Designer Brands Inc.

Good day and welcome to the Designer Brands, Inc. Third Quarter 2021 Earnings Conference 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, please press star then two. Please note that we do ask that you limit yourself to a single question with one follow-up. Please also note today's event is being recorded. I would now like to turn the conference over to Stacey Turnoff with Edelman. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended October 30, 2021 to the 13-week period ending October 31, 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 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, everyone, for joining us today for Designer Brand's third quarter earnings call. We are incredibly excited to share another record-setting quarter with you today. As always, we'd like to take this opportunity to thank our associates for their hard work and dedication. We could not achieve this level of success without you. Our strong performance continues to be driven by the strategies we outlined back in 2019, following our acquisitions of the Komodo Group and Shoe Company in Canada, with a clear focus toward casualizing our product offerings to meet the demands of the consumer. This direction has helped to improve our business throughout 2021 and will be a permanent piece of our go-forward model. Q3 sales continue to recover versus 2019 levels, and we achieved all-time records in gross margin, operating income, and EPS, with each and every segment contributing to these accomplishments. We've noted this, as well as other key highlights for the quarter, in our infographic on our investor relations site. We continue to see strength in our key assortment distortions, including athletic and athleisure, kids and men's, all powered by the top 50 brands in footwear. And our women's fashion business has also improved significantly, These investment strategies will ensure that designer brands is well positioned to continue to grow market share in categories where we have historically captured share well below the levels we've commanded in women's fashion. These assortment distortions open up opportunities to compete in time periods where categories other than fashion are top of the mind for the consumer and allow us to expand market share while mitigating risk we have traditionally faced from relying so heavily on the fashion and seasonal categories. For example, this year, we became a top destination for families to shop for back to school. We were able to participate in this season at a whole new level than we have ever had in the past, given our increased penetration of athletic and kids' product. Notably, according to NPD, we grew kids' sales 35 percentage points faster than the rest of the market in the quarter ending October, compared to the same period in 2019. Our brands were at the top of consumers' minds, as our integrated marketing strategy to increase awareness of DBI as an athleisure destination for the family was successful. Additionally, we've had a strong start to the fourth quarter, as kids and athletic typically lend themselves to greater gift-giving. We set an all-time record for demand in a single day and a single week this Black Friday and Black Friday week. Prior to setting this new record, our highest demand week was in the spring season, So we are very pleased to be opening up new times of the calendar in which we can grab market share. For the total holiday weekend, demand for DSW was up 8% versus 2019, with both digital and stores posting positive comps for the five-day period. These results were driven by athletic comps up over 50% and kids comps up over 40% versus 2019. Even more notably, we had positive comps in our fashion categories for the first time since the onset of COVID-19. Our best-in-class VIP loyalty program remains a key driver for our growth and is also benefiting from our widened customer base. For all of designer brands, new VIP enrollments grew by 1.8 million, and for DSW, enrollments were up 30% in the third quarter versus 2020. Additionally, our conversion of non-VIP members to VIP members at DSW was at a 12-month record high during July and August. As we've shared over the past couple of years, we are growing our business through our focus on the top 50 brands of footwear, including our own vertical brands. Over the last three years, we have reduced the number of labels we offer and have focused on the brands we know our customers want. This has resulted in a 25% reduction in the number of labels from whom we buy goods over a three-year period. In our U.S. retail segment today, our top 50 brands represent 77% of our total sales, as compared to 65% in 2019. Additionally, our number one selling item was a top 50 national brand boot with an average unit retail of $144. Today, we are one of the top retail partners for most of these brands, We believe that our strategy to go narrower and deeper with our inventory investments has been game-changing for designer brands for the following reasons. First, it allows us to see higher conversion as we're in stock with sizes more frequently. Second, we are more relevant to these key brands, giving us opportunities for priority access to exclusive items and ensuring we are placed at the top of the food chain when supply chain issues occur. Third, we can now Consistently tell marketing stories to consumers about brands we have available across our entire fleet of warehouses. And then four, finally, it increases our ability to engage in full price selling with fewer fringe items and sizes going into clearance, improving gross profit. As I've shared, our merchant and planning teams have made great decisions around our assortment by shifting to match consumer preferences. While athletic and kids categories continue to be strong, we saw our historically powerful fashion categories gain momentum in the third quarter. We've also seen our boot business kick in at the beginning of Q4 with the later onset of cooler weather. Additionally, our dress business continues to recover with women's dress up 58% in the third quarter versus 2020 and men's dress up 87% in the third quarter compared to 2020. As an organization, We have also rallied around brands that we own and control. We drove business through implementation of shop-in-shops, unique digital experiences, and major launches. We also continue to see strength in our top-rated omnichannel platform, with digital demand at U.S. retail up 12% in the third quarter compared to the same period in 2019, on top of a strong demand comp of 45% during Q3 of 2019. At Komodo, we are reigniting our focus on our owned brands and had a soft relaunch of the Vince Komodo brand on September 14th. We've done the work to dig into who the consumer is and what they expect from our Komodo product. We identified them in the channels we control. We focused our top design talent on building on-trend products for these customers, and we invested in relaunching the brand, placed bets on key items, and started transitioning the brand from being a women's-only fashion brand to a gender-neutral, casualized fashion brand. This strategic shift has already been a huge success, with the VinceCamuto.com sales up over 80% since the soft relaunch on September 14th versus the same period in 2019. Net wholesale sales of Vince Camuto women's footwear also increased by 5% versus 2019. Furthermore, VinceCamuto.com third quarter margin was 60% versus 46% in the same period 2020 and 52% in the same period 2019. We are pleased that our own brands made up three of the top 10 styles DSW sold in the quarter, whereas none of our own brands were in the top 10 items in 2020. This demonstrates how elevated our assortment has become and how much our customer loves it. In terms of inventory, we are well positioned despite the industry-wide supply chain issues and see our positioning as a strategic and competitive advantage. We bought product ahead of the season and overordered in anticipation of inventory cuts, accelerated orders of our own brands, and leveraged our scale and strong relationships with our vendors. This has enabled us to get access to additional product and has put us in a better position than most of our peers heading into the fourth quarter. We started the third quarter with the retail segments inventory down 19% versus 2019 and ended the quarter with the retail segments inventory flat to 2019. I want to say this again because this is so important as it relates to the future performance of our business and our competitive position. We improved our retail inventory position from down 19% to 2019 at the start of the third quarter to flat as we entered the fourth quarter. This positions us exceptionally well to deliver fourth quarter sales growth that is much stronger than even third quarter. Our top 50 brand strategy that I spoke about earlier has enabled designer brands to better manage inventory levels, particularly with our owned brands that are starting to outperform. As we look to the future of our business, we see notable opportunities to sustain much of this record-setting margin expansion over the long run. Gross margin continues to rise from historical levels due to the increased penetration in our top 50 brands, narrower and deeper inventory investments, growth of our private brands, and decreased promotions and clearance driven by all of these decisions. Let me go into detail on just a few areas of opportunities for continued growth. First, we continue to build awareness as an athleisure destination at a time when that's what the customers are looking for. This strategy and investment in our athletic assortment will allow us to grow market share in two athletic-heavy periods of the year. First, back to school. As I mentioned in my opening remarks, we are playing bigger here than ever before, and we have significant room to continue to compete. According to the NPD group, in peak back-to-school timeframe, which is defined as July through August 2021, DSW outpaced the remaining U.S. footwear markets significantly in in kids and athleisure compared to the same quarter in 2019. And then second, the athletic window also includes holiday and post-New Year's selling periods. These windows are large athletic selling periods in our industry. We have historically been in boot liquidation mode during these windows and expect to see material increases in athletic selling. We have positioned athletic inventory in these windows to compete more significantly this year and will continue to do so in the future. Next, our assortment is vastly different than pre-COVID, when we were carrying 500-plus labels and had to heavily market our portfolio of labels. Our increased penetration of the top 50 brands now carries more weight with the consumer and allows us to have more regular price selling, as many of these brands prohibit bulk discounting and require fewer marketing dollars for conversion. As we have mentioned before, the growth of our exclusive brands will drive our long-term margin profiles. our vertical brands have compelling margins relative to the national brands. Typically, our exclusive brands command margins roughly 1,000 basis points higher than branded product. And sourcing them ourselves through Komodo adds in an anticipated extra 500 basis points. And given the trends that we are seeing in today's market, the opportunity may be even greater than 1,500 basis points. We believe that there is still so much room for growth as it relates to overall athletic space that will help drive top line growth as well as improve our margins. Even with our recent success in the category, we are still heavily under-penetrated to the market. As we review our athletic brand portfolio, 60% of the athletic brands we carry posted a comp above 25% during the third quarter versus 2019, proving that our investment is working. Additionally, Leveraging our exposure to athletic has allowed designer brands to expand its reach to the male customer base. In fact, our men's athletic business was 8% of total sales in the third quarter versus 6% in 2019, and up 56% in regular price selling versus 2019. Also, we expect to continue our very successful strategy that started in the first quarter to meet the customer where they are by investing more in digital marketing. This investment continues to result in top and bottom line benefits, as well as strong customer acquisition with VIP enrollments of 1.5 million members in the third quarter, representing our second biggest acquisition quarter in the brand's history, following our biggest acquisition quarter, which was Q2 2021. Our targeted marketing campaigns continue to yield stronger results and increased efficiencies. In addition to strong customer acquisition, we continue to reengage customers that have reduced shopping patterns during the pandemic. As a result, our active members at DSW are up 29% from where they were at the start of the fiscal year. Lastly, we are acutely aware of the supply chain and labor challenges facing the industry today, and we have baked these factors into our projections. We believe we have planned well and can manage these headwinds and that our margins will continue to grow as they subside. Moving to Canada, we have seen considerable improvement from the second quarter, with third quarter comps down 6% versus 2019. Our Canadian stores also had a strong back-to-school period, with total sales coming in just slightly under 2019. Store comps significantly improved as customers returned to physical shopping, all while our Canadian digital business remained strong, gaining market share online. We ended the quarter with inventory in a healthier and lower position at down 2% versus 2019, compared to down 16% in the second quarter. Notably, Canada delivered the best quarterly gross profit contribution performance in the history of the segment. Before turning it over to Jared, I'd like to quickly touch on our results. We are extremely pleased with our total company performance, with comps up 40.8% versus 2020. Gross margin was up 740 basis points to 36.7% in the third quarter versus 29.3% in 2019. We are pleased we continue to see strong momentum heading into the fourth quarter. Jared will speak to our expectations in more detail in just a moment. Looking forward, we will continue to execute on our three key strategic initiatives. First, customer. We are removing friction and focused on acquiring new customers. Number two, brand. We are continuously evolving our assortment to match consumer preferences by supporting the top 50 brands in footwear while growing our own brands. And then finally, three, speed. We are working to get product to our customers faster and more efficiently. We expect that our focus on these strategic pillars will allow us to grow market share, improve margins, and grow our bottom line both this year and into the future. With that, I'll turn it over to Jared. Jared?