Designer Brands Inc. (DBI), a leading designer, producer, and retailer of footwear and accessories, has navigated a challenging landscape in the footwear retail industry. With a history dating back to 1969, the company has weathered various market conditions and adapted its strategies to maintain its position as a prominent player in the sector.
In-Depth Business Overview Designer Brands Inc. operates through three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The company's journey began in 1969 as a shoe importer and distributor, eventually opening its first retail store under the DSW Designer Shoe Warehouse banner in the United States. This marked the beginning of the company's transition into a direct-to-consumer retailer. Over the following decades, Designer Brands continued to expand its retail footprint, opening additional DSW stores across the U.S.
In 2007, the company went public and listed its shares on the New York Stock Exchange under the ticker symbol DBI, providing additional capital to fuel growth initiatives. During the 2010s, Designer Brands diversified its business model by acquiring several footwear and accessories brands, including Camuto, Keds, Topo Athletic, and Jessica Simpson, to expand their brand portfolio segment. This strategic move allowed the company to generate revenue not only from its retail operations but also from wholesale distribution and e-commerce sales of their owned brands.
The U.S. Retail segment operates the DSW Designer Shoe Warehouse banner through its direct-to-consumer stores and e-commerce site in the United States. The Canada Retail segment operates The Shoe Co., DSW, and Rubino banners through its direct-to-consumer stores and e-commerce sites in Canada. The Brand Portfolio segment earns revenue from the wholesale of products to retailers and international distributors, the sale of branded products through direct-to-consumer e-commerce for the Vince Camuto, Keds, and Topo brands, as well as from commissions for serving retailers as the design and buying agent for products under private labels.
The company has a 40% ownership interest in ABG-Camuto, LLC, a joint venture that owns the intellectual property rights of Vince Camuto and other brands. Designer Brands is also party to a licensing agreement with ABG-Camuto, which provides for the exclusive right to design, source, and sell footwear and handbags under the brands that ABG-Camuto owns. Additionally, the company has a 33.3% ownership interest in Le Tigre 360 Global LLC, which manages the Le Tigre brand, and is party to a license agreement with Le Tigre, which provides for the exclusive right to design, source, and sell Le Tigre-branded footwear.
Financial Performance and Solvency In the latest fiscal year (2024), Designer Brands reported annual revenue of $3.07 billion, net income of $29.06 million, annual operating cash flow of $162.40 million, and annual free cash flow of $107.40 million. The company's financial performance has been impacted by various market conditions, including the COVID-19 pandemic and ongoing macroeconomic uncertainties.
For the most recent quarter (Q3 2024), the company reported revenue of $777.19 million and net income of $13.01 million. Year-over-year, net sales decreased 1.2% compared to Q3 2023. The decrease was primarily driven by a 2.8% decline in comparable sales in the U.S. Retail segment, partially offset by a 10.4% increase in the Canada Retail segment and an 18.5% increase in the Brand Portfolio segment.
As of the most recent quarter, the company reported total assets of $2.08 billion, total liabilities of $1.71 billion, and stockholders' equity of $359.22 million. The company's current ratio stood at 1.41, indicating a healthy liquidity position, while the debt-to-equity ratio of 4.19 suggests a moderately leveraged capital structure.
Liquidity Designer Brands' liquidity position remains stable, as evidenced by its current ratio of 1.41 and quick ratio of 0.29 as of November 2, 2024. This indicates that the company has sufficient current assets to cover its short-term liabilities. The company's cash balance stood at $36.23 million as of November 2, 2024.
The company has a revolving credit facility of up to $600 million, including a $60 million sub-limit for Canadian borrowings, with $118.3 million available for borrowing as of November 2, 2024. This provides additional financial flexibility to navigate the challenges in the footwear retail industry and implement strategic initiatives.
Navigating Challenges in Footwear Retail Designer Brands has faced several challenges in the footwear retail industry, including the impact of unseasonably warm weather and sustained macroeconomic uncertainty. In the third quarter of 2024, the company reported a 1.2% decrease in net sales and a 3.1% decrease in total comparable sales compared to the prior-year period.
The U.S. Retail segment, which operates the DSW banner, experienced a 2.8% decrease in comparable sales, primarily driven by a decline in the seasonal category due to the warm weather. This segment had net sales of $615.50 million for the three months ended November 2, 2024, representing 75.9% of total segment net sales. The decrease in comparable sales was driven by a decrease in comparable transactions of approximately 4% due to lower traffic, partially offset by higher comparable average sales amounts per transaction of approximately 1%.
The Canada Retail segment also faced challenges, with a 4.6% decrease in comparable sales, largely attributable to the significant impact of the warm weather on boot sales, a crucial part of the Canadian business. Net sales for this segment were $83.50 million for the three months ended November 2, 2024, accounting for 10.3% of total segment net sales. The increase in net sales was primarily due to the addition of Rubino, which contributed $8.10 million in net sales, as well as $2.20 million from the net new stores opened since the end of the third quarter of 2023.
Despite these headwinds, the company has remained focused on its strategic priorities, which include reinvigorating its assortment, elevating its marketing, and enhancing its omnichannel shopping experience. The Brand Portfolio segment, which includes the Vince Camuto, Keds, and Topo brands, reported net sales of $111.49 million for the three months ended November 2, 2024, representing 13.8% of total segment net sales. The increase in net sales was primarily due to a change in how the segment sources certain Owned Brands for the U.S. Retail segment, transitioning from a commission model to a wholesale model.
Gross profit as a percentage of net sales for the third quarter of 2024 was 31.8%, down 80 basis points compared to the same period last year. The decrease was primarily driven by lower gross margins in the U.S. Retail and Canada Retail segments due to a change in product mix, as well as higher freight costs in the Brand Portfolio segment.
Operating expenses decreased by $20.33 million, or 8.8%, in the third quarter of 2024 compared to the same period last year, driven by a decrease in marketing expense of $8.70 million and a decrease in incentive compensation of $9.10 million. As a percentage of net sales, operating expenses decreased 230 basis points due to the larger decrease in operating expenses on lower sales.
During the third quarter of 2024, the company recorded impairment charges of $17.76 million, including $9.20 million related to a vacated leased corporate office, $1.00 million for an underperforming Canada Retail segment store, $0.60 million for an underperforming U.S. Retail segment store, and $7.00 million due to the write-off of the equity investment in Le Tigre.
Outlook and Guidance In response to the market conditions, Designer Brands has provided updated guidance for the fiscal year. The company now expects net sales growth to be down in the low single digits, incorporating the impact of the loss of the 53rd week compared to the prior guidance of flat to up slightly. The company also anticipates external wholesale sales in the Brand Portfolio segment to be down in the low single digits versus the prior guidance of flattish.
The midpoint of DBI's updated guidance, excluding the impact of the 53rd week, would contemplate the second consecutive quarter of year-over-year adjusted operating income growth, leading to an annual diluted earnings per share outlook in the range of $0.10 to $0.30, versus their prior guidance of $0.50 to $0.60. The company reaffirmed their expectations for capital expenditures to be in the range of $60 million to $65 million for the year, and their estimated effective tax rate of roughly 32%.
Despite the challenges, the company remains focused on executing its strategic initiatives and is well-positioned to navigate the current market environment. The company's diversified business model, which includes both retail and brand portfolio segments, provides some resilience against the volatility in the footwear industry.
Risks and Considerations Designer Brands faces several risks, including continued macroeconomic uncertainty, fluctuations in consumer spending, and the ongoing shift towards e-commerce in the retail industry. The company's reliance on seasonal categories, such as boots, exposes it to weather-related risks, as evidenced by the impact of the unseasonably warm weather in the third quarter.
Additionally, the company's leverage and debt levels, as reflected in its debt-to-equity ratio, could pose challenges in the event of a prolonged economic downturn. Regulatory changes, supply chain disruptions, and intense competition in the footwear retail industry are also potential risks that the company must navigate.
Conclusion Designer Brands Inc. (DBI) has demonstrated its resilience in the face of challenging market conditions, leveraging its diversified business model and strategic initiatives to navigate the complexities of the footwear retail industry. While the company has faced headwinds, such as the impact of unseasonably warm weather and sustained macroeconomic uncertainty, it remains focused on executing its strategic priorities and positioning itself for long-term success.
The company's performance across its three segments – U.S. Retail, Canada Retail, and Brand Portfolio – reflects both challenges and opportunities in the current retail environment. With a strong liquidity position, including a substantial credit facility, Designer Brands is equipped to weather near-term volatility while investing in growth initiatives.
However, the revised guidance for fiscal year 2024 underscores the ongoing challenges in the market, with expectations for lower net sales growth and earnings per share compared to previous projections. This adjustment highlights the need for continued adaptation and strategic execution in the face of external pressures.
Investors should closely monitor the company's ongoing performance, its ability to adapt to the evolving landscape of the footwear retail industry, and its success in implementing cost-saving measures while driving growth across its diverse brand portfolio. The company's focus on omnichannel experiences and owned brands may provide avenues for differentiation and growth in a competitive market.
As Designer Brands navigates through these challenging times, its ability to leverage its strong market position, diverse brand portfolio, and operational efficiencies will be crucial in driving long-term value for shareholders and maintaining its position as a leading player in the footwear retail industry.