Good day, and welcome to the Designer Brands Incorporated First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Jesse Miller. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended April 30, 2022 to the 13-week period ended May 1, 2021. Please note that remarks made about the future expectations, plans and prospects of the company constitute forward-looking statements. Results may differ materially due to various factors listed in today's press release and the company's public filings with the SEC. The company assumes no obligation to update any forward-looking statements. Joining us today are Roger Rawlins, Chief Executive Officer; and Jared Poff, Chief Financial Officer. Now let me turn over the call to Roger.

Thanks, Jesse. Good morning, and thank you, everyone, for joining us today. The strength we saw throughout 2021 continued into the first quarter of 2022, and we are extremely pleased with our performance as it demonstrates the progress we are making towards the long-range plan that we recently outlined at our Investor Day. I want to take this opportunity to thank our associates for their work that continues to successfully deliver long-term shareholder growth, even in today's challenging operating environment. Their hard work has resulted in market share gains, topline improvement and bottom line results that have exceeded our expectations. Designer Brands entered the year in a position of strength after returning to a growth trajectory in 2021. Our engines are back on and all the actions we took since our acquisition of Camuto in 2018 have enabled us to grow our market share across the board. We delivered outstanding results in the first quarter with net sales increasing 18% and adjusted diluted EPS growing 300% versus the first quarter of 2021. Providing value to our shareholders remains a top priority for us. We bought back 1.7 million shares in the first quarter and another 1.8 million so far in the second quarter as of May 27. At our April 8 Investor Day, we also announced the reinstatement of our quarterly dividend, which was effective starting in the first quarter of fiscal 2022, and today, announced our upcoming quarterly dividend that will be paid on July 6. Jared will provide more details on this a little later. We are proud to be providing a return for our shareholders via multiple avenues from significant EPS growth to consecutive dividends and opportunistic share repurchases. This all demonstrates the successful integration of our business model and our confidence in our financial footing. As…

Thank you, Roger, and good morning, everyone. We are incredibly pleased with our first quarter results, led by remarkable growth of our own brands. It is a continuation of the strength that we have driven over the past year. Please note, the financial results that we referenced 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. Let's turn to our results. For the first quarter, sales increased 18.1% to $830.5 million compared to the same quarter of 2021. For the first quarter, total comps were up 15.3% on top of last year's 52.2% increase. As Roger mentioned, net sales of our own brands increased by 68% in the first quarter versus last year with significant growth in both the direct-to-consumer, which includes DSW and vincecamuto.com and revenue from wholesale. Owned brands have been a major focus for our company, representing 25% of Designer Brands revenue for the first quarter, a notable increase to last year's level of 18%. We couldn't be more pleased with these results as this further demonstrates our ability to deliver on our goal of owned brand penetration, representing nearly one-third of our sales by 2026. We saw strong sales across all of our segments in the first quarter. For U.S. retail, comp sales were up 13.6% during the first quarter on top of 56.3% last year. We have continued to see a strong resurgence of business in our stores with store traffic up 22% compared to the prior year, which we believe to be some of the strongest traffic comps in the industry. vincecamuto.com comps were up 19.7%, well above the 6.8% we saw in the prior year, and comps in Canada were up 41.4% compared…

Thank you. We'll begin the question-and-answer session [Operator Instructions] Today's first question comes from Gaby Carbone with Deutsche Bank.

Hi, good morning, and thank you so much for taking my questions. Congrats on the nice quarter. So you mentioned your own brands grew 68% in the first quarter. Curious, what that may be represented as a percentage of sales? And then maybe how you're thinking about that growth for the remainder of the year kind of within your long-term framework?

Yes. Hi Gaby, that was roughly about 25% of overall sales. And as we mentioned in the call, when you really look at the categories that we dominate with our own brands being that for us, that's seasonal, that fashion, the fact that those are really, really trending right now, that was great, and we were ready for it. So we're really excited about that.

Yes, Gaby, that's actually ahead of what we had planned as we had shared with you in our Investor Day. And I think some of the benefits we're reaping as you're able to see in margin, as you know that we're getting at least 15% -- 15 points or more of additional margin on those goods. And when you think about the some of the inflationary pressures around cost of goods and all of those kind of things, it's really allowed us to offset some of those challenges. So really happy with the progress.

Great. Thanks Rob. And then just another follow-up. Just curious how you're maybe thinking more about the macro backdrop moving forward on your customer? And then maybe you can maybe dig into the drivers of your change in the comp guidance to mid-single digit for the year?

Yes. Gaby, I think one of the benefits we have of having that loyalty program that we have and access to so many consumers is that we're able to provide different offerings to different types of consumers. So obviously, I think as we all would recognize inflation hit someone with a lower household income in a bigger way than higher. And that's what -- as Jared had said, we are positioned to take some action and clearance to help support folks that are really in need of a value proposition that's perhaps different than they've had in the past, but the majority of our customer base has a household income over $100,000. So we haven't felt perhaps some of the same pressures that others have from a customer. The only real shift that we have seen is the consumer going more into our physical locations and less to the digital footprint that we have. Jared, I don't know if there's anything else you'd add.

Yes. The only thing that -- and I kind of mentioned this in my comments is that really that guidance assumes that the trends that we have seen in Q1 really play out. And that is -- to be perfectly frank, our store sales were well above what our expectations were. Our digital sales were a bit below, and that's not unique to DSW. We're seeing that across the industry and across athletic. So we rolled that through, and therefore, as you can see, that allowed us to take up our overall EPS guidance, but we wanted to make sure we were postured properly on the top line. I do think that there's potential upside, as I mentioned, in my comments. If that digital expectation changes or if athletic actually starts to come back in a bigger way, there's upside to that.

Great. Thank you. That's very helpful. Best of luck.

Thanks Gaby.

[Operator Instructions] Our next question today comes from Jay Sole with UBS. Please go ahead.

Great. Thank you so much. Roger, I wanted to ask you about your comment that athletic grew. I think you said 29% in Q1, obviously, despite the loss of a key national brand. How are you understanding the consumer and your ability to serve the consumer without that brand? Is it the consumers are seeing great fashion and other brands and maybe they didn't realize before? Is it you're maybe more brand-agnostic than maybe people thought? How do you understand what's changing and how you're able to drive that kind of result without that one big national brand?

Yes, Jay, I think as you know, we have a dominant position when it comes to the female consumer. And we've had this conversation about some folks want to compete with us to take that customer, and I think what we have proven is, there is a fashion element to athletic, and there are a bunch of amazing brands that can fill that void, frankly, better than what some of those big players can and that's what we leaned into. And when you look at the success we've had in Puma or a Reebok or -- again, a whole but new balance, you name it, I mean we have done an amazing job of filling in the fashion element. At the same time, what I'm really proud of is, we've gone after some technical areas that we had not played in before. So we are getting after technical running with some of the great brands that are out there and some of our best shoes in our company are technical running shoes because our consumer is going elsewhere to buy those products. So frankly, it's been eye-opening as to the fact that when you're beholden to one large player and you're afraid to do certain things because you might torque that person off, it's freed our merchants to think differently, and I am so proud of Jim and Sean and the team that we have in our men's, women's and athletic space, they've done one hell of a job of filling that void. And that's just in the U.S. And when you think about what our team with Mary and Nancy have done up in Canada, it blows my mind every day of how they fill that in. So again, we told you that we thought we could do this and we've done it.

Got it. Okay. And then, Jared, maybe just on the quarter -- on the gross margin, maybe can you give us some of the pieces in terms of how much of a contribution the owned brands made to gross margin and were there offsets? If you can maybe give us a little breakdown that, that would be super helpful.

Yes. Obviously, when you look at, one, the shift to fashion away from athletic in general, no, I will say, that's a historic proposition where athletic always trailed fashion. We saw our ability to have athletic margins over 2021, be much more in line with our fashion, but overall, we still see fashion slightly accretive overall. So that was a good positive trend and then the better than expectation sales of our own brand certainly contributed. What I would share is, when you look at kind of the overall mix, it continued to be very driven by rig price selling. IMU up pretty considerably. Really no markdowns to speak of, and so very, very strong flow through. And then we also had some nice leverage on the shipping side because of our overperformance on the store sales versus digital. So those are kind of the big puts and takes. The only thing I would say, there was about $20 million that we digested. We absorbed and digested baked into our gross profit in Q1, incremental to last year for freight and gas fuel surcharges. And that posture is built into our guidance go forward, but that is what we absorbed an elevated expenses over Q1 of last year.

And Jay, I think the other piece as it relates to margin and I remember us talking about this at Investor Day is that the work that our teams have done to get narrower and deeper. So again, I said in the script that we were a 16% increase in all-door buys. I mean we are cutting off the tails of the assortment that have not been as productive, and we're getting after key items. And when you do that and you do it in brands that you own and control, as you know that, that drops straight to your bottom line. So again, the strategy has continued to work.

Got it. Okay. Thank you so much.

And our next question today comes from Dylan Carden with William Blair. Please go ahead.

Thanks a lot. Just curious on the guidance. It sounds like it assumed sort of maybe a weaker direct channel and strength in the retail channel. And I'm just curious if that kind of corrects or sort of reverses back to trend line? What that might mean for the earnings outlook? If you can kind of just update us where you are as far as the margin profiles between the two channels. And also from an inflation or I'm just trying to clarify some of the comments around the promotional environment or the need perhaps for some clearance for that sort of more inflation stretch consumer, but also a potential offset from trade down? Are you seeing any of that early days kind of working through that, if that makes sense.

Yes.

Do you want to go.

No, I'll take -- I can take the channel thing. So I think we have seen our historic store-only consumer who had not shopped with us because of -- obviously, there are concerns with COVID that they have come back in a meaningful way. And I think the activation of customers, I think -- Jared, correct me here when I'm wrong, but I think we were up 83% in that customer base. So to give you a sense, like that's in the millions of people that have come back to us. So we do not anticipate that there's going to be some seismic shift away from that in the coming months, Dylan, is what I would tell you. I think as it relates to the clearance consumer, the beauty of having both channels and our model is, there are things we can do because we know our customer. We keep describing it is as we know our customers, know them like our best friend. We can see the consumer that is more price sensitive and how we can present the roughly 15% to 20% of our inventory every single day that is clearance, how we can put that in front of a consumer differently to show value without having to take a ton of markdowns. So I think that's the play that we are making in order to meet both our regular price selling consumer as well as then a more price-sensitive customer.

Great. And then I joined a little bit late, but I don't think you talked about weather, which you're going to hang up the phone when I ask you to talk about weather because I always -- you shouldn't, but it was a cooler spring. And I'm just kind of curious what you saw in your business there? How quickly you're able to react just given how supply chains are and kind of what that might mean for the second quarter outlook.

So I cannot emphasize enough the number of times that we've had this conversation about how nimble our assortment is. We are not beholding to anybody. We are not beholden to any one category. We have the ability to flex. When it was 35 degrees in April, we sold a ton of boots. When it got to be 75, we sold a ton of sandals. So that is the beauty of our business. And again, I do think we are differentiated from others from -- on that fact.

Great. Thank you very much, guys. Nice work.

You're welcome. Thanks.

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

Would like to, in closing, just say thanks to all of our associates, and I hope everyone that's listening and can see, we have a very clear view of our future. And our mission of inspiring self-expression, our vision to know our customers like our best friends, build our brands to meet their needs and to move at a speed that folks just cannot compete with. When we do that the outcome is, we will double the size of our own brands, and we will maintain our national brands. And I think all of our associates are hearing that on a regular basis from us, and I think when you think about what you guys have accomplished by building a kids business, growing athletic without the solution that mix, acquiring Canada and having an extremely accretive asset with what we've done, acquiring Camuto that has allowed us to now go build our own brands and achieve record margins. And all the time we're doing that, you guys are also out there investing in the national brand partnerships, cutting off tails of the assortment, building depth, more and more key items. And you've done all of that while you have overcome whatever obstacle the market has put in front of you. So I just can't say thanks enough, and I want you to stay focused. Stay focused on the mission and vision, and believe me, at some point, the street will realize what it is you've accomplished and the stock will reflect that. So thank you so much for what you've done and have a fantastic day.

And ladies and gentlemen, 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.