Designer Brands Inc.

Good morning, everyone, and welcome to the Designer Brands, Inc. fourth quarter 2023 earnings call. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Justin Hunstine, SVP of Finance. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 14-week and 53-week periods ended February 3, 2024, to the 13-week and 52-week periods ended January 28, 2023. Please note that the financial results that we will be referencing 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. Additionally, please note that remarks made about future expectations, plans, and prospects of the company constitute forward-looking statements. Results may differ materially due to the 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 Doug Howe, Chief Executive Officer, and Jared Poff, Chief Financial Officer. Now let me turn the call over to Doug.

Thank you for joining us this morning. I'd like to begin by recognizing all of our associates for their continued hard work and dedication to designer brands. They effectively executed on our priorities, quickly adapted inventory to shifting sales trends, and worked to manage spending levels amidst the challenging macroeconomic backdrop. While we are pleased with where we ended the year, we fully recognize that we are not operating at our full potential. However, as we enter 2024, we do believe we have the right people and processes in place to move our strategy forward. This provides us with renewed confidence during what will be a transitional year as we begin to see the benefits of new leadership and simultaneously work to right-size our cost base in anticipation of future growth. In fiscal 2023, we saw a 7.3% year-over-year decline in total sales, though we were still able to deliver EPS at the upper end of our guidance range. During the year, we saw industry weakness across the market. According to Cercana, dollar sales in the footwear industry contracted year over year for both the fiscal third and fourth quarters consecutively, the first time we have seen a quarterly decline since 2020. This impacted us most within our U.S. retail and Canada retail segments, as our footwear offerings are highly discretionary. Within our U.S. retail segment, sales declined 9.2% for the full year compared to 2022, as we continued to operate with a seasonal mix approximately 50% above the market. The unseasonable warm weather we witnessed in the back half of the year contributed to softness in our seasonal offerings, and as a result, we instituted necessary promotions to ensure that we exited the quarter with healthy levels of inventory. During the fourth quarter, we achieved sales of $754.3 million, a decrease of 0.8% versus the fourth quarter of 2022, with January and the 53rd week specifically providing a boost to our U.S. retail and Canada retail segments as the seasonal category rebounded. While the seasonal rebound was not enough to offset the challenges we experienced in the fall, we did see some bright spots throughout our assortment. Contrary to the reduced demand we experienced in dress and seasonal, customers continue to lean into casual and athletic. Both of these categories saw positive comps during Q4. Notably, kids' athletic sales were up 15% compared to the fourth quarter of 2022, in part due to the return of Nike. Our results are less indicative of this exciting strength we're seeing in casual and athletic, given we remain underpenetrated in these growing segments. We acknowledge our overall performance was lacking, and we are laser-focused on moving swiftly to evolve our product offerings and reinvigorate our assortment. At this point, we are encouraged by the comp sales performance we're seeing quarter to date. We anticipate comps will improve throughout 2024 and expect an inflection in the second half as we lap a weak Q3 2023. That being said, there is a high degree of uncertainty headed into 2024 given the discretionary nature of footwear, the uncertain macro environment, the upcoming 2024 U.S. elections, and ongoing international conflict. But we are continuing to address the items within our control that are most immediately impactful to our turnaround. Perhaps most importantly, we have brought in talented new leadership. Laura Denk, president of DSW, who we introduced to you all last quarter, and Andrea O'Donnell, our newly appointed brands president. Although it will take some time to see the full effects of their actions on the organization due to lead times, both have already driven meaningful changes. I'll speak more about their strategic plans in just a moment. First, I want to look back at the progress we made in 2023. Over the past year, we set out to expand our penetration in casual and athleisure, both in our retail offerings and our brand portfolio, given the significant white space opportunities. We made notable progress, driven by recent acquisitions. Our newest athleisure brands, Keds and Topo, will remain key growth drivers of our brand portfolio, and we expect to accelerate distribution and awareness of all of our brands over the coming years. On KEDS, we are pleased with the progress we've made since acquiring this nostalgic Americana brand and largely exiting the Wolverine Transition Services Agreement. This has been an intensive effort, but we are thrilled to have reached this milestone. With only a few remaining components scheduled to transition, we are excited about the growth prospects this brand can bring to our brand portfolio once it is fully integrated into our DBI ecosystem. Topo Athletic, which we acquired in December of 2022, had a strong first year in our portfolio, with total sales growing sequentially by quarter throughout the year. This franchise-driven brand has a robust innovation pipeline and is focused on opening new wholesale accounts to build awareness and increase customer conversion. Also new to the brand portfolio is Hush Puppies. We signed our exclusive North American distribution contract midway through fiscal 2023 and are very excited about the new assortment currently making its way to the market. While this brand is undergoing a relaunch here in the U.S. and is still sold exclusively at DSW, it has a very strong reputation globally, and we are excited about the unique elements it brings to our portfolio. While we have made progress bringing casual and athletic into our brand's portfolio, we are also laser-focused on continuing to build upon a strong relationship with national brands in our retail segments and are seeing incremental progress under explore leadership at DSW. In September, we welcomed Nike back into our channels, and within a few months, Nike sales penetration neared pre-COVID levels. Being able to offer the largest athletic brand to our customers, shopping for men's, women's, and kids is a tailwind as we ramp up our casual and athletic offerings across our entire assortment. So where do we sit today? When I took the helm last year during a period of negative comps at DSW and shrinking sales at our legacy brands, I knew a sense of urgency would be critical in navigating this difficult landscape. I'm approaching my one-year anniversary as CEO, and I've made it clear one of my top priorities is to identify talent and hire leaders who will bring rigor and execution to our strategy. Our new leadership hires, specifically Laura and Andrea, position us to improve our operations and retailing fundamentals, expand our design expertise, grow the salience of our own brands, and put us back at the top of customers' minds. We'll also continue to lean into our strong leadership team in Canada, headed by Mary Turner, as they seek to further expand their market share. You heard from Laura last quarter about her early priorities for DSW, and although Andrea has just recently started with the organization, she is thoughtfully crafting her own strategic pillars, leaning on deep experience from her time at Decker's and Everlane. In Canada, Mary's strategy is already well underway, and the new year is off to a great start. I'd like to take a moment to speak to some of the strategies these new leaders are spearheading in 2024. Let's first talk about our plans at DSW. As we have previously discussed, Laura's extensive career in merchandising is a critical addition to DSW management. Her merchant-first leadership is essential as we drive strategic and tactical changes in the business. She has the tools and insights to execute on revitalizing our assortment and advancing our value proposition, which will optimize our promotions and elevate our brand partnership approach. I have conviction that we can deliver incremental sales by simplifying the transaction process, putting the customer at the center of merchandising, balancing trends with core assortments, and leaving a healthy in-season open receipts balance to act on exciting and buzz-worthy closeout buys. The cumulative effect of these changes will be a revitalized assortment and improved brand awareness for DSW. Beyond the return of Nike, Laura is actively re-engaging with other key national brands, such as Skechers, Birkenstock, and New Balance. Her objective is to build stronger relationships with brand partners and work side-by-side to develop growth targets and secure styles that customers are demanding. Having recently sat down to discuss DSW's merchandising strategy with our top brands for 2024, it is clear that leading brands want to be part of the DSW conversation. We are well positioned for spring and summer with all the newness to come. Our teams have built a strong assortment, and we are seeing encouraging results in casual, athletic, and kids. We will continue to seek opportunistic ways to drive newness to our customers including accessing new styles from longstanding vendors, as well as pursuing closeout opportunities with premium brands. To ensure that our customers are aware of our updated assortment, we will continue to invest in targeted marketing. Our top-of-funnel marketing campaign that launched in the second half of 2023 has already shown positive results in brand awareness. Investments in advertising on linear TV as well as streaming are expected to continue supporting growth in brand relevance, bolstered by our ongoing focus on expanding our unparalleled loyalty program. Finally, Laura is focused on strategically enhancing DSW's in-store and digital shopping experiences. This includes simplifying our pricing and promotions, as well as selectively updating aspects of brick-and-mortar stores such as LED lighting, painting, hardwood flooring, and decor to make the in-store shopping experience even more inviting and enjoyable. As part of our recent marketing investments, we are also making updates to our Canada retail operations under the leadership of Mary Turner. In 2023, we completed a rebranding exercise for the shoe company in Canada and will begin full implementation of the rebranding at the end of this month, both digitally and in new storefronts. We are also further leveraging our existing digital capabilities at DSW, which we anticipate will be a significant driver of sales growth in Canada in 2024. Finally, we are eager to see the expansion of shoe company stores in Canada as we continue to penetrate an attractive market, with plans to add eight net new stores in 2024. Moving to our brands portfolio segment, our brand journey is still in its early innings And we believe Andrea's appointment is the catalyst that will take us to the next level. Andrea brings proven, scaled footwear and brand building experience to our business for the first time. Her experience at Decker's, where she led the expansion of the UGG and Kula Burr brands, is indispensable as we strategically plan the next phase of growth for our brands that have been relatively flat over recent years. Her experience as the CEO of apparel brand Everlane is also immediately additive to the organization. She has the know-how to evolve our current design and marketing capabilities because she understands that each brand brings a specific and unique end customer. With Andrea's leadership, we plan to build robust brand plans with key distribution partners, fueling long-term growth plans that are informed, robust, and aligned to our strategy. One of Andrea's initial areas of focus is to optimize and streamline our current infrastructure to support and grow our brands. This includes finding leverage and efficiencies across the brand portfolio segment, as well as across shared infrastructure within our retail segments. Our current brand portfolio has grown through multiple acquisitions, each bringing its own architecture. As a result, we have an amalgamation of disparate systems, processes, and roles, supporting each of our brands in different ways. often creating inefficiencies and at times hampering growth. Rationalizing the way we are working internally will be critical in setting a proper foundation for Andrea's growth plans. Before I close, I want to again state how excited I am about what lies ahead for us. I continue to believe that the unique combination of our store network and our strategic and growing portfolio of nationally distributed brands is a true competitive advantage. The pairing of our extensive retail store fleet and logistics networks, together with our own brand's portfolio, provides designer brands with the opportunity to harness operational and financial synergies many peers simply cannot match. And unlocking additional distinct advantages across our organization is where we are most focused. We are going to continue to leverage assets and infrastructures where it makes sense. by driving not only financial leverage, but true process efficiency. And as our recent acquisitions become fully integrated, we will continue to identify cost savings and additional synergies. Looking ahead to 2024 specifically, we expect net sales to improve throughout the balance of the year as we continue to implement the strategic initiatives I've discussed. There are a variety of unknowns as we enter 2024, but we continue to believe that effectively managing the factors that are under our control will position us well to deliver on our guidance. I am truly excited about the direction in which we are headed, and the opportunities for growth remain both tremendous and attainable. With that, I'll turn it over to Jared.