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DESIGNER BRANDS INC (DBI) Q1 2021 Earnings Call Transcript | The Motley Fool

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DESIGNER BRANDS INC (NYSE:DBI)
Q1 2021 Earnings Call
May 26, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Designer Brands Inc. 1Q 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

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

Stacy TurnofSenior Vice President

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ending May 1st, 2021 to the 13-week period ending May 2nd, 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.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Good afternoon and thank you everyone for joining us today. We’re particularly proud of our first quarter performance and energized by our continued progress. We’d like to thank our associates for giving their best to our company and customers, helping us achieve our near-term goals. A recent internal associate survey confirms we continue to have a very engaged associate base, which has been critically important to our success. We’re seeing notable progress against the roadmap we laid out in the second half of last year and we are excited about what the future holds. Continued improvement, highlighted by a return to profitability for the first time since the onset of COVID, bolsters our confidence.

Sales have exceeded our initial expectations, and we achieved an exceptional first quarter gross margin rate. Inventory turns are improving and we saw continued robust performance in the athleisure category, while beginning to see strengthening results in our seasonal business. We continue to optimize the factors in our control that will maintain our momentum as the market continues to rebound. We have positioned our assortment to capture market share in athleisure, an area where we have been historically underpenetrated to the market and we’re gaining share. Although our overall dress business remained depressed, our seasonal product sales significantly outpaced our initial expectations and the improvement in sales relative to inventory was a major contributor to the upside in our gross margin in the quarter.

We remain in chase mode and continue to leverage our scale with key vendors. More importantly, we leaned on our vertical capabilities with our Camuto segment to give us an advantage in these categories by selectively increasing production at Camuto to support the demand that materialized. Our vertically integrated capabilities are a strategic differentiator for us and will enable our company to be well-positioned as seasonal demand further rebounds.

Although store traffic continues to be below historical trends, we’re seeing a significant recovery, specifically in the US. There remains a considerable rebound opportunity for the second quarter and beyond. Our digital business continues to expand, and our stores remain crucial points of distribution in fulfilling orders received through our digital channels. As we discussed last quarter, we continue to refine our strategy and playbook given the realities of our day-to-day in a COVID-impacted world.

There are numerous signs that the macro environment is improving, providing tailwinds to our DSW business. With vaccination rates rising and new optimistic CDC guidance, US adults are feeling more comfortable returning to social activities. Consumers are beginning to spend in categories that have hit hard by the pandemic, including beauty, apparel and footwear. At DSW, we are well positioned to capitalize on these trends and continue our momentum. Our pivot to athleisure is yielding strong results and we continue to take share in this important category. According to NPD POS data, DSW is outpacing the rest of the market in athletic by 15 percentage points versus the same 13-week period ending May 1, 2019.

We continue to grow in line with the largest brands in footwear as we focused on growing our relationship with the top 50 brands. Having the right brands and styles is enabling us to drive strong demand and we are simultaneously evolving the store and digital experience for our customers. This begins with resetting our store floors. When you walk into a DSW location, you will consistently see the best brands, front and center. Right now that means you’re walking right into an athleisure assortment, but we’ll continue to evolve that layout as trends change. To support our strategy, we have hired a visual merchandising leader. This is the first time we’ve ever had this talent formally in our business. And this role supports our customer-first mindset and evolution into a more vertically branded business.

Before going into more depth on some of our strategic initiatives, we do want to provide some color around our relationship with Nike. Given their continued focus on the direct-to-consumer strategy, similar to our own approach with Vince Camuto, we were not surprised when our largest athletic vendor shared the news with us that they will not be taking further orders from DSW or our Canadian operations, beginning in September 2021. We will continue to offer their products in our stores and online through the remainder of this year. Normally, we do not discuss our relationships with individual vendors, but thought it was important to give some detail around our athleisure strategy moving forward.

First, we want to remind you that no single brand is material to our operations and DBI’s broad assortment across multiple categories and channels is what differentiates our model from many others. This brand accounted for less than 5% of our total sales in 2019 and grew to just over 7% in 2020, as a result of the mix shift as dress and seasonal dropped off significantly during the pandemic. On a positive note, we have an active dialogue with all of our top 50 brands. And in the wake of this news, have spoken with the leaders of every single major athleisure brand that we work with. These conversations have been very positive. They see this news as an opportunity for growth and we couldn’t be more excited about the work ahead with these brands.

We’re also continuing to grow new categories. We have traditionally carried an athleisure like trail, hiking and technical running, and implementing new experiences that will support these brands partnerships. We are partnering in new ways through marketing to bring these brands to life, both in our stores with shop-in-shops and via amplification of their presence through our online channels. We will take every action necessary to ensure we retain and grow our customer base in athleisure. A strategic focus for us continues to be giving the customer what they want. We remain heavily focused on the top 50 brands in footwear and at the end of the quarter, these brands represented 78% of our sales. This is significant, given our goal for 2021 was to increase our penetration of this category to 75%, representing growth of 50% compared to 2019. Focusing here enables our company to maintain better in-stock positions and allows us to be less promotional, given the demand for these major brands.

Let me give you an example. Earlier this month, we had a call with the leading athleisure brand. In the last year, we have grown our business with them over 300% and plan to hit 400% growth by the end of 2021. We value them as a partner, and they have shared, they are committed to making DBI a primary point of distribution for their hottest selling items moving forward. Our rewards program that offers brand’s access to a large female customer base connected with the digital and physical presence that can create unique experiences for their brand forms a strong foundation for a desirable partnership.

We’re also shifting our focus more heavily to our owned brands. Owned brands include exclusive brands that you can only get at DSW, like Kelly and Katie, Mix No. 6 and others. In addition to brands in which we have 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. We also have the ability to more carefully control pricing with our owned brands. These brands are performing strongly. And 15, yes, 15 of our top 25 selling items in the first quarter were items designed and sourced vertically by Designer Brands. JLO, a product designed by DBI, is gaining notable traction as we move forward with our plans for a relaunch of this brand in the fall. 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.

Turning to marketing. Meeting the customer where they are is crucial to our strategy. We understand our customer was shopping in the digital space more than ever in the past year. Therefore, we invested heavily in digital marketing, largely funded by significantly reducing our markdowns. Focusing on large national brands means we don’t have as many markdowns, both because of high customer demand and requirements from the brands themselves that prohibit markdowns. We are redeploying those dollars into marketing, focused on customer acquisition. This investment resulted in top line benefits, and VIP enrollments for the quarter were very strong with 1.4 million new members. Additionally, as a result of these investments, March was our single largest month of new member sign-ups in the history of our loyalty program.

Turning to Camuto. Our Camuto business remains challenged when compared to its historical sales levels, given the reduced demand for dress/footwear, but beat our initial internal expectations, as we are seeing some recovery with more consumers getting vaccinated and becoming comfortable attending social locations. One of our biggest competitive advantages is our ability to quickly turn on production when we see changes in consumer demand, and that’s what we did in the first quarter. Our initial plan had Camuto production down in the first quarter. But when demand increased, we accelerated production and ended the quarter with production up compared to 2020, as we responded to positive sales trends. Production is still down compared to 2019 due to shifts in our customer portfolio and continued depressed demand for dress styles across the industry. But we are excited about this shift in consumer spending and expect production for Camuto to be up again versus 2020 in the second quarter. Soon, the majority of the products we produce at Camuto will be for the benefit of our own retail and direct-to-consumer channels.

Our position as a vertically integrated retailer enables us to gain market share with a leading position in footwear. I want to remind you that when we sell goods to the end consumer that we produced ourselves, the margin we generate for DBI is approximately 1,500 basis points higher than selling goods made by someone else. This is the key to unlocking future profitable growth.

Moving to Digital. Following the success we had in Canada, we implemented the retail and planning disciplines from DSW on vincecamuto.com and put this side on the DSW platform. Vincecamuto.com is now on the same e-commerce platform and has access to the same road-map of features and benefits as dsw.com. This platform gives them the scale and support to grow exponentially while lowering the overall cost to operate. Vincecamuto.com has the added benefit of being able to leverage DSW stores for returns, giving our customers more choice in convenience. In fact, of those customers that do choose to return product, almost 50% choose to return to a physical DSW location. In the first quarter, we have seen early signs of success with vincecamuto.com net sales higher than 2019 by 129%.

Moving to Canada. The region continues to experience headwinds due to COVID lockdowns and restrictions, which have negatively impacted our recovery efforts, resulting in-store sales down about 46% compared to 2019, and up 63% compared to 2020 as all stores last year were closed for almost seven weeks. However, sales continue to outperform our initial expectations and digital remains strong with 202% growth compared to 2019. We continue to lean more into athletic and kids footwear, which are focus areas for Canada, representing 60% of our assortment in 2021 as compared to 41% in 2019. Looking ahead, we will plan to leverage our digital platform and store experiences to continue to attract customers.

Before turning it over to Jared, I’d like to quickly touch on our results. Results in the first quarter continued to improve as we return to profitability for the first time since COVID hit. We are very pleased with our performance relative to our initial expectations with comps up 52%, marking the first positive comp since the third quarter of 2019. The first quarter is critical time for our company, as March-April [Phonetic] is one of our two biggest selling periods of the year. We saw strong performance during this holiday period with improvement throughout the quarter. Merchandise margins also significantly improved compared to 2019 and 2020, driven by strategic price increases and lower markdowns. We continue to invest in digital and demand outpace the strong growth seen in the first quarter last year with a positive 13% at DSW. Jared will share more about this in just a moment.

As we look forward, we believe the positive trends in the first quarter will continue and we are optimistic that the industry will recover more fully as we head into the fall. We have been aggressively going after athleisure market share and growing penetration with the most popular brands. We said 50% of our assortment would be athleisure in spring of 2021 and we have made excellent progress against that goal. In fact, we now expect to reach close to 55%. In the second half of the year, we will continue to follow the customer recovery and make selective inventory investments that mirror demand growth while maintaining flexibility and liquidity to deploy as appropriate.

Keep in mind that our company’s foundation was built upon the dress category. We have been underpenetrated in athleisure compared to the market and have been making tremendous strides in closing that gap. These gains coupled with our track record of success in dress and seasonal means we are poised as a major power player in footwear that is able to reach a broad and attractive customer base. I want to reiterate that we are extremely energized by our Q1 results. We have a way to go, but we are pleased with the signs of recovery that we are seeing so far. We continue to remain hopeful that vaccine rates will increase and infection rates will continue to decrease, and we are looking forward to the back-to-school and fall season.

With that, I will turn it over to Jared. Jared?

Jared A. PoffExecutive Vice President and Chief Financial Officer, Designer Brands

Thank you, Roger, and good afternoon, everyone.

Trends continued to improve in the first quarter across all metrics, and we are very pleased with our performance. As Roger mentioned, we are becoming more optimistic as the vaccine rollout continues, infection rates are decreasing, and our customers are coming back into our stores more frequently. Our targeted marketing campaigns are yielding stronger results and consumer demand is beginning to show signs of recovery in categories that were especially depressed during COVID, including seasonal.

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 items, please reference our press release.

We are continuing to execute against our near-term priorities outlined last year, and we are seeing success build each quarter. First quarter was exemplary, as we exceeded our expectations across the board. This quarter, we saw our best comp performance and gross margin rate since the start of COVID and we are pleased that we were able to return to profitability this quarter.

Turning to our results. For the first quarter, sales increased 45.6% to $703.2 million, which included $15.5 million in inter-segment revenue that is eliminated in consolidation. This was the best quarterly sales performance since COVID-19 began. During the first quarter, total comps were up 52.2% versus last year’s 42.3% decline. For US retail, comps were up 56.3% during the first quarter versus down 42.4% last year. Similarly, first quarter comps were the best we have seen since the onset of COVID-19 and were driven by our continued pivot to athleisure footwear, a category in which we are historically underpenetrated. While still below 2019 levels, we saw sequential improvement in store traffic throughout the quarter.

You have heard us talk repeatedly about our pivot toward athleisure and kids footwear in our US Retail business, and our results clearly demonstrate this was the right move. Further details can be found in our first quarter infographic on our Investor Relations site. During the first quarter, we saw athletic comps up 87%, demonstrating our strength in the category, despite the impact of COVID-19. Similarly, kids comps were strong, up over 78% compared to the prior year. Athleisure, which includes athletic and casual was up 92% versus last year. The athleisure category’s penetration continues to increase and now represents 58% of our sales this year versus 47% in the same period last year.

During the quarter, seasonal comps were up 56%, while dress was down 10%. Due to a lack of social gatherings and traveling, a continued trend of working from home as a result of the continuing impact of COVID-19 and our more conservative inventory positioning. As a reminder, the dress category remained significantly depressed during this time, accounting for only 10% of our sales in the first quarter compared to 22% in 2019 across the same period. We are excited that the seasonal business is showing signs of recovery and look forward to the segment continuing to normalize throughout the year and beyond.

We have seen customers continue to transition their spending preferences to online, and this quarter was no exception. We saw a strong performance in our e-commerce with digital demanded sales in US retail, up 13% for the quarter. Digital demand represented 35% of total demand during the first quarter versus 49% last year when the majority of our stores were closed, but well above first quarter 2019 level of 22%.

Turning to Canada. Total comps were up 10% during the first quarter. On a store level, comps were soft as our stores continue to be impacted by COVID-19 lockdown to capacity restrictions that negatively impacted store performance, especially in Ontario, which represented approximately 40% of our store sales as of the end of 2019. Despite the results in stores, we saw strong digital growth of 202% during the quarter compared to 2019.

Let’s turn to our Camuto Group, which produces almost exclusively seasonal and dress product and has been in a difficult position. We have been cutting back our production over the last 12 months, given the sharp decline in demand for seasonal and dress products. As Roger mentioned, we planned production at Camuto down 15% for the quarter. However, following better-than-anticipated consumer demand early in the quarter, we were able to quickly turn on our production, a key competitive advantage to our US Retail business. Ultimately, we increased production throughout the quarter, much to the benefit of our own retail channels, and ended the quarter with production up 3% year-over-year.

Looking forward, we are expecting second quarter production to be up 64% over last year, but remember that this is against the period when cancellations were in full swing, and we were cutting production significantly. When we compare our production to 2019, we were down 19% in the first quarter, which is largely due to us exiting a number of smaller, unprofitable brands. We will continue to plan Camuto production to build through the second half of the year, primarily driven by a recovery in seasonal footwear demand. Total net sales from Camuto, including sales to DSW were $57.4 million in the first quarter, down 30.1% compared to the same period last year. Wholesale sales were $48.6 million in the first quarter versus $67.5 million last year, including sales to our Retail segments, which totaled approximately $14.3 million versus $16.7 million last year.

Our consolidated gross profit increased $242.6 million to $216.1 million in the first quarter versus a loss of $26.5 million in the prior year. We were particularly pleased with our gross margin story this quarter as we saw the best quarterly performance in over two years. Gross margin was better than our initial expectations given the improved sell-through of seasonal inventory, which therefore required fewer markdowns, coupled with strong full price selling of athletic and kids product. Our consolidated gross margin rate increased to 30.7% in the first quarter versus a loss of 5.5% in the prior year and a 100 basis point improvement over the first quarter of 2019.

At our US Retail segment, similar to Q4, we delivered merchandise margins that were above both last year and 2019, demonstrating the success of the assortment pivots that we’ve made since the onset of COVID. We saw material leverage on our fixed occupancy and fixed cost lines versus last year, given our year-over-year sales improvement. And when you couple the sales improvement with the expense reduction work we’ve done since 2020 particularly on occupancy, we were actually flat to 2019 rates for occupancy and supply chain. The return of store demand provided leverage on shipping expense versus last year, but still provides deleverage versus 2019, given the continued shift to digital demand we are seeing from our customer. In the US, gross margin was 31.1% versus negative 8.7% last year and also improved 80 basis points to the first quarter of 2019.

Similarly, we saw strength in our Canadian operations. Canada’s gross margin in the first quarter was 26.7%, well above last year’s negative 7.9%. The improvement year-over-year was due to improved product margins, leveraging occupancy and lower inventory reserves, partially offset by higher shipping and freight costs.

Camuto’s gross margin rate was up 383 basis points to 20.8% in the first quarter versus 16.9% last year due to liquidations and markdowns taken last year, substantially better sell-through and improved inventory position year-over-year. Gross margin was down 380 basis points from the first quarter of 2019 due to fixed royalty deleverage. However, excluding royalty, gross margin improved 160 basis points due to much cleaner inventory positions, resulting in higher release of inventory reserves.

Our inventory levels are in excellent shape. We’ve been investing in our tried-and-true popular brands that perform well regardless of the macro environment. We have been managing our inventory levels exceptionally well, taking our cues from the customer. At the end of the quarter, our inventory was up 1% in total compared to last year, which was below our sales increase of 46%. On a unit basis, inventory was 25% lower to last year as a result of the material markdown reserves we had placed on our inventory at the start of COVID. Compared to the first quarter of 2019, inventory was down 16% in total and on a unit basis, down 19%.

I want to briefly discuss our inventory strategy for the spring and summer. Given the improvement we saw in the first quarter, we are anticipating a continuing increase in demand for seasonal footwear, and we have been chasing this product through our own channels at Camuto and in the broader market. We remain flexible and nimble to follow the customer as they continue to increase their spending on apparel and footwear and began to reengage in social occasions and events.

Moving to operating expenses. In the first quarter, our adjusted SG&A was up 7.3% to $199.1 million versus last year and down 7.4% compared to 2019. Given the significantly lower sales base, our SG&A ratio for the first quarter was 28.3%, well below last year’s level of 38.4% and slightly above first quarter 2019’s level of 24.6%.

During the quarter, we did make the strategic decision to repurpose some of our avoided promotional markdown dollars into digital marketing, which, as Roger mentioned, was highly productive, delivering the highest number of new member sign-ups to our loyalty program in our company history. As long as we continue to receive this type of productivity and are able to fund these investments with lower markdowns, I expect we will continue this approach for the foreseeable future.

Depreciation and amortization totaled $20.6 million in the first quarter compared to $23.1 million in the same period last year. Adjusted operating profit for Designer Brands was a gain of $18.7 million in the first quarter versus a loss of $209.7 million last year, but below the $46.5 million gain in the first quarter of 2019. We had $8.8 million of interest expense during the first quarter compared to $2.2 million in the prior year.

Moving on to taxes. Our effective tax rate on adjusted results was 4.7% in the first quarter versus 38.4% last year. The change in rate was largely impacted by the recording of net discrete tax benefits, including adjustments to our estimated fiscal 2020 return, reflecting implemented tax strategies. This benefit contributed to the increase in our income tax receivable from $149.8 million recorded at the end of 2020 to $158.9 million at the end of the quarter, which we anticipate receiving in the back half of fiscal 2021. It should be noted that this Q1 rate is not expected to continue for the balance of the year. And in fact, the following quarter’s tax rates may be notably higher than prior years given tax treatment of certain expenses when taken against actual taxable income levels.

Total weighted average diluted shares during the quarter were 77 million compared to 71.9 million last year. For the quarter, we reported a net gain of $17 million or $0.22 per diluted share, primarily impacted by the release of part of the tax valuation allowance with changes to our deferred tax assets versus a net loss of $215.9 million or $3 loss per diluted share last year. Excluding this release, adjusted EPS was $0.12 per diluted share for the quarter.

Last year, we spent a great deal of time focusing on our liquidity position and increasing our flexibility given the volatile and uncertain conditions. We remain pleased with our balance sheet, ending the quarter with $49.3 million of cash versus $250.9 million last year and had $289.9 million available to draw on our revolving credit facility, bringing our total liquidity to just under $340 million. We ended the quarter with $337 million of debt versus $393 million last year.

During the quarter, we closed five stores in the US and opened two new stores, resulting in a total of 516 US stores. In Canada, we closed one store and opened two new stores, ending the quarter with 145 stores. As discussed last quarter, we are closely evaluating our existing store infrastructure and have identified approximately 65 US stores that would make sense to close upon their natural lease expirations, primarily over the next four years, including approximately 25 stores that we currently view as eligible for closure in 2021. However, this number may change over-time based on landlord negotiations and actual post-COVID store level performance versus current projections.

We continue to plan to open six DSW stores in the US in 2021 that we’re contractually committed to prior to COVID. In Canada, we are currently planning to close three stores and open three stores in 2021. Similar to the US, we continue to evaluate our store fleet in Canada as well and could see additional stores close even in 2021 as leases come up for renewal.

Given the environment, we believe it is still too uncertain to provide guidance for 2021. However, we wanted to provide some broad commentary on the direction of our business. We expect that the second quarter at DSW will show continued improvement. Canada will see improvement, but given the government shutdowns, the recovery will be slower than in the US. And lastly, Camuto production has been increasing each quarter as we continue to see increased demand for seasonal products, especially at DSW-exclusive brands and our Camuto owned and licensed brands.

We are confident that our business is recovering, and we should start to normalize in the second half of the year. We are still planning our inventory conservatively, but we are prepared to make the necessary inventory investments and increase production as demand returns. First quarter marked our return to profitability, and we believe that, that trend will continue going forward driven by the strength in our athleisure and kids business, coupled with a recovery in our seasonal business.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Steve Marotta with C.L. King & Associates. Please go ahead.

Steven MarottaC.L. King & Associates — Analyst

Good afternoon. Roger and Jared, congratulations on the accelerating trends.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Thank you.

Steven MarottaC.L. King & Associates — Analyst

I wanted to talk to you a little bit about and focus on Camuto. I think, Roger, you mentioned that 15 of the 25 best selling brands during the period were of the exclusive nature or vertical, if you said the penetration, please forgive me, I missed it. Can you talk a little bit about where that is right now and where without giving — I know you’re not giving guidance for the balance of the year, but where you think that penetration could go through the balance of the year, again, specific to Camuto and the benefits of the gross margin there? Thanks.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Thanks, Steve. It was 15 of our top 25 items [Technical Issues] I was clear on that. And we’re still in the high single-digit to low double-digit penetration around our owned brands. And we have aspirations, as you know, when we bought the business to take that to be closer to 30%. And that’s the direction we’re headed. And again, we’re really excited about the progress and how we were able to chase business during the quarter and drive margins through the Camuto organization. So it’s working as we had planned. It’s now time that the business has recovered to turn it on in a bigger way.

Steven MarottaC.L. King & Associates — Analyst

One additional question there. Has anything occurred during COVID to shorten your turnaround times specific to Camuto inside of DSW stores?

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

I would say, there have been some things. The material changes are things we have on our road map where we can leverage some facilities that we have in Brazil and to test and learn and then go in a much bigger way and accelerate production. But those are things we’re working out for the back half of the year. Those are not in place in a big way today, but that is — the intent is speed, speed, speed is going to win. And that is what we’ve got to leverage Camuto — leverage the DSW consumer to better inform our Camuto decisions.

Steven MarottaC.L. King & Associates — Analyst

That’s really helpful. I’ll take the balance of my questions offline. Thank you.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Yeah. Thank you.

Operator

Our next question comes from Gaby Carbone with Deutsche Bank. Please go ahead.

Gabriella CarboneDeutsche Bank — Analyst

Hi, good afternoon. Thanks for taking my question. So I was wondering if you could dig into store traffic levels, maybe a little bit more on how that progressed through the quarter, maybe what you’re seeing here in May. And then maybe how do you view the opportunity for store productivity to get back to 2019 levels? Thanks.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Thanks, Gaby. And I would say what we saw and what we’ve been talking about is the sequential improvement, and that happened in the first quarter, and it happened throughout the quarter as we progressed. And our expectation is that that will continue through Q2 and the fall. So again, good progress. What I’m really excited about is, we knew we would not be getting after some of our, let’s just say, consumers that we knew historically had shopped their stores that shots and arms had not taken place. So we’ve not really pushed a lot of our marketing campaigns targeting that consumer. And we’ve turned some of those things on in first quarter and we love the response we’re getting. So those are weapons that, frankly, we’ve not been able to deploy to-date because we knew it would not be worth the spend. But those are all, I think, opportunities as we go through the back half of the year.

Gabriella CarboneDeutsche Bank — Analyst

Got you. Thanks for that. And just a quick follow-up. Are you dealing with any supply chain issues due to these like the ways of the ports that many retailers have been talking about?

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

I think our merchant and sourcing teams have done an amazing job of sort of managing around it. I would tell you, it is not easy. But our team has done a great job of opening up windows earlier, so that goods that perhaps might have been planned for later are hitting now. We’re doing everything we can to manage it. It is more than a full-time job for many people, but I feel good about our inventory position versus the sales we have planned and we’ll do everything we can to keep working with our vendor partners. And this really is a big benefit of our organization is because you are a large player, you move up closer or to the top of the line as goods do come in and get allocated. So again, I feel pretty good about our inventory position.

Gabriella CarboneDeutsche Bank — Analyst

Great. Thank you so much for the color.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Yeah. Thanks, Gaby.

Operator

[Operator Instructions] Our next question comes from Mauricio Serna with UBS. Please go ahead.

Mauricio SernaUBS — Analyst

Hi, good afternoon and thanks for taking my question. I have a question. If you could maybe talk about the second quarter. I mean, you mentioned that you expect an improvement and how should we think about that considering compared to a 2019 basis, first quarter sales were down around 19%, I mean how should we think about that for the second quarter?

And also, if you could talk a little bit more about the puts and takes into the gross margin expansion versus 2019? How much came from merchandise margins compared to occupancy and other cost inputs? Thank you.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Yeah. Mauricio, I think, again, we’re not providing future guidance, but we anticipate continued improvement in the business, just like what we have seen the acceleration in Q1 and what we experienced in Q4 as well. So that’s sort of the stair-step approach that we’re envisioning for the balance of the year.

As it relates to margins, there are a couple of things that I’m really proud of that we’ve done, leaning into these top 50 brands and having product that you know the consumer demands that you do not have to take markdowns on, that has been a big win for us. Getting after the owned brands in a meaningful way. And those things, again, margin, about 1,500 basis points better for us as an organization. So continuing to drive that is going to improve the business and it’s really been exciting to be in a chase mode, which is sitting here looking at Jared and knowing what we went through last year where it was the complete opposite of that. This is a lot more fun and creates much more margin opportunity on an upside.

Jared A. PoffExecutive Vice President and Chief Financial Officer, Designer Brands

Yeah. One thing I will mention Mauricio is, if you just look at our history and we’re looking at the full year, fall tends to be a couple of hundred basis points lower, merchandise margins in general than spring, just given the categories and the promotional environment of the holiday time period. So again, we aren’t giving guidance, but I do just point you to what history is for kind of our business model.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

And Mauricio, I think it’s important, too, that when you look at the assortment pivot we’ve made, and we have an athletic business that has historically run gross margin rates significantly below non-athletic footwear. We grew athletic by 87%. We are playing in a kids space that has historically had gross margin rates materially below non-athletic and athletic. And despite the fact that those have grown at 87% and 78%, as an organization, we still grew gross margin rates. And that is a huge — I can’t applaud enough our design team, our merchant team, our planning team, our allocation team, our store team, our marketing team, for all working together to get the customer what they want, when they want it, and you can avoid markdowns. It’s something I’m really, really proud of for our team.

Mauricio SernaUBS — Analyst

Got it. Thanks a lot. Congratulations.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Thank you.

Operator

[Operator Instructions] Our next question comes from Dylan Carden with William Blair. Please go ahead.

Dylan CardenWilliam Blair & Company — Analyst

Yeah. Hi. Thank you very much. Just curious as you’re sort of thinking about getting Camuto more a part of the assortment here. Are there any changes to the strategy as it relates to the categories that you’re going to move more into the assortment, or just sort of how you’re thinking about the integration of that business kind of coming out of the pandemic?

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Well, I think it’s a great question. And yes, there is opportunity, especially when a certain brand decides to take their talents elsewhere. And we’re going to look at how do we continue to be more athleisure like in the brands that we own and operate and I think that’s upside for us as an organization. There’s open to buy to be had in that space. So that’s an area in particular where we think we know we can do better. And then I would say the growth potential that we have with the Jennifer Lopez brand that we’re going to relaunch later this year, from a fashion perspective, we think there’s significant upside there and Vince is still a very small part of the DSW brand. And doing things like what we’re doing to create shop-in-shops for the big brands, those are the kind of things we’re thinking about that can help us grow Vince, Jessica, JLO, Crown Vintage, Mix No. 6, all of those brands.

Dylan CardenWilliam Blair & Company — Analyst

Excellent. Thank you very much.

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Thanks, Dylan.

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 L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Thanks everybody for listening in today. And if you get a chance as a DSW consumer, please check out your emails. There’s a great email today, featuring our own CFO, Jared Poff in a great set of sneakers. So please go check out your email from DSW, and really appreciate everybody listening. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Stacy TurnofSenior Vice President

Roger L. RawlinsChief Executive Officer, Designer Brands and Interim President, DSW

Jared A. PoffExecutive Vice President and Chief Financial Officer, Designer Brands

Steven MarottaC.L. King & Associates — Analyst

Gabriella CarboneDeutsche Bank — Analyst

Mauricio SernaUBS — Analyst

Dylan CardenWilliam Blair & Company — Analyst

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