Good morning, ladies and gentlemen and welcome to Designer Brands’ First Quarter 2019 Conference Call. Thank you for standing by. At this time, all participants are in listen-only mode. As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Allison… [Technical Difficulty] Earlier today, the company issued a press release comparing results of operations for the 3 months ended May 4, 2019 and the 3 months ended May 5, 2018. 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 filings with the SEC. And the company assumes no obligation to update any forward-looking statements. Joining us today are Roger Rawlins, Chief Executive Officer and Jared Poff, Chief Financial Officer. Now, let me turn the call over to Roger.

Good morning. I am excited to share with you the progress that’s been made towards the vision we outlined during our Investor Day. I am excited because we have seen continued growth in all of our retail segments, while also making great progress in leveraging the Camuto Group infrastructure for the benefit of Designer Brands and readying the organization to begin moving the production of our private brands to our Camuto organization. I would like to share a few highlights from Q1. First, we delivered a strong comp at the DSW brand on top of a positive comp last year, while delivering 70 basis points of gross profit rate improvement driven by digital demand growth key items in our seasonal categories. Second, our Canadian segment turned to profit during Q1 for the first time in 5 years. Third, our integration work at Camuto is in high gear, already producing many of our GWPs taking on replenishment orders for fall exclusive brand business and strong double-digit growth in our own digital direct-to-consumer businesses. Fourth, we have paid our quarterly dividend and repurchased approximately 4.5% of our outstanding shares for $75 million. And finally five, we are raising our annual guidance to $1.87 to $1.97 a share. Both our retail segments delivered strong revenue increases and healthy growth in gross profit rate over last year. Our distortion across North America to seasonal and kids products and a focus on key items fueled this profitability growth. I am excited to see the Canadian business deliver such an impressive performance through the talented leadership now in place and by leveraging the business discipline and established infrastructure that Designer Brands has brought to that business. The practices we have put in place at DSW over the past 3 years are now in place in our…

Thank you, Roger, and good morning. I have been on the road for the better portion of the quarter meeting with many of you and I have come away with a sense that most of you understand the power of what we have created at Designer Brands. And you understand the relative simplicity of what drives our significant growth over the next 3 years. But understandably, you are a little anxious to buy in too early until you see the fruits start to appear. I look forward to sharing those fruits with you as they come to fruition including on today’s call so that you can feel comfortable getting as excited about this model as Roger and I both are. To that end let’s dig into the results for the first quarter. Net income for the first quarter of 2019 was $31.2 million or $0.40 per diluted share which included net after tax charges of $2.4 million or $0.03 per diluted share primarily related to integration and restructuring expenses associated with the acquired businesses. Excluding these charges, adjusted EPS was $0.43 per share. Net income for the first quarter of 2018 was $24.3 million or $0.30 per diluted share which included net after tax charges of $7.2 million or $0.09 per diluted share, primarily related to exit costs associated with Ebuys, acquisition costs and foreign exchange net losses. The financial results that we will be referencing during the remainder of today’s call exclude certain adjustments recorded under GAAP. For a complete reconciliation of GAAP to adjusted earnings please reference our press release. Operating income for our legacy businesses which is DSW and our Affiliated Business Group grew 12% over last year. This was driven by healthy comp increases and margin enhancements. As Roger mentioned our Canadian Retail segment generated a…

Thanks, Jared. Hopefully, you are as excited about the performance of our individual segments as I am. Each fighting hard everyday to deliver differentiated products and experiences for their customer that ultimately disrupt the footwear industry. Before I leave you with some final thoughts, let me first spend just a few minutes walking you through our thinking around tariffs. While we join our fellow retailers and footwear manufacturers and believing that using such dramatic tariffs as negotiating club is shortsighted. We nonetheless appreciate the reality that such actions could be taken at will by the administration and have carefully studied the impact it would have on our business and what we can do to mitigate this impact. Non-athletic footwears don’t heavily rely on Chinese production and supply chain. And while we and our peers have been working to move production out of China for sometime now, the fact remains footwear is a very capital intensive industry with years of planning required to make sourcing decision. Companies cannot simply move factories to adjust to these changes instantaneously. When looking at the total impact in risk assessing our mitigation alternatives such as cost sharing with vendors in factories, accelerating our private brand rolled out at DSW, considering alternatives componentry, new and innovative business growth across all of our divisions, meaningful SG&A reductions in synergies and potentially some level of incorporating a portion of the tariff within the retail cost of our product. We believe we have identified actions that can mitigate the vast majority of the direct impact of the 25% tariff. That being said, we can’t predict the impact this action could have on consumer spending and will provide a projected annualized EPS impact if the tariffs are instituted and we have time to see the consumers and competitors respond. We…

Yes. Thank you. We will now being the question-and-answer session. [Operator Instructions] And today’s first question comes from Camilo Lyon with Canaccord Genuity.

Hi, good morning. Thank you for all the detail, much appreciated.

You’re welcome.

There is a lot of [impact there] [ph], maybe if you can just start high level from just the overall health of the U.S. consumer that you are seeing, you mentioned in which department stores we are having a little bit of more challenging period, get some of that inventory back, made it more profitable transaction through the DSW stores, I am wondering if you can just give an overall assessment of what you are seeing in the U.S. from the consumer and how that should perform, how we should think about your DSW comps in Q2 and Q3 in light of difficult comparison, particularly what is seeming to be a incrementally more promotional environment?

Yes. So Camilo I will take that question. I think at Investor Day we talked about three things we were doing to really differentiate the DSW segment within retail and I am really proud of the work that we have done. We talked about differentiated products and when you look at Q1, we have dominated the seasonal categories both boots and sandals. So the weather noise that we are always talking here about, we have some flexibility in our assortments that perhaps some others don’t. So we did double digit comps in both of our seasonal categories. And we are going to continue that throughout the balance of the year. We talked about expanding kids. We did over 50% increase in kids volume year-over-year which again continued growth we see in that. And we also talked about growing our Camuto produced brands. Then ultimately we did a 42% comp in private brand goods that added 50 basis points of margin rate for the quarter. So as I look at the retail segment, if we are continuing to focus our teams efforts on those kind of dominant positions around product, we got – we have momentum, we had momentum coming from 2018 and its continued in Q1 and we want that to continue throughout the year. That being said Q2 will be a much larger challenge than any other quarters. We had plus 10 comp last year, but we are focused on the year and what this thing looks like 2 years and 3 years from now and we feel really good. So in general that’s why I would tell you as it relates to products and how we are performing as a business.

Great. And then my follow-up is on the tariffs, thanks for addressing that already. I just had one or two follow-ups to that topic, if you could just help us understand what’s baked into your guidance right now I guess I am assuming that 10% is baked into your guidance on behalf of that [indiscernible]. And then the second portion of that question is as we think about the scenario if the tariffs expand to include footwear, what pricing actions are embedded in your assessment of being able to almost fully mitigate that offset?

I will let Jared take the first part and then Camilo I will take the second part.

Certainly and so yes, you are correct. As we look at our handbag business one at the DSW side, we have been working with our vendors to find the way to mitigate as much of that as possible. On the Camuto side, we certainly have been taking the actions that we can to mitigate as much of that. I will tell you as far as moving production outside of China our handbag business was well ahead of the curve vis-à-vis our footwear business. And so we have incorporated all of that with we are looking at for the year.

And as it relates to I think go forward Camilo how we are looking at it, I am going to give you these are the eight things and hopefully if I answer this question here it would be the hopefully the one time on this call we have to talk about this stuff. But I get the uncertainty that it creates for all of you, but there are 8 actions that sort of outlined in the previous comments, but I want to go through them again quickly. Number one and our first priority is moving product to other countries. And I think when everyone was giving us doubting our ability to acquire something and why would we acquire Camuto, this gives us flexibility we never had before, because now our first focus is moving product to other countries and we are doing that and it’s a great news for us is at Camuto we produce in over 13 countries and we have existing relationships that creates a flexibility now for both DSW and our other businesses we didn’t have before, so that’s priority number one. Number two, cost sharing with vendors in factory. Remember at our earnings day, I talked about the fact that DSW is being paying too much for goods from for the last 13 years that I have worked here and that was all validated with the information we got from our Nine West acquisition look as well as acquiring Camuto. So we [hadn’t] [ph] embedded any of that into our future guidance and we are going to use that as a way to hopefully deal with some of the cost increases, because we shouldn’t absorb them, because we already paying too much for goods. So that’s number two. Number three, we will accelerate our private brand…

Much appreciated. Thank you.

You are welcome.

Thank you. And the next question comes from Paul Trussell with Deutsche Bank.

Hi, good morning. This is Gabby Carbone on for Paul. Thanks for all the detail this morning. I was hoping you discuss your merchandizing market outlook for the DSW banner following your strong performance his year. We are hearing from other retailers that the promotional environment is elevated, but you mentioned you are able to reduce markdown this past quarter, just wondering how you feel about the opportunity moving forward? Thank you.

No, good question and again it comes back to what I talked about earlier about differentiated products. So getting after seasonal, growing kids, those exclusive brands and Camuto produced brands bringing those to life, but I also really have to recognize the efforts of our planning and allocation team and our merchants who are getting after the cost of goods with our vendors, but also how we are optimizing inventory and we talked a lot at Investor Day about operational excellence. And one of the things that Bill Jordan has talked about was optimizing inventory management and we exited the quarter with a 3% decline in inventory while driving a 3% comp. And our in-stocks and our key items are significantly better than they were last year. And as we go through Q2 they are going to be – we are going to be better positioned in sandals then we have ever been. So our belief is by having this incredible loyalty program that was recognized as the number one retail loyalty program in America that added 1.4 million new members in Q1 that if we leverage that asset and optimize our inventory in these seasonal kids and private brand categories, we can deal with the noise that’s created out there as others are promotional and I was driving by some stores the other day one of our competitors had a sign up in front that said buy one get one half off. If I am a brand and I am trying to put my brand in that retailer, I would be embarrassed and that is not who DSW is, that’s not the way we play. We leverage our loyalty program and our ability to run our business day-in and day-out to provide value to our customers. So I think if we stay focused on those things we can compete as people are playing that dirty promotional game.

Thank you so much.

You are welcome.

Thank you. And the next question comes from Rick Patel with Needham & Company.

Good morning, guys and congrats on the strong execution in a tough environment.

Thanks, Rick.

Great to hear the integration of Camuto was tracking ahead of schedule, can you give us a little more color on what you have learned from owning this business so far perhaps what you are most excited about and any surprises you have run into as we think about the rest of the year, can you talk about what you are hearing from – little bit more color on what you are hearing from Camuto’s legacy retail customers as they think about the fall open-to-buy?

Yes, it’s great Rick. Thanks for the question. I think first of all I think there are the number one and most and the highest priority we had in engaging with this business was getting to know the leadership team. And I am really excited with the team that we have there, our design and sourcing teams are as good as what we had expected and that’s fantastic and that ultimately is what differentiates this thing, it’s all about the people and the talent and the leadership that we need. I think we are working in where we have opportunity, it’s the stuff that’s Simon had outlined on Investor Day it’s growing our branded business. And as we mentioned earlier in the call, we have actually had our team go out there and engage on the digital side and we had a 46% comp within vincecamuto.com and I think getting that on the right platform that we can leverage long-term is a big deal. I am also feeling really good about the execution of the brands in Camuto and what we are seeing in general with exception of a few retailers, our sales are outfacing our inventory position. Unfortunately, we can’t fix the pullback in open-to-buy that has taken place over the last couple of years, but as we look to the fall access that we will have to open-to-buy based on the results we are getting in Q1 and hopefully we will deliver in Q2, we feel pretty good about our upsides for the fall season. So I think growing that branded business is still really good, but I think more importantly long-term for DBI shareholder, it’s demonstrating the ability to pickup this private brand and we knew this team had disability based on the work they had done whether it be with Nine West or Tory Burch or a bunch of other people that they have done the work for, but our plan was to make this happen in 2020 and I specifically told the team you are not allowed to talk about doing this in the back half of 2019 and they obviously did not listen to me, because they have already picked up I think it’s over 800,000 pair of DSW private brand goods that will be design stores by the Camuto team for the fall season. That is a huge win for this organization as you guys know from a profitability standpoint, but more importantly, it demonstrates the kind of leadership and the flexibility that Camuto organization has and that’s why we bought the business and it’s why we are excited about the future.

Can you give us a little more color on product performance at DSW, it sounds like women and kids were strong, what’s your level of confidence in that momentum in the context of comparisons getting a little bit more difficult here going forward and anything noteworthy or changes in trend to callout as we think about various product categories or key brands?

I would say and think as you know we are not going to give a ton of color around that. I would tell you what I am really excited about is again the inventory positioning key items. And we talked about this several times in the past about how our inventory would come down in a way that our conversion rates would decline in a materially way throughout second and third quarters as we transitioned out of sandals and into – and some boots. And I love the fact that our team is managing key items in our in-stocks significantly better than we have ever done in the history of this business. So I think that’s the big upside. And for us again it’s all about the season category, it’s all about kids and it’s all about private brand. And there are ebbs and flows that go with our business, but if we win at those we are going to have success. So that’s what the color I can provide you on sort of what’s working and what’s not working.

Thank you very much.

You’re welcome. Thanks.

Thank you. And the next question comes from Steve Marotta with C.L. King & Associates.

Good morning Roger and Jared. As far as Q2 goes, you provided some additional color on which I appreciate and I know you do not guide quarterly, but do you expect the positive comp in the second quarter and can you just assemble a little bit about the comparison maybe of what was projected during the first quarter on what is the difficult comparison and what might be a current environment?

Yes. Steve, I think the way that as I have said we are not going to provide quarterly guidance, but we are looking at the full year. And you look at Q1 we did a 5 comp from the 2 year basis. And that’s more directional as we see it throughout the full year. And I think if you play that math out, I think that can at least give you some framework to sort of how – get a sense of how we see Q2 playing out. And as Jared have mentioned earlier there are some things that happened last year with the rewards re-launch or loyalty re-launch that created some margin upside last year and those kind of things. We are very, very focused on the full year. And as Jared said the back half is going to be stronger than what the front half is going to look like. So that’s what I would tell you.

Okay, that’s very helpful. Jared were there – I am just putting the final point on everything were there any metrics besides the share repurchase which drove the annual increase in fiscal guidance increase?

No. What we wanted to do is just make sure we passed on everything that we could in the share repurchase and so what we did was basically take the full amount of the repurchase plus the incremental interest. And I think on my script I think I have said net income dollars I meant op income dollars what were going to be the same because we do have a couple of million dollars of elevated interest expenses related to that. Everything else we have passed on, because as I have mentioned before we feel very confident with our year even from where we were at the beginning of the year.

Sure, that’s very helpful. My last question is you added 1.4 million loyalty members in the first quarter, what is that on base [indiscernible] please?

That’s on the base of roughly 26 million.

You increased it over roughly 5% in the first quarter alone?

We added 1.4 million there also was some churn of people that naturally rotate off because they have to make [indiscernible] or so.

Yes. I think now our net numbers roughly went 27 million.

That’s very helpful. Thank you so much.

You’re welcome.

Thank you. And the next question comes from Chris Svezia with Wedbush.

Good morning everyone and thanks again for all the color. I guess just going back to – I just want to go back to the private brand color and commentary, well you said 42% increase, 13% of the business, you called out are you already getting call it 800,000 pairs for the DSW private brand for the back half of the year and I would assume that 42% increase in the first quarter includes Lucky and Jessica Simpson along with your existing private brands, so I guess the question is what’s the likelihood that that – you had the ability or the capacity to ramp that more aggressively than what you had looked at now or get more replenishment orders in faster than you expect, what’s baked into the guidance at this point in your projections and how quickly can you build into that maybe fourth quarter related to what you are looking at right now?

So Chris the color we provided about private brand that does not include Lucky, Jessica and Vince. That’s just on Kelly Katie, Mix No. 1 those brands that we have historically had operating within DSW. So hopefully that answers that first question. As far as ramping up, as we shared on Investor Day this organization was producing I will forget the exact math, but about 40% more units through this Camuto organization than it was last year. When you go back and look at its history I think the infrastructure is still there to ramp this thing up in a meaningful way. What we are doing is making certain we do it in a measured way that ensures what we deliver is the quality of product that a consumer would expect from us. And I am really excited to see that so far we have demonstrated the ability to do that and that makes me feel even more confident in our ability to hit our long-term goals that we had set out there.

Yes, I would add Chris specifically to Lucky and Jessica at DSW you heard Roger say in his comments we are very happy with the work we have seen the teams doing working together and especially in the fall being able to first look at those wholesale brands, second our private brands, and then to outside brands to fill in the assortment where we are excited with the traction we are seeing there of us working with those two groups.

And then Chris the other thing I would like add to that is that what we are doing here is not just to the benefit of DSW or Shoe Company, what Simon and Alex and the team that we have there at Camuto is doing, we are trying to learn how we move faster and we talked about this on Investor Day that one of the three pillars of Camuto is speed-to-market and we want to be the fastest player in the marketplace and being able to take our learnings from tests that we could do it at DSW on whether it be Lucky, Jessica, whatever brand or a private brand at DSW and take those learning and apply it to Macy’s, Nordstorm’s, Dillard’s whomever else on the retail wholesale side we could deal with, that’s an incredible upside for our wholesale partners that no one else in the footwear space can provide. And we have been having those conversations with our retail partners on how we can bring that to life and that is what we are working towards. We want to have a larger share of the consumers wallet whether it’s sold at DSW, whether it’s sold at Shoe Company, whether it’s sold at Macy’s, Nordstorm’s and Dillard’s as long as it’s something that we produce for them. So the more we can use the DSW brand to learn that and apply to those businesses, we think that is a huge advantage for us in this space.

Got it, thank you. Just follow-up just Jared for you, just so I appreciate the color trying to lay out some mechanics around guidance Q2 and EBIT, I just want to make sure I understand something it seems like from a revenue growth perspective, correct me if I am wrong potentially Q3 is the second strongest year-over-year growth rate and overall revenues maybe not the Q1, because you will be lapping most of the businesses. Q2 is lower in terms of that revenue growth relative to Q3, Q3 strongest, Q2 second strongest and then obviously Q4 is elite in terms of year-over-year growth in revenue, is that – am I thinking about that right?

Yes, I think so Chris. I will in our one-o-one I will have the growth percentage mapped out for you. I don’t have that year-over-year I am just looking at my dollar expectations. Certainly, I am seeing that from a dollar standpoint, but I just want to – I want to confirm on the growth percentages. So, let’s take that offline. But Q3 – to reiterate, Q3 across every single one of our segment is the strongest and obviously Camuto will be brand new to Q3.

Got it. Alright, thank you and all the best.

Thank you.

Thank you. And the next question comes from Tom Nikic with Wells Fargo.

Hi, good morning guys. Thanks for taking my question. I just want to ask about the kids business, I know you noted that the extremely strong growth in Q1 was driven by both the combination of comp within existing doors and the fact that it’s basically now in all your stores or it wasn’t in Q1 last year, I think right about now you are sort of lapping the full rollout. So how should we kind of think about the growth of the kids business now that you are sort of on a comp basis companywide?

Yes, thanks Tom. I want to talk to long-term opportunity of kids in the U.S. but I want to start with how successful we are in Canada with kids and the learnings that Mary and Billy and Jill and the rest of the team in Canada have provided us. So we can penetrate as high as north of 20% in kids as we especially in that back-to-school time period up in Canada. So we see they are being significant upside in kids, but I think more importantly, it’s not just about kids, it’s about getting that traffic to both our brick-and-mortar and our digital experiences that was going somewhere else to buy their kids footwear in the past. And in the U.S., Bill and the team are really focused on how can they grow kids even though we are now lapping the stores being open for full year, I would tell you if we are not doing 20% or 30% comps in the kids category, I would be very disappointed in our team, because I think we are just now getting out there and consumers are starting to see that we carry kids. And I think having a 3-year-old myself, we have lots of opportunities to stand more for key items and in stocks the way we do on the adult side in kids. So, I would say go forward it should be 20% to 30% kind of growth annually, but I think our team has higher expectations than that is what I would share.

Got it. Thanks Roger. And just a quick follow-up for Jared, you bought back bunch of stock in Q1, shall we kind of think that, that’s sort of all the buyback you will do this year or would you potentially be opportunistic if you see a chance later in the year to buyback some more stock?

Great question, Tom. As I always say we execute opportunistically and we look at not just the stock price, although that’s always something we look at first and foremost, we look at overall utilization of cash, expectations of the business, what might be looming out there such as tariffs or other things. So I can’t commit to more or no more it will still be opportunistic.

Got it. Alright. Well, thanks and best of luck for the rest of the year.

Thank you.

Thank you. And this morning’s last question comes from Dylan Carden with William Blair.

Thanks for sticking me in there. Just following-up on the last question I guess the balance sheet and sort of the debt pay-down versus buyback and the dividend obligation how do you think about that as far as timing on maybe sort of reducing some of the debt on the balance sheet?

Yes. So, you saw that increase over the quarter and that was a direct result of the share repurchase. So as we have said before, we want to keep a minimum level of liquidity around at all times and that’s why you even see on the balance sheet outstanding at the same time we have got cash and investments not almost equal to our outstanding debt. So that may seem a little backwards, but that’s just a way that we want to position our liquidity cushion. So, we will feel very comfortable utilizing our revolver if we feel that opportunistically now is the time to do that. All that being said it is a revolver, so as cash comes in, if we are not buying back stock, if we are not reinvesting it in some other way that does just naturally pay down the debt, that is not a term debt that’s out there.

Great. And just if I can squeeze one more in, Jared, certainly, it sounds if I am registering correctly, little bit more confidence in the Camuto business and what scenario that you outlay are pretty compelling, am I correct in that sort of where you were a couple of months ago and now you have got a little bit more confident in some of those numbers and the volatility of that business, is that fair?

Yes, I think that’s fair. We have a couple of people from our teams that have been up there, including someone from our FP&A team that’s really started to instill more of the financial planning disciplines that we get used to here. So we started to get our arms around that. All that being said they still are a new organization. We are inserting new practices such as balance sheet reconciliations and things like that. So, there is a couple of new things here and there we are finding, but we do feel much more confident around that. And as Roger said around the adoption that their leadership team has taken to kind of these new muscles and how accountability and transparency are something that we live by here at DSW, at Designer Brands and they are adopting wholeheartedly.

Thanks very much.

So, I would like to close by saying thanks to all of you that have stuck by us and believe in this team whether that be our shareholders or board or Jay. I know a lot of our team mates that are listening to this call and my message to you is stay focused, focused, focused. We have incredible opportunities to provide experiences and products for our customer that when we deliver on those we will win long-term and I think Q1 was a good start to the year. We have continued the momentum we had from 2018 and I am excited for the balance of the year. Thanks for everything you are doing and have a great day.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.