The American shoe retailer Designer Brands, formerly known as DSW, expects the Covid-19 pandemic will continue to have a significant impact on its business in the second half of 2020, with a double-digit decline in sales likely and a return to profitability seen as “challenging.”

As consumer preference shifts from dress shoes to so-called athleisure footwear, the company also announced it was shutting down the Sole Society label that is part of the recently acquired Camuto Group and focusing on Camuto’s Vince Camuto, Jessica Simpson and Lucky brands.

In the second quarter, ended on Aug. 3, net sales decreased by a reported 42.8 percent to $489.7 million, with sales in the first half falling by 43.8 percent to $972.5 million. Second-quarter comparable sales decreased by 42.7 percent against a 0.6 percent decline in the second quarter of fiscal 2019. Comparable digital sales were instead up by over 40 percent.

In the U.S. retail segment, which consists of the Designer Shoe Warehouse chain, sales declined by 41.9 percent to $394.0 million and comparable store sales were down by 44.9 percent. The company’s brand portfolio segment, which includes Camuto, saw reported revenues decline by 70.4 percent to $30.5 million.

For the Canadian retail segment, sales fell by 21.7 percent to $49.6 million and comparable sales declined by 27.9 percent, as the Canadian business outperformed thanks to its higher penetration in the athleisure and kids’ footwear categories, which have been more resilient during the pandemic. Sales for other businesses fell by 24.5 percent to $22.3 million and were down by a comparable 36.2 percent.

Reported gross margin as a percentage of net sales declined to 7.6 percent, or 8.2 percent on an adjusted basis, compared to 30.5 percent on both a reported and an adjusted basis in the second quarter of 2019.

Designer Brands posted a reported second quarter net loss of $98.2 million, or $1.36 per diluted share, compared with a net profit of $27.4 million the year earlier. Its adjusted net loss amounted to $92.0 million, or $1.28 per diluted share.

Inventories in the second quarter declined by 37 percent to $445.0 million, because of strong inventory controls and higher inventory reserves compared with the year earlier.

Following temporary closures due to the health crisis, Designer Brands has now completed the reopening of nearly all stores. While weekly in- store traffic saw “material” sequential improvement upon reopening, the company highlighted a “definitive pause” in that improvement around the middle of June, amid a resurgence of the pandemic in key markets, such as Florida, Texas and California. Since mid-June, comparable store traffic has been down by 30 to 40 percent fairly consistently, the company said.

Given continued uncertainty on the evolution of the Covid-19 pandemic, the company is continuing to refrain from issuing full-year guidance. However, in a conference call with analysts on second-quarter results, Jared Poff, the chief financial officer of the company, said sales in the second half are seen improving “modestly” over the first half but should still be down significantly from last year, with a double-digit decline in the top line likely. “Given we have taken significant markdowns and our inventory is in good shape, we expect our merchandise gross margin deterioration to slow in the back half of the year on a sequential basis,” he said.

Roger Rawlins, the chief executive of Designer Brands, added that a return to profitability in the second half of the year would be “challenging” but “not impossible.”

In the second quarter, the company witnessed a shift in customer purchases away from seasonal dress shoes, which suffered despite strong markdowns, and towards athleisure footwear. For the fall, total receipts are seen down 15 to 20 percent, with those for athletic and kids’ products seen up double-digits and those for seasonal footwear continuing to decline.

During the second quarter, Designer Brands narrowed its focus to the top 50 brands in footwear, which in some cases has meant gaining access to brands it did not previously offer. “Customers are currently demanding products almost exclusively from brands they know and trust,” explained Rawlins.

The company has also taken steps to cut costs, announcing an internal reorganization and the elimination of about 380 corporate office associate positions and over 700 store associate positions – measures that would allow it to realize annualized cost-savings of approximately $40 million pre-tax, net of planned investments in the business.

Designer Brands is in discussions with landlords aimed to obtain flexible lease terms and thereby better match obligations to traffic and sales. While discussions are in an early stage, most landlords have agreed to more flexible terms, helping to mitigate the top-line impacts of Covid-19.