DBI earnings name for the interval ending September 30, 2024.
Picture supply: The Motley Idiot.
Designer Manufacturers (DBI 4.75%)
Q3 2024 Earnings Name
Dec 10, 2024, 8:30 a.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Contributors
Ready Remarks:
Operator
Good morning and welcome to the Designer Manufacturers third quarter 2024 outcomes convention name. All contributors might be in a listen-only mode. [Operator instructions] After at present’s presentation, there might be a possibility to ask questions. [Operator instructions] Please additionally be aware, at present’s occasion is being recorded.
At the moment, I would like to show the ground over to Dustin Hauenstein, senior vp of finance. Please go forward.
Dustin Hauenstein — Senior Vice President, Finance
Good morning. Earlier at present, the corporate issued a press launch evaluating outcomes of operations for the 13-week interval ended November 2, 2024 to the 13-week interval ended October 28, 2023. Please be aware that the monetary outcomes that we are going to be referencing through the the rest of at present’s name exclude sure changes recorded below GAAP until specified in any other case. For an entire reconciliation of GAAP to adjusted earnings, please reference our press launch.
Moreover, please be aware that remarks made about future expectations, plans, and prospects of the corporate represent forward-looking statements. Outcomes could differ materially because of the varied elements listed in at present’s press launch and the corporate’s public filings with the SEC. The corporate assumes no obligation to replace any forward-looking statements. Becoming a member of us at present are Doug Howe, chief government officer; and Jared Poff, chief monetary officer.
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 tricky 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 setting. Whereas we noticed demand under expectations throughout most of our classes, our boot enterprise, whereas already deliberate down roughly 15%, was down 27%. Nonetheless, based on 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 costume, luxurious, athletic, and children. And our prime eight manufacturers, seven of which had been athleisure, continued to prepared the ground. As we navigate by the rest of the 12 months, we’re conscious that pressures are more likely to proceed.
As such, we are going to proceed to give attention to these initiatives inside our management and lean into areas the place we’re profitable and the client is buying. I’ll get into the technique in a second, however I wish to lengthen a honest thanks to our workers 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 degree.
This was primarily pushed by a damaging 2.8% comp in our U.S. retail section, pushed by the dynamics I mentioned earlier. Regardless of these exterior pressures, we proceed to see our strategic priorities yielding robust outcomes. In line with 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 costume 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 point.
In line with 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, subsequently 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. Because of the continued weak point we have seen, we have now 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 tip of the 12 months.
Our goal for the tip of This autumn 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 biggest 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 give attention to executing on these issues inside our management, I will briefly stroll by our efforts towards DSW’s three strategic pillars within the third quarter: reinvigorating our assortment, elevating our advertising and marketing, and enhancing our omnichannel buying expertise. Beginning with our assortment. Our prime 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 power 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 nicely, up triple digits. Excitingly, we additionally noticed a optimistic mid-single-digit comp in girls’s costume.
As we head into the vacation season, we have now additionally made investments in extremely giftable manufacturers, together with a number of that might be merchandised in our cozy store on the entrance of our shops. As I am going to 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 probably the most fascinating manufacturers for this time of 12 months. Transferring to advertising and marketing. Our means to amplify our developed assortment is extra important than ever, and our new chief advertising and marketing officer has hit the bottom operating.
We have had various 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 buying information to cater to the wants of scholars, mother and father, and academics 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 Tendencies that guided clients towards the trendiest kinds, from over-the-knee boots to the colour pink 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 shops, together with The Right this moment Present, U.S.
Weekly, and PureWow. Bettering 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 shoppers, and has improved our model consciousness rating with these key audiences.
Whereas we consider we’re early on in our journey and have extra room to enhance, these early indicators are encouraging. And eventually, bringing on a world-class model company, Crispin, as our new model technique companion, initiating strong work aimed toward elevating and reenergizing DSW model and enhancing general consciousness. To that finish, our efforts round our third pillar, to reinforce our omnichannel buying 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 web new buyer acquisition. To completely make the most of our omnichannel platform within the quarter, DSW leaned into being a back-to-school vacation spot, each on-line and, specifically, 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 crew has recognized that we had a major 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 should embrace a very reimagined queue line and several other updates to our gifting and impulse product choices that may solely be present in shops. This might be accompanied by artistic collateral to help a present information, key tendencies, prioritized manufacturers, and different related vacation messaging.
Now we have an action-packed client engagement plan that may showcase nice worth, prime tendencies, and the season’s finest 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 develop into 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 ordinary third quarter tendencies, with boots down double digits and sandal gross sales up practically 40%. On condition that typical boot-buying tendencies 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. Subsequently, we felt an outsized impression.
Much like the U.S., athletic and informal proceed to publish optimistic efficiency. Regardless of the break within the ordinary seasonality, the third quarter marked 9 straight months of market share good points in Canada, pushed by power in youngsters. This quarter, we opened two new Shoe Firm shops in Canada, bringing us to a web eight new retailer 12 months up to now, on prime of the 28 Rubino shops. Now, to our model portfolio section.
As referenced on prior earnings calls, our efforts to cut back prices, rightsize the group, broaden margins, streamline and simplify the way in which 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 larger over the long run. Successes in these areas led to a significant enchancment in earnings contribution from the section.
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 web gross sales for the quarter, continues to construct momentum as we broaden our distribution and lift product consciousness, supported by our enhance in advertising and marketing investments. Moreover, there’s loads of buzz across the operating class, and Topo is entrance and middle, driving the joy and providing clients extra consolation.
Jessica Simpson did nicely as we noticed power in our special day put on, with gross sales up 14%. As I conclude, I’m happy with the way in which our enterprise has continued to execute efficiently on our strategic priorities. We stay targeted on persevering with to create the correct 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 am going to 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 consider 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 steering. For the third quarter of fiscal 2024, web 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 section, 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 section 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. Complete gross sales had been up double digits because of the addition of Rubino places to our retailer base. Lastly, in our model portfolio section, gross sales had been up 18.5% within the third quarter. As a reminder, beginning this fiscal 12 months, we have now harmonized our method to how we transact enterprise between our model portfolio section and our retail segments.
This alteration resulted in roughly $15 million of year-over-year further gross sales for our model section within the quarter that will get eradicated in consolidation. We noticed notable power in our DTC websites, the place we have now been investing. Particularly, Topo.com delivered a triple-digit comp. The power of Topo, nonetheless, 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 prime 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 enterprise an expense effectivity initiative with exterior consultants.
Our companions have recognized various 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 look ahead to 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 web curiosity expense, in comparison with $8.8 million final 12 months. Greater curiosity expense is a direct results of the time period mortgage we put in final 12 months, in addition to larger rates of interest on our ABL.
We drew on our ABL within the third quarter as our crew 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 largest 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 web 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, largely pushed by the numerous lack of demand for seasonal footwear. Because of this, Doug famous that we have now pulled again additional on fourth quarter receipts for seasonal product to make sure we’re shifting right into a wholesome stock place by the tip 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.
Complete debt excellent was $536.3 million as of the tip of the third quarter. Earlier than I conclude, I wish to take a minute to debate our fiscal 2024 steering. By way of 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 stress, considerably dampened efficiency within the final two months of the quarter.
As we glance forward, we really feel it’s prudent to present you an replace on our expectations for the complete 2024 outcomes. As a reminder, our steering 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 challenge our fourth quarter as our strongest comp progress quarter. Ought to macro circumstances stay constant to what we’re seeing now, we’d anticipate web gross sales progress for the 12 months to be down low single digits, which contains the impression of the lack of the 53rd week, in comparison with prior steering of flat to up barely.
We might anticipate exterior wholesale gross sales in our model portfolio to be down low single digits, versus prior steering of flattish. Moreover, regardless of depressed gross sales ranges, we have now been producing bigger earnings, and the midpoint of our steering, 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 steering 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. At the moment, we want 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 targeted 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 at present comes from Dylan Carden from William Blair. Please go forward together with your query.
Dylan Carden — Analyst
Thanks. Jared, sorry when you talked about this, November tendencies or simply tendencies usually as soon as the climate form of cooperated, did you present that?
Jared A. Poff — Government Vice President, Chief Monetary Officer, and Chief Administrative Officer
Yeah. What we mentioned is what we’re — what the midpoint of our steering implies. And to be completely trustworthy, I might, you recognize, say it is indicated or knowledgeable by the November tendencies we’re seeing. And on the — on form of by the vacation, what we noticed was general demand barely under final 12 months, nevertheless it was distorted.
Shops had been really 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 under final 12 months. However gross margin {dollars} and charge, clearly, had been nicely above final 12 months, and we’re seeing that pattern proceed. So, our midpoint of the steering form of incorporates all of that.
Dylan Carden — Analyst
Nice. Thanks. After which form 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 mentioned 27%.
And also you care. And I assume type of the implied query in that’s, you recognize, is it type of a waterbed impact at this level the place you are form of seeing good points elsewhere however losses elsewhere and form of maintaining you at a web drawback place till you get the assortment in a greater type of combine?
Doug Howe — Chief Government Officer
Yeah. That is Doug, Dylan. Thanks on your query. You already know, we consciously deliberate the class down, as we talked about, 15%.
It was nearly double that lower. I imply, we’re going to be very strategic about persevering with to form of de-weatherize the enterprise clearly. So, you recognize, we’re nonetheless working by the extent of what that will appear like. Fourth quarter is definitely even a better p.c of our enterprise within the boot class, clearly, than Q3.
And, you recognize, we have now seen a little bit of a rebound with the climate as we transfer by the quarter. After which as Jared mentioned, 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 might 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 nicely. However once more, we will 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 type of overcorrecting for boots because the climate has turned I assume can be one thought.
Doug Howe — Chief Government Officer
No, we do not consider 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 means for subsequent 12 months close to 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 prime eight nationwide manufacturers, what are you seeing there? And likewise, when you talked about what was your quarter-to-date pattern? And likewise — and however, on the stability sheet, you noticed — you recognize, in money stream, you noticed like — you talked about you probably did your largest share repurchase of the 12 months. How are you eager about, you recognize, debt ranges administration contemplating that, you recognize, I assume, like, the enterprise has been somewhat bit extra challenged than anticipated?
Doug Howe — Chief Government Officer
Hello, Mauricio. That is Doug. Thanks on your query. I am going to take the primary two on the model efficiency after which quarter up to now, after which I am going to 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 whole. Actually happy with the work the crew has completed on actually going out to the relationships with these prime manufacturers.
Being conscious 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 expect that is a really considerate method.
Quarter up to now, as Jared mentioned a few moments in the past, is consistent with the steering that we’re offering. Once more, we noticed somewhat 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 nicely, 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 form of debt degree administration, you recognize, what we at all times take a look at is extra of a liquidity administration. We have two large working capital cycles a 12 months. We’re really on the money technology aspect of a type 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.
You already know, I might say, clearly, we wish to stay cautious as we simply take a look at the buyer setting out sooner or later. So, you recognize, we really feel like we have our capital construction in the correct place proper now however at all times have a watch on that. And definitely, additionally a watch 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 bear in mind, like, you had been very enthusiastic about, you recognize, new — simply having extra product out there from that model this 12 months than even whenever 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 web new optimistic for us. Now we have 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 women and gents, presently, in exhibiting 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 at present, and we look ahead to 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]
Period: 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
