8-K: Designer Brands Inc. Reports Mixed Q2 Results, Athleisure Category Outperforms

Designer Brands Inc. announced its second quarter 2024 financial results, showing a decrease in net sales but strong growth in the athleisure category.

Summary

• Designer Brands Inc. reported a 2.6% decrease in net sales to $771.9 million for the second quarter of 2024 compared to the same period last year.
• Total comparable sales decreased by 1.4%.
• Gross profit decreased to $252.9 million from $273.4 million, with gross margin at 32.8% compared to 34.5% last year.
• Reported net income attributable to Designer Brands Inc. was $13.8 million, or $0.24 diluted earnings per share, including $0.05 per diluted share from adjusted items.
• Adjusted net income was $17.1 million, or $0.29 adjusted diluted EPS.
• The company's athleisure category grew by 8% in the U.S. Retail segment, outpacing the overall market by over 4 percentage points.
• U.S. Retail sales outpaced the footwear market by 1 percentage point.
• The company repurchased 2.7 million Class A common shares for $18.0 million during the quarter.
• One store was closed in the U.S. and two stores were opened in Canada, resulting in 499 U.S. stores and 177 Canadian stores.
• The full-year 2024 net sales growth guidance was revised from low-single digits to flat to low-single digits.
• The full-year 2024 adjusted diluted EPS guidance was revised from $0.70 $0.80 to $0.50 $0.60.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to decreased sales, reduced profitability, and lowered guidance, despite some positive performance in the athleisure category. The company faces significant challenges and risks.

Positives

• The athleisure category showed strong growth, outpacing the market by over 4 percentage points.
• U.S. Retail sales outperformed the overall footwear market by 1 percentage point.
• The company successfully navigated the back-to-school season, particularly in the kids' category.
• The company continues to invest in its retail and brand businesses to accelerate growth.
• The company repurchased 2.7 million shares, indicating confidence in its value.

Negatives

• Net sales decreased by 2.6% to $771.9 million.
• Total comparable sales decreased by 1.4%.
• Gross profit decreased to $252.9 million, with a gross margin of 32.8%, down from 34.5% last year.
• Cash and cash equivalents decreased to $38.8 million from $46.2 million last year.
• Debt increased to $465.7 million from $331.0 million last year.
• Inventory increased to $642.8 million from $606.8 million last year.
• The full-year 2024 adjusted diluted EPS guidance was lowered.

Risks

• The company faces challenges from uncertain economic conditions, including potential recession, fluctuating interest rates, and inflationary pressures.
• The company must adapt to rapidly changing consumer preferences and fashion trends.
• Unseasonable weather and climate change could impact consumer traffic and demand.
• The company faces risks related to integrating recent acquisitions and maintaining strong vendor relationships.
• Cybersecurity threats and disruptions to IT systems pose a risk.
• The company's debt levels have increased.

Future Outlook

The company has updated its full-year 2024 guidance, projecting flat to low-single digit net sales growth and adjusted diluted EPS of $0.50 $0.60.

Management Comments

• This quarter, we further built on our track record of steady improvement as we continued to refine and refresh our strategic initiatives intended to accelerate our ongoing business transformation, stated Doug Howe, Chief Executive Officer.
• We saw sustained pressure on challenged categories such as dress and seasonal in the second quarter, which we were able to partially mitigate through providing a greater selection of athletic and athleisure brands in our assortment.
• We continue to believe that our investments across our retail and brand businesses will help us to accelerate growth moving forward as we sharpen our focus and optimize our assortment, our marketing, and our omnichannel customer experience.

Industry Context

The company's focus on the athleisure category aligns with current market trends, as this segment is experiencing significant growth. The company's ability to outperform the market in this category suggests a strong position in a competitive landscape. However, the overall decline in sales and profitability indicates challenges in other areas of the business.

Comparison to Industry Standards

• Designer Brands' 1.4% decrease in comparable sales is worse than some competitors who have reported flat or positive growth in the same period, such as Nike and Adidas who have seen growth in direct to consumer sales.
• The company's gross margin of 32.8% is lower than some luxury footwear retailers, such as Jimmy Choo, who often maintain margins above 40%.
• The 8% growth in the athleisure category is a positive sign, but it needs to be sustained and expanded to offset declines in other categories.
• The reduction in full-year EPS guidance suggests that the company is facing headwinds that are impacting profitability more than initially anticipated.

Stakeholder Impact

• Shareholders will be impacted by the decreased sales and lowered earnings guidance.
• Employees may be affected by restructuring and integration costs.
• Customers may see changes in product assortment and shopping experience.
• Suppliers may be impacted by changes in the company's purchasing patterns.

Next Steps

• The company will continue to refine its strategic initiatives to accelerate business transformation.
• The company will focus on optimizing its assortment, marketing, and omnichannel customer experience.
• The company will continue to invest in its retail and brand businesses to accelerate growth.

Key Dates

Keywords

footwear, retail, athleisure, sales, earnings, Designer Brands, financial results, comparable sales, gross profit, EPS