doug Howe. The company incurred $2.9 million in CEO transition costs in Q1 2023. There have been no other major scandals, short seller reports, or additional CEO departures reported.

Conclusion

Designer Brands' ability to navigate the evolving consumer landscape and adapt its business model has been tested in recent years. The company's strategic focus on reinvigorating its assortment, elevating its marketing efforts, and enhancing its omnichannel capabilities have positioned it well to capitalize on the shifting trends in the footwear industry.

As Designer Brands continues to navigate the challenges posed by macroeconomic headwinds and changing consumer preferences, its diversified portfolio, strong brand recognition, and commitment to innovation will be crucial in driving long-term growth and delivering value to its shareholders.