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Designer Brands Inc. (NYSE:DBI): Navigating Headwinds with Strategic Initiatives
Published on September 24, 2024 | Ticker: DBI

Designer Brands Inc. (NYSE:DBI) is an American footwear and accessories retailer that operates through three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The company reported annual net income of $29,062,000, annual revenue of $3,074,976,000, annual operating cash flow of $162,399,000, and annual free cash flow of $107,402,000 in its most recent fiscal year.

Financials

In the first quarter of fiscal 2024, Designer Brands reported net sales of $746.6 million, up 0.6% from the prior year period. Comparable sales declined 2.5% during the quarter. The U.S. Retail segment saw a 1.4% increase in net sales and a 2.3% decline in comparable sales, while the Canada Retail segment reported a 2.9% increase in net sales and a 4.9% decline in comparable sales. The Brand Portfolio segment generated a 12.0% increase in net sales.

Gross profit margin expanded by 80 basis points to 32.8% in the first quarter, driven by strong inventory management, reduced closeouts, and growth in the direct-to-consumer channel within the Brand Portfolio segment. However, operating expenses increased 8.4% year-over-year, primarily due to higher incentive compensation, marketing expenses, and store selling costs. As a result, adjusted operating income declined to $14.7 million from $25.8 million in the prior year period.

Business Overview

The company's strategic initiatives are focused on reinvigorating the assortment, optimizing marketing investments, and enhancing the omnichannel shopping experience. In the U.S. Retail segment, the company saw strong performance in athletic and casual footwear categories, which outpaced the overall footwear market. The company also made progress in its affordable luxury offerings, which received positive customer feedback. However, the seasonal and dress categories continued to experience softness.

To support the company's marketing efforts, Designer Brands has appointed Sarah Crockett as the new Chief Marketing Officer for the DSW banner. The company's renewed top-of-funnel programming is engaging national audiences, while efforts to reach out to lapsed and about-to-lapse customers have yielded positive results.

In the Canada Retail segment, the company acquired Rubino, a profitable Canadian footwear retailer with nearly 30 stores in the province of Quebec, a market in which Designer Brands previously had no presence. The acquisition is expected to be immediately accretive and contribute to the segment's operating income at a similar rate as the overall Canadian retail business.

The Brand Portfolio segment, led by the newly appointed President Andrea O'Donnell, is focused on reducing costs, right-sizing the organization, increasing margins, and defining the role and potential of the brands in the portfolio. The segment saw solid performance from Keds, Hush Puppies, Jessica Simpson, and Topo Athletics in the first quarter.

Outlook

Looking ahead, Designer Brands is reaffirming its fiscal 2024 guidance, which calls for low single-digit net sales growth and low single-digit comparable sales improvement, with the third quarter expected to be the strongest sales period and the fourth quarter the weakest due to the loss of the 53rd week in the prior year. The company also expects slight SG&A leverage for the full year, as it continues to find efficiencies and reinvest in key areas such as marketing, personnel, and technology.

Liquidity

The company's strong balance sheet, with $43.4 million in cash and $231.2 million in total liquidity as of the end of the first quarter, provides flexibility to navigate the current economic environment and invest in strategic initiatives. Additionally, the company received $47 million in CARES Act tax refunds subsequent to the quarter end, further bolstering its financial position.

Conclusion

Overall, Designer Brands is navigating a challenging retail environment by focusing on its strategic priorities, optimizing its cost structure, and leveraging its strong brand portfolio and omnichannel capabilities. The company's progress in reinvigorating its assortment, enhancing its marketing efforts, and expanding its geographic reach through the Rubino acquisition position it well for future growth, despite the near-term headwinds.

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