Designer Brands Inc.

Good morning and welcome to the Designer Brands, Inc. first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Stacey Turnoff. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week and 52-week periods ending May 2, 2020, to the 13-week and 52-week periods ending May 4, 2019. Please note that the remarks made about 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 filing for the SEC. The company assumes no obligation to update any forward-looking statements. Joining us today are Roger Rawlings, Chief Executive Officer, and Jared Poff, Chief Financial Officer. Now let me turn over the call to Roger.

Good morning, and thank you for joining us to discuss our results for the first quarter of fiscal 2020. I'm going to start off the call by thanking our team for their diligence in taking swift and effective action to ensure the safety of associates, customers, and our communities during this difficult time. Our industry has been heavily impacted by the COVID-19 pandemic, and we have acted strategically to preserve the long-term viability of our business. Despite short-term challenges, we are adapting to the environment and refining our near-term focus based on learning so far. We will also continue to execute against our three strategic pillars in innovative ways to deliver differentiated products and offer differentiated experiences and focus on new growth opportunities to increase market share. These strategic pillars, coupled with our priority of keeping employees and customers safe and healthy, guide our decisions as we navigate the COVID-19 pandemic. Preserving liquidity and financial flexibility has been a top priority for designer brands. As discussed previously, we reacted swiftly upon seeing the risks of COVID-19 by significantly constraining our cash burn. We notified vendors and landlords that we were suspending payments until there was better visibility, massively reducing spring receipts, and implemented significant cost cutting and capital preservation measures. We drew down on our $400 million credit facility and immediately focused attention on amending that facility to ensure we would remain within covenant compliance and improve our access to liquidity. Moving forward, along with the success we've had reopening the majority of our retail locations, we've reached alignment with nearly all of our major vendors and landlords on past due amounts and have extended go-forward payment terms, which gives us more flexibility from a liquidity perspective. We are continuing to evaluate our liquidity options with a focus on ensuring a firm financial foundation for the company. We've also needed to make some difficult decisions to manage the business more efficiently and develop a cost structure that will enable us to operate as a leaner organization. We announced cost-cutting initiatives in March and April that included furloughs, reduction in compensation for nearly all employees not placed on temporary leave, as well as the board. and the freezing of hiring and merit raises for 2020. We're deferring CapEx where we can and have delayed new store opening plans across North America where possible. We are actively negotiating with vendors to strengthen relationships as we rationalize our brand portfolio in order to focus our business on the largest footwear brands and our own exclusive brands. Finally, we, like many other businesses, are undertaking a review of our fleet and are working to streamline and optimize our retail footprint. Lastly, before turning to our results, we want to take a moment to recognize the importance of giving back to the community during this time of need. We have teamed up with Reebok and long-term partner Souls for Souls to provide over 100,000 pairs of new footwear to COVID-19 frontline workers and their families. Additionally, in early May, we kicked off our donation campaign on Giving Tuesday. This gave our customers a chance to engage and help their local communities. DSW locations across the country accepted new and gently used shoe donations, and customers who gave two or more pairs received an instant $10 reward. I'm proud to announce that since 2018, we have donated over 3 million pairs of shoes through Souls for Souls. Turning to Q1 results. We were pleased with the trajectory of our business through March 5th and were on track to achieve growth in 2020. In fact, comps were up in the low single digits, even with less promotional activity, driven by structural changes in our business model. As the COVID-19 pandemic began, we faced a number of challenges during the first quarter as a result of store closures, decreased consumer demand, and disruption to our wholesale business. as Komodo's largest customers canceled a substantial number of orders. We began seeing a meaningful deterioration in store traffic beginning on March 6th, and the trajectory materially worsened by the time all North American stores were closed on March 18th. This directly overlapped Marple, our second most significant selling period of the year. For the quarter, total sales were down 45%, and comparable sales were down 42%. During the time that our North American stores remained closed, we served our customers through our e-commerce operations at an accelerated pace. Over the past several years, we have made substantial investments in our digital infrastructure, which enabled us to pivot quickly and meet our customers' needs in this unique situation. This was supported by our ability to utilize our stores as fulfillment centers, a competitive advantage. as retailers shifted to digital-only sales beginning in the second half of March. We have seen unprecedented e-commerce demand, and we were well prepared to fill orders in a timely manner as we optimized shipping across 500 points of distribution. Other key investments over the past few years included redesigning our website, launching the DSW app, rolling out ship from store, and adding clearance product to our online product assortment. all of which proved essential during store closures and our shift to a digital-only model. We continue to evolve our capabilities with the recent rollout of curbside pickup and contactless self-checkout. Ultimately, we were able to generate strong e-commerce growth while our stores were closed, with digital demand up 25% at DSWUS during the first quarter and representing 50% of total demand versus 22% last year. Our digital strength in Canada was even more robust, with e-commerce net sales up 348% during the first quarter versus last year. While we do not expect growth in digital to continue at this pace, we believe that our accelerated work in digital will serve us well moving forward. We are taking a phased approach since we started to reopen our stores on May 1st and hope to have nearly all our North American stores open by the end of June. We are excited that approximately 90% of our total store base is now open. We've continued to monitor state government and local mandates and have been carefully reopening stores in areas that we believe to be safe for our associates and customers. As of today, we have welcomed roughly half of our team back as we execute these plans. It is important to note that the majority of our northeast locations, which represent nearly 20% of our in-store business, and are some of our highest volume stores remain closed at this time due to continued COVID-19 concerns and local restrictions. When looking for the best ways to make the store experience safe for our associates and customers, we made several COVID-19 related investments to assess the situation at hand and attain appropriate supplies. We partnered with Johns Hopkins and conducted testing on the longevity of the virus across multiple surface and material types. We've taken these results along with recommendations from governmental health organizations and implemented a number of changes to our store operating model. These include mandating employee use of personal protective equipment, making PPE available to customers, improving cleaning measures at checkout, enforcing social distancing, reducing capacity in higher risk locations, sanitizing try-on areas, updating return procedures, and implementing frequent full store cleanings. As we begin to reopen stores, we are seeing an acceleration in traffic and sales trends as compared to Q1. Although it is still early, we currently see a relatively consistent store traffic maturity curve once a store reopens. We believe that this is also being driven by our investment in broadcast advertising that helps us reach a large portion of our core audience. To this end, we anchored our integrated marketing programming on a recent national television campaign we launched aimed at making our customers aware that we are reopening and highlighting the safety changes we have made. And we've seen a strong improvement in traffic in these markets. We've also restarted the use of direct mail, our most effective marketing vehicle, specifically aimed at geographies where we have reopened. Quarter to date, comp trends are improving week over week. And in stores open over a month, sales are now trending to 80% of the volume they were doing last year. This trend has improved significantly by 8 to 12 percentage points each week as the customer is informed the store is open and they become comfortable with our COVID procedures. Despite the sales weakness we experienced this past quarter, our team quickly adapted to the environment to right-size our merchandise receipts and inventory plans, so that we can improve our financial flexibility. Furthermore, we were more aggressive with promotional activity to drive sales given the seasonal nature of our assortment. As a result, we were successfully able to manage our inventory levels and ended the quarter with flat inventory units on hand versus last year. We expect that our cancellations and liquidation efforts will lead to inventory being down substantially in the fall as we navigate an unknown season of consumer demand. The impact of this virus will not be short-term in nature, especially in its effect on consumer behavior. As such, we have taken a close look at how we need to evolve our near-term areas of focus. We have shifted to a digital-first model in recent months, utilizing our strong e-commerce framework. and we expect to continue with this strategy going forward. We have analyzed our learnings from the beginning of the pandemic and are prioritizing two initiatives in the near term that fit squarely into our existing long-term strategic pillars. First, delivering everyday value, a focus supported by our recent acquisition of Komodo. And second, prioritizing the top 50 brands in footwear. During the pandemic, our customers' needs have evolved. We have seen an influx of younger digital-only customers drawn in by our online offerings, marketing investment, and their desire to participate in our donation campaign. On the opposite side of the spectrum, we have our more mature store-only customers who haven't been able to meaningfully shop with us for quite some time due to store closures and ongoing COVID-19 concerns. Regardless of demographics, we know that everyday value is critical to customers' footwear purchase decisions. We are looking carefully at how to provide attractive, everyday value through pricing, assortment, and convenience. In recent months, we have taken certain pricing actions that allow us to demonstrate extreme value while also clearing some seasonal and dress product. This has taken the form of hard price reductions as well as the acquisition of some exciting branded closeout opportunities. We have the unique ability to provide value to our customers on their inline product Through our rewards program, source branded special makeup product to offer a visibly differentiated pricing value and partner with brands on premier closeout deals. The combination of offering top quality footwear brands at regular price, special makeup, and closeouts enables us to maintain one of the largest assortments in footwear. This is further bolstered by our recent acquisition of Komodo. which gives us the ability to deliver our own brands at a better value than ever before. As we scale our VIP program and build our loyalty customer base, we are able to offer compelling rewards and promotions, supporting our everyday value offering. Finally, our investments in providing a great online experience, coupled with our new rollouts of curbside pickup and self-checkout, are redefining convenience at Designer Brands. In addition to increased focus on value, we are also learning during this time that customers enjoy the comfort of familiar brands. Time and time again, we see our customers returning to their favorite labels to seek their next pair of shoes or latest accessory. And we are accelerating our brand rationalization work to grow even deeper with the top 50 brands in footwear. As points of distribution are rationalized, our vendors are excited to grow with a customer that is actually increasing share, and we are excited to gain great access to product and find enhanced economics in partnerships. With our flexible assortment, scale, and strong vendor relationships, we have the ability to adjust receipts and impact our assortment when we see categories and brands performing particularly strong. For example, during the pandemic, two categories have seen relatively better results, kids, and athleisure. Parents have continued to shop for growing children's feet, and athleisure has become a hot trend with people spending more time at home and taking more opportunities to exercise. As we all continue to navigate this challenging time, there is still too much uncertainty to provide 2020 guidance. The rapidly evolving nature of this pandemic, coupled with unpredictability of the supply chain impact, and consumer buying behavior makes it difficult to accurately account for how our business may be affected. Presently, we plan to continue to concentrate on near-term areas of focus, prioritizing the top 50 brands in footwear, emphasizing our everyday value proposition through value, assortment, and convenience bolstered by Camuto's capabilities, and ensuring we have a firm financial foundation and ample liquidity. Finally, We would be remiss not to address the recent civil unrest in our country. As a company, we stand firmly against discrimination, bigotry, and injustice in all forms, and I personally feel strongly about not staying silent in the face of recent horrific racist events. These are deep-rooted issues that we, as a society, are required to confront and address. Change is desperately needed, and at DBI, our management team and board are committed to doing our part. Our company has always stood for self-expression, and I believe a diverse team is absolutely key to our success. Recently, we have taken time to listen and reflect on what we are doing internally to be the best company possible for our employees and our customers. We have a diverse customer base, and it is important that our own team mirror that diversity. Currently, 53% of our workforce is comprised of people of color. and we have opportunities to expand the diversity in our leadership team. We will be intentional in our actions over the coming weeks. We will listen, and we have. I have had transparent, often emotional, and highly productive conversations over the last couple of weeks. I want to personally thank our African American business resource group, MySoul, of which I am the executive sponsor, for their invaluable, honest, and transparent counsel. We stated publicly, black lives do matter, because they do. And we needed our employees and our customers to hear it. We will partner with people and organizations making a difference. And we have, from 3 million pairs of shoes donated to Souls for Souls, to our former board member, Hank Aaron, and his 755 Society, focused on technical education. Any changes require a growth mindset, embracing the challenge, recognizing sustained effort is required, and holding ourselves accountable. The road ahead remains challenging, but we have invested in the right areas to position designer brands for long-term success. Again, we want to emphasize that the health and safety of our employees and customers continues to be our priority. We are confident in the long-term sustainability of the business and our ability to grow market share to create long-term value for our shareholders. With that, I will turn it over to Jared.