Designer Brands Inc (DBI) 2021 Q3 法說會逐字稿

Good day, and welcome to the Designer Brands, Inc. Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please also note today's event is being recorded.

I would now like to turn the conference over to Stacy Turnof Edelman. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended October 30, 2021, for the 13-week period ending October 31, 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.

Now let me turn over the call to Roger.

Good morning, and thank you, everyone, for joining us today for Designer Brands' third quarter earnings call. We are incredibly excited to share another record-setting quarter with you today. As always, we'd like to take this opportunity to thank our associates for their hard work and dedication. We could not achieve this level of success without you.

Our strong performance continues to be driven by the strategies we outlined back in 2019, following our acquisitions of the Camuto Group and Shoe Company in Canada, with a clear focus towards casualizing our product offerings to meet the demands of the consumer. This direction has helped to improve our business throughout 2021 and will be a permanent piece of our go-forward model.

Q3 sales continued to recover versus 2019 levels, and we achieved all-time records in gross margin, operating income and EPS with each and every segment contributing to these accomplishments. We've noted this as well as other key highlights for the quarter in our infographic on our Investor Relations site.

We continue to see strength in our key assortment distortions, including athletic and athleisure, kids and men's all powered by the top 50 brands in footwear, and our women's fashion business has also improved significantly. These investment strategies will ensure that Designer Brands is well positioned to continue to grow market share in categories where we have historically captured share well below the levels we've commanded in women's fashion. These assortment distortions open up opportunities to compete in time periods where categories other than fashion are top of the mind for the consumer and allow us to expand market share, while mitigating risk we have traditionally faced from relying so heavily on the fashion and seasonal categories.

For example, this year, we became a top destination for families to shop for back-to-school. We were able to participate in this season at a whole new level than we have ever had in the past, given our increased penetration of athletic and kids product. Notably, according to NPD, we grew kids sales 35 percentage points faster than the rest of the market in the quarter ending October compared to the same period in 2019. Our brands were at the top of consumers' minds as our integrated marketing strategy to increase awareness of DBI as an athleisure destination for the family was successful.

Additionally, we've had a strong start to the fourth quarter as kids and athletic typically lend themselves to greater gift giving. We set an all-time record for demand in a single day in a single week this Black Friday and Black Friday week. Prior to setting this new record, our highest demand week was in the spring season. So we are very pleased to be opening up new times of the calendar in which we can grab market share. For the total holiday weekend, demand for DSW was up 8% versus 2019, with both digital and stores posting positive comps for the 5-day period. These results were driven by athletic comps up over 50% and kids comps up over 40% versus 2019.

Even more notably, we had positive comps in our fashion categories for the first time since the onset of COVID-19. Our best-in-class VIP loyalty program remains a key driver for our growth and is also benefiting from our widened customer base. For all of Designer Brands, new VIP enrollments grew by $1.8 million. And for DSW, enrollments were up 30% in the third quarter versus 2020. Additionally, our conversion of non-VIP members to VIP members at DSW was at a 12-month record high during July and August.

As we've shared over the past couple of years, we are growing our business through our focus on the top 50 brands in footwear, including our own vertical brands. Over the last 3 years, we have reduced the number of labels we offer and a focus on the brands we know our customers want. This has resulted in a 25% reduction in the number of labels from whom we buy goods over a 3-year period.

In our U.S. Retail segment today, our top 50 brands represent 77% of our total sales as compared to 65% in 2019. Additionally, our #1 selling item was a top 50 national brand boot with an average unit retail of $144. So today, we are one of the top retail partners for most of these brands. We believe that our strategy to go narrower and deeper with our inventory investments has been game changing for Designer Brands for the following reasons: First, it allows us to see higher conversion as we're in stock with sizes more frequently; second, we are more relevant to these key brands, giving us opportunities for priority access to exclusive items, and ensuring we are placed at the top of the food chain when supply chain issues occur; third, we can now consistently tell marketing stories to consumers about brands we have available across our entire fleet of warehouses; and then four, finally, it increases our ability to engage in full price selling with fewer fringe items and sizes going into clearance, improving gross profit.

As I've shared, our merchant and planning teams have made great decisions around our assortment by shifting to match consumer preferences. While athletic and kids categories continue to be strong, we saw our historically powerful fashion categories gained momentum in the third quarter. We've also seen our boot business kick in at the beginning of Q4 with the later onset of cooler weather. Additionally, our dress business continues to recover, with women's dress up 58% in the third quarter versus 2020 and men's dress up 87% in the third quarter compared to 2020.

As an organization, we have also rallied around brands that we own and control. We drove business through implementation of shop-in-shops, unique digital experiences and major launches. We also continue to see strength in our top-rated omnichannel platform with digital demand at U.S. retail up 12% in the third quarter compared to the same period in 2019 on top of a strong demand comp of 45% during Q3 of 2019.

At Camuto, we are reigniting our focus on our owned brands, and had a soft relaunch of the Vince Camuto brand on September 14. We've done the work to dig into who the Camuto is and what they expect from our Camuto product. We identified them in the channels we control. We focused our top design talent on building on-trend product for these customers, and we invested in relaunching the brand, placed bets on key items and started transitioning the brand from being a women's only fashion brand to a gender-neutral casualized fashion brand. This strategic shift has already been a huge success with the vincecamuto.com sales up over 80% since the soft relaunch on September 14 versus the same period in 2019.

Net wholesale sales of Vince Camuto women's footwear also increased by 5% versus 2019. Furthermore, vincecamuto.com third quarter margin was 60% versus 46% in the same period 2020 and 52% in the same period 2019. We are pleased that our own brands made up 3 of the top 10 styles DSW sold in the quarter, whereas none of our own brands were in the top 10 items in 2020. This demonstrates how elevated our assortment has become and how much our customer loves it.

In terms of inventory, we are well positioned despite the industry-wide supply chain issues and see our positioning as a strategic and competitive advantage. We bought product ahead of the season and over ordered in anticipation of inventory cuts, accelerated orders of our owned brands and leveraged our scale and strong relationships with our vendors. This has enabled us to get access to additional product and has put us in a better position than most of our peers heading into the fourth quarter.

We started the third quarter with the Retail segment's inventory down 19% versus 2019 and ended the quarter, with the Retail segment's inventory flat to 2019. I want to say this again because this is so important as it relates to the future performance of our business and our competitive position. We improved our retail inventory position from down 19 to 2019 at the start of the third quarter to flat as we entered the fourth quarter. This positions us exceptionally well to deliver fourth quarter sales growth that is much stronger than even third quarter.

Our top 50 brand strategy that I spoke about earlier has enabled Designer Brands to better manage inventory levels, particularly with our owned brands that are starting to outperform.

As we look to the future of our business, we see notable opportunities to sustain much of this record-setting margin expansion over the long run. Gross margin continues to rise from historical levels due to the increased penetration in our top 50 brands, narrower and deeper inventory investments, growth of our private brands and decreased promotions and clearance driven by all of these decisions.

Let me go into detail in just a few areas of opportunities for continued growth. First, we continue to build awareness as an athleisure destination at a time when that's what the customers are looking for. This strategy and investment in our athletic assortment will allow us to grow market share in 2 athletic-heavy periods of the year. First, back-to-school. As I mentioned in my opening remarks, we are playing bigger here than ever before, and we have significant room to continue to compete.

According to the NPD Group, in peak back-to-school time frame, which is defined as July through August 2021, DFW outpaced the remaining U.S. footwear market significantly in Kids and athleisure compared to the same quarter in 2019. And then second, the athletic window also includes holiday and post-New Year selling periods. These windows are large athletic selling periods in our industry. We have historically been in boot liquidation mode during these windows and expect to see material increases in athletic selling. We have positioned athletic inventory in these windows to compete more significantly this year, and we'll continue to do so in the future.

Next, our assortment is vastly different than pre-COVID, when we were carrying 500-plus labels and had to heavily market our portfolio of labels. Our increased penetration of the top 50 brands now carries more weight with the consumer and allows us to have more regular price selling as many of these brands prohibit bulk discounting and require fewer marketing dollars for conversion. As we have mentioned before, the growth of our exclusive brands will drive our long-term margin profile.

Our vertical brands have compelling margins relative to the national brands. Typically, our exclusive brands command margins roughly 1,000 basis points higher than branded product and sourcing them ourselves through Camuto adds in an anticipated extra 500 basis points. And given the trends that we are seeing in today's market, the opportunity may be even greater than 1,500 basis points. We believe that there is still so much room for growth as it relates to overall athletic space that will help drive top line growth as well as improve our margins. Even with our recent success in the category, we are still heavily underpenetrated to the market.

As we review our athletic brand portfolio, 60% of the athletic brands we carry posted a comp above 25% during the third quarter versus 2019, proving that our investment is working. Additionally, leveraging our exposure to athletic has allowed Designer Brands to expand its reach to the male customer base. In fact, our men's athletic business was 8% of total sales in the third quarter versus 6% in 2019 and up 56% in regular price selling versus 2019. Also, we expect to continue our very successful strategy that started in the first quarter to meet the customer where they are, by investing more in digital marketing. This investment continues to result in top and bottom-line benefits as well as strong customer acquisition with VIP enrollments of 1.5 million members in the third quarter, representing our second biggest acquisition quarter in the brand's history, following our biggest acquisition quarter, which was Q2 2021.

Our targeted marketing campaigns continue to yield stronger results and increased efficiencies. In addition to strong customer acquisition, we continue to reengage customers that have reduced shopping patterns during the pandemic. As a result, our active members at DSW are up 29% from where they were at the start of the fiscal year. Lastly, we are acutely aware of the supply chain and labor challenges facing the industry today, and we have baked these factors into our projections. We believe we have planned well and can manage these headwinds, and that our margins will continue to grow as they subside.

Moving to Canada. We have seen considerable improvement from the second quarter, with third quarter comps down 6% versus 2019. Our Canadian stores also had a strong back-to-school period, with total sales coming in just slightly under 2019. Store comp significantly improved as customers return to physical shopping, all while our Canadian digital business remains strong, gaining market share online. We ended the quarter with inventory in a healthier and lower position at down 2% versus 2019 compared to down 16% in the second quarter. Notably, Canada delivered the best quarterly gross profit contribution performance in the history of the segment.

Before turning it over to Jared, I'd like to quickly touch on our results. We are extremely pleased with our total company performance, with comps up 40.8% versus 2020. Gross margin was up 740 basis points to 36.7% in the third quarter versus 29.3% in 2019. We are pleased we continue to see strong momentum heading into the fourth quarter. Jared will speak to our expectations in more detail in just a moment.

Looking forward, we will continue to execute on our 3 key strategic initiatives. First, customer. We are removing friction and focused on acquiring new customers. Number two, brand. We are continuously evolving our assortment to match consumer preferences by supporting the top 50 brands in footwear while growing our own brands. And then finally, three, speed. We are working to get product to our customers faster and more efficiently. We expect that our focus on these strategic pillars will allow us to grow market share, improve margins and grow our bottom line, both this year and into the future.

With that, I'll turn it over to Jared. Jared?

Thank you, Roger, and good morning, everyone. We are thrilled with our third quarter results and pleased that our momentum continues to accelerate across the board. We delivered an incredibly strong quarter as we significantly surpassed our expectations and set all-time records across our operations, while also positioning our business with a substantially stronger balance sheet as we exit 2021. Our flexible business model and strategy have contributed greatly to our success as we have pivoted our assortment over the last 1.5 years in response to the impact of COVID as well as changing consumer demand. .

Additionally, we were able to significantly improve our inventory position during the quarter despite the challenging supply chain environment that the industry is facing. As a result, we believe that we are well positioned for continued growth throughout the fourth quarter and into 2022. Please note the financial results that we will reference during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release.

Turning to our results. For the third quarter, sales increased 31% to $853.5 million compared to 2020. Total comps were up 40.8% in the third quarter compared to last year's 30.4% decline. In U.S. retail, comp sales were up 43.9% during the third quarter versus down 31.9% during the same quarter last year. This continued improvement has been driven by our near-term strategy, and we've seen this play out in some of our leading indicators. Notably, our operational performance has continued to improve compared to pre-pandemic 2019.

Store traffic continued to improve to down 8% in the third quarter versus 2019 compared to down 10% in the second quarter, and down almost 30% in the first quarter. We continue to see even further improvement as we head into the fourth quarter. Additionally, e-commerce traffic was up 8.7% compared to the third quarter of 2019. And it's important to note that third quarter of 2019 was a highly promotional period for us that saw digital traffic up a strong 26.3%, which makes the improvement this past quarter even that much more compelling.

Our stellar performance across categories drove continued success. To add to the metrics that Roger discussed during the quarter athleisure comps were up 38% versus the same period in 2020 and up 30% compared to the third quarter of 2019. According to NPD, we grew athleisure sales 26 percentage points faster than the rest of the market in July and August compared to the same period in 2019, resulting in an overall market share gain of 30 basis points. Athleisure penetration was 50% in the third quarter versus 38% in 2019.

Turning to seasonal. Similar to what we experienced in sandals this past spring, we are seeing the consumer come back to freshen up her boots later than usual in the season. In the spring, 62% of overall women's sandal sales fell in Q2 compared to closer to 58% historically. We are seeing a similar trend in this year's boot selling with less emphasis on Septober and greater demand in Q4.

In fact, November was our best boot selling comp of the season so far with regular price sales comping positive to 2019. For all seasonal, we posted comps of 61% compared to third quarter of 2020, but were down 10% compared to third quarter of '19 due primarily to the clearance being down 26%, and the shifting of regular price selling into Q4.

We are excited as we are seeing our boot business accelerate as we progress through the fourth quarter, and we have the ability to pull forward inventory produced by our own Camuto division to meet this demand. As Roger mentioned, our dress category continues to recover with women's dress down 34% in the third quarter '21 versus 2019, a sequential improvement from the down 40% in the second quarter and down 57% in the first quarter of 2021.

Men's posted a positive 3% comp compared to 2019, with men's dress also improving to down 19% versus 2019 from down 30% in the prior quarter. Per NPD, we grew men's dollar sales 10 percentage points faster than the rest of the market in the quarter ending October compared to the same period in 2019. Kids comped up 44% compared to Q3 of 2019. Our focus on growing our kids business has created an entirely new selling cycle for us around back-to-school. We saw record back-to-school results this year in the kids category, pushing our total company to strong positive comps over the same period in 2019, with kids penetration reaching over 15%.

According to NPD, DSW outpaced the market in kids dollar volume growth by 7.5x in the back-to-school time frame of July and August of 2021 versus 2019. We have leaned into this new market share opportunity with the right product, enhanced marketing to drive awareness and new customer acquisition initiatives, and it has played out perfectly.

Importantly, we have not seen a slowdown in our digital growth U.S. retail digitally demanded sales for the third quarter were up 12% versus 2019, which is notable considering the 45% comp in the third quarter of 2019 due to the high promotional environment. Digitally demanded sales were also up 9% compared to third quarter of 2020. Digital demand remained steady at 27% of total demand in Q3 versus 35% last year, and above 2019 levels of 24%. As has been the case all year, Canada's recovery is a bit delayed from the U.S. but is seeing continued traction. Total comps were up 15.2% in the third quarter compared to down 18.7% in the prior year and above both the first quarter comp of 10% and second quarter comp of 14.6%. Traffic comps significantly improved during Q3 and were down 20% to 2019 compared to down 51% in Q1 and down 43% in Q2.

Similar to the U.S., the Canadian boot business got off to a later start than typical with much warmer weather throughout much of Canada. However, as the weather turned, we have seen our boot business come roaring back, and our inventory is in a good position. Digital demand continues to be strong, up 70% to 2019, with digital sales representing 17.7% of total Canadian sales, almost twice that of 2019.

Turning to Camuto. We continue to ramp production as we are seeing growing demand for our products, and Camuto remains an essential contributor to our long-term strategy of building our own vertical brands. Q3 production increased by 64% compared to the same time last year, and we are expecting Q4's year-over-year production to increase over 100% in anticipation of a strong spring. Total net sales from Camuto, including sales to DSW, were $103.9 million in the third quarter, up 23.9% versus last year. Wholesale sales were $90.6 million in the third quarter versus $73.7 million last year, including sales to our retail segments, which totaled approximately $31.6 million versus $21 million last year.

I am also very happy with the work we've done to refocus and streamline our efforts at Camuto. As previously discussed, during 2020, we exited many of our brands that were unprofitable and taking focus away from our core and refocused our efforts around 4 major go-forward brands. In Q3, 3 of these 4 go-forward footwear brands grew wholesale sales compared to 2019. As Roger mentioned, we had a soft refresh of the Vince Camuto brand in Q3. This refresh had a significant positive impact on our vc.com site, which grew 50.4% compared to the third quarter of 2020 and 62% compared to 2019. Not only were the quarterly sales the highest that the digital site has seen, but we also produced the highest margin rate as well. This is a great example of the synergies we can bring to bear. The combination of the digital retail expertise and infrastructure from DSW, combined with the brand marketing and product knowledge of Camuto, has pushed vc.com to its best quarter ever.

Our consolidated gross profit increased 89.3% to $313.6 million in the third quarter versus $165.7 million in the prior year, and 14.7% compared to third quarter of 2019, benefited by increased penetration of our top 50 brands, continued recovery in seasonal product as well as growth in our vertical brands and improved margin in the athletic category from full-price selling. Our consolidated gross margin sharply improved to 36.7% in the third quarter versus 25.4% in the prior year and 29.3% in 2019.

At our U.S. Retail segment, gross margin was strong at 36.4% in the third quarter versus 23.4% last year and 28.1% in the third quarter of 2019, marking the highest quarterly gross margin rate in DSW's history. Merchandise margin of 53.1% was also an all-time record for DSW. The margin upside was driven by several factors. First, we saw a huge growth in our higher-margin Camuto-produced products. During Q3, DSW's vertical brand sales increased 117% compared to 2019. Second, as we have shifted our assortment mix, we had notably less product to clear. And regular price demand accounted for 88% of the total demand in the quarter compared to 83% in 2019.

Canada produced record gross margins as well at 38.2% versus last year's 30.7%, and above third quarter of 2019's 36%. This was primarily due to a pullback in promotional activity and tight inventory management. We also set records at Camuto, where the gross margin rate was 31.1% in the third quarter versus 26.4% last year, and over 140 basis points above third quarter of 2019, primarily related to lower closeouts, fewer vendor allowances and less promotional activity on the vincecamuto.com site.

When looking at inventory, we believe our inventory management has been a real strategic differentiator for us this quarter, a trend that will continue through Q4 and into 2022. As we have said many times in the past, when the industry is chasing limited inventory, our ability to self-produce product as well as our influential relationships with our vendor partners as a result of our scale allows us to win the battle for inventory. We ended the quarter with inventories of $602 million versus $546 million last year. Inventory for the retail segments ended the quarter flat to 2019, which we believe is a true competitive differentiator as we head into Q4 and spring of 2022. This is a remarkable achievement given that we started the quarter, Q3, down 19% in our retail segments, especially in this constrained environment.

We're very proud of the work our teams have done here and want to highlight again that this gives us the inventory we need to fuel Q4 sales. When you consider we delivered Q3 comps at our U.S. Retail segment down only 2% of 2019 on inventory down 19%, we believe we are very well positioned for the fourth quarter compared to much of the industry, which is still scrambling for inventory.

In the third quarter, consolidated SG&A for all of our businesses was $214 million, up 9.6% versus last year, but essentially flat to 2019. However, as we have seen throughout 2021 year-to-date, marketing and employee compensation costs are higher by about $25 million combined compared to 2019 as we strategically redeploy a portion of our record gross profit into customer and employee acquisition and retention. We intend to continue this strategic investment into Q4, especially as we build our authority in the post-holiday athletic spike that occurs in the market each year similar to the strategy we deployed with back-to-school, and the strong successes we saw there.

Our adjusted SG&A ratio for the third quarter was 25.1% of sales, well below last year's level of 29.9%, and above third quarter of 2019's level of 22.9%. Depreciation and amortization totaled $18.9 million in the third quarter compared to $22.1 million in the prior year.

Adjusted operating profit for Designer Brands was an all-time quarterly record of $102.2 million in the third quarter versus a loss of $27.7 million last year and $62.4 million in the third quarter of 2019. In terms of adjusted operating margin, we delivered a rate of 12%, well above 2019's rate of 6.7%. This level of profitability is exceptional, and I am thrilled with where we ended the quarter. Each and every segment contributed to this achievement at record levels. And as we will discuss in a moment, I'm even more excited about the things we believe will continue to drive growth well beyond Q3.

We had $7.7 million of interest expense during the third quarter compared to $9 million in the prior year. Our effective tax rate was 29.5% in the third quarter versus 49.4% last year. Total weighted average diluted shares during the quarter were $77.1 million compared to $72.3 million last year. The increase was primarily driven by a return to positive earnings and related dilution stock-based compensation awards.

Third quarter reported net income was $80.2 million or $1.04 per diluted share, which included after-tax benefits of $13.6 million. Excluding these benefits, adjusted EPS was $0.86 per diluted share for the quarter. Both our net income and EPS are also all-time quarterly records even when taking into account the elevated interest that we are paying at the moment. We have seen tremendous improvement in our financial health and liquidity position over the past year. Looking back at the onset of COVID, we took actions to fortify our liquidity and financial flexibility with an asset-based revolving credit facility and senior secured loan, which we installed in August of 2020. Since then, we have been laser-focused on reducing our debt position and rebuilding our financial strength. In fact, assuming we receive our 2020 CARES Act tax refund during the fourth quarter, if we take the amount of cash principal, we will still own lenders at the end of the year and subtract out the amount of cash and investments we anticipate holding at the end of the year, I expect that difference to be less than $50 million. That same calculation would have been $284 million at the start of this year and $78 million at the end of 2019.

With the business back into growth mode, and this return to financial strength that exceeds even 2019 levels, we will have the flexibility to consider paying off or refinancing the term loan, which would free us to consider resuming dividends and share repurchases. In total, we are pleased with our liquidity position, which includes cash and availability under the revolver. We are in a healthy position with total liquidity at the end of the quarter at $477.8 million versus $409.5 million for the same period last year. We had $227.9 million of debt at the end of the third quarter versus $337.1 million last year, and down $106.9 million since the end of fiscal 2020.

At the end of the quarter, we had $83.1 million of cash versus $114.5 million last year, and have $394.7 million available to draw on our revolving credit facility. During the quarter, we opened 4 new stores in the U.S. and 1 new store in Canada, and closed 4 in the U.S., resulting in a total of 515 U.S. stores and 144 Canadian stores.

Last quarter, we said that we expected for fall of fiscal 2021 that we would be able to achieve operating margins slightly above fall of fiscal 2019's levels. Our record-setting performance in Q3 puts us well above that mark. And as mentioned, we expect continued strong momentum throughout Q4. As such, we are introducing new guidance as follows. Q4 adjusted EPS will be in the range of $0.10 to $0.15 driven by revenues up mid-single digits compared to 2019 at our retail segments, slightly offset by revenues at our wholesale segment, down due primarily to the exit of unprofitable brands. Together, our consolidated Designer Brands revenues are expected to be flat to up low single digits compared to 2019 with the fourth quarter.

With that, we will open up the call for questions. Operator?

(Operator Instructions)

Today's first question comes from Steve Marotta with CLK Associates.

And congratulations on a terrific third quarter, well done. Can you talk a little bit about -- and you alluded to this on the call, the supply chain your actions earlier this year to be more aggressive bringing in product and allude, if you will, some of the supply chain issues that are currently manifesting across the industry seems to be, again, you're sort of benefiting from those decisions? Can you talk a little bit about just maybe cadence of what you expect to come in either from a Camuto or a branded standpoint over December and January and February? And how current supply chain issues are really simply not affecting you as much as the industry? Can you just go into a little detail there? It'd be helpful.

Yes. Steve, I think the big thing as it relates to supply chain is -- it's the strategy that we put in a couple of years ago of narrowing the number of brands we buy inventory from so that we are now more relevant with these top 50 brands. So that when they're in a situation, and we talked about this last quarter of making a decision of who's going to get product. You want to be #1, 2 or 3 in that lineup. And I think those decisions strategically a couple of years ago have materially helped our business. And then when you think about a category like athletic, where remember, I mentioned this in the comments, that 60% of our athletic brands that we carry comped over 25% to 2019. So we're investing inventory, and we're driving results. So you know how this goes. That's who people -- that's who gets the inventory, or the folks that are driving results.

So I think that's step number one. The second one was our merchant and planning and finance teams partnered to say, yes, this is what our open-to-buy looks like, but we also recognize there's going to be fallout. And so let's plan above that. And that -- as a finance guy myself, historically, that makes you a little nervous, but it was the right thing to do for the business. And I think our team has done a phenomenal job managing the inventory through all of this. And those are the 2 big things is what I would tell you. And then as we move forward, we're planning to run the business the same way because we don't see this softening any time in the near term. So I think we are in a very good position.

And again, as I said, we went from down 19 to flat inventory at a time when our sales were performing well. So really, really proud of our team and the work they've done.

That's great. Can you talk a little bit about your Camuto penetration goals inside the DSW stores for fiscal '22? Actually, where you'll land -- I know that's accelerated as the year has progressed. So maybe where you will land there in fiscal '21 and what your expectations are for '22.

Yes. We are -- I don't think we're prepared yet to share what 2022 is going to look like, but I think we are really happy with the progress that's been made at Camuto. And it's less about what the penetration is to DSW, but it's about what that team has accomplished. I mean -- again, I had this in the commentary, but they went out and understood the customer. They looked at the channels in which that consumer shops, and they built product for that customer and then they made investments in inventory on key items. And it is paid off, whether it be through vincecamuto.com, through selling it at wholesale, which comped to 2019. I think that's an important point for folks that have doubted our ability to run the Camuto organization in a positive manner. On the wholesale side, we grew sales to 2019 for the Camuto brand. And then you add into that the ability to go direct-to-consumer through DSW. Those are all positive signs for what we've done with the Camuto organization.

That's very helpful. And I just have one question, my favorite question. Can you talk a little bit about the tack-on sales during back-to-school for kids? A lot of the kids strategy, when you were introducing it, was tacking on a purchase. Can you talk a little bit about how successful that was in the most recent back-to-school season?

Yes. I think it's really about that market share gain that I talked about. And it is growing the kids business, which I said, 35 percentage points to the total market is what we experienced, which is pretty amazing from a growth standpoint. And then what we're seeing is, as I said, in the quarter, it was the second largest acquisition -- customer acquisition quarter in the history of the company. And that comes by having athletic in kids, and the digital investments we're making. So we are seeing that it's introducing us to a new consumer, and it's adding to the business we were already doing with that family.

Yes. Steve, 1 data point I would remind you, and I think we mentioned it in the script, is during that back-to-school time frame, while the kids penetration did significantly increase, and we quoted, we hit around 15%. It also pulled the entire comp for the entire box up to positive to 2019. So during that time period, there were add-on sales and the whole entire box started comping positive, which, again, we think is very, very good.

And Steve, I think -- and this is for everyone on the call that the decision to get after athleisure has opened up the kids windows that we've talked about, back-to-school and holiday, but it's also opening up windows where we can now play more aggressively than, as we mentioned, the post-holiday when everyone is going to live out their New Year's resolutions and get back in shape. We're going to play there. And we've never played there. We would have been focused on selling $39 boots, and we can sell full-price athletic product in that window. Those are ways in which these investments, the strategic decisions we made a couple of years ago are paying off for our organization.

And our next question today comes from Gaby Carbone of Deutsche Bank.

I was just wondering if you can maybe dig into your top line outlook for the fourth quarter, the acceleration kind of what you're expecting for the third quarter? And then any additional color around core at trends? I know you talked about having a very good Black Friday. And then as you move to next year, just kind of how you're thinking about consumer demand, especially as we lap stimulus payments in the first quarter.

Yes. Yes, Gaby, I'll take that first part. While we gave overall guidance for revenues in flat to up low single digits, under the covers, it's a little more dramatic. So we're seeing continued momentum building in our retail channels. And so we're going to be up, I'd say, mid-single digits in retail. And the data points we gave around Q4 already is giving a lot of validation to that. Wholesale, because we strategically exited those brands that we intended to exit during 2020, we do think that we'll probably see some flattish to down a little bit in wholesale. But in the brands go forward that we're carrying, those will continue to be strong and see growth. So that's kind of how it all shakes out on the top line. And I apologize, the second part of your question.

it's consumer demand next year, I think.

Yes. Around that, yes.

Yes. I think we mentioned this throughout the year as these stimulus packages hit. We never really experienced the same level of impact that some others had felt because our customer base skews more to household incomes over $100,000, which had not received as large of a benefit as perhaps some others. But we're not ready to give guidance to 2022 yet. But again, we're feeling really, really confident in our business, whether it was the result -- the record results we had in Q2, the record results in Q3, and the really strong performance we've had Q4 to date.

Great. And then just a quick follow-up. You obviously experienced really strong gross margins in the third quarter. Just wondering if you can provide some color on how you're thinking about that line item for the fourth quarter, and maybe how freight will impact versus what transpired in the third?

Yes. I'll give you a few data points. And as you know, we don't typically dive too deep into gross profit and SG&A for guidance, but I will give you some color. So from just the overall gross profit dollars, obviously, you're going to see Q4 slightly lower even if rates were to stay the same. Just because if you do the math, the revenues are a little bit lower in Q4 than in Q3. But we do have a couple of things that are unique to Q4. One, shipping is always higher. It's holiday gift-giving time period. So you're going to have a few million dollars of shipping both for the U.S. and in Canada and at vs.com, that wasn't as dramatic in Q3. And then also, as we've mentioned a couple of times in the calls, we are making strategic investments to establish our authority in that post-holiday athletic, very similar as we did in back-to-school, especially in the leading part -- the early part of back-to-school.

So I think you're going to see about $20 million or so pivoted towards that with some SG&A as well to support that because it was very successful for us in back-to-school. And then lastly, there's a little less than $10 million baked in for expedited shipping or freight because we see product that if we can get access to it, we want to get it in and into the cycle or into the channel as soon as possible. So we've got that built in there as well.

Gabi, I want to make certain that I hit on 1 thing I've read a couple of the notes that you guys have seen out. The Q3 sales result was phenomenal in our view, and I want to share with you why. We had 16 days out of the roughly 90 for the quarter where we were promotional, meaning you're out there telling people, here's some offer. That number in 2019 was 51 days, so 16 versus 51. We also only had 7 million direct mail pieces that went out versus 39 in 2019. And direct mail, as you know, usually has an offer -- always has an offer attached for the most part. So to say that we were able to post the results in DSW we did while not promoting to that level.

Again, I want to reinforce how important that is to the health of our business. And oh, by the way, when we're not promoting, we're adding new customers to our file, which, if you look at the long-term history of this organization, as that file is growing that is the future lifeblood of the company. And so I'm really, really pleased with the results we had top line wise in third quarter. .

And the next question today comes from Dana Telsey at Telsey Advisory Group.

Nice to see the progress. When you think about -- you mentioned on the when you mention on the vertical brands, the opportunity for greater than 1,500 basis point margin opportunity. Where do you see that coming from? How does that grow? And then I have 2 follow-ups.

Yes. I think, Dana, this is the exciting thing that as we've shifted this assortment to be targeted to the top 50 brands in retail -- obviously, as you know, we're selling down a lot of things at regular price. And we've done such a great job, building product based on what we know about our customer and what we can learn from the brands we carry that the gap between what we sell something with our own brand name on it to that -- compare at price, that gap doesn't have to be as aggressive as what we had originally thought. And so that is where we are seeing margin upside.

So being able to take price up on items that you've designed and sourced yourself, and as an organization, that's something that our planning and merchant teams are looking at day in and day out. We're taking price ups where it's appropriate based on the supply and demand curve. So that's really, really exciting. And again, it's a testament to our Camuto team and the quality of product we know that team can design and source for us.

Got it. And then in regards to inflation, how are you thinking about it? How does it impact? And what are you doing with your pricing?

We -- again, given that we are so invested in these top 50 brands, we're surfing off of the waves that are being created there. It's probably the best way to describe it. And all of the pricing increases that we have felt, or cost increases, that's embedded in what we're anticipating for fourth quarter. And so far, we feel like we've done a nice job of managing those things.

Got it. And then just lastly on Nike. When does Nike fully exit the store? I know I think the order stopped in September. It's still in your stores on the website. When does that exit? And with the strength in athletic, what brands do you -- other brands are you seeing the most growth from?

Yes. We'll continue to sell the Swish product as long as it's on our floor, and it will go away when the consumers demand it all. And we can't get into the specific brands, but I want to reinforce the point I made that 60% of the athletic brands we carry, and all you have to do is look at our site and go to a store and see it, they comped over 25% to 2019. So we are getting strong results really across our entire athletic portfolio. Again, because we've known the customer is buying this product somewhere. And they've been buying it from the competitors in the past. And by us offering those goods, it's adding to their basket with DSW.

(Operator Instructions) Today's next question comes from Jay Sole with UBS.

Maybe, Jared, is it possible to just summarize maybe with some quantification why gross margin in Q3 was up so much versus Q3 of 2019? So if it was up 720 basis points, there's the vertical brand sales, that's an important piece of the mix. There's the full price selling overall, maybe mix shift to like there's different drivers happening here. Can you sort of break down the key points and just explain like how much really contributed overall? So just to understand really what the drivers are and where the gross margin is going.

Yes. You hit most of them right there. So I'm glad that, that message came through. But when really you look at our merchandise margin, that was the vast majority of what was going on. And as we mentioned a few times in the call, it was all about the reg price selling. We saw strong reg price positive comps at the expense of extreme markdown leverage. So that -- I mean that's the ideal playbook even in Q4 -- as Roger mentioned, Q4 of 2019 was heavily promotional as we were liquidating out of excess inventory, both at DSW and Camuto. And we're not doing that in Q4 of this year. So that merchandise margin story is going to remain a very, very strong one.

We saw leverage on our occupancy line slight a little bit, and then on the DCFs. So those are the big pieces, but it really was all about that merchandise margin. And the vertical brands that you mentioned, being able to see those turn back on into growth mode, up 117%, I think it was to 2019 at those elevated margins, that all plays right into that.

And Jay, I think 1 other piece to remember as we've narrowed the number of brands, we are buying product from, we are able to invest deeper into the items we carry from the top 50 brands. So it's retail 101. You're better in stocks, drives conversion, drives more reg price selling, and that has worked and will continue to work as we move forward into 2022.

All right. Understood. I guess when it comes to the brand portfolio, is it possible to sort of give us an idea -- I'm just giving us a ballpark number, let's just say the brand portfolio is $250 million in sales or something like that. What percentage of that is -- those -- the 4 key brands, and what percentage of that is being sold through DSW? What percentage is still like pure wholesale? Can you just give us an idea after you've done all this work to reset the brand portfolio? Sort of where does it stand right now?

Yes. What I would share is almost all of the revenue is with the 4 key brands. I mean that was very strategic. We cut out almost all production in 2020 and the only production we ramped back on were the 4 key brands. So that's that. Of those 4 key brands, JLO is only sold at DSW. It's still a growing brand. But -- and then we do have the vincecamuto.com site, which is also a direct-to-consumer that flows into that. And that's got very aggressive growth targets on it, as we've mentioned before. So those are going to be the 2 kind of that you see where we play a lot in interplay. And then the Jessica Simpson side has been really, really strong, both at DSW as well as outside of DSW, and we're seeing that brand have a really big moment at the -- right now.

Jay, I think the big thing is we are continuing to focus on our key accounts, and our key accounts, our ability to go direct-to-consumer through our dot-com and store channels that we own and control, and our key accounts, meaning Nordstrom's, Dillard's, Macy's, Amazon. Those are the people that we are focusing our attention on. And we need to grow with those folks. They are our key partners. And by narrowing the number of brands, I think at one point, when we acquired this company, there were over 20 brand/labels that they were working on. And we were making a lot of product for other retailers and private brand areas. And that did not allow us to play with focused tempo and disruption. And by narrowing the number of brands we carry and limiting the number of people we're selling to. It's really allowed the organization to focus. That, I think, is the key thing that we have to call out.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for the final remarks.

Thanks, everybody, for dialing in. And again, really excited about the progress of our business in the quarter and as we've headed into the holiday. Thanks, everybody, and happy holidays.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.