Good morning and welcome to the Designer Brands Inc. First Quarter 2020 Earnings Conference Call. All participants will be in a 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 Stacy Turnof. Please go ahead.

Good morning. Earlier today the company issued a press release comparing results of operations for the 13-week and 52-week periods ending May 2, 2020 to the 13-week and 52-week period ending May 4, 2019. Please note that the 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 first quarter of fiscal 2020. I’m going to start off the call by thanking our team for their diligence in taking swift and effective action to ensure the safety of associates, customers and our communities during this difficult time. Our industry has been heavily impacted by the COVID-19 pandemic and we’ve acted strategically to preserve the long-term viability of our business. Despite short-term challenges, we are adapting to the environment and refining our near-term focus based on learning so far. We will also continue to execute against our three strategic pillars in innovative ways to deliver differentiated products and offer differentiated experiences and focus on new growth opportunities to increase market share. These strategic pillars coupled with our priority of keeping employees and customers safe and healthy, guide our decisions as we navigate the COVID-19 pandemic. Preserving liquidity and financial flexibility has been a top priority for Designer Brands. As discussed previously, we reacted swiftly upon seeing the risks of COVID-19 by significantly constraining our cash burn. We notified vendors and landlords that we were suspending payments until there was better visibility, massively reducing spring receipts and implemented significant cost cutting and capital preservation measures. We drew down on our $400 million credit facility and immediately focused attention on amending that facility to ensure we would remain within covenant compliance and improve our access to liquidity. Moving forward, along with the success we've had reopening the majority of our retail locations, we've reached alignment with nearly all of our major vendors and landlords on past due amounts and have extended go-forward payment terms, which gives us more flexibility from a liquidity perspective. We are continuing to evaluate our liquidity options with a focus on ensuring a…

Thank you, Roger, and good morning, everyone. Our first quarter was full of unprecedented challenges and unforeseen changes. Our team has come together and taken numerous actions in the near-term to help manage our business through recent volatility and set us up for long-term success. First, I would like to discuss the steps that we have taken from a liquidity and cost perspective and then I will discuss our first quarter results. 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 as a substitute for or an isolation from GAAP results. Last month we amended our $400 million credit facility. And as a result, we have suspended dividends and share buybacks. Since February 1, we have increased our borrowings by $203 million and place that liquidity and cash thus ending the quarter with $250.9 million in cash. We remain comfortable with our liquidity and continue to assess our needs, while also working with our bank group to evaluate alternatives for incremental flexibility as we move forward. Lastly, we also significantly lowered our capital expenditures. For the year, we plan capital expenditures to be roughly $25 million to $35 million, well below last year's $77.8 million as we have delayed our store openings, nonessential maintenance and distribution center projects, as well as various business and IT plans. In terms of rightsizing the cost structure, we have reduced expenses across our all areas of the company. Payroll expense declined significantly following our actions to furlough certain team members and reduce salaries across the rest of our employee base. In total, we reduced our operating expenses by $26.5 million in the first quarter over last year and…

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question today comes from Sam Poser with Susquehanna. Please go ahead.

Good morning. Thank you for taking my question. I'd like to know, first of all, on Camuto Group, how do you -- how was the mix of product going to change within Camuto Group going forward, given the focus on kids and athleisure versus dress and even dress casual?

Yes, Sam. This is Roger. Thanks. Thanks for the question. I think, obviously you know, that Camuto has historically been known as a dress house. And when you look at actually across Designer Brands, we actually own about 12% of the women's non-athletic footwear business across all of our businesses. I mean, we think we are the dominant market share player in that space. We see that as an asset and there will come a time when she's going to go out of her home and go to a restaurant or do something in the evenings or go back to work. So we are happy about where we're positioned and we think we will leverage that when the recovery does hit. But in the interim window of time, what we've got to do is we are going to figure out how do we get after the sneaker business in a bigger way. We brought in some resources that know that business better than frankly we do ourselves. We are working in a huge way outside of Camuto with DSW and shoe company with our athletic partners, because the beauty of our model is we have 30 million consumers, 80% of them are female. And guess what, we do not have a huge portion of their wallet when it comes to athletic. And given how those large athletic players are looking for athletes, and when I say athletes, not the Olympic athletes, but the one that runs in front of -- the ones that run in front of my home every day as I'm on these calls. We have that customer. So we're excited actually about the kind of conversations we've been having with the top athletic brands. And given you a long winded answer here, but there's just -- there's so much opportunity in athletic for us to get after, or I should say athleisure, both at Camuto and at DSW and shoe companies. So, I think we are not going to back down from the fact that we are who we are. We are a dress house, we are seasonal house. That two, our businesses have been historically, but we have a great opportunity to grow athletic share during this time period.

Thank you. And then, can you talk about some of -- can you talk about this focus on the top 50 vendors, maybe give us some examples. Is this just taking the reduction of what you called labels away or I mean, to what degree is this a completely taking this whole thing to another level? And with brands like Nike, Adidas, Sketchers, the ones that are like even Steve Madden that have a big athletic portion of their business. Again, how do you -- I mean, I know you want to grow your athletic trend with Camuto, but I mean, how do you compete with the people that have already been there for so long? And I left out a bunch of new balance and so on, that can really -- would you rather do it yourself and try to grab, share at a price, or do you just take advantage of these very established brands in these spaces?

I think the -- that is exactly the point. Going after the relationships in a bigger way with these top brands, we have the conversation at dinner the one night about the 700 or 800 labels that we carry, that ultimately we help convert into brands. While we're not going to play that game anymore, we're going to invest our inventory dollars, meaning owned inventory into these top 50-ish kind of brands that are the ones that the consumer demands. And I think this is the data point that through COVID that has really stuck out for us is that 85% of our sales as an organization are digitally demanded. And I want you to understand that what that means. When I say 85%, 20% to 25% of the time they're on the website, they decide to click to buy at that moment, but the research we've done and what we've seen is the influence it has on when they walk into the physical plant is significant. So being able to have a broader assortment from these key brands, which when you look at the top 20 search terms on our website, 18, roughly of those top 20 are these major brand names. And yes, sandals will show up there, or yes, boots will show up there in winter, but getting after these top brands and we're in the process of having these discussions with all of our top partners. And people are shutting doors, people are filing bankruptcy and we're going to be here. And so they're looking for places for them to grow, and we think we are that destination both online and in the physical location. So I think that's a great, great point. And then when you look at -- this is the best example of how important, athletic -- athleisure can be for us. In the month of May, in stores that were open in May, our athleisure and kids business combined was up 17%. We comped up 17%. That's fantastic. The challenge we have is we have a large chunk of our business that's seasonal and dress. And guess what, that's not comping. So -- but we're really proud of the progress that we've made with athletic and as we go forward for the back half of this year, and I think the foreseeable future, you're going to see that penetration grow significantly.

Thanks. I’ve got one more. With the e-commerce business, you were up 25% for the quarter. Can you sort of talk about how that may have trended by month and can you give us any color into how that e-commerce business has been doing since you've reopened stores? So can you walk us through, February, March, April, into May and June on e-commerce as a percent increase, and can you provide us what the penetration of e-com was in Q2, Q3 and Q4 last year?

So I'll -- I won't give you all of that, but I'll give you, I think, enough color to get you to understand how pleased I am with our performance. So, first -- during the first 5 weeks of the quarter, we had walked away from a significant amount of promotions that we had ran last year, frankly, because we wanted to drive the customer into our warehouses to improve margins. And actually our first 5 weeks, we were in the low single-digit comps across the enterprise. And .com comps were minimal, but it was the right thing to do. And then we got hit with COVID. And for the eight weeks that followed that, our digital demand was up 49% during that window of time. And the minute those stores closed, we started to have -- we actually had 3 of the 6 biggest days in the history of our company happened after stores closed. And when I say biggest days, meaning .com days. So like what Black Friday, Cyber Monday kind of days. And we managed through that successfully without any major site issues and all these omni tools we have invested in, we were fulfilling 80%, 90% of that demand out of our, what we call warehouses, but were the stores. And -- so I'm really proud of the work we did. And then as it relates to Q2, we're still in that 25%, 26%-ish range of .com demand. So as stores are starting to ramp back up and we're getting a bunch of them open now, we're still seeing demand online as well.

Up around 25 or so percent?

Yes. Yes.

Okay. Thank you very much. Good luck.

Thanks, Sam.

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

Thanks. Good morning. And hope everyone is well.

Thanks, Rick.

I had a two part question related to the productivity from your reopen store. So, first, can you provide some additional color on these reopened doors and productivity, as we think about DSW versus Canada? And then second, this ties into Sam's last question. Can you talk about the trends that you're seeing in markets as a whole so that when we think about a market at stores plus e-com for those areas where stores have reopened are those -- how's the market revenue look versus last year?

Yes. So Rick, I'll -- I think I will answer the end of that first, but we're seeing that right now in stores that have been opened for about a month, we are at about 80% of the volume we were doing last year. I think, the good news is that is significant progress. We've really started opening stores April week three. That first week we were doing roughly 5% of the business in the -- that first group we had opened and now to see them be closer to 80% is a significant improvement. As we said, it's been improving 8 to 12 kind of top points each week. So I think I'm really, really happy with that. As it relates to U.S versus Canada, Canada we have been much more aggressive with some of our markdowns that we've taken. We didn't have the ability to get out of as much seasonal product up there as we were in the U.S. So the comp trends have been better, but margins have been impacted in a bigger way. But again, overall, we are beating our expectations that we had coming out of this as it relates to the doors that we have opened.

Got it. And you talked about planning inventories down substantially in the back half, any additional color there? Does that mean down mid single digits or down double-digits, any relative context? And then, also can you provide color on how you're thinking about categories, just given the relative strength that you're seeing in active and kids. I'm assuming, are those categories going to be playing lower as well, or can we actually expect an increase in inventory there?

Yes, we ended the quarter with inventories down roughly 16%, 17% in dollars. And I think that's sort of the directional plan as we head through the balance of the year, but we are going to keep significant open device. So what I keep going back to is 2008. And we have a playbook that worked in 2008, as it relates to turning on our marketing, which we've done. Hopefully you've seen the TV we're doing at a level that we've never done in the history of our company. You'll hear us on all the different digital channels that you listen to. So we're ramping up marketing in a significant way and we're going to manage inventories in a chase mode so that when we see it, we will get it. And I think that leveraging the relationships we have with these top brands is key to the approach that we take. So I feel pretty good about that. And then as it relates to categories, obviously, I -- Jared and I were in the office for the first time this week and I said, I think it's the first time in 13 weeks, I've actually worn a pair of pants, that's not a sweat pants. So, we're going to continue to figure out ways to get after this at leisure, kind of look and as Sam had pointed out, whether that be sneakers from some of the brands or sneakers that we can develop at Camuto, that is what he and she are wearing right now, and we've got to continue to get after that along with kids.

Thank you very much. All the best.

Thanks, Rick.

The next question comes from Tom Nikic with Wells Fargo. Please go ahead.

Hey, good morning guys. Thanks for taking my question. You said something in the prepared comments about rationalizing the brand portfolio. And I think, Jared, you might've touched on it briefly as well during your comments. I'm not sure I completely understand what's happening with the Camuto business and the brand portfolio. If you could sort of elaborate on that a bit, that would be helpful. Thanks.

Yes. Thanks, Tom. So, when we acquired Camuto, they were working on or managing upwards of 30 plus brands. And so the work that we've been doing is trying to really identify who are the target customers for each of our brands, what's the market look like for each of those brands and then what investments are required to grow them. And so that's the work that we've been doing and it won't be 30 brands, this is what I could tell you. It's going to be something significantly less than that where we will focus our attention. And this isn't just because of COVID or because of downturn, this has been our game plan from day one, but that's what we mean. So you're going to hear about us focusing our efforts on Vince, on Lucky, on Jessica, on JLO and on our exclusive brands. Those are the areas of the business that we see that there's growth potential and market opportunities. So that -- that's where our core focus is going to be.

Got it. And a quick question on, I guess the store associate base. I know you had to make the unfortunate decision to furlough a large portion of your employee base. Have you had any sort of difficulty getting people back to work? Did people find on their jobs elsewhere, or do you anticipate any issues, re-staffing the stores as things get back to normal?

We have -- unfortunately we ended up having to furlough about 88% of our entire workforce. I'm happy that, because our stores are getting back up and we're getting sales, we've now called back roughly 60% of our organization, which I'm excited by that. And as we start to open the Northeast and some of these other larger markets, that number is going to go up significantly in the next couple of weeks. So -- but to date, we have not experienced any major hurdles is what I would say. What I'm really proud of is the investment that we made in protecting the health and safety of our associates. I think probably us and American Eagle because we work together a lot on different projects, obviously because of Jay and his relationship between the two companies. But I think the two -- our two brands I think stood out when you go in to see what the experience is like for our customer. And we messaged that to our associates. So, I think we are a very safe place for an associate to come back to work and we haven't really experienced any, I would say, major kind of challenges of getting folks back to work.

Got it. Well, thanks for taking my questions. And hopefully we can all get back to a somewhat normal -- a normal situation sometime soon. Best of luck for the rest of the year.

Thanks, Tom.

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

Good morning, Roger and Jared. In the prepared remarks, you mentioned that the company's reached alignment with nearly all major vendors and landlords on past due amounts and its extended go-forward payments. Can you peel the onion back a little later there? Is this just a matter of extending terms and pushing back payments, or are -- has there been a net amount of reduction that you're -- that you would have otherwise been expected to pay that you are not also, if you could dovetail that into you mentioned essentially future agreements that are still the potential to save money on rent is what I heard. And maybe could elaborate a little bit. Thanks.

Yes, Steve. This is Jared. Thanks for the question. We approached -- so let me kind of take it back to when we first went into COVID. We first went into COVID, we reached out to all of our vendors and all of our landlords and said until we have a better clarity and visibility on our -- amending our current revolver, and when our stores are going to reopen, we need assistance and not having to pay things as do. And we received huge support across the board on that front. Once we had visibility on those two items, we actually started reaching out one-on-one with all of our top vendors and with every single one of our landlords to say, okay, of those items that we didn't pay you for but were due, let's get on to payment plan for that. And the vast, vast, vast majority were very cooperative and we are on a -- we are back in good graces and we are on good terms and we are not in default with any of those major creditors. And that is being paid off. Every deal was different, but it's being paid off over the next few months to the next couple of years, if it was added to the end of a lease term. Those were not concessions. Those were deferrals and I think that's what your question was getting to. We then had a discussion and reached alignment with all of our vendors about our new go-forward terms. And those are for any orders that have been written for future delivery. That is going to be much more aligned with what our anticipated inventory term is going to be. So we should see some permanent working capital improvement come out of that. Again, as Roger was talking about, given the amount of growth we're going to have with the top 50 vendors, having that part of the discussion, it was a good time to have that with them and it's worked out very, very favorably there. On the landlord front, we are working with A&G Realty Consultants, one of the largest lease workout groups. And we are now assessing, how do we go back and have the discussion with the landlords on what does the actual rent expense look like based on what's happening with traffic. And to be perfectly honest, right now, as much as we don't know what the permanent impact of traffic is, the landlord doesn't either, but we all know that right now, it's impacted pretty substantially and it's causing significant deleverage on our occupancy line and that's not sustainable in the long-term. So with the help of an advisor who does this for a living and does it very, very well, we are having those discussions about how do we get true actual relief in some way shape or form on that big expense line.

That's very helpful. And I actually have another follow-up or two on that, but I'll take that offline. Roger, can you talk a little bit about, you mentioned opportunistic buys and close outs. Can you talk about what you intend to utilize immediately? What you intend to pack away, how that will I assume positively impact your margins potentially in the short-term and maybe what percent of the business you would anticipate, maybe at the balance of this year, maybe a little bit of next year, I assume it's going to be a little bit more than it has been? And maybe you can just talk about your strategy around buyouts and close outs.

Yes, Steve. Thanks. Historically, those have become a significantly decreasing portion of our assortment and what I'm excited about is we have had these conversations with our top brand partners is talking about how do we continue to sell their inline product, which is the same goods you could find in other retail channels. But the beauty of that for us is be through our loyalty program we're actually able to offer a value proposition that you can't find elsewhere. So we're able to pass value to our consumer through that. And then the second big chunk of our assortment is the special make-ups, that allow us to show compare at value. And then the third bucket are the close outs. And that has fallen down to be 8% to 10% of our business. And we're anticipating that we should double that, or bigger as we move forward. And then having these conversations with our top brands, being their first choice for liquidating those kinds of goods, that's the approach that we're trying to take. And so far this conversations gone really well. We've had some really good close out buys that some of them will, will show up in fall. We've tried not to do a ton of pack and hold of spring goods, frankly, because from a liquidity standpoint right now, I'm really not into buying a bunch of stuff and putting in a room somewhere and burning through cash with that. So we are going to continue to get after the close out business in a big way and to be able to pass value under our customer. And when you combine all three of those, there really is no one else out there that you can go to from a brand perspective that has all three of those within the same brand portfolio. So that that's the approach we're trying to take.

Very helpful. Thank you for the clarity.

Yes. Thanks, Steve.

The next question comes from Gabi Carbone with Deutsche Bank. Please go ahead.

Hi, good morning. Thanks for taking our question. We understand you aren't providing guidance, but on gross margin, how should we be thinking about the trajectory through the year at the U.S segment? And if you could dig take into the headwinds we should be considering that will continue and if there are any offsets you see potentially? Thank you.

Yes. Yes, Gabi. So you are right. We are not providing guidance. What I would tell you is due to the fact we did have to take large reserves because we're on the retail method of accounting. In Q1, we wouldn't expect the gross margin deterioration in Q2 to be as severe. However, it certainly is going to be impacted as we continue to have to look at ways that we can liquidate out of this inventory that we -- obviously, we are intending to sell and didn't have the opportunity to do so. As we get into fall, where we have right-sized the buy, and as Roger mentioned, we are sitting on a lot of open to buy, and we will put that to work in a chase mode, should we see the trends materialize, we would expect our margin rates to get much improved, much closer to normal in the fall with one caveat. I mean, depending on the level of actual comp sales, our occupancy deleverages, if it's anything below about 1.5% positive. So that will probably continue to be a headwind. But from a merchandise margin, fall should look much better.

Got it. Thank you. And then just a quick follow-up. You mentioned store optimization kind of going ahead. How are you rethinking your store count in the U.S.? Is there anything you can tell us now how you're thinking about that?

Yes, Gabi. This is Roger. I think I'm pretty certain in all of retail, we have one of the better fleets from the way we've positioned the business. As we exited last year, there was roughly five or so doors that were cash flow negative. So that's pre-COVID. So we were in a really, really good place. The conversations that we're having now with the landlords is that was pre-COVID. And as the consumer behavior permanently shifts as a result of what we've all just gone through, that number is significantly higher. And so what we're trying to do is to try to get to some level of, let's just call it, a normalized sense of how does the consumer come back to the physical store versus shop online. And then we've got to sit down to have the tough conversations with our landlords that are they going to work with us or not. And the beauty of our model is, and credit to Bill Jordan and our real estate team, our deals really every five years, we have the ability to open or close a store because of the way our leases are structured. So, 20% of our fleet each year, we have the ability to make some decisions on. So that's the lens we're using, let's get through Q3. Let's see how things play out as things come back to normal and then sit down and have the real conversations with the landlord about the actions that we need their support on to ensure that we can still stay open in all of these markets. And as part of that, it will also be a conversation about how we bring these services to life. And part of the discussion can be, we are a traffic driver. And we have found an incredible tool, called W Nail Bar, that when we open those nail bars, we can get more traffic to our center. So, in helping to invest with us on how we can retro some stores, we’ve a greater appetite to go after that once we get through this. So those are all things that, as we have the conversations with the landlords, we keep reminding them. But I really like the fact that we have the ability to adjust our fleet roughly 20% a year.

Great. Thank you so much for all the color.

Yes. Thanks, Gabi.

[Operator Instructions] The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Good morning, everyone. As you think about the digital business and the penetration of the digital business that you've had, how do you see the cost structure aligning with that? How do you see shipping costs go forward and how you're planning and the penetration rate? And lastly, on the expense structure, what doesn't come back, or how much of the expenses that you've realigned, what doesn't come back? And what are the categories where there's opportunity? Thank you.

Well, thanks, Dana, for the question. I think, again, as we talked about the digital demand, again, think about 85% of all of our purchases really start with that digital -- with a digital sale. And as it relates to shipping costs, right now is not, frankly, a time to be able to negotiate rates with some of those carriers. What I like about our business is during this pandemic we’ve one carrier that we utilize today. We turned on the ability to use multiple carriers. And we did that while only having roughly 20% of our workforce in place. We've turned on buy online, pick up in-store years ago, but we turned on curbside pickup during the pandemic. We have some new things we've done around self-checkout. So, I think there are things we can do that can leverage the digital experience in a way that reduces the cost of shipping as we run the business more efficiently. So I feel like it's probably going to stay in the ballpark of where we are today. And then obviously, as that continues to grow, we will find ways to negotiate harder on what those rates could look like. As far as expense realignment, I mean, obviously, the largest expenses we’ve are payroll and our occupancy costs. And the occupancy side, as Jared had mentioned, we're getting after that over sort of a three staged approach. So over the next six months, I think we're going to be able to answer that question more specifically for you. As it relates to payroll, as I shared earlier, roughly 60% of our team is back to work. And that's going to flex based on the kind of demand that we are able to generate. And again, we're at roughly 80% of the business we were doing before in our stores. So expenses will have to model after how those sales recover. But our intent is to try and get as many people back to work within this organization as we possibly can.

Yes, Dana, one thing I would add to that. You may recall back in 2018, we went through a pretty big labor force -- or a labor model redo, where we actually made our labor model in the stores much more flexible because we were finding at that time, there was a mismatch of when we had floor coverage versus what the traffic was. But here, as we have seen big impacts to traffic, that gives us a lot more flexibility to flex that up and down than what we had before we did that big redo.

Thank you.

All right. Thanks everybody …

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

Thank you. Thanks, everybody for taking the time to call in and look forward to, hopefully, someday, getting to see all of you in person. But thanks for your interest in our business. Have a great day.

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