Good morning and welcome to the Designer Brands Inc. Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Ms. Malkin, please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the three months ended August 3, 2019 to the three months ended August 4, 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. 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’m proud to share an update on our second quarter performance across all of Designer Brands and the progress we are making towards the vision we outlined at our Investor Day. As I hope you recall, we shared that our vision was to take control of our own destiny by building a platform to drive growth and consolidation. I’m here to report that we’re doing just that. During the quarter, we delivered on our sales expectations reporting a slight comp sales decline of minus 0.6%. And while our comp sales decline is not healthy long term, I’m happy we came in as projected. Our comp represented an acceleration in our two-year comp sales stack to 9% in Q2 from 5% in Q1. As many of you are aware, DSW strongly benefitted from the re-launch of its VIP rewards program last year. Our ability to digest this event and still deliver two-year comps well above the industry average demonstrates the power of our model. A relentless focus on our best at and win at merchandize categories in both the U.S. and Canada delivered these results. And speaking of Canada, our ability to leverage the expertise, decades of experience and robust infrastructure already in place at DSW in the U.S. allowed our Canadian operations to leapfrog to the front of the pack in Canada paint a picture perfect M&A integration story. We are all well in our way in implementing the strategy we outlined at Investor Day. We will continue to move down this path to achieve our goal of becoming the dominant footwear retailer in North America by growing market share, adding scale through our negotiating leverage and providing even more customers with whom to engage with the brands we produce. I’m also proud of the work we are…

Thank you, Roger. Net income for the second quarter of 2019 was $27.4 million or $0.37 per diluted share which included net after tax charges of $8.3 million or $0.11 per diluted share primarily related to the integration and restructuring expenses associated with the acquired businesses. Excluding these charges, adjusted EPS was $0.48 per diluted share. Net loss for the second quarter of 2018 was $38.4 million or $0.48 per diluted share which included net after tax charges of $89.3 million or $1.11 per diluted share, primarily related to the acquisition of the Canadian retail business. Excluding these charges, adjusted EPS last year was $0.63 per diluted share. The financial results that we will reference 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 Designer Brands came in $20.1 million below last year in line with the expectations discussed last quarter. As you may recall, we were facing the sales boom last year of the VIP rewards re-launch as well as the associated benefit of just under $10 million of rewards reserve last year. Additionally, we are including Camuto this year which generated a loss in the quarter as expected. At the U.S. retail segment, comp sales declined by 1.5% versus last year’s comp growth of 9.6% delivering a two-year comp of 8.1%. I will reiterate a point Roger already made that our two-year comp actually accelerated from Q1 to Q2 and allowed us to still post one of the most respectable two-year comp stacks in retail. Under the covers, we continued to see traction in our distortion to seasonal and key items with boots comping in the double digits and sandals comping in the low single digits. Kids grew…

Thank you, Jared. I’m proud of the work our teams have done to drive sales in a very challenging and ever changing environment, but guess what? Welcome to serving today’s customer. The success we have had integrating our latest and largest acquisitions, generating tremendous growth and setting Designer Brands up for long-term success demonstrates the type of talent we have developed and acquired. The challenge all of us faced to provide amazing products and experiences for our customers will continue to evolve every day. The fact that we have proven to be an innovative business that can manage to operate its core business DSW while entering new markets and acquiring new businesses gives me the confidence we can address whatever challenges we face. We shared our plan with our Board a few years ago and I’m happy to say it was the right plan and we will continue to focus our efforts on executing to the goals we outlined for all of you at Investor Day. While there is so much noise out there about things that are not in our control, I’m excited that we have been able to build a model that gives us tremendous advantages and flexibility. We now have greater control of our own destiny helping us navigate our way through these external factors better than nearly any other model competing in our space. I’m excited for our future and I look forward to continuing to share our progress. Thank you. I will now turn the call over to our operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question today comes from Tom Nikic with Wells Fargo. Please go ahead.

Hi. Good morning. Thanks for taking my question and thanks very much for all the color. It’s very helpful. Just a quick one for Jared. You talked about accelerating comps in Q3 and Q4. I think at the start of this year, you were targeting something like a low single digit comp for the full year. Is that sort of how we should still think about the full year shaping up?

Absolutely, Tom. We’re reaffirming our guidance and sticking with that as well as EPS.

Got it, okay. And then just a higher level question, maybe Roger you can help us out here. Just overall health of the consumer I know this earnings season in general has been somewhat volatile for retail and you’ve seen sort of a wide range of results from companies out there. Can you just give us a sense of what you’re seeing from the consumer in general, like what the outlook is there because it does seem from our seat that maybe the consumer isn’t feeling as great as they were 12 months ago or something like that? So any insight you could give would me tremendously helpful? Thanks.

Thanks, Tom. As I look at our businesses that we’re operating within the DSW banner, we delivered as we had expected. And as we had mentioned and as you guys are aware, last year we had a phenomenal year and we were lapping that and we told you we thought our two-year comp in Q2 would mirror Q1. Well, we beat that. So that was good news. The other thing that the way I look at it in our business, it’s about a rewards program. We signed up – I think we had like a 4% increase in sign ups in our loyalty program. So I think there’s real help there on that side. I think also on the Camuto side, on the wholesale front, we grew our wholesale sales in second quarter and many people and actually maybe one or two on this call doubted our ability to do that and I’m proud of our team. So I think – yes, there is always going to be I think the concern of how the consumer is responding to this stuff, but I think what we’re seeing as it relates to our business is very positive.

All right. Thanks for the color and best of luck in the back half.

Thanks, Tom.

Thank you.

The next question comes from Rick Patel with Needham & Company. Please go ahead.

Good morning, guys, and congrats on the progress.

Thank you.

Thanks, Rick.

A question on Camuto. So can you put into context how much of your private label assortment will be made by Camuto this fall and what the ramp up will look like as we look out to spring 2020? And can you also touch on the feedback you might be hearing from department stores and other wholesale partners on the new assortment that you plan to be rolling out?

Thanks, Rick, for the question. As we are looking to grow private brand I think the opportunity, and I’m going to speak just to the DSW brand first, we’re right around 12% penetration. That was about 9% last year, so we grew by about 30%. We’re looking to grow that about 30% a year. So just think of a 30% CAGR over the next three years. At the ultimate rate, it’s probably in the high 20s, low 30% rate as a percent of each of those departments taking athletic out of the equation. So in general that’s the direction we’re headed. I think the good news is as we progress throughout this season, the new product that we are getting and we’ve just got some of those goods showing up on the floor that are being manufactured by Camuto, we’ve got some good results coming out of the gate. I think the other good news is when you look at our private brand for the second quarter, our margin rate – this is margin rate and we are a footwear retailer, Rick, so I think you’ll get this was 59.9% on private brand. That’s up 180 basis points roughly to where we were last year. So that’s the kind of momentum and the expectation we have set go-forward in the business. Again, we’re going to offer you guys the opportunity to come take a look at the assortment. And then on the wholesale front, we can’t get into the details but I would tell you I feel really good about the fact that I think at Camuto we were able to eliminate a lot of distractions. I think as we had shared, they were in some challenging situations with the factories as well as with our vendor partners or retail partners. And I think by us being able to come in and eliminate some of that noise, meaning we could pay people on time and we’ve been able to win back some open to buy which is a very healthy thing for us. So again, just to reinforce what I said with the first question, we feel really good about where our business is positioned.

And the only thing I would add, Rick, specifically to your question is starting in 2020, the vast majority will be produced by Camuto. There will still be a few brands where we’re using a third party but our big, big core private brand, that is what Roger was talking about earlier as far as the review that we’re looking at and we’re going to bring you in to see and that is what hits the floor for spring of 2020.

That’s right.

Great. And nice to see the momentum in Canada. How confident are you about the sustainability of positive trends? I’m curious how much of it has to do with drivers specific to 2Q versus those that you expect to have a longer tail?

It’s a great question, Rick. I’m really proud of Mary and the team, so we’ll talk about a two-year comp there. We’re in a 15% two-year comp in Canada and frankly we as Designer Brands have been engaged in that now really for close to two years. So I think what the team has done there is amazing. The key callouts, the core competencies that we have had at DSW for 25 years taking those inventory disciplines and implementing those up in Canada, making certain that we get after the digital experience in a meaningful way. So within the quarter we put dsw.ca on the same platform we operate here in the United States. And as Jared had mentioned on the script, we had an 84% comp in the quarter. We’ve also implemented our rewards program for DSW up in the market which we added a significant number of reward sign ups up in Canada. So I think all of the things that we had learned here in the U.S. we are taking those up to Canada and applying them. And on an operating income standpoint, we made roughly $5.5 million op income and last year we made about $300,000 of operating income. So that’s a nice lift on what is today a small portion of our business, but we anticipate to be much bigger. And then the other big thing about Canada that we keep talking about is we are learning how to operate a small door concept. Remember, those Shoe Company locations are 3,000 to 6,000 square feet. That is a tool that we want to have in our toolkit as we think about growth potential in North America. So as we’re having the success, it’s allowing us to see how does a small market concept work in concert with the much larger concept of DSW. So great learnings that we’re getting from this acquisition.

Thank you and all the best in the back half.

Thanks, Rick.

Thank you.

The next question comes from Chris Svezia with Wedbush. Please go ahead.

Good morning, everyone. Thank you for taking my questions and thanks for all the color on all the moving pieces here in the integration. I guess the first question I have is first just on Camuto, when you talk about the organizational restructuring, changes in design, sourcing operations, it seems like profitability came a little bit better than what you expected in the second quarter. How do we step back and think about Camuto profitability for this year? I think previously you were expecting losses as a stand-alone entity, call it $10 million range if I remember correctly. Just where does that stand now? And then secondarily when you think about comp, you referenced for the season for DSW, you would expect it to be accelerating towards the backend by little more of a headwind in the beginning of the season. Are you still expecting positive comp for the third quarter for the DSW?

Yes, Chris, I will take those. First with Camuto, you are correct. We certainly had projected a loss for the year and that was indicated to be around $10 million operating loss. I would say that’s still probably a good number. Maybe there’s some optimism there. Maybe it will come in a little bit better than that. We have made some very important changes there. And we mentioned on the call we were able to redeploy a lot of those dollars from the reorg into beefing up design and sourcing and able to support the large increase that we are putting on that organization to take on our private label product. But overall, we’re very, very happy with the traction we’re seeing there across the entire business; the wholesale, the first cost, the sourcing. So I have a little bit of optimism, feeling a little better than we did even at the beginning of the year. We do expect Q3 for that to be a positive quarter for them, so we’re excited to see that and that’s always been the case. And then as I mentioned in my script, Q4 from an operating income growth contribution that is going to be by far the biggest because we recognize the $14 million loss last year and we’re expecting that to be closer to flattish. So that’s with Camuto. On the DSW front, we are looking at the fall and seeing a harder beginning and we’re leaving a little bit towards the end of the fall from a comp standpoint. I would say we don’t want to get into quarterly guidance on that comp front. That’s not something with a nice old company like DSW, it’s not one that you don’t have a lot of historical context on. But overall, we’re still very comfortable with the low single digits for the year.

Okay. And just one follow up just on the share count. What’s the share count we should be using for the total company? I think previously it was 77 million --

Yes, let me – I’m seeing if I’ve got that sheet really available for me. I’ll get you that in a one-on-one, Chris.

Okay.

We gave you the amount that we bought back, but the math for the full year I just don’t have right in front of me. I’ll grab that for you.

Thank you. I appreciate it. All the best, guys.

Thank you.

Thanks.

The next question comes from Steve Marotta with C.L. King & Associates. Please go ahead.

Good morning, Roger and Jared. You commented on the last call that Camuto had been accelerating some private label receipts for the DSW stores for delivery in the fourth quarter. Can you update us a little bit on that? And a larger question is the gross margin opportunities for both merchandize margin and buying at occupancy leverage in the second half, can you talk directionally about both of those? Thanks.

Yes. On the piece on the Camuto private label, we are still seeing that. Again, it was really just for replenishment orders, so it was really none of their design stuff because given the lead times in that product, we’re not going to see that until spring. But it is going to be there day one of spring. So we feel very good about that. But we are still able to leverage the Camuto infrastructure for some replenishment items with some of our fast-turning private label stuff that’s currently being produced by a third party. It’s not huge numbers but it’s more a really good indicator of what we’re expecting to see.

Steve, I think the thing I’m excited most about is there were some styles that the Camuto organization were able to, as Simon and team calls it, crash into our assortment. So as their out seeing what’s happening in the market, we’ve had a couple of those items that are not just replenishment styles but items that we’re getting after in a very short period of time and there’s a lot of people that talk a lot about how slow the footwear industry is and some of these items we’re talking six to eight-week turnarounds that we see something, the team is crashing it and they’re getting it in our stores so that we can get leads to help inform decisions, whether it be for spring of next year or for items we should get after in a bigger way this fall. So I’d say it’s a muscle we’re learning how to use is how I would describe it, but out of the gate I’m really, really happy with how both sides of the team are working, whether that be the DSW merchant team working with Camuto on that and then Camuto’s ability to turn product really, really quickly which is fantastic.

Steve on your second question, when we look at gross profit for the fall, I’m seeing probably a little bit of leverage from a rate standpoint for DBI in total, I would say flattish to slight leverage across the fall. We will see a little bit of a challenge from a leverage – fixed cost leverage standpoint in occupancy just given that Q3 is going to be our most challenging comp quarter. But overall, for the fall, we’re still seeing flat to slightly better gross margin rates.

That’s very helpful. Thank you very much.

The next question comes from Dylan Carden with William Blair. Please go ahead.

Hi. Thank you. Just curious, I appreciate there is some noise in the model just given the lapping of the VIP refresh and incremental kids product. Is there anything you can share from a metric standpoint on what you’re seeing from sort of the growth and conversion or behavior of the VIP program, kids product? I appreciate 32% probably isn’t a comp number. And then kind of getting to some of the services that you’ve layered into the model, any sort of incremental benefit you’re seeing from that?

Dylan, thanks. That’s a great question. As we shared with you this has been three, four years ago the reason why we got into kids; one, it’s to grow kids but it’s also to engage with the parent. So the kids side of our business we were really excited about as Jared had mentioned it was over a 30% comp. But I think more importantly it’s about retaining our adult customers. So the fact that we grew our file for our rewards program when it’s already over 90% of our sales I think is a very, very positive sign and we’re really excited about it. I think what we have learned from our Canadian business is that we’ve got lots of headroom on kids here in the United States, because we see the kind of volume that can be done during these peak back-to-school periods and we’ve learned as we’ve gone here in the U.S. but we think there is significant upside to continue to get after that. And we’re working in different situations where we’re moving it to the front of the store. We’re testing different ways in which we can communicate it this fall. There will be some new kids items we’re going to have in our assortment. There’s just some really cool things I think we can do with that category. And then as it relates to the services, again, we continue to be very excited about the progress we’ve made with our W Nail Bar partner in particular and just directionally just think of it in a box doing $1 million of nail services in roughly 1,200 square feet and without cannibalizing your footwear business. So we’re happy with what we’ve seen so far. This fall, we are opening up the DC market with several locations and we’re opening up Austin, Texas. And as I shared earlier, our process that we have been following for the last three years as we do tests, we pilot and then we roll. So we have tested and it has worked in Columbus, Ohio. However, I’m in Columbus, Jared’s in Columbus, Bill Jordan who runs DSW is in Columbus and we go to those locations on a regular basis. And by the way, our W Nail Bar partners are based in Columbus. So our pilot is to take it to other markets to see how we as a team can work to make it happen in those other markets. So that’s really what’s going to happen over the next six months or so. And then based on the success we have there, we have a game plan to roll it in a much larger way. But test, pilot, roll is the approach we have been taking on everything we’ve been doing whether it was the rewards program, expanding other things in digital space or the services.

And I would add to that, Dylan. All four of the tranches – so we rolled out kids in four different ways if you recall. All four of them are comping in at least double digits. And some of those have three, four or five handles on them. So we’re really happy with the performance we’re seeing across kids and think that there’s so much more there to go.

Great. And then lastly just on -- $0.12 to $0.15 of incremental upside to EPS assuming that Camuto had produced all the private label that you’re selling in the first half, is there any sort of metrics or sort of what you – can you share the math behind that? Is that simply just product margin of 1,000 or so basis points ahead of your typical product? And then I guess is it simple enough at 12% to 30%, can you just double that number to kind of think about the incremental EPS upside?

Yes. If you kind of looked at our – if you look at our Investor Day presentation, we had said that when we have our regular private label product that we had said before when it was produced by a third party, that’s was roughly 1,000 basis points better than balance of assortment. When it’s a Camuto produced product, we said it was a total of 15 to 20 full percentage points of better margin. So this is just basically taking the amount of private label sales that we’ve had over the last two quarters, the last six months and applying that additional 5% to 10% across that is where that came from. By all means you should be able to double that and say, hey, there’s my year. But to Roger’s point, we are growing this so far this year 30% every single quarter. That’s not planned to slow down and we’re looking to do that over the next few years eventually getting to that $725 million from Camuto produced brands number that we showed you at Investor Day. So that’s kind of how the math works. I just want to give you a concrete tangible example of what’s happening even this year and how that would play out had it been Camuto.

Dylan, just think of it as the profitability that third parties that have provided this footwear for us in the past. We now at Designer Brands, since we own Camuto, we will get to extract that profit. That’s a big chunk of it. That’s the equation.

Awesome. Thank you very much, guys.

Thanks, Dylan.

The next question comes from Sam Poser with Susquehanna. Please go ahead.

Hi, guys. Thanks for taking my question. This is Will on for Sam. So I just wanted to dig in on tariffs a little bit more. So what percent of purchases are impacted by the tariffs? And what is the breakdown by percentage of items impacted by List 4A that goes into effect September 1 and List 4B December 15?

Thanks. I’m actually surprised that it took us this long to get this question, so I’ve got a bit of longwinded answer for you, so please bear with me here. But here’s what I would say about tariffs and the approach that we’re taking. So to me this isn’t a tariff conversion. This is really about us finding ways to diversify our portfolio. Because I think when you look at the level of product that DSW and Camuto over the many years that all of us have existed that was produced in China, that’s where everyone has relied. So I think what we’re really working on is how do we diversify our portfolio? And I’ll give you some examples. So in October when we became Designer Brands, about 10% of the footwear that we were engaged with was manufactured outside of China, 10%. Since October that percentage is now north of 20%. So we got after this immediately because we could see there was a need to diversify our portfolio. And as we head through the next 12 to 18 months, our expectation is that’s going to be closer to 40% of the footwear we make will be produced outside of China. I’ll give you an example in handbags. In October when we acquired or build our business – combined our businesses, about 30% of our handbags were manufactured outside of China. As we sit here today, that’s north of 60%, so great progress. And I think by the time we get to the end of 2020, that number should be closer to 90%. So I think there’s real progress that our team has made and I think the reality is we’ve got to build this kind of flexibility in our supply chain. And I think the best example of…

I appreciate all the color there. And I guess just switching gears a little bit, you guys hit on it a little bit but can you just give us some detail on how you guys are going to overcome the difficult comps in the second half? And what makes you feel comfortable that you’re going to be able to hit that low single digit comp number for the year?

I think the biggest opportunities we have are around our best at/win at category. So just as we did with the sandal and boot categories in the first half where we got after that in a bigger way, that same plan is out there for the back half of the year. And I have all the confidence in the world of our seasonal team and the progress they’re making again continued with athletic. And then kids, obviously that is truly incremental to our business. We’re not seeing that – moms not spending money with us because she’s buying her kids shoes with us. So those are what I would say within the DSW brand the big opportunities. As it relates to our other business, Canada continued upside, same thing with seasonal but also all of the digital upside. Again, the plus 84% comp in Q2 in digital we think there’s continued upside that we’re going to experience up in Canada as we move forward. So within the retail businesses we operate I would say those are the big drivers. And then also within Camuto, our direct-to-consumer business there for the Vince Camuto brand in particular, it was close to 100% comp in second quarter and we’ve got those kind of plans as we head throughout the back half of the year. So those were all the things I would say at a high level that we’re doing to drive top line.

Great. Thank you.

You’re welcome.

This concludes our question-and-answer session. I would now like to turn the conference back over to Roger Rawlins for any closing remarks.

Thanks everybody for taking the time today. And for all of our associates, thank you for continuing to stay the course, stick to our plan and let’s have a great fall season. Have a great day, everybody.

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