Designer Brands Inc.

Good day and welcome to the Designer Brands, Inc. 4Q25 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 telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Matthew Crummey, SVP of Strategy and FP&A. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week and 52-week periods ended January 31, 2026, to the 13-week and 52-week periods ended February 1, 2025. 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 factors listed in today's press release and the company's public filings with the SEC. Except as may be required by applicable law, the company assumes no obligation to update any forward-looking statements. Joining us today are Doug Howell, Chief Executive Officer, and Seamus Toll, Chief Financial Officer. I'll now turn the call over to Doug.

Good morning, and thank you everyone for joining us today. I'm very proud that our fourth quarter and full fiscal 2025 results reflect disciplined execution and the meaningful progress we've made in strengthening our business. I want to recognize the commitment of our designer brands associates who have remained focused on serving our customers and advancing our strategy. Before discussing our results, I want to give a warm welcome to Seamus Toole, our new Executive Vice President and Chief Financial Officer, who joined us last month. Seamus brings decades of financial and operational leadership experience across complex organizations, and his expertise will be critical as we advance our strategic priorities and drive long-term shareholder value. I'm pleased to have him with us today. Building on the momentum we established throughout the year, we were pleased to deliver another consecutive quarter of sequential improvement. Net sales were flat year over year in the fourth quarter, and consolidated comparable sales improved sequentially by 50 basis points. For the full year, total company sales declined 3.9% compared to last year, coming in towards the high end of our guidance range, and comp sales were down 4.3%. Notably, we delivered full-year adjusted operating income of $65 million, significantly above our guidance range of $50 to $55 million, driven by an improvement in fourth quarter sales trends, continued gross profit expansion, and disciplined expense management that resulted in a $26 million reduction in adjusted operating expenses compared to last year. As I reflect on 2025, I want to acknowledge that the year began with a level of macroeconomic volatility and pressured consumer sentiment that few could have anticipated. I am proud of how our team responded. We executed discipline to meet the needs of our business while remaining committed to our strategy, ultimately closing the year on a strong note. Over the last year, we continue to enhance our retail product strategy by elevating our assortment, improving inventory productivity, and cultivating our relationships with strategic national brand partners. We launched a new DSW brand positioning campaign this past fall and are highly encouraged that it is resonating meaningfully with customers, strengthening brand perception and driving engagement. In 2025, the DSW brand generated 79 billion total impressions, up 10% year over year, signaling strong, sustained interest. Our new brand positioning is beginning to come to licensed stores as well, with several remodels and new store openings completed this past fall that incorporate updated creative and visual elements. Customer feedback and financial performance in these locations have been encouraging. In our brand portfolio segment, we are pleased with the progress we've made to refine our go-to-market strategies and improve the profitability of the business. driving an $8 million increase in segment operating income for the year as we navigated an incredibly complex tariff environment. Before turning to review of our financial performance, I'd like to share an update on a recent organizational change we implemented in the business designed to accelerate execution across key priorities while maintaining a focus on reducing operating expenses. We recently brought our U.S. and Canada retail businesses under a streamlined reporting structure. which will enable better collaboration and integration of operations across our businesses. As part of these changes, we have right-sized our shared services organization to appropriately support the business moving forward. Now let's review the financial highlights from the fourth quarter and full year. Starting with our retail segment, which reflects the aggregation of our U.S. retail and Canada retail operating segments, our total sales for the fourth quarter were flat year over year, with comparable sales down 1.7%, an improvement from down 2.1% in the third quarter. This improvement was driven by strength in the boost category, affordable luxury, and accessories. For the full year, total sales declined 3.4%, with comparable sales declining 3.9%. Comp sales improved throughout the year, driven by positive in-store sales trends. In addition to the momentum we saw in existing stores, we were encouraged by the early learnings from our new stores that opened in 2025. Over the course of the year, we opened 13 stores and remodeled four stores in total. While not all of these projects included the full suite of experimental features, each incorporated enhancements to improve merchandise, customer flow, and overall store experience. The initial customer reaction has been strong, with notably higher conversion and traffic. We will continue refining these concepts as we move forward by leveraging data and customer feedback to scale what works to further elevate the DSW in-store experience across our footprint. In the fourth quarter, we delivered retail operating profit expansion, driven by a gross margin improvement of 140 basis points compared to Q4 of 2024. For the full year, gross margin improved 30 basis points. Turning to our brand portfolio segment, in the early phases, our focus was on margin enhancement and cost discipline. And in 2024, we achieved profitability in the segment for the first time. 2025 was centered on foundational work to refine go-to-market strategies, and despite significant tariff-related disruption, we drove an $8 million increase in segment operating income. On the top line, fourth quarter sales were up over 5%, driven by Topo, which was up 42%, and Jessica Simpson, which grew 17% versus last year. We remain encouraged by the underlying growth trajectory inherent in each of these brands. For the full year, total sales were down 9%, reflecting headwinds in the first half of the year, with performance improving as the year progressed. A clear standout was Topo, which continued to drive impressive growth, up 46% on the year and more than doubling the size of the business compared to two years ago. We further strengthened and diversified our supply chain this year, which enabled us to proactively mitigate the impact of tariffs and external cost pressures and deliver an 80 basis point expansion in brand gross margin for the year. Now I'd like to spend a few minutes discussing our strategic priorities for 2026. As we move forward, we are laser-focused on the following. First, winning with the merchandise that matters most to our customers. Second, amplifying and expanding our DSW brand positioning. Third, elevating our in-store customer experience. And finally, building and scaling our brand portfolio. Let's start with our product strategy and winning with the merchandise that matters most. Our refreshed merchant leadership team has made incredible progress in shaping our 2026 assortment. We are doubling down in areas of strength and leaning into encouraging trends in fashion across dress, boots, and affordable luxury. These categories are resonating with our customers. This will be supplemented by our efforts to build and scale our brand portfolio. We are also planning strong growth in categories adjacent to footwear, such as beauty, wellness, hydration, socks, and sunglasses. To further support our initiative to add newness to our product offerings, we're excited to be working closely with a consumer-focused investment bank focused on emerging consumer brands called Consensus, which runs the Great Brands program, the preeminent platform for emerging consumer brands in North America. This partnership enables us to thoughtfully identify and introduce new, relevant brands within our leading categories, while also expanding into adjacent non-footwear categories that encourage customer discovery and exploration. Through this relationship, we gain early access to emerging brands that align closely with our customer and our brand vision. By infusing our assortment with this targeted newness, we reinforce our let us surprise you brand positioning, strengthen differentiation, and ensure our assortment remains dynamic and aligned with evolving customer preferences. These product strategies are enabled by a heightened focus on end-to-end inventory optimization across planning, allocations, and digital order fulfillment. These efforts are designed to drive healthier margins, improve in-stock rates, support store conversion, and lower supply chain costs in 2026. We've made great strides in amplifying and expanding our DSW brand positioning, energized by the success of last fall's DSW brand campaign. To open 2026, we launched our Let Us Surprise You campaign for spring, designed to broaden our reach, strengthen customer connections, and ignite meaningful brand engagement, anchored by new, fresh creative that debuted on March 1st. At the same time, we continue to invest in strengthening relationships with our most loyal customers. This fall, we are relaunching our loyalty program, which continues to represent roughly 90% of our transactions. With this revamp, we're poised to deliver an even more compelling, differentiated experience that drives long-term engagement and growth. Our stores remain the foundation and an important point of differentiation in our strategy, and we are continuously working to elevate the in-store experience. In 2026, we are bringing our brand positioning and product strategies to life in new and exciting ways across our store base. We're also planning new store openings as well as several remodels. Early indications from last year's work are encouraging, demonstrating how we can deepen engagement through a more immersive, differentiated shopping experience. Finally, turning to our brand's portfolio, we are now entering the third year of the transformation journey that we outlined in 2024. In 2026, we will continue to build and scale our portfolio, a strategy which will in turn supplement our strategic priority of focusing on merchandise that matters. We're very excited about the renewed focus on our exclusive brands, which are only sold at DSW. These brands serve as a strategic tool for us to increase profitability via vertical integration and strengthen the DSW brand. We believe we are well positioned to deliver meaningful sales growth in 2026, highlighted by opportunities to amplify trends in the dress and boot categories. COPO's sales trajectory continues to be strong as the brand executes against ambitious growth plans. We're confident this momentum will continue in 2026. Growth will be driven by core franchises as well as new product launches that further elevate Topo's brand positioning. We expect to continue expansion of the brand's footprint within existing partners as well as opening additional points of distribution with new customers with a particular focus on specialty running. With Keds, 2025 was the year where we sharpened our product design to improve comfort and fit across the assortment, while also focusing on building the profitability of the brand. We're now looking forward to accelerated growth in 2026. We plan to drive this through expanded wholesale distribution with a focus on value, as well as from our direct-to-consumer digital business, where we are seeing positive signs so far this year. Jessica Simpson has capitalized on the recent resurgence of trends in the dress category. Additionally, we have diversified into the boot category and lowered heel heights in key dress styles in an effort to strategically appeal to a larger audience. We are confident that this evolved product strategy will continue to drive momentum with this brand in 2026. Throughout the brand's portfolio, we are pleased with the progress we've made in building a profitable foundation and are looking forward to advancing our efforts to drive sustainable growth in 2026 and beyond. Before I conclude, I want to share a few thoughts on our 2026 guidance. We are currently operating in a volatile macro environment that includes evolving tariffs dynamics and conflict in the Middle East, the latter of which may introduce increased inflationary pressure moving forward. We will continue to monitor these situations closely and remain nimble and adaptable as the year progresses. While there is some uncertainty in the current external environment, in 2026, we do expect to build on the improving trends we generated in the back half of 2025. We anticipate that total sales will be between negative 1 percent and positive 1 percent, driven by strength in our brand portfolio sales, which are anticipated to grow double digits. We also expect to deliver meaningful operating income and EPS growth on the year. Seamus will take you through our 2026 outlook in more detail. Before I close, I want to reiterate how proud I am of our team's disciplined execution and unwavering commitment, which drove sustained sequential improvement throughout the year. Despite a dynamic operating environment, we stayed focused on what we can control and executed against our priorities, and I'm excited to see this momentum continue in 2026. With that, I'll turn it over to Seamus.

Thank you, Doug, and good morning, everyone. I'd like to begin by expressing my excitement about joining the team as Chief Financial Officer and thanking the Designer Brands Board and the leadership team for their trust and warm welcome. My first month has been exciting, and I look forward to supporting our strategy to drive long-term growth and value creation. I'm eager to engage with our investor community and hear your perspectives as we continue to execute our strategy. I'm pleased to share Designer Brand's fourth quarter and full-year results. The team successfully executed against its strategic priorities and delivered significantly improved performance as the year progressed. Let me provide a little bit more detail on the financial results. We were pleased to see another quarter of continued sequential improvement with net sales of $713.6 million flat to last year and comps down 1.9 percent. Full-year net sales decreased 3.9 percent to $2.9 billion, and comps were down 4.3 percent. In our retail segment, sales were roughly flat to last year and comps were down 1.7 percent in the fourth quarter. From a category perspective, boots, affordable luxury, and accessories were our top performers. In our brand portfolio segment, sales were up 5.3 percent in the fourth quarter, driven by strong performance in both Topo and Jessica Simpson. Consolidated gross margin in the fourth quarter was 42.4%, a 280 basis point improvement year over year driven by stronger IMU, fewer markdowns, and lower shipping costs. This resulted in a 20.1 million gross margin dollar improvement compared to last year. Full year consolidated gross margin was 43.6%. a 90 basis point improvement year-over-year driven by favorable merchandise margin and increased efficiency in our digital order fulfillment operations. For the fourth quarter, adjusted operating expenses were up $6.4 million compared to last year, representing 44.4 percent of sales. This reflects a deleverage of 90 basis points over last year on lower sales. It's also worth noting that the fourth quarter operating expenses were impacted by $9 million of incentive compensation in the quarter compared to none in the fourth quarter of last year. And absent the impact of incentive compensation, fourth quarter operating expenses would have leveraged 40 basis points versus last year. For the full year, Adjusted operating expenses represented 41.7 percent of sales and 80 basis point deleverage from last year. Amid a challenging macro backdrop, we remained focused on disciplined cost management across operating expenses, inventory, and capital allocation throughout the year. Our total adjusted operating expenses declined by approximately $26 million for fiscal 2025 compared to 2024. We also ended the fourth quarter with total inventories down mid-single digits from prior year and decreased our debt by nearly $60 million compared to last year. For the fourth quarter, adjusted operating loss was $11 million. compared to a loss of $23.5 million last year. The improvement was mainly driven by gross margin expansion of 280 basis points. For the full year, adjusted operating profit was $65.2 million, compared to $67.3 million last year. While full-year adjusted operating income declined slightly year over year, We were encouraged by the progress we made in the back half of 2025, delivering an increase in adjusted operating income of over $15 million versus 2024 across Q3 and Q4 collectively to come in above the high end of our guidance range for the full year. In the fourth quarter of 2025, we had $10.4 million of net interest expense compared to $11.1 million last year. For the full year, net interest expense was $45.3 million, flat to last year. Our effective tax rate in the fourth quarter on our adjusted results was 31.3%, compared to 38.6% last year. For the year, our effective tax rate was 54.3%, versus 31.6 percent last year. Fourth-quarter adjusted net loss was $15.6 million, or 31 cents per diluted share, compared to a loss of $21.3 million, or 44 cents per diluted share in the prior year. Our full-year adjusted net income was $8.3 million, or 16 cents per diluted share, compared to $15 million or 27 cents per diluted share in fiscal 2024. The full year decrease was largely driven by higher taxes as 2024 included one-time reversals of tax reserves. Turning to our inventory, we ended the fourth quarter with total inventories down 6% versus the prior year. We are planning to tightly manage inventory throughout the year as we focus on the brands, styles, and choices that matter most to our customers. We ended fiscal 2025 with $50.9 million in cash. Our total liquidity, which includes cash and availability under our ABL revolver, was $152 million at the end of the year. We continued to prioritize balance sheet strength in the quarter, applying excess cash towards debt repayments, and closing the year with total debt outstanding of $435 million, a decrease of nearly $60 million compared to the prior year. Turning to our guidance for the full year. As Doug mentioned, the macro environment remains dynamic. with the conflict in the Middle East introducing uncertainty that could drive inflationary pressures and impact consumer sentiment. Conversely, while there may be some net upside for our business performance as a result of tariff policy evolution, this is not currently contemplated in our guidance. We currently anticipate net sales to be in the range of down 1 percent to up 1 percent for the year. with sales in the retail segment flat to declining slightly, offset by double-digit growth in the brand portfolio segment. In 2026, we expect to drive operating income growth through gross profit expansion and a continued focus on increasing efficiency in the business. Our guidance contemplates actions taken to right-size our workforce in 2025 partially offset by a return to a normalized level of incentive-based compensation in 2026. This guidance assumes an effective tax rate of approximately 40 percent for the year. We plan to deliver EPS between 28 cents and 38 cents per diluted share on an average diluted share count of 58 million shares, compared to an adjusted EPS of 16 cents in 2025. I'd also like to provide some commentary on intra-year performance. Aside from some unfavorable weather impacts early in the quarter, we have seen a continuation of the positive momentum in Q1. We anticipate sales to be flat to up low single digits and EPS to be breakeven to slightly positive in the quarter. As we look across the year, We're anticipating sales and earnings growth to be stronger in the first half of the year. As we shift into the back half of the year and anniversary actions implemented during 2025 that drove margin expansion and cost reductions last year, the comparisons become more difficult. To conclude, I'm proud of the progress we've delivered in the fourth quarter and across the full year. I am confident in the foundation that has been built and our ability to continue building momentum throughout 2026, and I'm excited to be working alongside such a disciplined and strong team. With that, we will open up the call for questions. Operator? Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then two. Once again, that's farther than one if you have a question.

Today's first question comes from Mauricio Serna with UBS. Please go ahead.

Great. Good morning. Thanks for taking my question. A couple of things. First, could you comment on what you saw in performance in the top eight national brands? I believe that had been a focus for the company in the previous quarters. And then maybe just to understand the the shape of the revenue guide. You mentioned, you know, first quarter revenue should be flat to up slightly, but then, or, like, up to a single digit, but then, like, the guidance for the year is actually calls for, like, flat at the midpoint. So, just trying to understand, like, what drives, like, the implied slowdown as you move on to, you know, after Q1. Thanks so much.

Yeah, Mauricio, this is Doug. Let me take the first question. On the top eight brands, we're going to actually be evolving that to top 10 brands for 2026. It would be those brands plus our three exclusive brands, which we sell only at DSW, and we're really excited about the growth that those brands represent, given they're only sold in our channels of distribution. The top eight brands for 2025 drove a comp increase. We were very happy with that, roughly 40% of the total business. The team's continued focus on, you know, deepening those relationships with the merchandise that matters most and deepening our planning with those strategic brand partners has definitely paid off, and we see that continuing to pay dividends into 2026 as well. It relates to your second question on guidance. You know, I'm the general optimist. There could be some upside in there. We just want to acknowledge that given the uncertainty of the macro environment, you know, we want to be mindful of that, particularly as it relates to the back half, which, as Shane has said in his prepared remarks, we come up against stronger comps. Very encouraged by quarter-to-day trends that we're seeing in Q1. That momentum that we experienced in Q4 has continued. particularly in the store channel, which has been a big focus for the teams. I mean, we feel like that's our biggest point of differentiation. You know, we had a little bit of challenging weather impacts as we started the quarter, but it's kind of come around that. And, you know, coming up against the shift of Easter, we feel really encouraged by that. So in large part, you know, just a little bit of a conservatism probably in the back half when we come up against those. On the overall side, obviously, we're going to see a strong double-digit increase on the wholesale business throughout the year. So that's kind of how it balances out for total.

And that is the increasing wholesale is just driven by the strength in some of the exclusive brands that you sell, right? Topo, Jessica, is that the right way to think about it?

Yeah, the whole portfolio is going to drive significant growth. Obviously, Topo is a significant driver of that growth. Jessica Simpson is a big growth driver. Ted will have a nice increase in 2026 as well. And, again, those are largely, you know, the largest clients are either not DSW at all or their largest customers are outside DSW. And then the exclusive brands piece will be driving growth in our channels of distribution. So it's pretty well-rounded growth, internal and external.

And one last housekeeping item. You know, in the guidance, you included share count being $58 million. I think that's like $8 million, sorry, not million dollars, just $58 million shares outstanding for fiscal 26. That's like $8 million higher, 16% versus last year. I just want to understand what drove that increase, and how should we think about the interest expenses for the year?

Thank you.

Hi, Mauricio. I'll take those questions. So first, in terms of the share count, I think, you know, if you look back at the history, the lower share counts were in periods in which we had a loss. And in those periods, from a GAAP accounting standpoint, we do not include the full impact of potential dilutive shares. As we move into the future, we are anticipating, and based upon our guidance, anticipating that we will shift back into profitability. And as such, we need to include the full impact of potentially dilutive shares in our diluted share calculations. So that's what's driving the increase. It's not really incremental shares. It's just the fact that now they are included in periods of income. In terms of the interest... For the year, I think as we disclosed on the call, we're expecting to see significant reductions in debt levels as, you know, we completed this year. So, we completed this year with debt levels down approximately $60 million to last year. So, that is helping us from a, certainly from an interest perspective, in controlling interest costs as we move into the fiscal year this year. So those expectations are built into our numbers for the year. In terms of the total dollar value, we're anticipating about $40 million of interest for the full fiscal year, which takes into account that lower level of debt. Also, I would point out, You know, in terms of our interest calc, you might have noticed that we have, you know, tremendous partnership with our banking partners. We negotiated an extension of our, you know, ABL revolver. So we're really pleased with those partnerships, and that will continue for us into the future.

Very helpful. Thanks so much.

Thank you. And as a reminder, if you'd like to ask a question, please press star then 1 at this time. We'll pause for just a moment to assemble our roster. And our next question today comes from Dana Telsey at Telsey Group. Please go ahead.

Hi. Good morning, everyone. Can you talk a little bit about on the inventory side and tariffs, As you're bringing in inventory now, what rate are the tariffs being brought in by and how are you thinking about the tariff impact flowing through with rates where they are and how they were? How is that changing and the impact on margins? And then just lastly, Doug, category-wise, what are you seeing category-wise? How is it shifting and promotional landscape of how you're seeing the environment? Thank you.

Thanks, Dana. Appreciate your questions. First of all, there's actually a tariff question. You know, it's still an evolving tariff environment. We thought we had, you know, kind of gotten through all of that in 2025, but there's still, you know, quite a bit of evolution that's happening there. Our guidance is built on the assumption that the new tariffs are largely going to be inactive. We'll replace the IEPA tariffs. So, you know, there's definitely favorability that we're seeing right now with regards to year-over-year comparisons, but There potentially could be some upside if, you know, if the enacted tariffs don't replace those APA tariffs. So that proved to be conservative, but we want to just be, you know, clear about the fact that there's ever-changing dynamics there, so we want to stay close to that. So, again, could be some net upside in there, but, again, just continues to be so much volatility. Okay. On the category perspective, I'd say it's pretty broad-based. We feel really good about the dress category. We've always had leading market share penetration in that category. We're seeing nice increases there. For fall, we planned boots down significantly. We actually had an increase, so that was a big rebound. Sandals for spring are off to a really good start. It's pretty broad-based. We talk about affordable luxury. It's a business that is providing incredible growth for us and fits into that, you know, let us surprise you component of our product assortment. And then the accessory business in adjacent categories has given us very significant growth as well. And we feel really good about all those continuing momentum through 2026. From a promotional perspective, I'm really proud of the team and the evolution that the new refreshed merchandising team has made on the product assortment. You heard about our margin expansion of 280 basis points for last year's performance. We are being much more surgical with regards to promotions. We've focused a lot on channel profitability, specifically on digital, pulling back on some of those unprofitable promotions. And as a result, we've reduced our markdown rate significantly. tied to the fact that we're very conservatively managing our inventory. We ended with inventories down 6%. So, you know, all that has led to a pretty nice expansion in margin that we feel really good about.

Thank you.

Thank you. And that concludes our question and answer session.

I'd like to turn the conference back over to Dr. Howell for any closing remarks.

Thank you all for your continued interest in designer brands. Before we close, I just want to, again, recognize the dedication and the commitment of our teams. Really proud of the determination and the resilience that they demonstrated this past year. I'd also share that we continue to be encouraged by the momentum we're building in the business, driven by the strategic priorities that we shared. And we look forward to continuing to update you on our progression throughout the year. Thank you.

Thank you. That concludes today's conference call. We thank you all for attending today's presentations. You may now disconnect your lines and have a wonderful day.