Designer Brands Inc.

Good morning and welcome to the Designer Brands second 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 August 3, 2024 to the 13-week period ended July 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 the 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'm pleased to report that during the second quarter, we made continued progress on our plan to return designer brands to growth. As anticipated, we did see consistent improvement in our top line performance throughout the quarter and have now experienced three consecutive quarters of sequential cost improvement. However, with consumers being increasingly mindful of their discretionary spend, that improvement has been more muted than anticipated. In spite of this, as expected, our comps have now turned positive as we've moved into the back half of the year and reached our anticipated inflection point. We expect positive comps to continue in the back half, supported by our strategic initiatives. We've been particularly pleased with our back-to-school business, which has carried its momentum into the third quarter, supported by our expanded athletic and athleisure offerings. Turning to our results. In the second quarter, our sales were down approximately 3% versus last year. We saw roughly 1% decline in comparable sales versus last year, a sequential improvement as our efforts to reinforce and grow relationships with our key national partners are paying dividends. Our top eight brands, all in the aesthetic and add leisure categories, continued to generate outsized growth in the second quarter, up over 30%, which was in line with the growth that we saw from them in Q1, and showcases the benefits of developing keeper relationships with key brand partners. Further, the penetration from these top eight partners climbed to 39% of sales in the quarter, a significant increase over the prior year penetration of 30%. While our assortment pivot is gaining traction, our over-penetration in dress and seasonal once again pressured results. We remain committed to reducing our reliance on these categories, and we're encouraged by the continued comp improvement as we exited the second quarter stronger than we started. As I mentioned earlier, we've seen that momentum continue quarter to date, primarily driven by strength in the back-to-school season. Gross margin contracted by 170 basis points to 32.8%, influenced primarily by lower IMU on athletic and athleisure products, as we prioritize growing our penetration in those categories, as well as pressure from promotions needed to clear through seasonal inventory. As we head into the fall season, we are maintaining our disciplined inventory allocation, which we believe will enable us to be less reliant on promotions to sell through inventory and capitalize on any momentum shifts we may see. Though we still expect IMU to be a continued headwind as our athletic inventory expands. Let's first talk about our retail business. According to Sukana, DSW outpaced the overall footwear market by one percentage point in the second quarter. In total, our U.S. retail sales declined roughly 3% versus last year, while posting a 1% decline in comparable sales as we saw increasing pressure on seasonal volume in the spring. However, thanks to our efforts to increase our athletic offerings, we had a powerful tailwind, with total athletic sales increasing 16% for the quarter. Allow me to briefly provide an update on the progress that we are seeing across DSW's three strategic pillars. reinvigorating our assortment, elevating our marketing, and enhancing our omnichannel shopping experience. Beginning with our assortment. Since the pandemic, the footwear market has undergone a structural shift to footwear more appropriate for everyday use. And we've made an effort to capture that shift by pivoting our assortment. Prior to the pandemic, our penetration of dress and seasonal was as high as 60% in 2017. compared to roughly 49% today. Conversely, athletic and casual was only 32% of our assortment in 2017 versus 42% today, a key driver in our improving overall performance. Being able to offer a robust selection from Nike, the largest kids' athletic brand, is also a notable tailwind for us. the strength in athletics this quarter was robust, with our adult athletic comps up 15% versus last year, along with kids' athletic growing over 25% versus the prior year period. At this time, we expect kids' and athletic comparable results to continue to strengthen in the third quarter, bolstered by the majority of our back-to-school efforts following during this time period. As a result of the success in athleisure, we're also taking a new look at our strategy in adjacent categories, One new initiative we implemented was an increase of inventory in athletic stocks. As we leaned into this newer area, we saw a 52% increase in athletic stock sales in the quarter and expect stock growth trajectory to climb further in the back half of the year as we continue to lean into this offering. Although a relatively smaller part of our assortment, affordable luxury offerings provide a bit of differentiation in our assortment while also having the potential to enhance margins. Our recent reinvestment into the space has promoted the differentiated value that DSW can provide to both new and long-time customers who enjoy the treasure hunt that comes with our buzz-worthy closeout buys, and we have seen strong growth as a result. As we reduce our reliance on seasonal undress, we have taken substantial actions in planning our fall assortment. Notably, we are planning boots to be down in the double digits versus last year. As we continue to rebalance our assortment to athletic and athleisure, we anticipate seasonal and dress penetration to continue to further contract over time. Moving to our marketing, as we evolve our assortment, our ability to effectively utilize marketing is crucial. In the second quarter, Sarah Crockett joined DBI as our new Chief Marketing Officer. bringing extensive experience in consumer marketing, having led marketing efforts at Dickey's, Backcountry, Vans, and Burton, amongst others. Sarah's work going forward will augment our efforts to evolve our assortment and enhance our omni-channel experience, which we expect will drive further momentum with new and existing customers. In the near term, our teams are executing our ongoing VSW brand equity building through top-of-funnel initiatives, leaning in heavily to the back-to-school season. We've created a digital and physical back-to-school destination by integrating our marketing message with opportunities in stores, such as leveraging influencers and using a digital lookbook to drive engagement. We are also capitalizing on the presence of Nike in our marketing, given its stature as a cornerstone of the back-to-school season. In addition, we are increasing our presence on social media in new and different ways. This includes a renewed content strategy the expansion of our influencer program, and specific targeted enhancements. These marketing strategy changes are already driving an improvement in social media performance, where we are seeing a two-times list in performance in recent campaigns. On TikTok alone, we've seen our engagement rate increase over 450 basis points, outpacing the retail industry benchmark by over 100 basis points. We've grown video views and organic engagements by over 100% each, and are consistently gaining new followers. Finally, we continue to invest in personalization to further refine and improve our customers' experience with ESW and to more effectively engage last or about-to-last customers. As part of this, we are piloting new strategies in our loyalty program. This brings me to our third strategic pillar of enhancing the shopping experience across DBI sales channels. We're encouraged by the success of our digital platform, which continues to lead the business, sustaining mid-single-digit growth for the third consecutive quarter. In stores, we are actively upgrading aesthetics with enhanced visual merchandising and promotional signage, which goes hand-in-hand with our refreshed assortment and omni-channel marketing strategy. Turning to our Canadian business, Sales increased by 6% versus last year, driven by the acquisition of Rubino, while comps contracted by roughly 3% as the Canadian market experienced similar pressures to the U.S. As a reminder, last quarter we entered into the previously untapped Canadian territory of Quebec following our acquisition of Rubino. Quebec is a new territory for designer brands, and we are excited to compete here and extend our reach to another quarter of Canada's population. As discussed, we intend to continue operating the 28 storefronts under Rubino's legacy banner given their established brand in the region. As a result, we continue to anticipate no material expenses associated with integrating the Rubino business within our portfolio. This quarter, we opened one new shoe company store and one new DSW in Canada, bringing us to a net six new stores year-to-date on top of the 28 Rubino stores. And we expect to further expand our shoe company store count by two more stores in the third quarter. Now to our brand portfolio segment. As we shared last quarter, we have implemented new programs and reviews that have supported reducing costs, right-sizing the organization, increasing margins, streamlining and simplifying the way we work, and defining the role, purpose, and potential of the brands in our portfolio. We are elevating our core competencies and leveraging scalability to develop best-in-class brands that we expect will, over time, provide significant returns. Our product ideation process is being greatly revamped with the purpose of improving adoption rates and expanding profitability in the coming years. We continue to be excited about the growth we are seeing in our brand's portfolio, with Topo Athletics and Jessica Simpson being just two examples of success we are recognizing. Topo continues to gain momentum as we grow its recognition with a dedicated running community. We are constantly engaging premier fitness and outdoor channels to further expand Topo's accessibility nationwide and drove a 109% year-over-year growth in its wholesale channel in the quarter. Jessica Simpson also sustained the momentum it saw in the first quarter with high double-digit sales increases as the brand continues to appeal to customers for its colorful and unique style. We're embracing the Jessica Simpson brand momentum and have capitalized on this excitement with expanded wholesale distribution up 70% in the quarter. I want to reinforce our message from last quarter that this year is all about execution and discipline within our brand's business, and we've right-sized our inventories and are implementing new ways of working amongst our teams. Looking to the future, both Jared and I are working closely with our brand portfolio team to identify and pursue prudent investments where we can deliver the highest returns. As I conclude, I want to remark on our 2024 fiscal year outlook. As I've discussed already, and as Jared will elaborate upon further in just a moment, we are seeing the turnaround we have been steering beginning to come to fruition, and I am energized by the return of our U.S. retail business to positive comps. It has been a significant effort to get to this point, and I am grateful to all of our team members for diligently pursuing our current strategic initiatives to get us to this place. Even with this turnaround gaining traction and transitioning us back to growth, the ongoing macro uncertainty and the challenges we saw as a result of a pressured consumer in the second quarter, specifically related to sandals and dress, have muted the overall level of these improvements below what we were expecting at the start of the year. Accordingly, we are repositioning our full-year earnings guidance at 50 cents to 60 cents. As we shared last quarter, we continue to expect comp sales in the fall to be materially stronger than in the spring and, in fact, remain positive. Notably, as mentioned earlier, we have already seen positive comps to start the third quarter as our assortment evolution continues to take hold. We expect this to produce an improved EPS in the back half of 2024 versus the back half of 2023, while helping forge a recovery from last year's lackluster boot seizure. We are in a transitional period for designer brands, as our refreshed leadership team implements thoughtful, strategic, and operational improvements, and we are excited by the initiatives that have been put in place by our new leaders and look forward to updating you on our continued progress. With that, I'll turn it over to Jared. Jared?