Good morning, and welcome to the Designer Brands, Inc. Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Stacy Turnof from Edelman. Please go ahead, ma'am. Stacy Turnof;Edelman;Senior Vice President: Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week and 52-week period ending February 1, 2020, to the 13-week and 52-week period ending February 2, 2019. Please note that remarks made about 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 over the call to Roger.

Good morning, and thank you for joining us to discuss our results for the fourth quarter and fiscal 2019. As I'm sure you have all seen, the recent spread of the COVID-19 or coronavirus has caused massive disruption for every industry across the entire world. First and foremost, our thoughts are with those who have been affected by this virus. Our priority continues to be the health and safety of our employees, customers and the communities in which we operate as well as the viability and stability of our business over the long term. We've already taken several precautions, implemented new policies, conducted business continuity planning and are meeting daily to monitor this rapidly changing situation. We are reliant on the Centers for Disease Control, World Health Organization, Health Canada and local and U.S. government officials as reliable sources of information to inform our decisions. I am committed to ongoing communication and taking all necessary measures to ensure our customers and associates remain safe. To that end, we're taking the following steps: to help flatten the curve and protect the welfare and safety of our store associates and customers, we will be temporarily closing all of our North American retail locations effective with the close of business, Tuesday, March 17. In addition to forcing social distancing by these actions, it will also provide us time to conduct further deep cleaning and sanitization services across our entire store fleet, distribution center and fulfillment center. Because this situation is incredibly complex and evolving rapidly, our plans may change. Store associates will be compensated for 2 weeks following the official closure. Our online business, including our app and website, remain up and running. Our warehouses will remain open to fulfill our online orders, operating under our emergency preparedness plan. As we assess the…

Thank you. I want to echo Roger's comments that the health and safety of our employees is our top priority, along with the long-term health of our business. I will now walk you through our 2019 results. Our fourth quarter was marked by positive comps, an improvement in store traffic trends and a sequential recovery in margin trends as a result of our proactive approach to mitigate many of the self-inflicted issues Roger discussed. Although we are still disappointed with our full year results, we made significant progress and ended the quarter with a clean inventory position, a patched POS system, a more refined marketing strategy and new inventory controls at Camuto. 2019 was challenging for us, but we are confident that recent actions we took help to strengthen us. Please note the financial results that we will reference during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise. These non-GAAP measures should be considered in addition to and not in -- not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including complete reconciliations with comparable GAAP results in our press release. Finally, please note that we have reclassified commission income, previously presented as commission franchise and other revenue, to net sales. It is now included in our calculation of gross margin. Including commission income in both net sales and gross margin for the brand portfolio segment is appropriate as the intersegment commission income charged to DSW is included in DSW's cost of goods and flows through DSW's gross margin. Other revenue, primarily including sublease income, was reclassified to operating expenses. Overall, these reclassifications simplify the presentation of our income statement. These reclassifications do not have an impact on operating income but will influence…

[Operator Instructions] Today's first question comes from Sam Poser at Susquehanna.

I have a handful. First of all, good job of closing the stores. Second off, if the store closures go beyond 2 weeks, what do you do about paying the staff after that point? Because it's going to be difficult -- it's going to be exceptionally difficult for everybody.

Yes, Sam, let me start, and it's probably not just for you but for the rest of the folks that we have in the queue. I mean, as we said on the call, there are 2 things we have as priorities: it's protecting the health of our associates first of all and second, protecting the long-term health of the business. So we're going to be focused on that. We're going to be taking actions. Frankly, they're changing by hour. But those are the 2 priorities. So as we're going through answering questions today, I really want to make certain you guys understand that we're not going to be able to engage in sort of hypotheticals as this is a very fluid situation that's going to change by day. And number two, we are playing in unprecedented territory that I think it's going to be impossible to quantify the financial impact of some of these decisions. So, Sam, what I would tell you is we're not prepared to answer that question at this time. We will make decisions just like what we have over the last, frankly, 7 days as these things sort of crop up. But where we sit today is, as people were scheduled and we've shut down stores for the next 14 days, we will pay them as we had planned.

Okay. All right. Just a -- I have a few more here. Your inventory is in very good shape, but given that the stores are going to be closed, how are you adjusting your inventories going forward and so on? And some of that's very seasonal goods. So if stores do stay close, I mean how are you managing flow plus the goods you have on hand right now?

Yes. Great question, Sam. So I think, first, let me start by saying the investments we have made over the last 4, 5, 6, 7 years to develop the omnichannel capabilities, those things are going to pay back in a huge way right now because while we are shutting the stores down to the consumer walking in day in and day out shopping, we are going to keep them up and operating as fulfillment centers. So leveraging them as a huge asset because we are within 20 minutes of 70% of the U.S. population. That's a huge advantage for us. So we're going to get after that. Obviously, we are cutting receipts. And as things are late, we will pick what we want to keep and what we would cancel. But the diligence around inventory management that the DSW brand has exhibited for the last 28 years, I have a really, really, really good planning and merchant organization, and we're going to be very diligent in managing the inventories. But I do think the tools we've put in place to help us mitigate a situation like this, it won't offset all of the impact, but it will allow us to perhaps alleviate some of the markdown pressure we would have felt had we did not have that capability.

Good. I have 2 more. One, what's the status of ABG throughout this whole thing? How many of those stores are open, closed and so on? And secondly, what percent of Q1, generally -- of Q1 revenue generally runs through those first 36 days? There was a lot more volume coming in the back half or back 2/3 of the quarter.

Good question. Yes. So I'll split it up in 2. One, as it relates to sort of the first quarter. As you know, Marpril, those 9 weeks as well as Septober, those 9 weeks they are huge for our business. They are our holiday equivalent. So while I was really excited about the first 36 days, it still was a fairly small portion of the first quarter as well as the year, obviously. As it relates to ABG, we are in conversations daily with what's happening within our ABG relationships. As of this hour, yes, there are some Stein Mart locations that have shut down, but there's not been a full chain shutdown. But again, I haven't looked at the press releases here of late, but we're continuing to do business within our -- within Stein Mart and Frugal Fannie's today.

And I mean, just have you given that you're looking out for your employees and everything else, have you pressured Stein Mart and everything to think about shutting it down as you had?

That's up to the Stein Mart team. That is something that's out of our control, Sam. And frankly, we've got enough challenges of our own trying to manage through this to make it through in a way that protects our associates and our business. But I have not been having those conversations.

Our next question comes from Rick Patel at Needham & Company.

I appreciate the situation is extremely fluid at the moment, but I was hoping you can update us on how your expenses are split between fixed and variable in a normalized environment. I'm just curious if stores had to remain closed until the end of April or even longer, how much of the pain you can mitigate as we think about the impact to operating profit?

Yes, Rick, I'll take that. I won't be able to give you a defined fixed versus variable. What I can tell you in categories, obviously, our store expenses tend to be relatively flexible. We changed our labor model, if you recall, 2 years ago, 18 months to 2 years ago, where we actually alleviated a good amount of our fixed leverage in our stores and move to a much more variable scenario. So that has allowed us, both in this situation as well as just regular volatility in the business, to be able to flex up and down more regularly. Obviously, most of your home office expenses and things like that are more fixed in nature. And then the expenses associated with our digital business tend to be very variable, not heavily fixed.

Understood. And can you also update us on what your debt covenants are for the revolver? And perhaps touch on what actions you're taking from a working capital and CapEx perspective to support the balance sheet and free cash flow. I think you touched on a few factors on the call, but just hoping for some more color there.

Yes, we have 2 covenants. We have a leverage ratio and then a fixed charge coverage. If I quoted you the actual number, I probably would miss it by something. It is a public document. So if you go out and look when we redid that, I think it was 2 years ago. It's filed, and you can find them out there or I can look it up and tell you in our one-on-one, but those are the only 2 financial covenants that we've got in our revolver. We did just enter into an amendment on the revolver. It actually brought down our pricing. And that just closed. And we've got the cushion built into our covenants to be able to withstand certain amounts of volatility, and we're working with our partners. We have had the same bank partners for decades. We have very strong relationships. And I have no doubt that as we continue to explore financing and liquidity options, we'll have the support of the banks.

And Rick, I'll take the other part of your question. I think we have already begun to roll out, I think, a number of mitigation -- mitigating strategies. Obviously, we've been facing this for all of 7 days. But first, we have already dramatically reduced our inventories and are cutting back future orders in anticipation of what we think is going to be a notable sales disruption for some period of time. Second, we are accelerating our level of markdowns. So you're going to see us offer a deeper value to our consumer. As you guys are aware, seasonal product does not get better as the season progresses. So we're going to distort a lot of marketing there. We are also going to distort our marketing dollars away from what I would define as conventional channels that would have been intended to drive store traffic, and instead, we will divert those dollars in toward -- toward digital engagement. And then lastly, we are going to closely evaluate all of our SG&A expenses across the business. I mean, as I said, we are looking out for the health of our associates, but also we have to manage the long-term health of this business. And unfortunately, SG&A will be an area that we will have to look at, given the disruption that we're experiencing.

Our next question today comes from Tom Nikic of Wells Fargo.

I'm not sure if this is a question you'd want to answer, but let's say, you were reporting earnings 2 weeks ago rather than today and before all this disruption happened, I think you mentioned that you were comping up low singles, quarter-to-date, and that's what's embedded in your multiyear plan. So I mean, if I kind of think about like what your -- what the shape of the year would have looked like if the situation had never happened, is it safe to say that something in the order of like low single-digit comps and gross margin expansion is what we would have been looking at in 2020 in a more normal environment?

Yes, Tom, I'll take that. I think I was really, really pleased with Q4. We addressed all the missteps we had had in Q3. We cleaned up inventories. We had improved the margin trend as we -- compared to Q3, and we were seeing the same thing as we were headed through those first 36 days. We've made gigantic progress in Canada, which I won't get into all the detail, but I was really, really happy with that. Our Kids business was continuing to grow in fourth quarter as well as in February, we're up over 25%. All of our categories, with the exception really of dress, we were getting really strong selling out of. And the progress we have made with the exclusive brands that grew close to 30% in Q4, we were seeing that same run rate as we were in those first 36 days. So all of the things we have said we were going to do to differentiate product, to differentiate the experiences and drive growth, those things were playing out really through January and February exactly as we had played out in our budgets. And then Monday happened. And that's the lens that I've applied to the business looking back at it and how we had started the year.

I would add to that, Tom. One other thing that we were very excited about was we literally had received and had set all of the product for the exclusive brand, the conversion to Camuto, which was a huge initiative for us. So progressing as we had planned to have that product customer-facing. It was in stock. It was here. The stuff that was already on the floor was selling more swiftly than even what we had anticipated. So we were very excited, still are very excited for that product. But unfortunately, obviously, there's a demand disruption across all footwear.

And I know right now, you can't go see -- well, today, you could go see it, but -- if you want to go look in a store. But the work we had done to set Mix No. 6 as an example in the front of the store and the way that product looked and the way it was targeting a certain customer, we were really, really proud of the work our team at DSW, our team at Camuto had done to bring to life a whole different product line for a different customer. So again, we were feeling good about our business.

And our next question today comes from Paul Trussell of Deutsche Bank.

I guess, maybe let's just ask the question. Again, I know theoretical isn't where we want to -- what we want to deal with. But let's maybe flip it the other way and say that the store closures continue through what you've already outlined, and then the stores are open and are back to expected volume thereon. Is there any way for you to share with us or quantify what that financial impact would be just for what has taken place to date and for the time frame over these next few weeks while the stores are closed?

Paul, I would say, as I said in my opening comments, this is just unprecedented territory, and we just can't speculate on what we think the financial impact is going to look like. I will tell you that the conversations that we've been having with our team, I feel really good about how we're positioning inventory, and as it comes out, I think we have a history and a tradition at DSW of finding ways to get product. So I know we will be aggressive, and there will be product available. I do know that.

Absolutely. Well, maybe let's get an update on Camuto, right? As we kind of think about the steps taken last year, maybe kind of give us an update on how you feel like you're positioned with that organization, and what volume you think will be transferred over to Camuto by this fiscal year end.

Yes. Thanks for the question, Paul. I think I will share sort of the different buckets of the business we do in our -- on our now production sourcing side of our business. I was really, really happy with the progress we've made with our direct-to-consumer capabilities with Vince Camuto growing at close to 100% year-over-year. And that's still going to be a real focus not just for Vince, but for all of the brands that we own and operate, how do we get after that? You've heard us share that the folks that have really grown market share over the last 6, 7 years in footwear, have really been brands themselves going direct-to-consumer. And we own and operate 3 of the most powerful footwear brands that are out there in Vince, Lucky and Jessica. And we have growth potential in going direct-to-consumer there. So I was really happy there. I think the progress that, that team made, along with the support of the DSW organization around getting these exclusive brands up and running and the kind of sell-throughs we were seeing, were exactly in line with what we were expecting. So I think that part of the strategy is working. I think the work that the Camuto organization did to win back open to buy within their customer base, they had made great progress, and as we've been out of the gate, I'm pleased with where that has progressed. So really across the board. And then when you add into the fact that we do a large chunk of the private label brands for many other retailers out there. And I think -- this isn't a data point, so please don't quote this, but I think we're probably the largest designer and sourcer of private brand footwear in North America, based on all the relationships we have. So I'm really happy with the progress that we've been making there. And then to come back, I really -- I think it's important for this group to understand, I was sharing this the other day with some of our partners, take athletic out of the equation, we own roughly 13% of the nonathletic footwear market. That's an amazing market share. That's on the women's side. That's an amazing market share position. So our lens is, let's get through this, let's keep our people healthy, let's keep our business healthy, and then let's come out of this and take advantage of that market share position and really grow this thing the way that we had planned. So again, I'm pleased with the work we've been doing at Camuto.

And I would add 2 data points to that -- or 2 color points to that, Paul. One, as I mentioned in the script, we had positioned all of the transition that we had planned to do from our prior vendor to Camuto for our own exclusive brands such that the sales of private brand product that we were going to make in 2020, 55% of that would have been produced by Camuto. That is right on track. There are a few categories we had not transitioned yet, but we were in the process of doing it. And the sale of all of our Camuto-produced goods, be they exclusive brands or our sale of their national brands, was going to increase in the very strong triple digits for this year. So that vertical margin story is very real and is positioned to take off once demand is back there. The second data point I would give, and I don't think Roger mentioned this, although initial expectations are relatively -- from a sales standpoint, relatively muted, we were very excited about the relationship that we were able to craft with Jennifer Lopez, and the way it was structured is only because of what we've created a designer brand. So the fact that she can source with Camuto, one of the best in the industry and sell exclusively at DSW, it's something that we know is going to be a big deal for us. And it's created unlike anything you've ever seen from a structuring standpoint. So we're really excited about that.

Yes, great color, Jared.

And lastly for me, just curious to hear an update on how you're thinking about adding in services in the store or any other kind of retooling of the way the store is engaging with the customer.

Thanks, Paul. I love the opportunity to talk about the progress we have made in services. And I'm going to use the reference point of the locations we have in Columbus, Ohio, where all 3 of our DSW locations have nail bars. So we have experienced for a customer that had shopped our footwear assortment a year prior, that comes in and receives a nail service, we are seeing a 30% to 40% increase in their footwear purchases 1 year later. There are not many other things that we have had experience working in, in our retail history that drives that kind of lift. And as an example, they're coming in about twice as many times -- or no, it's actually 4 times as many visits as a customer that does not have a nail service and their attachment rate when they come in for that nail service is close to 25%. So we got to survive and make it through the challenging times we're dealing with today. And we are going to continue to grow more aggressively the service offerings, whether that be nails or other things. But obviously, in today's climate, that's not something we're focused on at this very moment, but we think there's still lots of opportunity there. But thanks for that question.

Our next question today comes from Dana Telsey at the Telsey Advisory Group.

As you think of measures to manage through this, the warehouse and obviously, e-commerce continuing to operate, is there any changes to the warehouse productivity or labor? Or do you need to do any more efficiencies in terms of the warehouse side in order to manage through this? And same thing on the marketing side, any adjustments to marketing that you make in the first quarter that you may push to 3Q or the back half of the year, especially given the prominence of the JLO launch?

I think there are -- obviously, from a -- I'll start with the marketing. We are going to be shifting our focus of our marketing to focus more on the digital side of the business. Obviously, the social space and having Jennifer Lopez as a partner and being able to leverage her over 200 million social followers to find ways to engage with our brand, that's something that we're going to work on and how we can leverage that. So I think you're going to see a distortion of our marketing efforts toward, obviously, the digital experience. As it relates to operating the warehouses, I'll split that into 2 frameworks. The warehouses, one, that are close to the consumer, meaning what many folks would call a store. We have standards in place today in each of those locations on what it takes to fulfill an order and how quickly we can get that out. We will be evaluating what those standards could be because we are anticipating more volume coming out of what is -- what would be defined as a store to fulfill the consumer demand. And then, obviously, our fulfillment center that we use here to fulfill that demand is also going to be busy. So -- but I feel like we've got that in a really good place. But as far as the day-to-day operation of the local warehouses, I think we've got good practices in place, and we will -- I know our team will be all over ensuring we're meeting the demand of the customer.

And on the warehouse side, any functionality in terms of putting it in 1 or 2 warehouses instead of however many? How are you operating that through this time period?

Again, the way we look at our business is, our average store is roughly 20-some thousand square feet. And we have lots of opportunities to leverage those facilities to house product, whether they're open or closed. And that's how we're looking at utilizing our space. And then we also, through our Camuto acquisition, acquired a warehouse in New Jersey that has capacity. So we feel pretty good about our ability to manage through this with the existing footprints we have.

Yes. One thing I would add, Dana, we have made just some work shift changes to account for social distancing and cleaning. So we've gone through and put some space between shifts and things like that. But we were already functioning at a multi-shift kind of environment.

Got it. And any movement of store openings and timing of openings to the back half of the year from the front half? Or what were you looking for in the front half of the year?

Go ahead.

Yes. So we were -- again, I don't want to give guidance that really just completely fell off the cliff. But obviously, we were going to continue with a very modest net new store opening cadence, I'm sure. And if you kind of follow how we do that, we tend to be a little heavier weighted in the back half, but trying to get open by that fall time period. Right now, we've halted basically most anticipated openings, just as we are looking to see where we want to expend capital and things like that.

Our next question comes from Chris Svezia at Wedbush.

I guess, just first, I want to go to supply chain for a moment. I think any color you can update us on just -- I guess, you would normally step back and say there might have been supply chain disruptions given what was going on with China and product availability. Where does that stand now, in relation to your observations about comp slowing, making some reductions, canceling some orders, maybe looking at both the DSW side and the Camuto side shipping into your wholesale and your private label customer? Just sort of where that whole dynamic on the supply chain side stands right now today?

Yes, Chris, thanks. We were very focused prior to Chinese New Year to get as much product out as we possibly could, in light of many situations. One, we were launching our exclusive brands at DSW. So we were able to move a lot of product and actually were delivering goods when I know that there were a lot of folks that were feeling some real stress and pain around some of the shutdowns that had taken place in China. So I think we did a really nice job of managing through that. As it relates to where things stand today in the supply chain, all of the factories that we have historically worked with are up and operating. I would say, in general, capacity-wise, operating between 70%, 80%-ish of their capacity is where we stand today. So that's more than enough to meet the kind of flow that we see of product that we need to keep the business moving forward. So I feel pretty good about where that stands. As it relates to the DSW brand, obviously, we have a lot of product that's flowing. This is a peak period for us. Again, Marpril is -- that's a holiday, Easter is a huge holiday for us. And we're working with all of our partners as well as our supply chain team to ensure that we get the product in the right place right now. That's the big focus we have. As stores are slowing down or closing, where can we get that product so that we can ensure we can get it to a customer when it's demanded digitally or when the stores open back up to ensure that it's located in the right place when that does happen.

Okay. And on the -- I'm curious on the SG&A side. I guess, as you look at SG&A today, are you finding savings opportunities? Or are you waiting until after the 14-day period, if by any chance, you still have stores closed, taking that action to look at opportunities? I'm just curious where you are in that thought process? Are there opportunities today that you actually have line of sight to? Or are you waiting until if this prolongs, looking for opportunities at that point in time?

Thanks, Chris, for the question. No, we have already started acting upon some of the SG&A, as an example, implementing the hiring freeze, ensuring that every single cash outlay that we are making is something that is driving a sale today. That's sort of the mindset that we're having, and we're obviously working through all of our teams to figure out ways to cut expenses. And I think we were really lucky as we went through this whole tariff thing to reach out to partners, and I don't know who else did this, but real proud of the fact that we reached out to all of our vendor partners and asked for a 5% reduction in SG&A to deal with the tariffs. And for the most part, with the exception of 1 or 2, we got that support, and we'll be going down that same path with partners that are in place today. Obviously, everyone's going to end up sharing in the pain that I think we're feeling. So we're going to take every action we possibly can to, again, ensure the long-term health of this business. We've got a great balance sheet, very little debt, access to cash. We got to weather this storm and come out of it stronger than when we went into it.

Got it. And just final thing for me, just clarification. What you saw in the first 36 days, just to be clear, roughly a 2% comp. You talked about the Kids accelerated. I think you had mentioned athletic improved relative to what you saw in the fourth quarter. Any color about early reads on spring? Open-toe sandals, any color on that product? I think you referenced the dress business. Women's dress was still down, but just clarification around color on some of those puts and takes and what you saw in the first 36 days.

Yes, Chris, I can't give that color. But what I would tell you, what I think is important for everyone on the call to know is what was great about the result we were getting, we were doing that without having to be promotional to get comps the way that we were publicly really throughout the fall season. Yes, there were still marketing activities in place, but we had reduced the number of days of public promotion, meaning screaming 1% off or some kind of tier offer that was available significantly year-over-year and significantly to where we had been throughout third quarter and really November, December. So the progress we made in January and February to enhance margins to really tell the story about our value proposition to our consumer, leveraging our rewards program, leveraging our stores and digital channel to demonstrate the everyday value offering, I was really proud of the team and the progress we had made. So while a 2% comp might not sound like it's all that inspiring, when you're doing it without having to run the same level of promotion, you guys have followed our business long enough, you know what that flows through. So that's where I was really excited.

And our next question is a follow-up from Sam Poser, Susquehanna.

I have 2 things. One, have you -- prior to today, have you opened any stores? And if so, where or which banners in the quarter?

No, Sam. We haven't opened stores this quarter.

Correct.

Okay. And then secondly, can you give us some idea maybe for last year of what e-commerce was to your total? So we can get some idea of how to think about what sales may or may not occur during this time of store closing?

Well, Sam, again, we've never shared that color and we can't start that today. It's such a huge impact on all channels that I just -- I don't want to get into that practice. If we see that over time, we continue to have these store closures, I'd be more than comfortable to share that breakout at some point. But as we sit here today, I'm not comfortable doing that yet.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Roger Rawlins for any closing remarks.

Thanks, again. I know everyone's got a lot going on. We appreciate you taking the time to listen in today. Again, I want to reinforce, we're working to protect the health and safety of our associates, we're working to help -- the health of our long-term business. I think the fact that this organization has demonstrated a resiliency and passion for overcoming hurdles that have been thrown our way, whether it be a border tax, a tariff, changing consumer landscape, changing competitive landscape, I will tell you, I feel very confident in our ability to get through this challenge and to come out stronger and more relevant to our partners, to our customers and grow amazing brands and leverage our retail channels to add value for our shareholders. So thank you so much for your time, and everybody, please be safe.

Thank you. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.