Good day and welcome to the Designer Brand Inc. Second Quarter 2021 Earnings Conference Call. All participants will be view-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] We do ask the one in queue, you limit yourself to one question and a single follow-up. Please also note today's event is being recorded. I would now like to turn the conference over to Stacy Turnof Edelman. Please go ahead.

Good morning. Earlier today, the Company issued a press release comparing our results of operations for the 13-week period ended July 31st, 2021, for the 13-week period ended August 1st, 2020. 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 on 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, everyone, for joining us today. We are pleased with the tremendous momentum in our business. And as always, we want to thank our associates for their hard work that has enabled our success. I'd like to highlight 5 notable achievements in the Quarter before diving into the rest of my remarks. First, for Total DBI, [Indiscernible] of 85% exceeded our initial expectations, resulting in record gross profit and significant improvement in our operating income rate. Second, at DSW, we set an all-time sales and gross profit record for the Quarter. Third, we continue to see strong support in athleisure in kids, and we're positioning ourselves to capture even more market share in these areas. Number 4, we also experienced incremental improvement in categories that were hit harder by the pandemic as demonstrated by a recovery in seasonal, which was up 5% for the quarter at DSW compared to the pre-pandemic 2019. And finally, we are seeing our core customers returning to our stores. And they are buying full-price items. In fact, we saw 10% comps in regular price selling in our U.S. retail business during the quarter compared to 2019, which clearly benefited our gross margin. Although store traffic continues to be below our historical trends, we are continuing to see a rebound, especially in the U.S. while our digital demand, it continues to be robust. Let's talk a little bit about our continued progress in providing our customers with the best possible assortment. At DSW, our pivot to athletic continues to yield strong results with comps up 45% compared to 2019 and kids comps up 55%. According to NPD's Retail and Consumer tracking services, in the quarter, DSW sales growth in both kids and athleisure outpaced the remaining U.S. footwear market significantly compared to…

Thank you, Roger. And good morning, everyone. Our second-quarter performance blew away initial expectations across the board. This is a continued example of how we are successfully executing against the strategy we previously laid out by leveraging the flexibility of our business model, pivoting our assortment to what the customer is demanding right now, and controlling what we can across the business. We are optimistic that business will continue to improve in the second half as vaccination rates have the potential to increase following the FDA's approval of Pfizer's vaccine and as we see our customers increasingly returning to stores and social occasions. This optimism is somewhat tempered by the continuing uncertainty with Delta and other variants and the direct impact it is having on the global supply chain, which I'll discuss further a little later. 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. For a complete reconciliation of GAAP - to - adjusted earnings, please reference our press release. Turning to our results, for the Second Quarter, sales increased 66.9% to $817.3 million compared to 2020. Total comps were up 84.9% in the second quarter, a significant increase from the first quarter's comps of 52.2%. As Roger mentioned, we saw record level second-quarter sales and gross profit in our U.S. Retail segment. U.S. retail Comp sales were up 94.3% during the second quarter versus the prior-year period and sequentially improved from the 56.3% in the first quarter. This growth was driven by our near-term strategy and improving store traffic. Year-to-date traffic as compared to 2019 has continued to improve. While store traffic in the second quarter in total was down 10% to 2019, we saw sequential improvement throughout the quarter with May down…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We ask that you please limit yourself to one question and a single follow-up. Today's first question comes from Steve Marotta with C.L. King & Associates, please go ahead.

Good morning, Roger and Jared. Congratulations on the second quarter. Jared, can you go over the inventory position again? It looks like your inventory is up year-over-year, which is a somewhat enviable position considering what other footwear retailers have announced. And can you talk a little bit about composition? It seems like a competitive advantage, but you also mentioned a couple of other items that I was writing as fast as I could, that seemed to be – I know that there are headwinds also and pinch points, of course, in the supply chain, but maybe you can just disassemble current inventory position a little bit better and also what you would expect from a flow standpoint for the back half. Thanks.

Yeah. Am -- I'm happy to give that and I'm sure Roger will want to add some colors, especially around the composition. What -- what we reported was we were up over last year in dollars, we were down slightly over last year in units. And -- and much of that is -- is a question of lack of reserves and -- and the overall IMU that we're experiencing. So that -- that's kind of that disconnect there, not -- not -- not overly concerning, but -- but that was, that was why ones up and one's down. The second stat that was provided was just versus 2019 and -- and there we were down in the high twenties. What we are seeing is absolutely a lot of flow coming our way. We have seen quite a few delays in shipments but on the flip side, we actually are getting a lot of those shipments. And one thing I'm very happy to say is on the athletics side of the world, we had been very aggressive. In fact, placed quite a bit of over-ordering athletic knowing there was little risk to that product even if it all showed up. So that has put us in a pretty good position on that front. On the seasonal front, that's where we see some potential delay. And we are very thankful we've got our Camuto operation that is giving us priority access to the inventory that is coming off the factory lines. We're receiving that now and we're really happy, but that's where I could see some potential delay and why I mentioned. You might see some traditional shifting from Q3 seasonal selling into Q4, very similar, even with sandals that we saw that decline not happened into Q2 the way that it normally does. So I don't know Roger if there was anything else.

Steve, I would say that when you look at the seasonal category, in particular, making certain that we put in sufficient freight into our back half expect to get that product here, which, as Jared had said in his comments, that we built that into our plan for the back half. But right now, day in and day out, it's about athletic and kids and I feel really, really good about the way our team has positioned inventory in that piece of the business, which is frankly the key to the game we're now playing with back-to-school.

That's really helpful. Also, is it possible to tease out the gross margin improvement in the second quarter versus '19? what was captured with better full-price selling and what was captured with increased DSW -sourced, Camuto -sourced items selling in the store.

Yeah. The name of the game, first and foremost, was full-price selling. I mean, not only did we reduce promotions materially, but we also had the opportunity to increase pricing several times throughout the quarter. Just as we were seeing turns just be so aggressive. And so we saw that the consumer followed us there, and we really did not experience any hesitation around that. We did see some -- a little bit of deleveraging on the shipping side of the world but not a whole lot. And then as Roger mentioned, there were some additional freight charges even in Q2, where we had agreed to expedite some freight and just the overall inflationary environment of freight across the board did the lever there. So, again, net, very positive, but those are the big under the covers.

Steve, I've been trying to figure out how do we share this assortment strategy and what we've done. And if you break it down, our distortion toward athletic, kids, and seasonal has absolutely paid off. Our athletic business is up 45%, this is 2019. Up 45% are kids, up 55% are seasonal business upfront. Those are the three big things we've told you that we were going to distort to it's worked. And then the way in which we've distorted is to get after the top 50 brands, which were 78% of our sales. That number was 40% or less just a couple of years ago. So to give you a sense of how we've leaned into those folks, it was up 112% to last year and then you add into that to your question about Camuto. We're leveraging them in a huge way. Our business was up 88% the last year in Camuto-produced brands on inventory down 13. And that came with an extra 1500 basis points of profit -- of gross margin. So you add all that stuff up and then you go tell a story to a customer in the way that we've been doing it and you grow your customer file at a rate as you've never seen. This strategy that we implemented a couple of years ago is -- it's working and it's just so exciting to see the progress we've made.

Thank you and our next question today comes from Gaby Carbone of the Deutsche Bank. Please go ahead.

Hi, congratulations on the nice quarter.

Thanks, Gaby.

So first, I was wondering if you could maybe dig into the increased freight expenses that you mentioned. How should we be thinking about the impact of that versus what you saw in the first half of the year? Are you able to quantify that at all?

Yeah. I would say we saw roughly $5 to $6 million of increased freight costs of deleverage versus 2019 in the first half. We baked into a little more than double that for the second half. So that's what we've got currently in our projection. If some of that isn't needed, we are able to get priority access and can both things and not have to air some things in, that may subside, but that's what we have currently baked in.

Got you, thanks for that. And this is another bigger picture question. Earlier you mentioned, approximately, 65 U.S. stores that would make sense for closure over the next 4 years. Just wondering if there's any update there and maybe how you're just thinking about the overall store fleet.

Yes. Yes. And I will remind you and all the listeners that I also said, I'm 100% positive that that list would change because that was based on tracking and looking at projections when we were in the height of COVID and not knowing what the stores would do. And in fact, as you just heard on our results, the stores have come roaring back. We are blowing past what those initial projections were, so that number is certainly is not the same number that was on the table before. However, longer-term under the -- the -- the consumer, the customer brand in speed pillars that Roger talked about. We do know that the shift to digital, it's continuing and we're going to follow our customers there we're happy to do that. And so the longer term, we are looking to see how do we reduce our fixed occupancy related to store overhead? And so one of the ways of doing that without vacating a market is to look at a different Square footage solution. We -- we're in the process, very far in the process right now at a redesign, we call it to warehouse re-imagined. Some people used to call it the store of the future. But how can we get more productive in a smaller space and still offer that same type of flexibility? So we can service our customers and serve as a fulfillment center. So more to come on that front. I don't think it's going to be the full 55 stores, but I do think longer term we want to see a net-net reduction in square footage. It just may not be vacating stores as much as we thought.

Thank you. [Operator Instructions]. Today's next question comes from Jay Sole at UBS. Please go ahead.

Great. Thank you so much. A lot of great information on the call. I just want to make sure I understand the guidance. Jared is it possible to provide any insight into how you're thinking about sales in Q3, maybe relative to 2019, and also maybe just start with that one.

Yeah Jay, I unfortunately right now and then why we left it as just operating income, we just see too much volatility, especially slippage between Q3 and Q4 that I don't want to put ourselves in a box that unfortunately we may not be where someone things we should be in Q3 and then overdo it in Q4. So we're really hesitant to go lower than operating income, but we do feel really good when we look at all the leverage we have at this point. We look at how we've maneuvered Q1 and Q2, and we saw shifting there between quarters that weren't traditional, but we also saw gross margin play differently. We just don't feel comfortable right now giving more than that. But we were excited to reinstate some level of guidance, which was the operating income. Jay, I think it's important to share that this is the first time that I can recall in my 15 years that we actually provided some kind of insight into how we are doing in the next quarter in our comments. And that we are very pleased with how back-to-school is playing out and the success that we had as we were in Q2 and we saw that spillover into the third quarter. So we're not going to provide you the by-quarter breakdown, but we still feel very, very good about our business and how we're positioned.

All right, so I understand, maybe just on some of the uncertainty that's out there, there is a lot of talks that hopefully factories in Vietnam open up next couple of days and obviously through the next couple of weeks. Obviously, there's a chance that doesn't happen. Can you just talk to us about how the -- how you think about managing through that potential situation If there's not a lot of product being made and what the Company can do given that you do work with so many different vendors to get the goods that you need to be able to drive the business going forward, especially in 4Q. Can you -- can you talk about your ability to get inventory? If there are factories that remain closed for an extended period of time beyond what's currently expected.

Yeah, Jay. There isn't a day that goes by, I don't think, where I remind Jim and Brooke, and our team that does all of the buying and planning for our organization, how much I appreciate the work they've done to distort to these top 50 brands. And so this is how I've been describing it to folks. When you're in these situations, you're going to take care of your family first. And when I think of how we've transitioned our assortment from carrying 7 or 800 labels to now really being focused on these top 50 brands, we're a part of their family. And so we anticipate that we'll get our food along with everyone else at the table in a meaningful way. So when you're running 112% increases in your top 50 brands, you'd hope you can have a conversation with those leaders and say, "Hey, can you please make certain we get our fair share of products? " So I think that's priority number 1. And then the second one is leveraging our ability to design and source our own goods, which Debbie and our team at Camuto are doing a fine job at doing that. So it's the combination of those 2 things. Will there be some misses here there? Yes. But have we demonstrated over the last 24 months an ability to be nimble on our feet and manage whatever comes our way? We absolutely have. And that's my expectation as we go through the back half.

Thank you. And our next question today is a follow-up from Steve Marotta of C.L. King & Associates. Please go ahead.

Thank you for providing the opportunity for a follow-up. Roger, can you talk a little bit about the current back-to-school season? How normal do you think it is from a pace of sales in comparison to '19? And I understand there are some variances, but if you could quantify or qualify them a little bit of the cadence and the geography, and just specific to how you would have expected kids to have sold this year in a completely normal environment. Thanks.

So Steve, I will bring you into the conversation our team had last night. This is not normal for us because historically we've always talked to you about September, there are 9 weeks of September and October because we really didn't have a business in July and August other than clearance selling. And when I look at our penetration of kids that in this window of time is sitting upwards of 14%, 15% based on the timing of folks going back to school, I am really excited about it. So I wish I could tell you that I knew how that compared to our history. We don't have any history in this space. I mean, it's that much of distortion when you, again, when you hear that Kids was up 55% to 2019 in the second quarter, and that gives you a sense of just how different we

are playing. We are now in the back-to-school space. We're in the top 15 in kids. We're killing it in athletic and I'm just really excited about this and I think we see an opportunity in the future to do a whole heck of a lot more. And the example is the Staples experience that we've created, we're going to have that in more doors. The things we're doing with Lids to engage differently. The things we're doing with apparel that will match back-to-school timing. Things we're doing with athletic brands to offer their apparel products in our stores during this kind of window. Those are all things that I think provide us significant upside in the future to the kid's piece of the business. But unfortunately, right now, this is -- this is a new normal for us.

One thing I would add just from quantifying that, Steve, that I think you'll find opportunistic, is that when we look at what is happening this year, there's a very direct correlation that stores around districts that are returning back-to-school the following week. That is when we have their heyday. It's 1 week prior. In Q2, there had only been 39 of our stores that had had that week. And so all the rest of our 515 stores have that week in Q3. So to Roger's point, we don't have history to really go off of, but what we do know is what we're seeing now. And that most of that is a Q3 event, not already behind us.

Great point.

That's very helpful. One last question pertaining to back-to-school. You had plans when you talked about kids to have the tag-along sale for the mom or dad that was bringing them back-to-school shopping. Can you talk a little bit about how that is running and what the upsell is -- are you maximizing the upsell opportunity currently or that's still on the come? Thanks.

Great question, Steve. Again, the conversation we're having last night with our team. I think there's still upside to that. And I think what we are seeing is that it is truly an incremental transaction. But then how do we marry those two things together and tie that into our rewards program and provide benefit to mom and dad to come in at the same time and buy for themselves when they are buying for their child. I think we still have an opportunity there.

Thank you. And our next question today comes from Dana Telsey of Telsey Advisory Group. Please go ahead.

Hi. Good morning and nice to see the progress. Given the announcement that you made about Hush Puppies, how you're going to be the exclusive supplier or provider, whatever -- whichever you want to call it, how do you think of this as an opportunity for other brands? And also any update on Canada and what you're seeing there?

Yes. Thanks, Dana. I think, first I have to think Blake and Brendan for their support and their partnership. And as we talk about brands and vendor relationships, there is good as it gets for us. So fact that we were able to sit down and have this conversation and reached an agreement. And when you think about the fact that this provides such puppy access to 30 million rewards members across our platform and we're going to do things for them that we would not do for others. The fact that we can build differentiated experiences both digitally and in the store. So we're going to be doing some shop-in-shops to build out the brand in a meaningful way. And then at the end of the day, what we're able to provide is the ability to remove friction from transactions. So there will now be returned centers for Hush Puppies products to come back to a DSW or there will be a Buy Online Pickup in Store locations within 20 minutes to 70% of the population, like those are all things that we'll be able to offer to this consumer that we think provides, not just a great platform for Hush Puppies, but for other brands like Hush Puppies, that's looking for a growth vehicle and we think we are that vehicle. So, hopefully, Dana, that answered your first question. As it relates to Canada, I'm still really happy with the results we're getting there. Things have been slower to recover there, primarily from a store standpoint. Our digital business was still up 140% -- north of 140% for the Quarter and stores have been a little slower to recover and their back-to-school has extended really frankly, starting more in the Third Quarter than it has historically. So, I'm actually feeling really good about the results we've had up there.

Thank you.

Yeah.

Thank you. 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, everybody for listening in and to all of our associates listening. Keep up the great work. Appreciate what you're doing, and everybody has a great day. Thank you.

Ladies and gentlemen that concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.