Designer Brands Inc.

Good day and welcome to the Designer Brands, Inc. 1Q21 earnings call. All participants will be in 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 from the queue, 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 period ending May 1, 2021 to the 13-week period ending May 2, 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 Rawlings, Chief Executive Officer, and Jared Poff, Chief Financial Officer. Now, let me turn over the call to Roger.

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 return to profitability for the first time since the onset of COVID-19 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've positioned our assortment to capture market share and athleisure, an area where we have been historically under-penetrated 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 Komodo segment to give us an advantage in these categories by selectively increasing production at Komodo 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 U.S., 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, U.S. adults are feeling more comfortable returning to social activities. Consumers are beginning to spend in categories that were 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 focus 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 a 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 product 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 DVI'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 haven't traditionally carried in 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 and Shops and via amplification of their presence through our online channels. We will take every action, every action necessary to ensure we retain and grow our customer base in that leisure. 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 a 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 brands access to a large female customer base connected with a 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, Mixed No. 6, and others. In addition to brands in which we have an ownership stake, like J-Lo, Vince Camuto, Lucky, and Jessica Simpson, Having the ability to design and source the majority of this product through Komodo 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. J-Lo, 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 Komodo, our Komodo 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 occasions. 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 Komodo 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 Komodo to be up again versus 2020 in the second quarter. Soon, the majority of the product we produce at Komodo 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 the site on the DSW platform. VinceCamuto.com is now on the same e-commerce platform and has access to the same roadmap 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 and 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 returned 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 Marple 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 outpaced 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 of 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 ways 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?