Designer Brands (DBI) Q4 2024 Earnings Call Transcript

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Designer Brands (NYSE: DBI)
Q4 2024 Earnings Call
Mar 20, 2025, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Designer Brands Inc. fourth-quarter 2024 earnings call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dustin Hauenstein, senior vice president of finance.

Please go ahead.

Dustin Hauenstein -- Senior Vice President, Finance

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week and 52-week periods ended February 1, 2025, to the 14-week and 53-week periods ended February 3, 2024. Please note that the financial results that we will be referencing 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.

Additionally, 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 the 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 Doug Howe, chief executive officer; and Jared Poff, chief financial officer.

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Now let me turn the call over to Doug.

Doug Howe -- Chief Executive Officer

Good morning, and thank you, everyone, for joining us. I'd like to by saying a special thank you to our associates for their continued hard work and dedication to Designer Brands throughout the year. We were pleased to return to positive comps in the fourth quarter of fiscal 2024 for the first time in nine quarters as results improved throughout the year with our transformation taking a greater hold. In the fourth quarter, given the inclusion of the 53rd week last year, we saw a 5% year-over-year decline in total sales.

Excluding the 53rd week, our comps were up 1%. For the full year, total company sales were down roughly 2% to last year and costs were down 1.7%, in line with our revised guidance. We also delivered full-year adjusted EPS of $0.27 at the upper end of our revised guidance range of $0.10 to $0.30. As I reflect upon our performance this year, the improvement we saw was a direct result of our commitment to executing on those initiatives within our control.

This included decisive actions to refresh our leadership team, revitalize and modernize our assortment, optimize our marketing, rightsize our brand portfolio organization and continuously improve our customers' omnichannel experience. Over the last year and a half, we've updated our leadership team, naming a new president of DSW, a new brand president and new chief marketing officer, and a new head of merchandising to reinvigorate our teams implement new ways of working and bring in expertise we were previously lacking. We've also made considerable progress in revitalizing our assortment. We ended 2024 with a more rubbing and balanced assortment that includes more athleisure than ever before, increasing our penetration by five percentage points and grabbing market share.

We have and expanded our relationship with our top brand partners, deepening the number of styles offered with key brands to build an eye-catching in-store and online selection. Our top eight brands remain a primary driver of positive performance with sales of those brands up 25% on a full-year basis. On the marketing front, this year, we leaned into the holiday season more than ever, focusing on giftable items. Black Friday, Cyber Monday, and a well-timed post-holiday sale helped generate buzz, capture consumer interest and maintain some momentum beyond the season.

Additionally, we enhanced the customer experience, leading with over messaging and strategic collaborations allowed us to establish our stores as a gifting destination. A holiday assortment had an impactful visual presence with impressive and intention grabbing gift-giving collateral. Within our brand portfolio organization, we remain focused on cost reduction, brand optimization, higher product margins and improved SKU productivity through streamlined operations. I'm pleased to share that we successfully delivered on driving top line growth and margin expansion.

Let's quickly review some of the financial highlights from the fourth quarter and full year. Starting with our retail businesses. In U.S. retail, we were pleased to post comps up 1% in the fourth quarter, reflecting a return to positive comps for the first time since the third quarter of 2022, driven by strength in athletic, women's dress and luxury, accessories and kids.

According to SCANA data, DSW sales growth versus last year outpaced the footwear market in the fourth quarter resulting in a 10-basis-point gain of footwear market share versus last year for DSW. Sales for the quarter rose 7%, primarily due to the impact of the 53rd week last year. For the full year, U.S. retail comps were down a little over 1%, driven by weaknesses in seasonal.

We saw strength in a number of categories throughout the year, such as athletic women's affordable luxury and kids. Sales for the year were down roughly 3%, driven by the impact of the 53rd week and the decline in comps. In Canada, fourth quarter comps were up 5% driven by strong performance in most categories, led by Athletic and kids. Sales were up over 7% to last year.

For the full year, comps were down 2% due to similar trends we saw in the U.S., strong athletic casual and kids performance, which was offset by weakness in seasonal and dress. Sales were up 7% to last year, primarily as a result of adding Rubino to our store footprint. Turning to our brand portfolio segment. For the fourth quarter, sales were up approximately 12%.

For the full year, sales were up roughly 14%. In 2024, we were able to reach operating profitability in this segment for the first time as our brand's president, Andrea's initiative to reset the business have proven successful, and we believe have set this business up for continued profitable growth into the future. For the year, we expanded our gross margin by 100 basis points. and reduced our segment operating expenses by nearly 700 basis points.

The combination of the two has led to a significant improvement in operating margin. Operationally, our adoption rate of design proposals has increased from roughly 20% historically to 50% for our fall 2025 collection. We expect for this to continue to increase over time. On the product side, we are excited to have seen continued growth in Topo Athletic and Jessica Simpson.

Both brands have been significantly outperforming expectations throughout the year. For the year, Topo was up nearly 80% and Jessica was up over 20% in wholesale sales. As we move forward in 2025, we believe our ongoing business transformation will drive continued stabilization and improvement of sales and profitability, with expectations to significantly increase our adjusted EPS compared to 2024 results. Let me spend a few minutes discussing our strategic focus areas for 2025.

In our retail segment, we will use the pillars of customer and product to guide our focus. First and foremost, we are placing an even more deliberate focus on being customer first in everything we do. Leveraging insights and advanced analytics to refine the DSW brand identity and positioning, update our target customer segmentation and enhanced marketing tactic effectiveness. We've executed both qualitative and quantitative research and are embedding the focus into the organization in real time.

In 2025, we'll be able to better understand what drives our most valuable customers in or in how we can acquire more of them. We will continue to evolve our brand positioning in 2025, which we believe will be exciting for our loyal customers as well as new customers. We will also be revisiting our robust VIP rewards program, which represents roughly 90% of our transactions. We'll be transforming VIP rewards and FERC with an aim to relaunch the program early 2026.

Additionally, we intend to continue evolving our approach to promotions and discounts to help serve customers searching for value. To this end, our semiannual sales will continue to evolve as it becomes a more important promotional event to DSW. We will also continue to evolve our omnichannel customer experience in ways that are intended to drive both value for consumers and improved financial results. We will continue to enhance our in-store selection and displays a key differentiator when it comes to the in-person shopping experience that drives over 70% of our sales.

We'll also be adding DSW net new stores to our fleet for the first time since 2019, expanding access to product and aligning with population migration. In addition, we are rolling out simple tech-enabled shoe fitting services and post purpose protective shoe cleaning, which we believe will provide points of differentiation for our brand and incremental margin in 2025. We look forward to sharing updates on these and other initiatives across the course of the year that we expect to drive profitable omnichannel growth. Our next strategic pillar for 2025 is a continuation of our assortment revitalization journey.

This year, we are further enhancing our product offering through a data-driven approach that we expect to drive improved inventory availability and productivity. We are rationalizing unproductive product, which will allow us to amplify our investments in key items and top-selling products. We are also optimizing our inventory allocation and digital order management to improve product availability across our network. We expect these enhancements to directly drive increases to in-stock rates improved conversion on store traffic and lower fulfillment costs for digital orders.

These efficiencies are expected to build over the course of the year. As we look to our brand segment for 2025, we have outlined a number of ways we expect to deliver growth, notably reestablishing our private label brands as margin drivers and building a more profitable wholesale business, which includes investing in core names like Keds and Topo to drive top line revenue. Our private label brands are those only filled at DSW, including Kelly and Katie, Mix No. 6 and Crown Vintage.

All have a position of strength within key DSW women's categories, and we plan to leverage these strengths to grow our top line and drive margins for the business. Given our control over the design and production of these brands, we deliver over 1,500 basis points of incremental margin rate above our national brands, which drives our overall margin. Private label brands currently penetrate at less than 20% of DSW sales and we believe this has the opportunity to expand in the future. As Andrea mentioned last year, we are also in the process of advancing our brand and product strategy for our wholesale brands, such as Vince Camuto, Lucky and Jessica Simpson.

Additionally, we will continue to invest in Topo and Keds, two well-positioned brands with strong heritage growth potential and solid distribution. In the short term, we are focused on rebuilding the foundation of Vince Camuto and Lucky. We have a number of initiatives in place, which include a new marketplace strategy, growing new channels of distribution, diversifying product assortment, and leading into growing categories like casual for Lucky and dress for Vince Camuto. Jessica Simpson is another brand that is well-positioned to continue to capitalize on the in the marketplace, which went to leverage by offering a strong assortment and delivering great value to consumers in this growing category.

We plan to continue to invest in fueling growth in our Topo Athletic and Keds brands. Both brands are uniquely positioned within the portfolio, have compelling heritage and are situated in growing categories. They already have access to excellent distribution and are delivering strong operational income contribution to the segment. At Topo, we remain energized by the outsized growth potential the brand represents.

Today, Topo represents over 10% of our total brand portfolio sales and grew over 70% in 2024. We anticipate another year of growth in 2025 driven by a strategic approach to distribution within the core specialty running area, strong product launches, and increasing investment in marketing to establish key franchise items, drive volume and overall the brand with a strong reputation. Our strategy to reposition the Keds brand for growth in 2025 is critical to building a healthy and sustainable brand. We will work to reposition ourselves in the comfort casual category, target the Gen X and above customer who already know and trust the brand and add new technology-infused athleisure offerings powered by our exclusive swap technology.

We are seeing positive results from this evolved product already and are excited about expanding this approach in 2025. We believe that we will have double-digit growth over time with gross margin improvement as well. Before I conclude, I want to share a few thoughts on our 2025 guidance. While we do not expect a material impact on our business from currently anticipated tariff policies, we have seen our consumers being more cautious starting in the back half of January as a result of ongoing inflation, rising prices and less discretionary income.

This was a marked change from the trends we were seeing exiting December, and we recognize that uncertainty remains as they continue to be selective with their discretionary income. As such, we are leaning into initiatives to drive demand and value. On balance, we expect to post positive comps for the full year as well as meaningful operating income growth for the year. We anticipate quarterly performance will improve gradually as we move through the year.

Jared will discuss this more in a moment. I want to reiterate how pleased I am with our team's execution and unwavering dedication as we continue our transformational journey. I'm confident the strategies we are employing are the right ones to support long-term value creation for DBI. With that, I'll turn it over to Jared.

Jared?

Jared A. Poff -- Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Thank you, Doug, and good morning, everyone. We were pleased with the results from the fourth quarter reporting positive comps for the first since Q3 of 2022 and continue to focus our financial improvement throughout the year. As noted in our earnings press release, we changed our financial statement presentation related to expenses associated with distribution and fulfillment and store occupancy for the U.S. retail and Canada retail segments.

These expenses were previously included within cost of sales and are now included within operating expenses in order to present all of our operating segments on a consistent basis. Included in our earnings press release are schedules showing the impact of these reclassifications for each quarter for fiscal 2023 and 2024. We also changed the presentation of segment performance by including an operating profit measurement in addition to the previously reported gross margin measurement for our reportable segments. We have restated quarterly and annual historical results to be on a comparable and our remarks will be based on this restated basis.

Let me provide a bit more detail on our fourth quarter and full-year financial results. For the fourth quarter of fiscal 2024, net sales of $714 million were up 0.5% on a 13-week comp basis, and due to the 53rd week in the fourth quarter of 2023, net sales around 5.4% versus the prior period as reported. For the full year of fiscal 2024, net sales of $3 billion were down 1.7% on a 52-week comp basis and down 2.1% versus last year, inclusive of the 53rd week. In our U.S.

retail segment, comps were up 0.7% in the fourth quarter. We saw positive comps across the majority of our categories with the strongest performance in kids, athletic, accessories, namely socks and women's dress. Our Canada retail segment comps were up 4.7% in the fourth quarter primarily due to strength in athletic and kids and the reintroduction of Nike, women's casual and dress and boots as we became more promotional in the quarter to help clear through our seasonal product. Finally, in our brand portfolio segment, sales were up 12.3% in the fourth quarter.

From a segment perspective, full year net sales versus last year ended at down 2.7% for our U.S. retail segment up 7.1% in our Canada retail segment and up 14.3% in our brand portfolio segment. As a reminder, starting fiscal 2024, we have harmonized our approach to how we transact business between our brand portfolio segment and our retail segments. This change resulted in approximately $21 million of year-over-year additional sales for our brands segment in the fourth quarter that were eliminated in consolidation.

The brand portfolio segment also benefited from notable sales growth in Topo Athletic, which was up 57% versus last year, driven by both our wholesale and DTC channels. Consolidated gross profit of 39.6% in the fourth quarter increased 80 basis points versus the prior year, primarily driven by our U.S. retail segment with less promotional offers as well as decreased DTC shipping associated with lower rates and an improvement in packages per order. Full-year consolidated gross margin of 42.7% in 2024 deleveraged 40 basis points versus the prior year primarily driven by lower IMU in our U.S.

retail segment as a result of our continued penetration shift into more athletic footwear. For the fourth quarter, adjusted operating expense was 43.5% of sales, a 40-basis-point deleverage from the fourth quarter last year. Although operating expense was down from last year, the deleverage was mostly driven by the inclusion of the 53rd week of sales last year against a partial fixed cost base. For the full-year 2024, adjusted operating expense was 40.9% of sales, a 50-basis-point deleverage from last year.

Similar to the fourth quarter, full-year operating expense experienced deleverage that was primarily driven by the inclusion of the 53rd week of sales last year against a partial fixed cost base. The leverage was in both retail segments as well as the corporate costs related to incremental technology expense associated with cloud-based cost. This was partially offset by leverage in our brand portfolio segment operating expense related to cost savings efficiency measures. Recall that we said last quarter, we now have a detailed expense savings road map for 2025, which we expect to aid in reducing our cost of sales through things like fewer promotions in 2025.

For the fourth quarter, adjusted operating loss was $23.5 million, an improvement versus an operating loss of $30.2 million last year, inclusive of the 53rd week which included $6.6 million of additional operating income. It was the second consecutive quarterly year-over-year improvement. For the full year, adjusted operating profit was $67.3 million versus $89.6 million last year, which again included operating income generated in the 53rd week, as previously noted. In the fourth quarter of 2024, we had $11.1 million of net interest expense, compared to $9.9 million last year.

Higher interest expense as a direct result of the term loan we installed last year as well as higher interest rates on our ABL. For the full year of 2024, we had $45.3 million of net interest expense, compared to $32.2 million last year. Our effective tax rate in the fourth quarter on our adjusted results was 38.6%, compared to 37% last year. For the year, our effective tax rate on our adjusted results was 31.6%, compared to 24.8% last year.

Our fourth quarter adjusted net loss was $21.3 million versus $25.3 million last year or a loss of $0.44 in diluted earnings per share for both years. Finally, our full-year adjusted net income was $15 million or $0.27 earnings per diluted share, compared to $43.2 million or $0.68 earnings per share in fiscal 2023. Turning to our inventory. We ended the fourth quarter with total inventories up 5% versus the prior year as we continue to emphasize a clean inventory position and prioritize placement of our newest product.

We feel good about our inventory levels heading into the new fiscal year and our flexibility to continue to chase and take actions on opportunistic buys. In fiscal 2024, I'm pleased to report that Designer Brands returned $79 million to shareholders through a combination of dividends and share repurchases. During the year, we repurchased an aggregate 10.3 million Class A common shares at an aggregate cost of $68.6 million and paid $10.5 million in dividends. As of February 1, 2025, $19.7 million of Class A common shares remained available under our share repurchase program, which as a reminder, has no set expiration date.

We have also once again reaffirmed our commitment to returning cash to shareholders, declaring a $0.05 per share dividend for the first quarter of 2025. For the full year, we again generated positive cash flow and ended 2024 with $44.8 million of cash our total liquidity, which includes cash and availability under our revolver was $172.1 million. Total debt outstanding was $491 million as of the end of the year. Before I conclude, I want to share a few thoughts on our 2025 guidance.

As Doug mentioned, our guidance incorporates continued macro uncertainty that may impact our consumers' spending habits. On a consolidated basis, we expect sales to be up low single digits for the year. The midpoint of our guidance suggests a nice improvement compared to 2024. But given the soft start to the year, we do anticipate first quarter performance to be below last year.

We expect performance will gradually improve as we move through the year. For the U.S. retail segment in 2025, we expect net sales growth in the low single digits versus last year. We also expect comparable sales to be up low single digits.

The comp growth is expected to be driven by our focus on improving our inventory availability, productivity and assortment strategy as well as optimizing marketing to drive DSW awareness. In our Canada retail segment for 2025, we expect a mid- to high single-digit growth versus last year. The majority of this increase is expected through the addition of Rubino, modest comp growth driven by weather and strategic initiatives to grow our base business. We anticipate sales and our brand portfolios for 2025 will increase mid-single digits, driven by strong growth in Topo Athletic, Keds, Jessica, and a return to growth of our private label brands at DSW.

A critical foundation to our transformation is a focus on driving profitable growth. As a continuation of efforts that we initiated last year, we are evaluating expenses across the company and executing on road maps to drive efficiencies across all of the business. Some of these work streams are straightforward with benefits contemplated in our 2025 guidance, primarily in sourcing costs, which will drive improvement in our gross margins. Others are more complex efforts with benefits that will be realized over a multiyear period unlocked by some technology advancements and/or process changes.

The inventory productivity work that Doug mentioned earlier is a great example of where we expect to see notable impacts this year, and we anticipate even more opportunity beyond 2025. To help accelerate this benefit, we opened a distribution center in Arizona dedicated to store fulfillment, which came online this month. This 3PL facility will reduce time to service our Western stores, which currently can take up to 10 days longer to service than other stores within the fleet. For 2025, adding approximately $12 million of operating expense to our expense base.

Additionally, this guidance takes into consideration that we are returning to a normalized level of incentive-based compensation in 2025, which will be an impact of roughly $30 million, and our Rabino operations in Quebec will add approximately $5 million of incremental SG&A as we annualize that acquisition. We anticipate the effective tax rate of roughly 3% for fiscal 2025 and expect earnings per share to be in the range of $0.30 to $0.50, representing nearly a 50% increase at the midpoint when compared to our '24 results. We expect capital expenditures to be in the range of $45 million to $55 million for this year. I want to echo Doug's comments and express my gratitude for the hard work of our DBI associates.

We believe we are on a clear path to returning to more consistent top and bottom line growth over the long term, and I'm excited for what we are set to accomplish this year. With that, we will open the call for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Mauricio Serna with UBS. Please go ahead.

Mauricio Serna -- Analyst

Good morning, and thanks for taking my question. Could you tell us a little bit more on the fourth quarter? How much did you see a growth, and maybe comment a little bit what you saw in terms of Nike's performance in DSL as you lap the brand's return at this point? Then maybe could you elaborate on, you mentioned that you expect first quarter sales to be down versus last year. Any details on what you're seeing quarter to date? What does that imply for your like expectation of the ranging of how much they can be down in the first quarter?

Doug Howe -- Chief Executive Officer

Yes. Thanks for your question, Mauricio. I'll start, and then I'll ask Jared to elaborate on the second part of the question. As it relates to that leisure, I mean, as you heard, we saw a significant increase in the penetration of that business.

A lot of that is driven, obviously, through the athletic brands. We are really pleased in particular with the top 8 brands which, as we said, had a $0.25 increase on the full-year basis. So that trend that we've seen continuing is definitely a tailwind for us. We feel really good about that.

Part of that is to offset some of the reliance on the seasonal businesses. We had a 900 basis points decrease in the boot category as an example. Again, the team has done a really nice job of kind of balancing that. I would say as it relates to Q1, we don't comment specifically in the quarter that we're in.

As we said, we have started out the year a little slower than anticipated. We're focusing on controlling what we could control. I think there's certainly a lot of uncertainty out there in the macro environment just given rising prices, less discretionary income in the lots of tariff conversation on the overall kind of sentiment. That is incorporated into our guidance that we provided for '25, but I'll let Jared elaborate.

Jared A. Poff -- Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Yes. The only thing I would add to that, Mauricio, is that while our initial budget and what we were seeing coming out of Q4 certainly showed year-over-year growth. As I mentioned in my comments, given what we've seen so far, we are now seeing a trending toward probably Q1 being a bit below last year's Q1. That's kind of what we've put in there when we put our guidance together.

What we are anticipating is that, that continues to improve as we move throughout the year. Certainly, Q1 has started off more challenging than what we thought it would be.

Mauricio Serna -- Analyst

Understood. Then could you give us a sense of how you're thinking about gross margin for the year and SG&A dollar growth? I'm particularly interested, could you maybe explain a little bit more, too, about the promotional strategy? I'm having a little bit of a hard time understanding is like you're going to be more promotional or less promotional? Just trying to understand that. Again, the addition for gross margin and SG&A dollar growth.

Jared A. Poff -- Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Yes. I'll say just from the financial mechanics, our current guide and the way we've built the budget has our promotional activity actually giving us good news or leverage in the year to our gross margin rate, and that's primarily driven by the efforts that we talked about inventory availability. A lot of the work that we did with the help of McKinsey and our own analysis, showed us where we had opportunities even on existing traffic patterns to drive higher conversion just given store availability and kind of what had happened with our digital orders being pulled out of stores, so on and so forth. We had planned the year relatively flattish from a gross profit rate standpoint.

That's helping to offset some continued pressure on our IMU from continued growth in athletic and national brands being offset by a reduction in promotions. All that being said, we are certainly starting off Q1 a bit more challenging. We don't want to end with excess inventory. We'll always be measuring that, but that's kind of how we've positioned that.

To answer your second question on the SG&A, there's about $50 million being added over last year's SG&A, primarily anchored on those guidance that I talked about in my remarks. The West Coast Logistics Center, which is brand new to the infrastructure, but really necessary to support that initiative, the bonus or management incentive plan and then annualizing Rubino.

Mauricio Serna -- Analyst

Got it. If I take that into consideration, like it seems like the midpoint of the revenue guidance kind of implies like maybe just modest operating margin expansion. Is that the right way to think about it?

Jared A. Poff -- Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Yes. I think that's spot on.

Mauricio Serna -- Analyst

Understood. Thank you so much.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Doug for any closing remarks.

Doug Howe -- Chief Executive Officer

I'd like to end where I started by again just expressing gratitude to the DBI team for their continued hard work and dedication, and thanks to all of you who joined us today. We look forward to continuing to update you on our progress as we advance through the year. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Dustin Hauenstein -- Senior Vice President, Finance

Doug Howe -- Chief Executive Officer

Jared A. Poff -- Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Mauricio Serna -- Analyst

Jared Poff -- Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

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