DSW Shifted to Athletic and Comfort Just as Consumers Started Venturing Out Again — Was Its Athleisure Push Too Late?

Amid the COVID-19 health crisis, indoor-bound consumers held back spending on dress, formal and special-occasion shoes and looked to active and comfort-driven styles for everyday wear. In response, Designer Brands Inc. pivoted its merchandise mix toward sneakers, sandals, slides and the like.

But now, as the economy continues to reopen with a rapid vaccine rollout and federal fiscal stimulus, investors might be left wondering: Was the company’s push into the lucrative athleisure market too little too late?

According to analysts, Designer Brands’ latest quarterly results suggest a move in the right direction for the retailer, which noted a return to profitability for the first time since the onset of the pandemic.

“Some investors have expressed concern that Designer Brands has too aggressively edited the merchandise mix towards athletic, just at the point in time the consumer will be pivoting toward more dress and seasonal items,” CL King & Associates managing director Steven Marotta wrote in a distribution note. “We are not overly alarmed by this, as simply catching up to the industry’s representative shares does not ultimately indicate over-indexing.”

According to the investment research firm, consumers allocated upwards of 75% of their footwear purchases to athleisure styles in the first quarter of 2021, compared with roughly 55% back in 2019. Comparatively, in the most recent three-month period, the merchandise mix in DSW stores was 55% athleisure, while in the same period two years ago it was 30%.

“True, some sales undoubtedly were left on the table when consumers’ seismic shift towards athletic during the pandemic increased the above-market share, but once that settles back to the median, DBI’s mix will be more representative of market share categories,” added Marotta, who recommended a “buy” and raised the chain’s price target to $24 from $22. “In the meantime, the company is in a prime position to simultaneously take advantage of the expected growth in dress shoes and a robust kids/back-to-school season.”

William Blair analyst Dylan Carden was also optimistic about Designer Brands’ rebound. In a distribution note, he gave the DSW parent a “market perform” rating, noting that its shares have risen 150% in the year to date.

“We expect to see a gradual improvement throughout 2021 as demand returns for dress and occasion styles, with the company reaching 2019 comparable top line and margin by next year,” Carden said. “Longer term, we believe the company has potential for earnings upside from the Camuto integration as the company targets exclusive brands penetration around 30%, up from roughly 10% currently.”

For the three months ended May 1, Designer Brands reported adjusted profits of $9.5 million, or adjusted earnings of 12 per share, compared with the prior year’s adjusted loss of $130.3 million, or adjusted loss of $1.81 per share. Wall Street had predicted a loss of 18 cents per share. Similarly, revenues rose 45.6% to $703.2 million — handily topping market watchers’ estimates of $651 million.

In the company’s conference call with analysts, CEO Roger Rawlins said that the company plans to shift its focus more heavily to its owned brands, such as Kelly & Katie and Mix No. 6, as well as those in which it has an ownership stake, like JLo, Vince Camuto, Lucky and Jessica Simpson.

“Having the ability to design and source the majority of this product through Camuto and having full control of the supply chain enables us to move these brands faster through our DSW channel when demand increases,” he said, adding that 15 of the chain’s top 25 selling items in the first quarter were items designed and sourced vertically by Designer Brands. “With a best-in-class assortment, we are a footwear powerhouse with the ability to introduce new brands to the market and create long-term growth for both us and the brand.”

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