It’s still early days for Designer Brands Inc., the umbrella organization formed by DSW in the wake of the footwear retailer’s October acquisition of Camuto Group. But on the company’s earnings call Thursday, executives shed some light on the integration of the businesses, which they said has taken hold ahead of schedule.
The $238 million deal gives Designer Brands control of Camuto Group’s sourcing, production, design and distribution infrastructure, along with a 40% share in the intellectual property of its brand portfolio, which includes labels such as Vince Camuto, Enzo Angiolini, and Sole Society. (Brand management company Authentic Brands Group acquired the remaining share of the IP, and will be responsible for growing and marketing the labels, bringing the total purchase price to $341 million.)
“Having the full spectrum of expertise and infrastructure, from design and sourcing to transportation and logistics to store operations and direct-to-consumer capability, provides us with more flexibility and greater control across many fronts, including cost and transparency, negotiating with vendors and mitigating external factors such as tariffs and changing consumer buying trends,” said Designer Brands CEO Roger Rawlins.
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Through the acquisition, the company is bringing its private-label business in-house (currently, it is produced by a third party) and “aggressively growing” its penetration from about 12% of the business today to around 25% to 30% over the next few years, with the goal of improving margins and lowering costs.
Already, said Rawlins, the company has seen progress on both fronts. Whereas before, DSW was paying vendors “well above market,” he said, “we now have visibility to what it costs to make a shoe. We never knew that kind of detail, and so we’re in a position now, I think, to push back.” Gross margin on private-label goods also reached 59.9%, an increase of about 180 basis points over the same period last year.
For Camuto Group — which had faced financial struggles in recent years, including a failed deal with Aldo in 2017 — the DSW acquisition brings with it a much-needed healthy balance sheet and source of cash flow, said Wedbush Securities analyst Christopher Svezia. “Previously, Camuto had restrictions in place from a sourcing perspective that were creating margin issues and product delivery timing issues. Those have now been for the most part resolved.”
Also, he said, the wholesaler can now benefit from DSW’s deep knowledge of building e-commerce and retail businesses, which it has had little experience with historically. “I’m not saying they’re going to open up hundreds of retail stores, but incrementally there’s the opportunity to build up a more comprehensive direct-to-consumer platform,” said Svezia. In the second quarter, VinceCamuto.com saw sales nearly double, according to Rawlins, though the brand’s direct-to-consumer business still represents only a small portion of sales.
When the deal was announced, several analysts expressed concerns that Camuto’s new ownership could compromise some of its existing wholesale relationships with stores such as Dillard’s, Macy’s and Nordstrom, but on the call, Rawlins did his best to dispel that notion, pointing to second-quarter year-on-year growth.
Steven Marotta, managing director of research and senior analyst at CL King & Associates, said the success (or failure) of Camuto on the wholesale front will come down to its ability to execute, not who its owner is.
“If there is a retail customer of Camuto Group who’s satisfied with the design, sourcing and delivery of goods from Camuto and they’re making a profit on those items and those items are outperforming other items within the assortment from other vendors, I don’t believe they will stop doing business with them simply because they are now a quote-unquote competitor,” he said.
Designer Brands executives also addressed the uncertainty hanging over the heads of likely every American footwear company: U.S.-China tariffs, the next round of which are scheduled to take effect Sept. 1, saddling $125 billion worth of consumer goods, including many types of shoes, with an additional 15% import tax. (The remainder of the total $300 billion worth of products will be affected by new tariffs beginning December 15.)
While not all of Designer Brands’ portfolio will be affected — its recently-consolidated Canadian business saw comparable sales jump 8.1% in the second quarter — the vast majority will be, and Rawlins said the company is working hard to diversify its sourcing, increasing the share of footwear produced outside of China from 10% in October to 20% today, with the goal of reaching close to 40% in the coming 12 to 18 months. It also plans to expand production to 14 countries from 11 today as it ramps up production at Camuto.
“Their ability to scale private label is going to be material,” said Marotta. “They’re doing right now ultimately about one-third of what they could be doing a couple of years from now. So that built in growth trajectory should be pretty attractive for manufacturers and vendor partners that they intend to partner with in the Far East, whether that’s in China or outside of China.”
Meanwhile, noted Rawlings: “One of the biggest benefits we have of acquiring Camuto was we now control our own destiny, and with these tariffs, we are able to to maneuver. And had we not had Camuto at play, I think that we would have had to rely on others to solve many of these problems for us.”
In other words, tariffs are now Designer Brands’ problem to solve on the sourcing end, but it hopes the benefits will outweigh the risks.
“Tariffs make it a little bit more complicated, but I still think the opportunity is there from a margin and pricing perspective, and that was really the backbone of this transaction,” said Svezia.