Designer Brands Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Mar 2021

[Operator:]

Good day, and welcome to the Designer Brands, Inc. Fourth Quarter and Fiscal Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stacy Turnof with Edelman. Please go ahead.

[Stacy Turnof:]

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week and 52-week periods ended January 30, 2021 to the 13-week and 52-week periods ending February 1, 2020. 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 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 Roger Rawlins, Chief Executive Officer; and Jared Poff, Chief Financial Officer.

[Roger Rawlins:]

Good morning, and welcome to Designer Brands fourth quarter of fiscal 2020 earnings call. Thank you everyone for joining us today. We hope you and your loved ones are continuing to stay safe and healthy. Once again, we'd like to express our sincere gratitude to our employees at every level for their dedication to our company and our customers during this time. As a token of our appreciation, we paid a special bonus to all eligible associates during the first quarter, including our hourly store associates. We are always focused on retaining best-in-class talent, especially during this challenging time. We're grateful for our team members and especially our field associates, who have continued to interact with our valued customers on a regular basis. All our associates have shown resilience and fortitude throughout the pandemic, and we are incredibly proud of their hard work. Turning to our business, as we anticipated, challenges in the fourth quarter continue, but we are seeing sequential improvement. Our store protocols remain in place, including our universal mask requirement, sanitizing stations and strict social distancing within the stores. Store traffic remains depressed, especially in geographies that continue to experience more stringent shutdowns than other areas, but ultimately, we are focused on what we can control. As we increasingly move to organize ourselves around our customers, top areas of attention include, number one, continuing to pivot our assortment to athletic. We continue to believe that we remain well positioned to capture market share in an area where we have been historically under-penetrated. Number two, giving the customer what they want to buy through prioritization of our top 50 brands. These are brands we know our customers love and as such require fewer markdowns and promotional activity. And three, setting ourselves up for success as the market begins to recover. We are improving our digital capabilities to meet the customer where they are and have recently hired a new Chief Digital Officer to lead that charge. We also have our Camuto teams at the ready for when we see us to sustainable shift in customer demand for dress and seasonal footwear, while simultaneously actively protecting our new market share in athletic. We've outlined these priorities in more detail in our fourth quarter infographic on our Investor Relations site. These are priorities that we believe will help us to be successful in the near-term. Long-term, we're taking inventory of our assets and capabilities, aligning on our assumptions regarding customer preferences and macro trends into the future and developing a roadmap to maximize our potential as we move ahead. Playbook we used in 2019 is no longer as relevant in a post-COVID world. And we will maintain our nimble approach, meeting the customer where they are. We look forward to sharing more with you in the coming quarters.

[Jared Poff:]

Thank you, Roger; and good morning, everyone. The trend of the sequential improvement continued in the fourth quarter, setting year-to-date high watermarks against last year's performance across a number of key metrics even as we continue to be challenged by the impact of COVID-19. We are cautiously optimistic as a vaccine rollout continues and infection rates are decreasing, but it will take time before our customers can feel comfortable regularly socializing once again. First, I want to walk you through our fourth quarter and full year results, then I'd like to discuss how we're thinking about 2021. Please also note the financial results that we will reference during the remainder of today's call exclude certain adjustments recorded under GAAP, unless specified otherwise. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. In the fourth quarter, we continued to execute against the near-term priorities that we spoke about in the second and third quarter. This strategy has been working and we have seen success in our business pivots. In the fourth quarter, we had our best comparisons versus the same period in 2019 across sales, gross margin, operating expenses and operating margin. Entering the New Year, we remain conservatively postured as we wait for the market to recover and for consumers to return to a more normalized social setting. We believe that we are positioned to act swiftly as soon as we see signs of a sustainable recovery. Moving on to our results. For the fourth quarter, sales decreased 26.6% to $609.4 million, which included a $12.3 million in intersegment revenue that is eliminated in consolidation. This was the best quarterly sales performance versus 2019 that we experienced in 2020. For the full year, sales decreased 36% to $2.2 billion. For the fourth quarter, total comps were down 20.1% versus last year's 0.7% increase, a sequential improvement from the down 30.4% in the third quarter. For the full year, total comps were down 34.2% compared to last year's 0.8% increase. For U.S. retail, comps were down 19.7% during the fourth quarter versus down 0.3% last year. This was a material improvement from the down 31.9% in the third quarter. Fourth quarter comps were the best that they've been since the onset of COVID-19 and were led by the pivot to athletic footwear, a category in which we are historically underpenetrated. Store traffic improved throughout the quarter with November at a down 42%, December at a down 35% and January at a down 34%. For the full year, U.S. retail comp sales were down 34.9% compared to up 0.3% in the prior year. As we have pivoted our business to higher penetrations and athletic and kids footwear, we've seen increased strength in both women's and men's athletic and kids versus last year. We saw athletic comps up 19% and kids comps were up 4% versus fourth quarter last year. This contrasts the comp performance we saw in dress, which was down 61% versus fourth quarter of 2019, driven by a lack of social gatherings and traveling, as well as the continued trend of working from home as a result of the continuing impacts of COVID-19. As a reminder, the dress category accounted for 16% of our sales in the fourth quarter of 2019 and was only 8% in the fourth quarter of this year. We look forward to that piece of the business recovering in the back half of 2021 and beyond. As customers continue to transition their spending preferences to online, we saw continued strength in our e-commerce platform. Digital demand and U.S. retail for the fourth quarter continued to outperform our store demand and was up 26% on top of a strong 15% increase last year and represented 43% of total demand versus 28% last year. Turning to Canada, comps were down 27.6% in the fourth quarter compared to up 10.1% in the prior year's fourth quarter. For the full year, comps were down 26% compared to up 7.2% last year. Although sales continued to be negative, we saw strong digital growth of 113% compared to the fourth quarter of 2019. COVID-19 lockdowns and greater capacity restrictions negatively impacted our store performance, especially in Ontario, which represents 42% of our traditional store sales where stores were closed for part of December and January. These locations just reopened a few weeks ago, but subsequent temporary emergency break closures enacted by the local governments in response to rising infection rates are impacting the first quarter. Let's turn to our Camuto Group, which produces almost exclusively seasonal and dress product and thus remains in a very challenged position. As a result, we cut that production by 40% in the fourth quarter compared to 30% in the third quarter. We are expecting production to be down 15% in the first quarter as compared to 2020 levels. Please note first quarter 2020 production was based on pre-pandemic orders, so a 15% reduction is actually a healthy quarter-over-quarter improvement. We expect to see production begin to ramp back up throughout 2021 as demand for the dress and seasonal categories recover. Our ability to quickly turn on production is a key competitive advantage to our U.S. retail business, allowing us to remain conservatively postured today focusing on athletic and kids with the capability to swiftly pivot into high quality and higher margin dress and seasonal product produced by Camuto once we see signs of a sustainable recovery. Total net sales from Camuto, including sales to DSW, were $52.2 million in the fourth quarter, down 49.5% versus last year. Wholesale sales were $41.3 million in the fourth quarter versus $82 million last year, including sales to our retail segments, which totaled approximately $10.1 million versus $13.2 million last year. Commission income decreased 46%, including income earnings from our own retail segments on exclusive brand business, which totaled $2.3 million in the quarter. While our consolidated gross profit decreased $70.9 million to $135 million in the fourth quarter versus $205.9 million in the prior year continuing to COVID related deleverage, gross profit is another metric we saw the best comparative performance versus prior year. Consolidated gross profit for the full year decreased $688.4 million to $311.2 million compared to $999.7 million in the prior year. Gross margin exceeded our expectations in the fourth quarter, driven by better-than-expected sell-through of seasonal inventory that required fewer markdowns. The decline in gross profit was primarily the result of significantly reduced customer traffic in the store due to the continuing impact of COVID-19 and the resulting deleverage on our fixed occupancy and related expenses, leading to our consolidated gross margin rate decreasing 260 basis points to 22.2% in the fourth quarter versus 24.8% the prior year. For the full year, consolidated gross margin decreased 1,470 basis points to 13.9% compared to 28.6% in 2019. At our U.S. retail segment, similar to Q3, we delivered merchandise margins that were above last year by 40 basis points, demonstrating the success of the assortment pivots we've made since the onset of COVID. This improvement helped buffer the occupancy and fixed cost deleverage of our store infrastructure and increased shipping as our customers continued to favor touch-free shopping via our digital channels. In the U.S., gross profit was 22.4% in the fourth quarter versus 23.4% in the third quarter. We also wanted to point out an update as we work towards our resolution following the ransomware incident experienced at a third-party vendor in October. We are currently navigating the insurance process and recorded and initial recovery of $3 million in the fourth quarter, which is reflected in gross margin. This represents a partial recovery and the full claim is still being aggressively negotiated. Canada gross margin in the fourth quarter was 15.2%, a decline of 1,030 basis points versus last year, materially impacted by the renewed COVID store lockdowns instituted by the government, which resulted in higher shipping expenses and even more pronounced occupancy deleverage. We are very happy that we leveraged our award-winning omni infrastructure in Canada prior to the onset of COVID, which has allowed us to navigate this unprecedented time to the best of our ability. For the full year, Canada gross margin was 15.7% compared to 32.1% in the prior year. Camuto's gross margin rate for the fourth quarter was 22.6% versus 20.2% last year due to substantially better inventory positions year-over-year. For the full year, gross margin was 14.6% compared to 25.5% in the prior year. The substantial drop in margin rate was related to deleveraging of our fixed royalty expense and additional markdowns to exit canceled orders due to COVID. I want to briefly revisit our inventory strategy for the early part of 2021 and address how we are executing our plan for spring. We ended the quarter in solid shape. As a result of our strong inventory controls, our inventory was down 25.2% in total, which was generally in line with a sales decline of down 26.6%. On a unit basis, DBI inventory was also down approximately 25% to last year. With the continued lack of visibility to COVID-19 recovery, we have initially postured our inventories such that spring of 2021 will look similar to fall of 2020. We are not planning for materially increased demand in dress or seasonal footwear but have taken the necessary steps to ensure we have maximum flexibility to lean into those categories if demands return earlier, especially with our Camuto Group being at the ready. Moving to operating expenses, I would first like to echo Roger's sentiments in thanking our associates for all of their hard work during these unprecedented times. The bonus is extremely well deserved and we look forward to building through the recovery together. Our talent is our most valuable asset and ensuring we have committed and passionate personnel in every part of the business is crucial for our future success, especially during times of high volatility. Q4 operating expenses, like sales and gross profit, delivered our best quarterly SG&A rate of 2020 compared to 2019. Total adjusted SG&A in the fourth quarter was down 9.6% to $195 million versus last year. For the full year, total adjusted SG&A was down 13.1% to $744.6 million compared to last year. Given this significantly lower sales base, our SG&A rate for the fourth quarter was 32% of net sales, above last year's level of 26%, but this has sequentially improved over the last three quarters. Depreciation and amortization totaled $21.9 million in the fourth quarter as compared to $22.4 million in the prior year. Adjusted operating profit for Designer Brands was a loss of $57 million in the fourth quarter versus a loss of $7 million last year. For the full year, adjusted operating loss was $424.1 million compared to an operating profit of $152.8 million last year. As previously mentioned, these results exclude certain adjusted items, namely integration and restructuring expenses, impairment charges and a gain on settlement as shown on the non-GAAP reconciliation found in our press release. We had $8.7 million of interest expense during the fourth quarter compared to $1.4 million in the prior year. Interest expense for the full year was $23.7 million compared to $7.4 million in the prior year. Moving on to taxes, our effective tax rate on an adjusted basis was 41.2% in the fourth quarter versus 7.1% last year. For the full year, the rate was 37.1% in 2020 compared to 24.7% in 2019. As we have mentioned every quarter this year, our tax rate has become extremely volatile as we have been heavily impacted by the CARES Act tax relief measures. We have revised the treatment of certain adjustments to GAAP by, one, removing the immaterial adjustments related to net COVID-19 costs and credits and amortization of intangible assets; and two, including an adjustment to remove the impact of valuation allowances against deferred tax assets, which we believe provide a better measurement for the performance of the business going forward. As a result of these changes, we have also recast the prior period adjustments and referenced measures. Please refer to our press release for a reconciliation of our adjustments. Finally, we recorded a $149.8 million income tax receivable, reflecting the expected material cash refund we anticipate receiving in fiscal 2021 as allowed under the CARES Act. Total weighted average diluted shares during the quarter were 72.4 million compared to 71.8 million last year. For the quarter, we reported a net loss of $134 million or $1.85 loss per diluted share, including net charges of $1.32 per diluted share from adjusted items primarily related to impairment and restructuring charges and the valuation allowance established against deferred tax assets versus a net loss of $7.6 million last year or $0.11 loss per diluted share. Excluding the adjusted items, adjust EPS was a $0.53 loss per diluted share for the fourth quarter of this year. For the full year, Designer Brands reported net loss of $488.7 million or $6.77 loss per diluted share compared to $94.5 million or $1.27 per diluted share last year. Excluding the adjusted items shown in our non-GAAP reconciliation, adjusted EPS was $3.90 loss per diluted share for fiscal 2020 compared to $1.47 per diluted share for fiscal 2019. In 2020, we prioritized bolstering our liquidity position and increasing our flexibility, given the volatile and uncertain conditions. We are pleased with our balance sheet position ending the year with $59.6 million of cash and investments versus $111.5 million last year and had $294.7 million available to draw on our revolving credit facility, bringing our total liquidity to just over $350 million, which exceeds the same period last year by over $35 million. We ended the year with $343.8 million of debt versus $190 million last year. During the quarter, we closed five stores in the U.S. with no new stores, resulting in a total of 519 U.S. stores. In Canada, we closed one store with no new stores, ending the quarter with 144 stores. As store traffic remains constrained and consumers continue choosing to shop digitally and forego a trip to the store, we are closely evaluating our existing store infrastructure. On a preliminary basis, we have identified approximately 65 U.S. stores that would make sense to close upon their natural lease expirations, primarily over the next four years, including approximately 24 stores that we currently view as eligible foreclosure in 2021. It should be noted that the current list of planned store closures will be different than what actually materializes over time. First, we anticipate more willingness to negotiate from landlords once we have a lease expiration on the horizon. Additionally, as with any projection, future sales demand will be different than what is currently modeled. Some stores will be stronger while others will be weaker. We firmly believe that our markets are strongest when we service the customer with engaging and convenient store experiences while also providing a seamless and integrated top tier digital experience, but we also have to recognize changes in productivity and expense structures as consumers continuously evolve their shopping behaviors. We do anticipate opening eight DSW stores in the U.S. in 2021 that we're contractually committed to prior to COVID. We were successful in pushing the opening of these stores out of 2020 but we have met resistance from the landlords and pushing them out any further. In Canada, we are currently planning on closing three stores and opening three stores in 2021. However, we continue to evaluate our store fleet in Canada as well and could see additional store closures even in 2021 as leases come up for renewal. Turning to guidance. We continue to believe that the overall economic environment is still too volatile to provide guidance at this time. However, we are pleased with what we have seen so far this year and remain cautiously optimistic that the vaccine rollout and the return of consumers being comfortable shopping in stores and socializing in general will continue at an accelerating clip. All that being said, we are also very aware that many factors are at play, which could continue the volatility, including renewed or varied governmental restrictions across parts of the U.S. and Canada and pressure in the global supply chain grappling to return to some sort of semblance of normalcy. Let me speak to some of our assumptions about 2021. At our U.S. retail segment, we are anticipating a continued acceleration of our recovery with spring sales stronger than fall and a smaller operating loss in spring than was generated in fall. One important item to remember is that with the closure of Stein Mart in fall of last year, our ABG business has been eliminated for spring. This business generated nearly $30 million in sales and approximately $6 million in gross profit with basically no operating expenses in the fall. This EBIT contribution will not be carried into 2021. In Canada, though our business was performing better than U.S. retail for most of COVID, renewed government shutdowns have reversed that trend. And we are currently anticipating that business to be noticeably lower in sales and gross profits with a partial recovery but certainly not complete offset in expenses. And finally, Camuto. We brought production down over 40% in the fourth quarter and finished liquidating the last of the pre-COVID inventory in 2020. And as such, we expect that business to also be materially below fall and sales and gross profit due to reduced inventory as well as the impact of exited brands and lost customers who did not make it through the pandemic, partially offset by a healthy reduction in operating expenses, given the actions we have taken that we discussed earlier. On a positive note, we have seen initial interest in accelerating wholesale purchases earlier than normal as retailers hope to procure a product in the face of the ongoing global supply chain disruptions. As Roger mentioned, we are planning our overall inventory conservatively with a good amount of flexibility and liquidity available to deploy as these early reads accelerate. As the recovery unfolds through the course of the year, we do anticipate making net inventory investments. With that, we will open the call for questions. Operator?

[Operator:]

The first question comes from Steve Marotta with C.L. King & Associates. Please go ahead.

[Steve Marotta:]

Good morning, Roger and Jared. I just have a color on...

[Roger Rawlins:]

Good morning, Steve.

[Steve Marotta:]

Two quick questions a little bit, one, a little more high level, the other a little more detailed. So, on the controlling what you can topic, can you talk a little bit about Camuto's ability to pivot for DSW stores when things get better? Can you quantify the time, clearly I'm sure there are designs that are already in progress. There are items that are teed up. So from the point in time where you see demand that could be filled as a point in time that you can fill that demand. Can you talk a little bit about that turnaround time and how you plan to accelerate when we reopen?

[Roger Rawlins:]

Thanks, and Steve, thanks for the question. For us, the big thing is, like you had said, there are some key styles that have been in our assortment for an extended period of time that give us the ability to react to. And we were joking the other day. We actually, for the first time in a year, saw addressed style in our top 25 week in and week out, which was pretty exciting for us. And so getting after some of those kind of items is where we're really, really focused. But in general, you're talking earliest is probably eight to 10 weeks on small quantities, but a large quantity you're talking probably roughly 12 weeks to really be able to impact in a meaningful way.

[Steve Marotta:]

And this is a little crystal ball, but to the extent that you can talk a little bit about back-to-school penetration of kids, the increased penetration of dress, and when we reopen, there could be this sense of optimism. Are you planning for any of that or will you insist on seeing the demand first? Maybe you could just talk about your planning process.

[Roger Rawlins:]

I think, we have continued to have, as we described in the script, sequential improvement, and we have that built into our plan, especially kids. And the success we're having the kids is phenomenal. Again, the comps outpacing the market significantly. And we're seeing that as we've turned the corner into 2021. So we know we can get after that business in a meaningful way. So we will be much more aggressive in those categories where we are having success today in dress. Until the social occasion things, we don't want to go out and really see that happening. We don't get to go take crazy inventory positions on those. I'd rather much be in a chase mode around that piece of the business.

[Steve Marotta:]

Okay. One last issue we're hearing a lot about port issues, supply chain issues currently, is that affecting your business at all or is it just clearly again the headwind to store traffic trends that are at issue?

[Roger Rawlins:]

No. I'm really proud of our team in how we've responded, whether it was pulling up orders, and to-date, we haven't felt any significant pain but we're also monitoring every single day. Jeff, who runs our supply chain, we are talking every single day about the status of orders, how much is sitting at the port, what we're doing to accelerate receipts. But knock on wood, no material impact to our business as we sit here today.

[Steve Marotta:]

Really helpful. Thank you.

[Roger Rawlins:]

You're welcome.

[Operator:]

The next question comes from Jay Sole with UBS. Please go ahead.

[Jay Sole:]

Great. Thank you so much. Roger, kind of question just about the Camuto business. Can you give us a sense of what the changes that you've made, what the sales and profit would look like on a normalized basis now versus, say, fiscal 2019 when I think the business generated about $450 million in sales?

[Roger Rawlins:]

Jay, we're not ready to give that kind of direction. And I would say, I think, the changes we've made allow us to get the business focused on the three big brands – our big national brands as well as the exclusive brands for DSW. And I think we've positioned a business that, as we see turnaround, we are in chase mode. And I think the team is really excited about the progress.

[Jared Poff:]

Jay, this is Jared. One thing I would add to that is, if you go back to our 2019 Investor Day, we talked a lot about the rationale behind the Camuto acquisition. And as it always has been, it's been to increasingly become the vertical production house for our retail business while retaining key wholesale accounts and key brands. We've taken not only 2019 but certainly 2020 as an opportunity to get us further down that path by exiting brands that were too small to continue to make investments and then obviously you saw a natural pairing of some of the customers. And if you look at what their production will ultimately be in a normalized way, I think you're going to see half or a majority or greater intended for our retail distributions, again with select key wholesale accounts and a couple brands that we support for outside DBI.

[Jay Sole:]

Understood. Got it. Thank you. And if I could ask one more, you mentioned that the top 50 brands accounted for 71% of sales in the quarter. What would that stat look like if it considered only non-athletic wear brands, like is it helping the business to sort of consolidate more of the inventory on the top, say, dress and other non-athletic wear brands.

[Roger Rawlins:]

Yes, Jay, that's exactly it. That's the strategy. Instead of carrying from 500 to 600 labels in non-athletic, really being able to isolate that, let's just say, roughly to 35-ish kind of major brands of which our exclusive brands are playing in that. That's the goal. It does not mean that we will not carry those labels as an organization, they will be available digitally. But for us to take our shareholder money and put it into those labels and not see the kind of return that we know we can generate through investments in these other brands, that just – that wouldn't make sense. It doesn't make sense. And that's the approach that we're taking.

[Jay Sole:]

Got it. Okay. Thank you so much.

[Roger Rawlins:]

You're welcome.

[Operator:]

The next question is from Gabe Carbone with Deutsche Bank. Please go ahead.

[Gabe Carbone:]

Hi. Good morning. Thanks for all the color today. So you mentioned you're seeing positive. So you mentioned you're seeing positive signs and seasonal sandals. Is there anything else you could share with us quarter-to-date? And then, you also mentioned you're seeing a strong start to the marple season. Just wondering if you can elaborate on that and kind of how you view overall sales transpiring versus 2019? Thanks.

[Roger Rawlins:]

Thanks, Gabe. As we talk about the start of the year, it's really referencing 2019 is the approach that we have to take, given how challenging it was in 2020. But out of the gate, as Jared had mentioned in the script, we get hit with some weather in February but we've more than made up that ground and we feel good about how we've positioned our inventory, the distortions we've made and the trends we're seeing. And for us, day in and day out, we win or lose as people get vaccinated and decide to walk into one of our physical locations. And out of the gate, we're happy with the progress that's being made there. Again, sequential improvement from where we were in 2020.

[Gabe Carbone:]

Got it. So kind of given your sales expectation for the first half, just was wondering if you can elaborate on how you're thinking about expenses for the year. And if there's any, potential buckets where you're seeing being cost out?

[Jared Poff:]

Yes. If you kind of look at the big actions that we took in 2019, we are not reversing those. So, we had the very sizable reorganization shift happen in August, and that was across everywhere, but Canada – or excuse me, Camuto. And then we took our expense – organizational changes in Camuto at the end of the fiscal year. So, those two big pivots, I would say, are not anticipated to come back and will continue in a conservative posture. We are looking at where it makes sense from a marketing standpoint and Roger talked about our marketing investment, our digital marketing investment, and it's paying off in spades. So that's probably going to continue. And then, we are also focusing our continued efforts on the occupancy expense. So that doesn't flow through SG&A, but it is fixed cost leverage. And that's an area that we think will have – will make some meaningful progress as well.

[Roger Rawlins:]

Hey, Gabe, this is Roger. I think it's important that we continue to operate the business from an expense standpoint, the way that we did in 2020. And then, as sales start to improve, we see a fantastic waterfall to the bottom line. And I have to go back two years ago when we were having amazing success pre-pandemic. And the beauty of this model is leveraging that fixed cost base with occupancy and our store payroll. Both of those things add significant bottom line improvement as sales turnaround.

[Gabe Carbone:]

Got it. Thank you so much.

[Operator:]

The next question is from Tom Nikic with Wells Fargo. Please go ahead.

[Tom Nikic:]

Hey. Good morning, guys. Thanks for taking my question. I wanted to ask on the gross margins. I believe you said that your merchandise margin was up in Q4 in the U.S. retail segment and that all of the decline was driven by occupancy deleverage. So when we kind of look out to spring 2021 with the inventories being really, really tight and I know that the compares get lunky, but should we be assuming that your merchandise margin levels are pretty healthy in the spring? And if you're kind of comparing it to spring 2019, if the gross margins are below 2019, it's because of – it's purely a function of deleverage rather than markdowns or discount or anything like that?

[Jared Poff:]

Yes. Thanks, Tom. And without trying to get too deep into the guidance that we're not giving, what I would say is, I think that that trend is something that we would expect to stabilize and pretty much be in place. The one headwind is that obviously athletic has a smaller IMU component on the flip side because it's in such high demand, we're not having to do the promotions on the markdown. So overall, I think that that posture is something that should continue into the recovery. And just for one small piece of correction, the gross profit had not only the deleverage on the occupancy, but also shipping runs through gross profit as well.

[Roger Rawlins:]

Yes, Tom, this is Roger. One thing I have to do as a commercial for my merchant planning and marketing teams at DSW because with headwinds of selling athletic and kids product, which have historically had significantly lower margin rates, the team has found a way, whether it'd be how they've managed the inventory, whether it'd be the items they're investing in or whether it'd be the kind of promotional things we're doing, the team found a way to still grow margin rate. And I’m really, really proud of our team for doing that. And I know some of them are on this call, so thank you.

[Tom Nikic:]

Got it. And just a quick follow-up, if I can. Just a quick clarification. I think you gave some comments about spring 2021 relative to fall 2020 at the different segments. Were you talking about like total dollars when you were talking about sales and those profits and things like that, or were you talking about like the growth rate, I guess, relative to pre-COVID levels?

[Jared Poff:]

On the initial posturing for the business, it’s roughly – and on a consolidated basis, it’s roughly $1 are pretty much the same for Q1 and Q2 versus Q3 and Q4. As we mentioned, we’re actually running more favorable to that year-to-date. There’s a lot of still a big holiday business for us to go. These are our next six biggest weeks of the quarter of the season. So we are cautiously optimistic, but that’s how we initially planned it.

[Tom Nikic:]

Understood. Thanks for the color and best of luck recovering from the pandemic this year.

[Jared Poff:]

Thank you.

[Operator:]

The next question is from Dylan Carden with William Blair. Please go ahead.

[Dylan Carden:]

Yes. Thank you very much. Just curious if we could maybe touch on, if the year plays out kind of as you’re anticipating it, how much Camuto product for DSW retail could be exclusive? Where you would land sort of the back half? And then how much for 2022 would be private label? And if there’s any update just on kind of when you anticipate some of the earnings contribution, particularly after some of the cuts you’ve made to the cost structure this year, that’d be helpful. Thank you.

[Roger Rawlins:]

Yes, Dylan. As we’d mentioned before, we’re looking to grow those top 50 brands by about 50% and obviously the exclusive brands are embedded in that. So we’re going to let that business continue to grow because we know we have upside as Jared had referenced when we acquired the business, what we had pointed to. So we think we’ve got lots of headroom to continue to grow our exclusive brands. I don’t ever envision it being more than roughly 30% of our non-athletic assortment. But if the customer is going there, we’re going to go with him and her. And really excited for a couple of our brands that we’re going to launch as men’s this year so that having it both men’s and women’s allows us to actually go market and build that as a brand, rather than just a label.

[Jared Poff:]

And from the contribution standpoint, again, it’s too early to give that kind of color. But what I would tell you is, as I mentioned earlier in one of these questions, I think we are at the point or pretty dag-gone close, where about half or more than half of what Camuto produces is for the benefit of designer brands and our retail establishment. So, I mean, when you look at that and you look at all of the intercompany accounting, it really become – for that piece of their business, that’s a cost center piece that’s built into the much higher margins that you get out of selling your own goods. But I do expect that the select number of customers and the select number of brands we do produce will eventually become an EBIT contribution positive for the non-DBI business. I just can’t tell you exactly when that is right now. We’re not giving that kind of color.

[Dylan Carden:]

Understood. And then just one other one, if I could. The athletic, online piece of the business, that’s been performing well. Is that coming from new customers or is that largely just sort of a shift in wallet share with the loyalty base?

[Roger Rawlins:]

No, Dylan, it’s a combination. I mean, obviously, we have a lot of customers that have made the decision to not buy dress, but have transitioned into the athletic athleisure space. But at the same time, we added over 900,000 customers. And as we look at that customer base, it skews significantly younger and it’s a different consumer than the one we had pre-pandemic. So that’s a very, very positive thing. And in the digital space, we grew our athletic piece of the businesses. This is on that infographic that you can find on our investor website, but our athletic business online grew 86%. And we watch out you guys value brands that or let’s just say folks that sell athletic product, and I haven’t found anyone that ran those kinds of comps. So I’m really, really proud of the pivot. Is that our long-term desire to be that heavily penetrated? Honestly, no. We love the fact that we’ve acquired that customer. And as we get back into social occasioning, we’ll be able to retain the one we have in athletic now and get back into our customer that buys dress and seasonal in a big way. So again, we feel like we are uniquely positioned as this world turns around to be able to take advantage of what we think is next.

[Dylan Carden:]

And of those – thank you. And of those 900,000 sort of added new customers, are you seeing kind of similar signups for the loyalty program? Or is it just – it’s going to take a while to see it?

[Roger Rawlins:]

It’s not as greater penetration as what we have had in the past, simply because our signup isn’t as high when you buy online as when you buy in a physical store and that stuff, that’s why we had to go get a Chief Digital Officer that can make that change. But we still have the ability to communicate to those 900,000 people.

[Dylan Carden:]

Awesome. Understood. Thank you for all the color.

[Roger Rawlins:]

All right. Thanks, Dylan.

[Operator:]

The next question is from Sam Poser with Williams Trading. Please go ahead.

[Sam Poser:]

Hi, good morning. Thank you for taking my questions. I just got a couple more. One, what was the athletic inventory levels at the end of the quarter relative – you had a good sales force there.

[Roger Rawlins:]

Yes. They are in line with selling is what I would say in general sort of, again, the investments we’ve made there are helping to drive the business, but yes, in line with our selling.

[Sam Poser:]

Thanks. And then what percent of the sales, digital sales, I guess, that you do are drop ship right now?

[Roger Rawlins:]

Same, it varies by week, but it’s roughly in the teens as a percentage. And we anticipate that that can grow materially as – just actually had a meeting with our team yesterday, talking about some of the new technology things we’re putting in place to make it easier for us to get product available to the drop ship program, which I’m really excited about.

[Sam Poser:]

Thanks. And with that, I mean – all right, well, I’ll leave that alone. Also you talked – what is the status of your business with Dillard’s right now with the Camuto Group?

[Roger Rawlins:]

We have a great relationship with the Dillard’s organization. And both Dillard’s and Macy’s and Nordstrom’s, and those folks are our key accounts that we’re leaning into with our major brands.

[Sam Poser:]

What about private? I mean, you’re the primary private brand provider per Dillard’s. Is that still the case?

[Roger Rawlins:]

We’re working with the Dillard’s organization to continue to figure out how we transition things that are in the best interest of both parties, Sam. That’s what I would tell you.

[Sam Poser:]

Okay. Thanks very much and good luck.

[Roger Rawlins:]

Thanks.

[Operator:]

The next question is from Dana Telsey with Telsey Advisory Group. Please go ahead.

[Dana Telsey:]

Good morning, everyone. Three quick things. As you think about the port congestion out there, is there any impact or how do you see it in the half versus second half of the year as you plan your inventory? And then two other things on how big do you think can athletic become a piece of the business going forward? And how does that progress? And lastly, any update on your store closure program? Thank you.

[Roger Rawlins:]

Thanks, Telsey. I think – or Dana. I’d say on the port, we’re obviously thinking the back half will be in a much better situation than the first half. As I said earlier, I think what I’m really proud of is how our team has managed through this, whether it’s pulling up orders, how we’ve crossed docked items so that we can get it out to our stores faster once it hits our buildings. So we’ve actually done a really nice job of managing through this, doesn’t mean there still won’t be challenges as we go through the spring season, but we’re sort of anticipating there will be some cleanup there as we get through toward the fall season. As far as percentage athletic, as I had mentioned, the athleisure space, 55% of the total industry, our penetration was 30%. We do not anticipate getting to 55%, but we need to go where our customer is going and to put your head down and continue to make dress product that you can’t sell. Remember, our dress product was down 61% in the fourth quarter. That’s not a positive sign if you want to just be a dress house. So we’ve got to continue to be nimble on our feet and go where our customer goes. Will it ever be where the total market is? I do not anticipate that at all. But until he and she come back to us for the social occasion, this is the game that we’ve got to play. And then as it relates to the fleet, I think we’re going to continue to, as Jared had said, work with our landlords to find ways to manage our fleet, but I’ll give you an example of why. I’ve been very reluctant to talk about stores or dot-com demand. You could take a snapshot of the store business and say in any given day or week, the business is down 20%. But then when you add in the fact that the store is acting as a Buy Online, Pick-Up; Buy Online, Ship to Store fulfillment location, you take into account that our warehouses fulfill more than half of our digital demand and you add all that up. Our stores, actually from a pure contribution standpoint of demand, they’re actually positive to the prior year. So those are reasons why we’ve got a really – as we’re analyzing our fleet, look at it through the lens of the customer, doesn’t mean we don’t need to negotiate better rates around occupancy, which we have to, and we’re making progress on that. But we were really proud of the fact we have 525 points of fulfillment in the U.S. that are within 20 minutes to 70% of the population. And we want to keep that as close to that as we can.

[Dana Telsey:]

Thank you.

[Roger Rawlins:]

Thanks, Dana.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Roger Rawlins for any closing remarks.

[Roger Rawlins:]

Thanks everybody for participating today. Again, I just want to reiterate a couple of points. One, we stabilized our business and we expect to – and have experienced the sequential improvement to top and bottom line. The second thing, we’ve made this pivot to athletic and kids that we really do believe is meeting our customers’ demands as we sit here today. We’re going to leverage what I would describe as this new found strength in athleisure. And when you add in our historical success of dress and seasonal, we think we are set with a foundation that makes us stronger coming out of this pandemic. And I’m excited for the fact that we are ready as the market recovers and have the flexibility both in our open to buy, and then having a Camuto organization that can get after seasonal and the dress category to help fulfill the needs of our customer. You add all those things up, and I’m really, really proud of how we’ve made it through this and how we’re positioned for the future. So thanks everybody for your time.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.