00:04 Good day and welcome to the Designer Brand Inc. Third Quarter twenty twenty one 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 that we do ask you to limit yourself to a single question with one follow-up. Please also note today's event is being recorded. 00:39 I would now like to turn the conference over to Stacy Turnof with Edelman. Please go ahead.

00:44 Good morning. Earlier today, the company issued a press release comparing results of operations for the thirteen-week period ended October thirty, twenty twenty one, for the thirteen-week period ended October thirty first, twenty twenty. Please note that remarks made about the future expectations, plans, and prospects of the company constitute forward-looking statements. 01:05 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. 01:23 Now let me turn over the call to Roger.

01:26 Good morning and thank you, everyone, for joining us today for Designer Brands third quarter earnings call. We are incredibly excited to share another record setting quarter with you today. As always, we'd like to take this opportunity to thank our associates for their hard work and dedication. We could not achieve this level of success without you. 01:47 Our strong performance continues to be driven by the strategies we outlined back in twenty nineteen following our acquisitions of the Camuto Group and Shoe Company in Canada, with a clear focus toward casualizing our product offerings to meet the demands of the consumer. This direction has helped to improve our business throughout twenty twenty one and will be a permanent piece of our go forward model. 02:10 Q3 sales continue to recover versus twenty nineteen levels. And we achieved all-time records in gross margin, operating income and EPS with each and every segment contributing to these accomplishments. We've noted this as well as other key highlights for the quarter and our infographic on our Investor Relations site. 02:31 We continue to see strength in our key assortment distortion, including athletic and athleisure, kid’s and men's all powered by the top fifty brands in footwear, and our women's fashion business has also improved significantly. 02:46 These investment strategies will ensure that Designer Brands is well positioned to continue to grow market share in categories where we have historically captured share well below the levels we've commanded in women's fashion. These assortment distortions open up opportunities to compete in time periods where categories other than fashion are top of the mind for the consumer and allow us to expand market share while mitigating risk we have traditionally faced from relying so heavily on the fashion and seasonal categories. 03:16 For example,…

17:05 Thank you, Roger, and good morning, everyone. We are thrilled with our third quarter results and pleased that our momentum continues to accelerate across the board. We delivered an incredibly strong quarter as we significantly surpassed our expectations and set all-time records across our operations, while also positioning our business with a substantially stronger balance sheet as we exit twenty twenty one. 17:31 Our flexible business model and strategy have contributed greatly to our success as we have pivoted our assortment over the last year point half in response to the impact of COVID, as well as changing consumer demand. 17:43 Additionally, we were able to significantly improve our inventory position during the quarter despite the challenging supply chain environment that the industry is facing. As a result, we believe that we are well positioned for continued growth throughout the fourth quarter and into twenty twenty two. 18:01 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. 18:15 Turning to our results, for the third quarter, sales increased thirty one percent to eight and fifty three point five million dollars, compared to twenty twenty. Total comps were up forty point eight percent in the third quarter compared to last year's thirty point four percent decline. 18:32 In U.S. Retail, comp sales were up forty three point nine percent during the third quarter, versus down thirty one point nine percent during the same quarter last year. This continued improvement has been driven by our near term strategy, and we’ve seen this play out in some of our leading indicators. 18:49 Notably, our operational performance has continued to improve compared to pre-pandemic…

35:23 Thank you. [Operator Instructions] Today's first question comes from Steve Marotta with C.L. King & Associates. Please go ahead.

35:55 Roger and Jared, good morning and congratulations on a terrific third quarter, well done.

36:00 Thanks Steve.

36:01 Sure. Can you talk a little bit about, and you alluded to this on the call, the supply chain, your actions earlier this year to be more aggressive bringing in product and allude if you will, some of the supply chain issues that are currently manifesting across the industry seems to be again, you're sort of benefiting from those decisions? Can you talk a little bit about maybe cadence of what you expect to come in either from a Camuto or a branded standpoint over December and January and February? And how current supply chain issues are really simply not affecting you as much as the industry? If you can just go into a little detail there it'd be helpful.

36:44 Yes, Steve, I think the big thing as it relates to supply chain is, it's the strategy that we put in a couple of years go of narrowing the number of brands we buy inventory from. So that we are now more relevant with these top fifty brands, so that when they're in a situation and we talked about this last quarter of making a decision of who's going to get product, you want to be number one, two or three in that lineup. And I think those decisions strategically, a couple of years ago have materially helped our business. 37:16 And then when you think about a category like athletic where, remember, I mentioned this in the comments that sixty percent of our athletic brands that we carry comped over twenty five percent to twenty nineteen. So, we're investing inventory and we're driving results. So, you know how this goes. That's who gets the inventory, are the folks that are driving results. So, I think that’s step number one. 37:39 The second one was, our merchant and planning and finance teams partnered to say, yes, this is what our open to buy looks like, but we also recognize it's going to be fallout. And so, let's plan above that and that as a finance guy myself historically that makes you a little nervous, but it was the right thing to do for the business. And I think our team has done a phenomenal job managing the inventory through all of this. And those are the two big things as what I would tell you. 38:07 Then as we move forward, we're planning to run the business the same way because we don't see this softening anytime in the near term. So, I think we are in a very good position And again, as I said, we went from down nineteen to flat inventory at a time when our sales were performing well. So really, really proud of our team and the work they've done.

38:31 That's great. Can you talk a little bit about your Camuto penetration goals inside the DSW stores for fiscal twenty twenty two? Actually where you land, I know that's accelerated as the year has progressed, so maybe where you will land there in fiscal twenty twenty one and what your expectations are for twenty two?

38:51 Yeah, we are – I don't think we're prepared yet to share what twenty twenty two is going to look like, but I think we are really happy with the progress that's been made at Camuto, and it's less about what the penetration is to DSW, but it's about what that team has accomplished. I mean, again, I had this in the commentary, but they went out and understood the customer. 39:13 They looked at the channels in which that consumer shops. And they built product for that customer, and then they made investments in inventory on key items and it has paid off whether it be through vincecamuto.com, through selling it, on wholesale which comped to twenty nineteen, I think that's an important point for folks that have doubted our ability to run the Camuto organization in a positive manner. 39:35 On the wholesale side, we grew sales to twenty nineteen for the Camuto brand. And then you add into that the ability to go direct to consumer through DSW. Those are all positive signs for what we've done with the Camuto organization.

39:52 That's very helpful. And I just have one question. My favorite question. Can you talk a little bit about the [tack-on sales] [ph] during back to school for kids? A lot of the kids strategy when you were introducing it was the mom [attacking] [ph] on a purchase, can you talk a little bit about how successful that was in the most recent back to school season? Thank you.

40:14 Yeah. I think it's really about that market share gain that I talked about and it is growing the kid’s business, which I said thirty five percentage points to the total market is what we experienced, which is pretty amazing from a gross standpoint. And then what we're seeing is, as I said in the quarter, it was the second largest acquisition, customer acquisition quarter in the history of the company and that comes by having athletic and kid’s and the digital investments we’re making. So, we are seeing that it's introducing us to a new consumer and it's adding to the business we were already doing with that family.

40:54 Steve, one data point I would remind you and I think we mentioned it in the script is, during that back to school timeframe, while the kids penetration did significantly increase and we quoted we hit around fifteen percent, it also pulled the entire comp for the entire box up to positive to twenty nineteen. 41:14 So, during that time period, there were add-on sales and the whole entire box started comping positive, which again, we think is very, very good.

41:23 And Steve, I think and this is for everyone on the call that the decision to get after athleisure has opened up the kid’s windows that we've talked about, back to school and holiday, but it's also opening up windows where we can now play more aggressively then as we mentioned, the post-holiday when everyone's going to live out their New Year's resolutions and get back in shape we're going to play there. And we've never played there. 41:50 We would have been focused on selling thirty nine dollar boots, and we can sell full price athletic product in that window. Those are ways in which these investments, these strategic decisions we made a couple of years ago are paying off for our organization.

42:07 Thank you. And our next question today comes from Gaby Carbone from Deutsche Bank. Please, go ahead.

42:14 Hi, good morning. Thank you so much for taking my question.

42:19 Hi Gaby.

42:20 Hey. Just wondering if you can maybe dig into your top line outlook for the fourth quarter, you know the acceleration kind of what you're expecting in the third quarter. And then any additional color on quarterly trends? I know you talked about having a very good Black Friday, and then as you move to next year, just kind of how you're thinking about consumer demand, especially as we lap stimulus payments in the first quarter? Thanks.

42:43 Yeah, Gaby, I'll take that first part. While we gave overall guidance for revenues and flat to up low-single digits, under the covers it's a little more dramatic. So, we're seeing continued momentum building in our retail channels. And so, we're going to be up, I'd say mid-single digits in retail and the data points we gave around Q4 already is giving a lot of validation to that wholesale, because we strategically exited those brands that we intended to exit during twenty twenty, you know, we do think that we'll probably see some flattish to down a little bit in wholesale, but in the brands go forward that we're carrying those will continue to be strong and see growth. So, that's kind of how it all shakes out on the top line. 43:31 And I apologize. The second part of your question?

43:35 Consumer demand next year.

43:36 [Indiscernible] yeah.

43:39 Yeah. I think we mentioned this throughout the year as these stimulus packages hit, we never really experienced the same level of impact that some others itself because our customer base skews more to household incomes over one hundred thousand dollars, which had not received as large of a benefit as perhaps some others. But we're not ready to give guidance to twenty twenty two yet, but again, we're feeling really, really confident in our business, whether it was a result – the record results we had in Q2, the record results in Q3, and the really strong performance we've had Q4 to date.

44:20 Great. Thanks. And just a quick follow-up. You obviously experienced really strong gross margins in the third quarter. Just wondering if you can provide some color on how you're thinking about that line item for the fourth quarter and maybe how freight will impact what transpired in the third?

44:35 Yes. I'll give you a few data points. And as you know, we don't typically dive too deep into gross profit and SG&A for guidance, but I will give you some color. So, from just the overall gross profit dollars, obviously, you're going to see Q4 slightly lower, even if rate were to stay the same just because if you do the math, the revenues are a little bit lower in Q4 than in Q3, but we do have a couple of things that are unique to Q4. 45:01 One, shipping is always higher it's holiday gift giving time period. So, you’re going to have a few million dollars of shipping both for the U.S. and in Canada and at vc.com that wasn’t as dramatic in Q3. 45:15 And then also, as we've mentioned a couple of times in the calls, we are making strategic investments to establish our authority in that post holiday athletic, very similar to as we did in back to school, especially in the leading part, the early part of back to school. So, I think you're going to see about twenty million dollars or so pivoted towards that with some SG&A as well to support that because it was very successful for us and back to school. 45:45 And then lastly, there's a little less than ten million dollars baked in for expedited shipping or freight because we see product that if we can get access to it, we want to get it in and into the cycle or into the channel as soon as possible. So, we've got that built in there as well.

46:07 Gaby, I want to make certain that I hit on one thing. I've read a couple of the notes that you guys have [indiscernible], the Q3 sales result was phenomenal in our view. And I want to share with you why. We had sixteen days out of the roughly ninety for the quarter, where we were promotional, meaning, you're out there telling people here’s some offer. That number in twenty nineteen was fifty one days, so sixteen versus fifty one. 46:38 We also only had seven million direct mail pieces that went out versus thirty nine million in twenty nineteen. And direct mail as you know usually has an offer, always has an offer attached for the most part. So, to say that we were able to post the results in DSW we did, while not promoting to that level. 46:57 Again, I want to reinforce how important that is to the health of our business, and, oh, by the way, when we're not promoting, we're adding new customers to our file, which if you look at the long term history of this organization, as that file is growing, that is the future lifeblood of the company. And so, I'm really, really pleased with the results we had top line wise in third quarter.

47:22 Got it. Thank you so much. That's super helpful. Best of luck for holiday.

47:25 Thank you.

47:27 And our next question today comes from Dana Telsey at Telsey Advisory Group. Please go ahead.

47:33 Good morning. Nice to see the progress. When you think about, you mentioned – when you mentioned on the vertical brands, the opportunity for greater than fifteen hundred basis point margin opportunity, where do you see that coming from? How does that grow? And then I have two follow ups. Thank you.

47:51 Yeah. I think Dana, this is the exciting thing that as we've shifted this assortment to be targeted to the top fifty brands in retail, obviously, as you know, we're selling then a lot of things at regular price. And we've done such a great job building product based on what we know about our customer and what we can learn from the brands we carry that the gap between what we sell something with our own brand name on it to that compare at price. That gap doesn't have to be as aggressive as what we had originally thought. And so that is where we are seeing margin up side. 48:28 So, being able to take price-ups on items that you've designed and sourced yourself and as an organization, that's something that our planning and merchant teams are looking at day-in and day-out. We're taking price-ups where it's appropriate based on the supply and demand curve. So, that's really, really exciting. And again, it is a testament to our Camuto team and the quality of product that we know that team can design and source for us.

48:58 And then, in regards to inflation, how are you thinking of that and how does it impact, and what are you doing with your pricing?

49:08 Again, given that we are so invested in these top fifty brands, we're surfing off of the waves that are being created there. It's probably the best way to describe it. And all of the pricing increases that we have felt or cost increases, that's embedded in what we're anticipating for fourth quarter. And so far, we feel like we've done a nice job of managing those things.

49:33 Got it. And then just lastly on Nike, when does Nike fully exit the store? I know, I think the order stopped in September. It's still in your stores on the website. When does that exit and with the strength in athletic, what brands – other brands are you seeing the most growth from? Thank you.

49:52 We’ll continue to sell the [Swiss product] [ph] as long as it's on our floor, and it'll go away when the consumers demand it all. And we can't get into the specific brands, but I want to reinforce the point I made that sixty percent of the athletic brands we carry and all you have to do is look at our site and go to a store and see it. They comped over twenty five percent to twenty nineteen. 50:16 So, we are getting strong results really across our entire athletic portfolio. Again, because we've known the customer is buying this product somewhere and they've been buying it from the competitors in the past. And by us offering those goods, it's adding to their basket with DSW.

50:39 Thank you. [Operator Instructions] Today's next question comes from Jay Sole with UBS. Please go ahead.

50:51 Great. Thank you so much. Maybe Jared, is it possible to just summarize, maybe with some quantification, why gross margin in Q3 was up so much versus Q3 of twenty nineteen? So, if it was up seven twenty basis points, there's the vertical brand sales that's an important piece of the mix, there's the full price selling overall, maybe mix shift to [indiscernible], there's different drivers happening here. Can you sort of break down the key points and just explain like how much really contributed overall? So, we just understand really what the drivers are and where the gross margin is going?

51:24 Yeah. You hit most of them right there. So, I'm glad that that message came through, when really you look at our merchandise margin that was the vast majority of what was going on. And as we mentioned a few times in the call, it was all about the reg price selling. We saw strong reg price positive comps at the expense of extreme markdown leverage. 51:49 So, I mean that's the ideal playbook, you know, even in Q4 as Roger mentioned, Q4 of twenty nineteen was heavily promotional as we were liquidating out of excess inventory both at DSW and Camuto, and we're not doing that in Q4 of this year. So, that merchandise margin story is going to remain a very, very strong one. 52:11 We saw leverage on our occupancy line, slight, a little bit and then on the DCFC. So, those are the big pieces, but it really was all about that merchandise margin. And the vertical brands that you mentioned being able to see those turn back on into growth mode, up one hundred and seventeen, I think it was percent to twenty nineteen at those elevated margins that all plays right into that.

52:39 And Jay, I think one other piece to remember, as we've narrowed the number of brands we are buying product from, we are able to invest deeper into the items we carry from the top fifty brands. So, it's retail one hundred and one. Your better in stocks, drives conversion, drives more rig price selling, and that has worked and will continue to work as we move forward into twenty twenty two.

53:07 All right, understood. I guess, when it comes to the brand portfolio, is it possible to, sort of give us an idea, and I'm just giving the ballpark number, let's just say the brand portfolio is two fifty million in sales or something like that. What percentage of that is the four key brands and what percentage of it is being sold through DSW, what percentage is still like pure wholesale? Can you just give us an idea after you've done all this work to reset the brand portfolio, sort of where does this stand right now?

53:33 Yes. What I would share is, almost all of the revenue is with the four key brands. I mean that was very strategic. We cut out almost all production in twenty and the only production we ramped back on were the four key brands. So, that's that. Of those four key brands, J.Lo is only sold at DSW. It's still like a growing brand, but – and then we do have the vincecamuto.com site, which is also a direct to consumer that flows into that. And that's got very aggressive growth targets on it as we've mentioned before. 54:11 So, those are going to be the two kind of that you see where we play a lot and interplay and then the Jessica Simpson side has been really, really strong both at DSW, as well as outside of DSW, and we're seeing that brand have a really big moment right now.

54:29 Jay, I think the big thing is, we are continuing to focus on our key accounts. And our key accounts are ability to go direct to consumer through our dot com and store channels that we own and control and our key accounts, meaning Nordstrom’s, Dillard’s, Macy’s, Amazon. Those are the people that we are focusing our attention on and we need to grow with those folks. 54:55 They are our key partners. And by narrowing the number of brands, I think at one point when we acquired this company, there were over twenty brand/labels that they were working on when we were making a lot of product for other retailers in private brand areas. And that did not allow us to play with focused tempo and disruption. And by narrowing the number of brands we carry and limiting the number of people we're selling to. It's really allowed the organization to focus that I think is the key thing that we have to call out.

55:30 Got it. Understood. Thank you, Roger.

55:36 Well ladies and gentlemen this concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

55:45 Thanks everybody for dialing in. And again, really excited about the progress of our business in the quarter and as we've headed into the holiday. Thanks everybody and happy holidays.

55:56 Thank you. This 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.