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Designer Brands inc (DBI) Q2 2021 Earnings Call Transcript

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DBI earnings call for the period ending July 31, 2021.

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Designer Brands inc (DBI 5.00%)
Q2 2021 Earnings Call
Aug 31, 2021, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day and welcome to the Designer Brands Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

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

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Stacy Turnof -- Senior Vice President of Financial Communications & Capital Markets

Good morning. Earlier today, the Company issued a press release comparing results of operations for the 13 week period ended July 31, 2021 to the 13-week period ended August 1, 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. Rawlins -- Chief Executive Officer

Good morning and thank you, everyone for joining us today. We are pleased with the tremendous momentum in our business. And as always, we want to thank our associates for their hard work that has enabled our success. I'd like to highlight five notable achievements in the quarter before diving into the rest of my remarks.

First, for total DBI, our comp of exceeded our initial expectations resulting in record gross profit and significant improvement in our operating income rate. Second, at DSW we set an all-time sales and gross profit record for the quarter. Third, we continue to see strong support in athleisure in kids, and we are positioning ourselves to capture even more market share in these areas. Number four, we also experienced incremental improvement in categories that were hit harder by the pandemic as demonstrated by a recovery in seasonal, which was up 5% for the quarter at DSW compared to pre-pandemic 2019. And finally, we are seeing our core customers returning to our stores and they are buying full price items. In fact, we saw 10% comps in regular price selling in our US retail business during the quarter compared to 2019, which clearly benefited our gross margin.

Although store traffic continues to be below our historical trends, we are continuing to see a rebound especially in the US, while our digital demand, it continues to be robust. Let's talk a little bit about our continued progress in providing our customers with the best possible assortment. At DSW, our pivot to athletic continues to yield strong results with comps up 45% compared to 2019 and kids comps up 55%. According to NPD's retail and consumer tracking services, in the quarter, DSW sales growth in both kids and athleisure outpaced the remaining US footwear market significantly compared to the same quarter in 2019, allowing us to gain market share since 2019 and positioning us among the top 15 footwear retailers in both categories, while maintaining a top 3 position in women's.

This also holds true for the tremendous opportunity we see to grow our men's business. According to NPD's retail and consumer tracking services, DSW's results in men's compared to the same quarter in 2019 outpaced the rest of the market by 6 full percentage points also resulting in market share gain since 2019. Additionally, seasonal is continuing to rebound nicely and addresses seeing some green shoots. In the second quarter, NPD's Retail Tracking Service shows that DSW recovered after being down 19% compared to 2019 in seasonal in the first quarter to down 1%. This was a more significant improvement than the rest of the market.

In back-to-school [Phonetic] athletic and kids both have seen significant growth in sales penetration as the season began in late July. We still have a number of stores working through back-to-school, especially in the Midwest and Northeast, but we are encouraged by our early results. We continue to work to bring freshness to our physical locations and grow basket size. We started with some smaller initiatives that are scalable over the long term. For example, we partnered with Staples to instill pop-ups in 48 stores for back-to-school and see this is something we can expand in the future. We've added apparel to select locations in a meaningful way with T-shirts that suit [Phonetic] the local market and have sold those items twice as quickly as initially expected.

In Canada, we are doing Lids and Claire [Phonetic] shop-in-shops inside our stores, so customers can accessorize their most recent footwear purchases.

Additionally, we continue to focus more heavily on the top 50 brands in footwear. In the second quarter these brands, which include our vertical brands represented 78% of our sales in the US and we surpassed our goal to grow sales of the top 50 by 50% compared to 2020 with these brands growing a 112%. Additionally, according to NPD's Retail Tracking Service, we grew the top 50 brands, excluding our private brands 15 percentage points faster than the rest of the market in the quarter compared to the same period in 2019.

Let's turn to a few examples of how we are ensuring that we have the best product for our customers moving forward. In August, we announced that we will be the exclusive in-store distributor of the iconic brand Hush Puppies giving us access to a global heritage brand that has exceptional brand awareness and we'll now be sold only in DSW stores and on Not only do we anticipate we will capture new customers at DSW by having this brand exclusively at our stores. This will allow us to convert customers into DSW loyalty members as well as offer their digital customers, the ability to return product to stores and potentially serve its pick-up locations as well. Hush Puppies is the perfect blend of style and comfort something that our customers are demanding. We are thrilled to welcome this fund-optimistic colorful brand to our exclusive family and have an exciting partnership that supports our focus to build our robust assortment of brands. This is an excellent example of how we can partner with an existing, well-known brand, while leveraging the infrastructure in loyalty we've already built to deliver exclusivity and brand dominance. And we expect more opportunities like this that will allow us to give further in control of our brand destiny and provide differentiated experiences for our customers.

While I am excited about all of this progress, I also want to recognize that we continue to operate in a dynamic and volatile environment. Things are improving as vaccination rates increase. We are still facing a number of headwinds, including new COVID-19 variants and the increasing impact of supply chain issues including delays with inventory receipts.

Now let's talk a little bit about marketing. Our best-in-class VIP loyalty programs remain a key support for our growth. For all of DBI, we have approximately 30 million rewards members as of the end of the quarter. During the quarter, enrollments in our program for DSW grew 18% compared to 2019 building momentum from a 7% increase in the first quarter. This was the highest quarter of sign-ups in the history of DSW.

Now let's move up north and talk a little bit about Canada. The region remained challenged with COVID restrictions resulting in comps down 16% compared to 2019. However, comps were increasingly stronger throughout the quarter as Canada began the recovery that the US was seeing, just delayed by a few months. Digital sales continue to be impressive, as customers stuck to online shopping with digital sales up 146%. Athletic, kids and sandals all displayed growth when compared to the second quarter of 2019. Our Canadian operations also migrated to DBI's digital platform in July, which will streamline our e-commerce efforts and carry significant benefits into the future. I'm proud of how we have executed on our stated initiatives from 2020 through the early part of 2021 and while COVID continues to be top of mind, we have begun the journey to move our Company forward and are well positioned for future success.

As we look ahead to our strategic growth, we have organized our efforts around three pillars, customer, brand and speed. We must be obsessed with our customer more than ever before. They have a great desire for products and experiences and we're adding resources to our digital, IT and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience. These actions will enable us to better understand our customers provide improved service and pursue new demographics to bring into the DBI customer family in targeted and personalized ways we've never deployed before. And we're dreaming up new ideas for how we can provide more value to our VIP members who continue to be the lifeblood of our business and our largest competitive differentiator.

Next, we know how critical controlling our own brand destiny is for our growth. Camuto is absolutely central to this pillar. And we saw exciting results in the quarter, as sales of Camuto produced brands were up 88%; on inventory, down 13%. More specifically, sales of Jessica Simpson were up 92% compared to 2020 and up 9% compared to 2019. Retail sales across our key partners are similarly improving with sales up 140% compared to 2020 and down only 4% compared to 2019. A key to our success is our focus on design and an eye for key trends in the market.

A great example of this is our Brelanie Woven-Strap Mule, this best seller has been out of stock several times this year across multiple retailers. We expect to sell upwards of 100,000 pairs of this style alone. We're also leaning into our vertically integrated capabilities, allowing us to react much faster to emerging market trends in our exclusive brands and are piloting new programs to explore additional opportunities and encapture [Phonetic] whitespace in our assortment. As we continue to design some of the hottest footwear in the industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO, we must marry that up with the strong DTC distribution through our unmatched physical footprint across North America and award winning digital infrastructure.

As a reminder, Camuto-produced brands come in margins roughly 1,500 basis points higher than other brands, allowing us to sell world-class product with a high level of profitability. Additionally, given our massive loyalty base and commanding retail market share, we can partner with the top brands in the industry to offer one of the largest and most inclusive assortments both in person and online. We remain heavily invested in the top 50 brands in footwear through activations and differentiated experiences, all centered around our customer. We will continue to prioritize growing our vertical brands and to evolve our online presence, so that it's closely coupled with a broad reaching footprint of storefronts, the double as fulfillment centers.

Our last pillar, speed, is of the utmost importance in today's world. Customers today expect that we not only have the latest product in our stores, but that we can deliver it to them in an expedited manner. We're developing processes to deliver products more quickly, so we can get them in our customers hands faster. Fulfillment has historically taken five to seven business days and we're working to improve that two to three calendar days over the next few years while finding efficiencies along the way to keep cost contained. We're looking at optimizing our current infrastructure and expanding our small parcel delivery partnerships to include regional carriers that can respond more quickly and more cost effectively than the limited national carriers.

Additionally, part of the strategy within the speed pillar is to improve our West Coast fulfillment capabilities. But speed to market also means faster to market. As designers of some of the hottest footwear brands, we need to be early on trend and we anticipate that our direct access to millions of customers in shopping data will give us a leg up on design and development. We're working to improve collaboration through technology and processes around DBI and to squeeze out additional efficiencies in our overall development cycle time. All three of these pillars interact with one another [Phonetic] and our efforts simultaneously strengthen each one. We are offering customers the value they want, the experiences they crave, the speed they demand and the brands that can rise to those challenges. We want to be the footwear destination of choice for our customers.

Before turning it over to Jared, I'd like to quickly touch on our results. As I stated earlier, I am so proud of the results we delivered in the second quarter. Our comps return to 2019 levels and our gross profit grew significantly driven by full price selling. We've seen our Q2 momentum continue into Q3 as back-to-school has started across the US. In closing, there remains some uncertainty as we look ahead. COVID variants continue to create surges in infection rates and the global supply chain is increasingly challenged as a result. However, we believe we are on track to continue to meet or beat our 2019 performance for the back half of fiscal 2021. Jared will provide more color on this in just a moment.

We expect customers will continue to increase in their desire to go out and participate in social occasions and we are hopeful that vaccination rates will continue to rise. We are ready with great product that is differentiated as customers return to our stores more frequently. To date, we remain excited by our progress in our results and we are pushing hard to continue our success into the back half of the year. As always, we will remain nimble and innovative. We have a proven track record of staying ahead of trends to ensure our organization's success. We broke into omnichannel early and swiftly, and our digital demand continues to be strong even as consumers have returned to physical stores. We saw customer demand going the way of athleisure and we pivoted rapidly and we still see so much room for growth here. And we see athleisure as a core staple in our customers' closets. We saw our female customers walking out the door to buy their kids shoes elsewhere and prioritized growth in that category that is now one of our primary growth drivers. We see other things on the horizon that will allow us to leverage our direct to consumer and vertical capabilities to own and control brands and secure ourselves for the future growth.

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

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Thank you, Roger and good morning, everyone. Our second quarter performance blew away initial expectations across the Board. This is a continued example of how we are successfully executing against the strategy we previously laid out by leveraging the flexibility of our business model, pivoting our assortment to what the customer is demanding right now and controlling what we can across the business. We are optimistic that business will continue to improve in the second half as vaccination rates have the potential to increase following the FDA's approval of Pfizer's vaccine and as we see our customers increasingly returning to stores in social occasions. This optimism is somewhat tempered by the continuing uncertainty with Delta and other variants and the direct impact it is having on the global supply chain, which I'll discuss further a little later.

Please note the financial results that we will reference during the remainder of today's call exclude 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 second quarter, sales increased 66.9% to $817.3 million compared to 2020. Total comps were up 84.9% in the second quarter, a significant increase from the first quarter's comps of 52.2%. As Roger mentioned, we saw a record level second quarter sales and gross profit in our US retail segment. US Retail comp sales were up 94.3% during the second quarter versus the prior year period and sequentially improved from the 56.3% in the first quarter. This growth was driven by our near-term strategy and improving store traffic. Year-to-date traffic as compared to 2019 has continued to improve. While store traffic in the second quarter in total was down 10% to 2019, we saw sequential improvement throughout the quarter with May down roughly 17% and July, down just 3.6%, and we saw a positive store traffic comps on multiple days.

Our results are continuing to exemplify that our pivots toward athleisure and kids footwear and our US Retail business is working. During the second quarter, athletic comps were up 90% compared to the second quarter 2020 which I'm proud to say was among the strongest out-performances [Phonetic] in the footwear industry and delivered a sales penetration of 23% versus 17% in 2019. Athleisure sales comps which includes athletic and casual were up 107% during the quarter compared to second quarter 2020. And the athleisure penetration was 57% versus 44% in 2019. Coming into the quarter, we had consciously planned inventory for seasonal product and the category outperformed our initial expectations and was up 5% versus the same period in 2019. Our dress category also saw improvement from prior trends. While women's dress was down 40% for the second quarter versus 2019, it was much improved from the first quarter which was down 57% to 2019.

Similar to women's, men's dress was down 30% versus 2019, much improved from the down 56% in the first quarter. Dress continues to lag the broader recovery given continued challenges in the trend of working from home and apprehension around social gathering and traveling, but we like the trajectory we are seeing. As demand in stores has accelerated, we have not seen a slowdown in digital growth. US Retail digitally demanded sales for the second quarter were up 21% versus 2020 on top of a roughly 27% increase the same time last year. Digital demand was 27.2% of total demand for the second quarter, well above pre-COVID levels of percent in the second quarter of 2019.

Turning to Canada. Total comps were up 14.6% in the second quarter above first quarter comps of 10%. Store traffic comps were down 43% in the second quarter compared to 2019 levels, which is an improvement from down 51% in the first quarter. We saw sequential improvement in traffic throughout the quarter from being down 66% in the first five weeks to being down 29% in the last eight weeks. As discussed last quarter, Canada experienced much longer lockdowns and restrictions than were experienced in the US. As such, the recovery, while trending very similar to the US is running about two to three months behind what is being experienced in the US.

Turning to Camuto. I always like to remind everyone that Camuto is a critical part of our long-term focus to build our vertical brand strategy. As Roger mentioned, the performance of Camuto-produced brands within DSW has been increasingly strong. Our customers responding very well to our products as we are offering the right fashion at the right price points. Our ability to quickly turn on production when we saw changes in consumer demand was critical to this success and we'll continue to be a differentiator for our business. Across Camuto in total, for the quarter, we continued to ramp up our production to meet consumer demands. But as I mentioned previously, we are feeling the impact of the global supply chain pressures. Specifically, we saw approximately $7 million of our wholesale orders shipped into Q3 mainly due to production delays caused by increased demand with limited factory capacity during peak season, rolling blackouts, COVID issues and labor shortages. We anticipate more shifts will occur from Q3 to Q4 based on COVID closures, we are seeing in Vietnam, in addition to further rolling blackouts and labor issues.

We are expecting continued production ramp ups throughout the remainder of the year from both a shift of production from Q2 and an increase in consumer demand. Please keep in mind, unlike retail, consumer POs [Phonetic] are written well in advance for wholesale and thus the ability to impact pricing is more limited in the near term. Total net sales for Camuto including sales to DSW were $50.5 million in the second quarter, up 65.9% versus last year. Wholesale sales were $42.7 million in the second quarter versus $15.6 million dollars last year, including sales to our retail segments which totaled approximately $12.7 million versus $4.5 million last year. Our consolidated gross profit increased $247.6 million to $284.7 million in the second quarter versus $37 million in the prior year. Our consolidated gross margin improved to 34.8% in the second quarter versus 30.5% in 2019, up 430 basis points.

At our US Retail segment, gross margin was 35.5% in the second quarter versus 30.7% in the second quarter of 2019. This was driven by strong regular price selling, limited promotions and clearance and select price markups which was notable given our increased penetration of athletic was generally comps with lower initial markup. We also saw leverage in our store occupancy and supply chain cost. Canada gross margin in the second quarter was 32.6% versus 34.7% in 2019. This was primarily due to lower promotional activity and higher content of closeout buys which yielded higher rates versus 2019. This was mitigated by higher shipping expense due to growth in our digital business.

Camuto gross margin rate was 16.9% in the second quarter down 10 basis points from the second quarter of 2019, primarily related to deleverage from fixed guaranteed minimum royalties or GMRs. Without the GMRs, gross margin rate would have been up 110 basis points.

We ended the quarter with inventories of $504 million versus $445 million last year, but down in units by 16% and down 28% in units compared to 2019, which was below our initial plan to be closer to flat to 2019. This obviously causes some potential friction as we continue to see our sales ramp quite positively to 2019. Accordingly, we are leaning heavily into our own production capabilities at Camuto as well as aggressively working with our vendor partners to get priority access to the inventory that is available. Our scale and overall relationship size with most of the brands we carry typically positions us well when chasing limited inventory.

Additionally, we have projected several million dollars of increased freight costs across DBI this fall to expedite inventory that becomes available. In the second quarter, consolidated adjusted SG&A for all of our businesses was up 29% to $218 million versus last year and up 2.4% compared to 2019, driven by our continued strategic pivot of redeploying excess gross margin dollars into increased customer acquisition marketing dollars. Our adjusted SG&A ratio for the second quarter was 26.7% of sales, slightly above second quarter 2019's level of 24.9%. Depreciation and amortization totaled $19.7 million in the second quarter compared to $20.9 million in the prior year. Adjusted operating profit for Designer Brands was $69 million in the second quarter versus $50.9 million in the second quarter of 2019. I am so proud of the work we've done to have not only returned to profitability last quarter, but to have materially grown profitability this quarter and coupled of that with positive cash flow generation.

We had $8.1 million of interest expense during the second quarter compared to $3.8 million in the prior year. Our effective tax rate was 28.7% in the second quarter versus 29.5% last year. Total weighted average diluted shares during the quarter were $78 million compared to $72 million last year. The increase was primarily driven by the return to positive earnings and the related dilution accounting. Second quarter reported net income was $42.9 million or $0.55 per diluted share, which included after-tax charges of $0.6 million. Excluding these charges, adjusted EPS was $0.56 per diluted share for the quarter. We are quite pleased with our liquidity position which includes cash and availability under our revolver, which at the end of the quarter was $410.5 million versus $208.7 million last year.

We ended the quarter with $247.1 million of debt versus $393 million last year and down $87.7 million since the end of fiscal 2020. During the quarter, we did not open any stores and closed one in the US and two in Canada, resulting in a total of 515 US stores and 143 Canadian stores.

Given the environment, we believe it is still too uncertain to provide detailed long-term guidance. We see sales potentially increasing and volatility, given variant outbreaks and as discussed, we recognize the mounting global supply chain pressures. However, given the levers we have available to pull and our proven ability to strategically pull those levers, we do expect to continue meeting or beating our pre-COVID profitability performance and deliver an adjusted operating income for fall of fiscal 2021 that will be slightly above fall of 2019. And this includes the assumed increases in freight and labor costs, as I mentioned earlier.

If the potential impacts of the variants and supply chain pressures mitigate and consumer demand remains as robust as Q2, we believe we could certainly over-perform from this number. But at this time, we feel it is best to take into consideration everything we are seeing currently. Finally, I would like to call out that our traditional calendarization maybe skewed due to the various disruptions we've discussed during this call. Thus, we are looking at fall in total which is Q3 and Q4 combined.

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

Questions and Answers:


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

Steve Marotta -- CL King & Associates -- Analyst

Good morning, Roger and Jared. Congratulations on the second quarter. Jared, can you go over inventory position again. It looks like your inventory is up year-over-year which is a somewhat enviable position considering what other footwear retailers have announced. And can you talk a little bit about composition, it seems like the competitive advantage, but you also mentioned a couple of other items that I was writing as fast as I could. That seemed -- I know that there are headwinds also in pinch points of course in the supply chain, but maybe you can just assemble current inventory position a little bit better and also what you would expect from a flow standpoint for the back half? Thanks.

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Yeah, yeah. I'm happy to give that and I'm sure Roger will want to add some color, especially around the composition. What we reported was, we were up over last year in dollars. We were down slightly over last year in units. And much of that is, it is the freshness, the lack of reserves and the overall IMU that we're experiencing. So that's kind of that disconnect there. I'm not overly concerning, but that was -- that was why, one's up and one's down.

The second stat that was provided was just versus 2019 and there we were down in the high-20s. What we are seeing is absolutely a lot of flow coming our way. We have seen quite a few delays in shipments. But on the flip side, we actually are getting a lot of those shipments and one thing I'm very happy to say is on the athletic side of the world, we had been very aggressive. In fact, placed quite a bit of over-ordering athletic knowing there was little risk to that product even -- even if it all showed up, so that has put us in a pretty good position on that front.

On the seasonal front, that's where we see some potential delay and we are very thankful we've got our Camuto operation that is giving us priority access to the inventory that is coming off the factory lines. We are receiving that now and we're really happy. But that's where I could see some potential delay. And why I mentioned, you might see some traditional shifting from Q3 seasonal selling into Q4, on very similar even with sandals that we saw that decline not happen into Q2, the way that it normally does. So I don't know, Roger, if there was anything else.

Roger L. Rawlins -- Chief Executive Officer

Yeah, Steve, I would -- I'd say that, when you look at the seasonal category in particular, making certain that we put in sufficient freight into our back half expectation to get that product here which as Jared had said in his comments that we've built that into our plan for the back half. But right now, day in and day out, it's about athletic and kids, and I feel really, really good about the way our team has positioned inventory in that piece of the business, which is frankly the key to the game we are now playing with back-to-school.

Steve Marotta -- CL King & Associates -- Analyst

That's really helpful. Also, is it possible to tease out the gross margin improvement in the second quarter versus '19? What was captured with better full price selling and what was captured with increased DSW-sourced, Camuto-sourced items selling in the store.

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Yeah. You know, what, the name of the game. First and foremost was full price selling. I mean, not only did we reduced promotions materially, but we also had the opportunity to increase pricing several times throughout the quarter just as we were seeing turns just be so aggressive. And so, we saw that, the consumer followed us there and we really did not experience any hesitation around that. We did see a little bit of deleverage on the shipping side of the world, but not a whole lot. And then as Roger mentioned there were some additional freight charges even in Q2 where we had agreed to expedite some freight and just the overall inflationary environment of freight across the Board did delever there. So, again, net-net, very, very positive. But those are the big under the covers.

Roger L. Rawlins -- Chief Executive Officer

Steve, I think, you know, I've been trying to figure how do we share this assortment strategy and what we've done. If you break it down, I mean, our distortion toward athletic, kids and seasonal has absolutely paid off. I mean our athletic business is up 45%. This is the 2019, up 45%, our kids up 55%, our seasonal business up 5%. Those are the three big things we've told you that we were going to distort to, it's worked. And then the way in which we've distorted is to get after the top 50 brands, which were 78% of our sales. That number was 40% or less just a couple of years ago. So to give you a sense of how we've leaned into those folks, it was up 112% to last year and then you add into that to your question about Camuto, we're leveraging them in a huge way. Our business was up 88% to last year in Camuto-produced brands. On inventory, down 13% and that came with an extra 1,500 basis points of profit, of gross margin.

So you add all that stuff up and then you go to tell the story to a customer in the way that we've been doing it and you grow your customer file at a rate like you've never seen. The strategy that we implemented a couple of years ago, it's working and exciting to see the progress we've made.


Thank you. And our next question today comes from Gaby Carbone of Deutsche Bank. Please go ahead.

Gaby Carbone -- Deutsche Bank -- Analyst

Hi, congratulations on the nice quarter.

Roger L. Rawlins -- Chief Executive Officer

Thanks, Gaby.

Gaby Carbone -- Deutsche Bank -- Analyst

So, first, I was -- I was wondering if you can maybe dig into the increased freight expenses that you mentioned. How should we be thinking about the impact of that versus what you kind of saw in the first half of the year. Are you able to quantify that at all?

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Yeah. I would say, we saw roughly $5 million to $6 million of increased freight cost deleverage versus 2019 in the first half. We've baked in a little more than double that for the second half. So that's what we've got currently in our projection. If some of that isn't needed, we are able to get priority access and can both things in and not have to air some things in that may subside. But that's kind of what we have currently baked in.

Gaby Carbone -- Deutsche Bank -- Analyst

Got you. Thanks for that. This is another bigger picture question. Earlier, you mentioned, approximately 55 US stores that would come [Phonetic] for closure over the next four years. Just wondering if there's any update there and maybe how you're just thinking about the overall store fleet?

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Yeah, yeah. I will remind you and all the listeners, that I also said, I'm a 100% positive that that list would change, because that was based on looking at projections, when we were in the height of COVID and not knowing what the stores would do. And in fact, as you just heard on our results, the stores have come roaring back. We are blowing past what those initial projections were. So that number certainly is not the same number that was on the table before. However, longer term, under the consumer -- the customer brand and speed pillars that Roger talked about, we do know that there is shift -- always continuing, and we're going to follow our customer there. We're happy to do that. And so longer term, we are looking to see how do we reduce our fixed occupancy related to store overhead. And so one of the ways of doing that without vacating a market is to look at a different square footage solution. We're in the process, very far in the process right now at a redesigned, we call it warehouse reimagine, some people used to call it, store of the future, but how can we -- how can we get more productive in the smaller space and still offer that same type of flexibility so we can service our customer and serve as a fulfillment center. So more to come on that front. I don't think it's going to be the full 55 stores. But I do think longer term, we want to see a net-net reduction in square footage. It just may not be vacating stores as much as we thought.


Thank you. [Operator Instructions] Today's next question comes from Jay Sole at UBS. Please go ahead.

Jay Sole -- UBS -- Analyst

Great. Thank you so much. A lot of great information on the call. I just want to make sure, I understand the guidance.Jared, is it possible to provide any insight into how you're thinking about sales in Q3, maybe relative to 2019 and also maybe just start with that one.

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Yeah. Jay, unfortunately right now and why we lifted adjusted operating income, we just see too much volatility, especially slippage between Q3 and Q4 that I don't want to, I don't want to put ourselves in a box that unfortunately, we may not be where someone things we should be in Q3 and then overdo it in Q4. So we're really hesitant to go lower than operating income, but we do feel really good, when we look at all the levers we have to pull, we look at how we maneuvered Q1 and Q2 and we saw shifting there between quarters, that wasn't traditional, but we also saw gross margin play differently. We just don't feel comfortable right now getting more, more than that, but we were excited to reinstate some level of guidance, which was the operating income.

Roger L. Rawlins -- Chief Executive Officer

And Jay, I think it's important that to share that, this is the first time that I can recall in my 15 years that we actually provided some kind of insight into how we are doing in the next quarter in our comments and that we are very pleased with how back-to-school is playing out and the success that we had as we were in Q2 and we saw that spill over into the third quarter. So we're not going to provide you the by-quarter break down, but we still feel very, very good about our business and how we are positioned.

Jay Sole -- UBS -- Analyst

All right. So I understand. Maybe just on some of the uncertainty that's out there, there's a lot of talk that hopefully factories in Vietnam open up next couple of days. And obviously there is a chance that doesn't happen. Can you just talk to us about how -- how you think about managing through that potential situation, if there's not a lot of product being made? And what the Company can do, given that you do work with so many different vendors to get the goods that you need to be able to drive the business going forward especially in 4Q. Can you just talk about, your ability to get inventory, if there are factors that remain closed for an extended period of time beyond what's currently expected.

Roger L. Rawlins -- Chief Executive Officer

Yeah, Jay. I -- there isn't a day that goes by. I don't think, where I remind Jim and Brooke [Phonetic] in our team that does all of the buying and planning for our organization, how much, I appreciate the work they've done to distort to these top 50 brands. So this is how I've been describing it to folks. When you're in these situations, you're going to take care of your family first. And when I think of how we've transitioned our assortment from carrying 700 or 800 labels to now really being focused on these top 50 brands, we are a part of their family. And so we anticipate that we'll get our food along with everyone else at the table in a meaningful way. So when you're running a 112% increases in your top 50 brands, you'd hope you can have a conversation with those leaders and say, hey, can you please make certain we get our fair share of products. So I think that's priority number 1.

And then the second one is leveraging our ability to design and source our own goods which Debbie and our team at Camuto is doing a fine job at doing that. So it's the combination of those two things. Will there be some misses here or there. Yes. But have we demonstrated over the last 24 months and ability to be nimble on our feet and to whatever comes our way, we absolutely have and that's my expectation as we go through the back half.


Thank you. And our next question today is a follow up from Steve Marotta from CL King & Associates. Please go ahead.

Steve Marotta -- CL King & Associates -- Analyst

Thank you for providing the opportunity for a follow up. Roger, can you talk a little bit about the current back to school season? How normal, do you think it is from a pace of sales in comparison to '19? And I understand there are some variants, but if you could I know quantify or qualify them a little bit of the cadence and the geography specific to how you would have expected kids to have sold this year in a completely normal environment. Thanks.

Roger L. Rawlins -- Chief Executive Officer

So Steve, I will bring you into the conversation our team had last night. This is not normal for us, because historically, we've always talked to you about Septober [Phonetic], those nine weeks of September and October, because we really didn't have a business in July and August other than clearance selling. And when I look at our penetration of kids that, in this window of time is sitting upwards of 14%, 15% based on timing of folks going back to school. I am really excited about it. So I wish I could tell you that I knew how that compared to our history. We don't have any history in this space. I mean it's that much of a distortion when you again, when you hear that kids was up 55% to 2019 in second quarter. And that gives you a sense of just how different, we are playing.

We are now in the back to school space, we're in the top 15 in kids, we are killing it in athletic, and I'm just really excited about this. And I think we see an opportunity in the future to do a whole heck of a lot more. And the example is, the staples experience that we've created. We're going to have that in more doors, the things we're doing with Lids to engage differently, the things we're doing with apparel that will match back to school timing. Things we're doing with athletic brands to offer their apparel products in our stores during these kinds of windows. Those are all things that I think provide a significant upside in the future to the kids piece of the business. But unfortunately right now, this is -- this is a new normal for us.

Jared A. Poff -- Executive Vice President and Chief Financial Officer

One thing I would add just from quantifying that Steve that I think you'll find opportunistic is that, when we look at what is happening this year. There is a very direct correlation that stores around districts that are returning back to school the following week, that is when we have their heyday, it's one week prior. In Q2, there had only been 39 of our stores that had had that week. And so all the rest of our 515 stores have that week in Q3. So to Roger's point, we don't have history to really go off of, but what we do know is what we're seeing now and that most of that is a Q3 event not already behind us.

Roger L. Rawlins -- Chief Executive Officer

Yeah, great point, Jared.

Steve Marotta -- CL King & Associates -- Analyst

That's very helpful. One last question pertaining to back-to-school. You had plans when you talked about kids to have tag-along sale for the mom or dad that was bringing them back to school shopping. How -- can you talk a little bit about how that is running and what the upsell? Are you maximizing the up sell opportunity currently or that's still on the come? Thanks.

Roger L. Rawlins -- Chief Executive Officer

Great question, Steve. Again conversation, we're having last time with our team. I think there is still upside to that. And I think what we are seeing is that it is truly an incremental transaction, but then how do we marry those two things together and tie that into our rewards program and provide benefit to mom and dad to come in at the same and buy for themselves when they're buying for their child, I think we still have -- I think we still have opportunity there.


Thank you. And our next question today comes from Dana Telsey, Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Hi, good morning and nice to see the progress. Given the announcement that you made about Hush Puppies how you're going to be the exclusive supplier or provider, whichever you want to call it, how do you think of this is an opportunity for other brands? And also, any update on Canada and what you're seeing there?

Roger L. Rawlins -- Chief Executive Officer

Yeah, thanks, Dana. I think -- first, I have to thank Blake and Brendan [Phonetic] for their support and their partnership and as we talk about brands and vendor relationships there, there is good as it gets for us. So the fact that we were able to sit down, I had this conversation and reached an agreement. And when you think about the fact that this provides Hush Puppy access to 30 million rewards members across our platform. And we're going to do things for them that we would not do for others. The fact that we can build differentiated experiences both digitally and in the store, so we're going to be doing some shop-in-shops to build out the brand in a meaningful way.

And then at the end of the day what we're able to provide is the ability to remove friction from transaction. So there will now be return centers for Hush Puppy product to come back to a DSW or there will be buy online, pickup in store locations within 20 minutes for 70% of the population, like those are all things that we'll be able to offer to this consumer that we think provides not just a great platform for Hush Puppies but for other brands like Hush Puppies that's looking for a growth vehicle. And we think we are that vehicle. So hopefully Dana, that answered your first question.

As it relates to Canada, I'm still really happy with the result we're getting there. Things have been slower to recover there primarily from a store standpoint, our digital business was still up 140%, north of 140% for the quarter and stores have been a little slower to recover. And their back-to-school has extended really frankly starting more in the third quarter than it has historically, so I'm actually feeling really good about the results we've had up there.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Thanks, Dana.


Thank you. And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Roger Rawlins for any closing remarks.

Roger L. Rawlins -- Chief Executive Officer

Thanks again, everybody for listening in and to all of our associates listening. Keep up the great work, appreciate what you're doing and everybody have a great day. Thank you.


And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now short your lines and have a wonderful day.

Duration: 48 minutes

Call participants:

Stacy Turnof -- Senior Vice President of Financial Communications & Capital Markets

Roger L. Rawlins -- Chief Executive Officer

Jared A. Poff -- Executive Vice President and Chief Financial Officer

Steve Marotta -- CL King & Associates -- Analyst

Gaby Carbone -- Deutsche Bank -- Analyst

Jay Sole -- UBS -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

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