Designer Brands Inc.

Good morning and welcome to the Designer Brands First Quarter 2024 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 Dustin Honstein, Senior Vice President of Finance. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended May 4, 2024, to the 13-week period ended April 29, 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 Howell, Chief Executive Officer, Jared Poff, Chief Financial Officer, and Andrea O'Donnell, Brands President. Now let me turn the call over to Doug.

Thank you for joining us this morning. This quarter, we were pleased to deliver results in line with our expectations as we gained traction on our path to returning designer brands to growth. As a result of meeting our targets on both the top and bottom lines, we are also reaffirming our 2024 fiscal year guidance. As noted last quarter, we are confident that we have the right people and processes in place and believe that 2024 will continue to be a time of transition for designer brands as our refreshed leadership team implements thoughtful, strategic, and operational improvements. We are seeing early signs that this refreshed focus is benefiting our organization. To that end, I would also like to thank our DBI associates for their ability to quickly adapt to new ways of working as we transform into a more efficient organization. Turning to this quarter's results, in the first quarter, sales were up almost 1% versus last year, and we saw a 2.5% decline in comparable sales. These results were in line with our expectations and demonstrated sequential improvement from the fourth quarter of fiscal 2023. We anticipate that comps will continue to improve throughout fiscal 2024 as our new strategic initiatives, which we will discuss on this call, are further implemented. Our strategic changes also enabled us to expand gross margins in the first quarter by 80 basis points to 32.8%. This improvement was driven by strong inventory management, reduction in closeouts, and direct-to-consumer, or DTC, growth. During this turnaround year, we are continuing to look for ways to rationalize and size our cost base appropriately, streamline our operations, and improve our efficiency. Let's first talk about our retail businesses and how we're progressing on our strategic pillars to drive growth. In our U.S. retail business, we performed in line with the overall industry as our improving assortment featuring trend-right styles and brands engaged existing customers and reached new audiences, despite seeing continued broad-based weakness in seasonal footwear. As we continue to leverage consumer insights to evolve our assortment, we believe that the benefits of a strong athletic and casual assortment are evident. Our first quarter U.S. retail sales were up 1.4% to last year, with comps down 2.3%. We're pleased with the progress we've made on our strategic initiatives to fuel U.S. retail growth. Our efforts to reinvigorate the assortment, optimize our marketing investments, and enhance our omnichannel shopping experience are already beginning to contribute to our results. Let's begin with our first pillar and the progress we've made to reinvigorate the assortment at DSW. We were pleased with our performance in athletic and casual, which outperformed the balance of categories at DSW, with athletic in particular of 15%. According to Cercana, for Q1, DSW dollar sales in both of these categories, performance and leisure footwear, outpaced the balance of the footwear market. Kids significantly benefited from the heat in these categories as well, with sales dollars outpacing the balance of the footwear market in Q1, according to Sarkana. As such, athletic penetration of total DSW overall sales grew by over 460 basis points year-over-year to 30%. Furthermore, nearly all the leading national athleisure brands that we carry are seeing impressive growth within DSW that often outpaces their own growth in the market, which has facilitated constructive dialogue with our top partners. Zooming out, we've seen exceptional growth from our top national brands. Specifically, in the first quarter, our eight hottest brands alone, which include a number of the most sought-after, trending athletic brands in the market today, grew 27% year over year. We spoke last quarter about Laura's focus on strategically building stronger relationships with our brand partners. This will help to ensure we always have the right top brands on hand, based on consumer insights, regardless of category. Laura and her team have also been executing select strategic closeout buys in the affordable luxury market. These exciting finds carry a perceived value and product differentiation that extend well beyond the size of the buys themselves. Although relatively small compared to our other offerings, this affordable luxury category significantly outperformed the balance of our assortment. Additionally, we've gotten incredibly positive customer feedback. Many of our most ardent customers have been attracted to the excitement of the treasure hunt phenomenon at our physical locations, and we want to continue to be a destination of choice for shoppers eager to find exciting and unexpected selections. We believe that these buzz-worthy offerings are paying off by enhancing assortment relevance and customer excitement, complementing our existing product, and driving sales in ancillary categories. Amidst these category successes, we are equally aware of the categories that aren't resonating as strongly with the customer and have enacted prudent inventory controls. The seasonal category got off to a slower start as inconsistent weather impacted this category in the first quarter. The industry continues to see broad weakness in the seasonal footwear space. Likewise, dress continued to experience softness in the quarter, posting a comp of negative 7% year over year. We will continue to closely monitor these trends and manage our inventory levels and assortment planning accordingly. Beyond these exciting developments in our assortment, in the first quarter we advanced our second strategic pillar to optimize our marketing investments. I am very excited to share that Sarah Crockett will be joining our leadership team as DSW's new Chief Marketing Officer. Sarah brings a wealth of experience in customer acquisition and retention, driving traffic and marketing budget efficiency to DSW, which strongly complements the work Laura is already championing around elevating our assortment and shopping experience. Sarah is bringing to DPI an extensive background in global full-funnel marketing, including a comprehensive knowledge of brand strategy development. She also has considerable experience in multi-channel and consumer-centric marketing. She most recently served as Global Chief Marketing Officer at Nature Sunshine Products Incorporated, and prior to that was Global Chief Marketing Officer for Dickies and Chief Marketing Officer at Backcountry and Burton Snowboards. She also has held leadership positions at other specialty retail brands, including Lucky Brands, Vans, and REI. Our renewed top of funnel programming continues to engage national audiences. Our current campaign, DSW Pairs with Everything, emphasizes the continued expansion of our offerings and styles. We are also focusing on recouping lapsed customers through tailored engagement, including special promotional campaigns. Using data on past purchasing behavior and time since last purchase, we are analyzing new ways to reach out to both lapsed and about to lapse customers. While we are in the early stages of piloting this exciting initiative, we are quite pleased with the positive results we are seeing. Moving on to our final pillar, we have continued to find new avenues to enhance our omnichannel experiences. This quarter, digital demand achieved strong mid-single-digit growth versus last year, and conversion continued to improve as we evolved our digital customer experience. At our physical locations, new layouts continue to be piloted, and we have seen a positive reception to store refreshes we are doing, which include fresh paint, new lights, and updated flooring. Our customers love DSW because it provides a variety of brands and price points in convenient locations to try on items and receive exceptional customer support. We are committed to enhancing the client experience both in-store and online and will continue to evaluate new opportunities that will strengthen our ability to drive omnichannel growth. Beyond our DSW banner, our Canadian operations are also representative of our efforts to improve the shopping experience for our customers. Our sales grew nearly 3% versus last year, while comps declined by 4.9%, a sequential improvement from the fourth quarter in line with our expectations. This was primarily driven by kids in athletic categories, which posted strong positive comps this quarter. As we noted last quarter, Mary Turner has begun fully rebranding the shoe company, both digitally and in new storefronts. This quarter, we opened five new shoe company stores, and we expect to add an additional four net new stores to our portfolio by the end of 2024. Additionally, as we continue to expand our reach and grow our market share, I'm pleased to announce that in the first quarter, we acquired Rubino, a profitable Canadian footwear retailer operating nearly 30 stores, specifically serving the province of Quebec, a province that represents nearly a quarter of Canada's population, but in which we had no existing presence. Rubino currently operates stores that offer nearly identical atmospheres and assortments to that of our own shoe company stores. Rubino already makes efficient use of its working capital and is expected to contribute to DBI's operating income at about the same rate as our overall Canadian retail segment, and we expect the acquisition to be immediately accretive. Rubino's customers are loyal to the brand, and we intend to continue operating these storefronts under the Rubino banner. We also believe there's an opportunity to add value by offering our own brands in their stores. Moving on to the brand's portfolio, I'd love to turn the call over to the new president of our brand's portfolio and footwear industry expert, Andrea O'Donnell, to discuss her priorities for the business now that she has had some time to access the portfolio and meet with our brand leaders. As a reminder, Andrea joined us in January after serving as the Chief Executive Officer at Everlane at Fashion Retailer, and before that, as President of Fashion Lifestyle and the UGG Brands at Decker's. Andrea, thank you for joining us today.