Good morning, everyone, and welcome to the Designer Brands Incorporated 2Q 2022 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 also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Jesse Miller, Senior Director of Investor Relations. Please go ahead.

Good morning. Earlier today, the Company issued a press release comparing results of operations for the 13-week period ended July 30, 2022 to the 13-week period ended July 31, 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; Jared Poff, Chief Financial Officer; and Doug Howe, President of DSW. Now let me turn over the call to Roger.

Good morning, and thank you, everyone for joining us today. I want to begin by saying thank you to all our associates across the globe. We are operating in an incredibly dynamic environment and your ability remain nimble on your feet during these last couple of years continues to power our growth. We are very pleased with our second quarter results and our continued momentum against our long-term plan of doubling sales of our owned brands by 2026, while maintaining sales levels of national brands as we continue to strengthen relationships with our top partners. We ended the quarter with net sales up 5% compared to the second quarter of 2021, which is on top of last year's record net sales gain of 67% and reported a healthy adjusted diluted EPS growth of 11% compared to the second quarter of 2021. Before we dive into the details of our performance, I'm going to take a moment to address the current macro environment we are operating in. As you are all aware, the recent downturn in the macroeconomic market has included inflation, rising interest rates and softened consumer sentiment. As a result, the overall footwear market was slightly softer in the second quarter versus the first quarter of 2022. That being said, Designer Brands is still far outpacing the major footwear retail indices, and we believe we are better positioned than many to deliver on our fall expectations. That's because this team has developed a clear mission, vision and strategies that allow us to differentiate ourselves from the balance of the industry. Our ability to stay ahead of the competition by leveraging the diversity of our teams, assortment and business model is allowing us to continue to successfully execute and grow during this time. We are able to quickly adjust our…

Good morning, everyone. As Roger said, I'm Doug Howe, President of DSW. I joined the company this past May, and I'm excited to be working with such a visionary team. At DSW, I'm helping to bring our differentiated customer experience and desired brands to life across direct-to-consumer channels. I have a long history in brand building and retail operations and a privilege to join DSW as we evolve retail to the next level with the determined focus on customers while offering the best owned and national brands and delivering products with incredible speed. I'm joining today's call to give you some more color on how we are executing on our strategy here at DSW. As the team has mentioned time and time again, we are always looking for ways to grow our relationships with our national brand partners. You've heard Roger and Jared described it as going narrower and deeper. I personally like to think of it as amplifying and editing. While you've heard our strategic plans to maintain national brands in totality, I want to share with you a little bit how that breaks down and how we are actually growing our relationships with the most prominent national brands. We are prioritizing growing with the top brands that our customers are demanding across the board. We continue to evolve our assortment and the breadth and depth of the top brands we offer our customers. In doing so, we have seen meaningful growth, upwards of 20% with many of these top brands over the past year. And we have strategic initiatives in place to provide added value for our brand partners, helping them to effectively showcase and spotlight their products in our DSW stores. A perfect example of this is our new Warehouse Reimagined store, which we opened in Hedwig,…

Thank you, Doug, and good morning, everyone. We are very proud of our second quarter results and continue to be highly encouraged by the impressive growth in our owned brands as well as our top national brands. 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. Let's turn to our results. For the second quarter, net sales increased 5.1% to $859.3 million compared to the same quarter 2021. For the second quarter, total comps were up 6.2% on top of a robust 84.9% comp last year. Within this growth, owned brands were up 40% in the second quarter compared to last year, with notable growth in both direct-to-consumer and wholesale channels. We feel great about the progress, which we believe showcases our ability to build our owned brands to reach nearly one-third of our sales by 2026. Overall, we saw positive sales across all of our segments. U.S. retail comps were up 2.7% for the second quarter on top of a remarkable 94.3% last year. Vincecamuto.com comps were up 43.3% in the quarter on top of a strong 10.6% in the second quarter of 2021. This double-digit growth on top of impressive growth last year amplifies the reach we believe we have to grow our brands across multiple channels to many different customer sets. Comps in Canada increased 47.3% in the quarter versus 14.6% in the prior year. As a reminder, Canada has had a slower recovery in 2021 compared to the U.S., and we are continuing to see strength building here. Our consolidated gross profit increased 3.9% to $295.7 million in the second quarter. Consolidated gross margin was 34.4% in…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Steve Marotta from CL King & Associates. Please go ahead with your question.

Good morning, Roger, Jared and Doug, congratulations on the second quarter. Jared, can you just talk a little bit about any sort of margin differential and the expectations for the second half of the year? I know that you mentioned most of the revision – upward revision in guidance from an EPS standpoint was due to share repurchase as well as results in the second quarter. Is there anything that changed other than that for the second half of the year?

Yes. And thank you, Steve, and I will answer your second question first. No, there is nothing that's changed from the back half projection that we've had all year. So that we are reaffirming and feel pretty good about as has always been the case, and as we've been signaling all year, we did expect to see some margin deleverage in the back half because most importantly, because we are going after reacquiring that lapsed clearance customer, which is exactly what we started in Q2, and you heard Doug talk about almost two million new customers, incremental customers who have returned to the fold buying clearance and that assortment is building and is really pretty much in place now in the third quarter. So that's a good thing. That's going to drive roughly around 200 basis points of deleverage on the margin side. But again, that's been the plan that it's always been, and we're very happy with that.

That's really helpful. And Roger, can you talk about the success of the incremental purchase by mom during the current back-to-school season? And maybe also a little bit of color on how long of a tail you expect to continue from back-to-school – back to - the back-to-school activity, if you will? Thanks.

Yes. I think, Steve, one of the big things that we've done over the last couple of years, and Doug touched on this, is investing in this what is now a new holiday for us called Kids. And we are still in the middle of it. So I don't think we should share anything. But I would tell you, out of the gate which is really the first, let's just say, five weeks of that window, we are on our plan, which was to grow our kids business and to continue to gain some market share in the athleisure space, and we're very happy with both of those metrics is what I would tell you.

Okay. That's helpful. I'll take the balance offline. Thank you.

Thank you.

And our next question comes from Jay Sole from UBS. Please go ahead with your question.

Great. Thank you so much. My question is just about the brand portfolio. Jared, how should we think about modeling sales in Q3 and Q4? Just given the trends that we've seen in Q1 and Q2 and just with the changes that have been made in the business over the last couple of years?

Yes. We are very happy with what we've seen from the kind of the recovery of our wholesale business. As you know, we've really shut that down basically during COVID. We saw that come roaring back with the dress and seasonal business starting last year and continued into the first half of this year. We have taken a bit of a cautious approach for the back half of the year or as to say a more cautious approach. So I think our wholesale sales are not anticipated to be as robust as far as a growth perspective in the fall. However, I will tell you a decent amount of that is stuff that we have planned for our sales to ourselves, which is eliminated in intercompany, eliminations to be sold in the spring anyway. So that really is not impacting our overall year because we eliminate that out until that's ultimately sold. And one thing we are very good at is if things change differently and caution wasn't necessary, then we can chase back into inventory very, very quickly, which we've demonstrated over the last two seasons. So I would say maybe a bit of a tempering in the back half on that wholesale business, but more than made up for from a reduction in the assumed intercompany eliminations.

Okay. Understood. And then maybe just a follow-up on that. If you can just talk about – you made some comments about gross margin in Q3. Does that apply to the brand portfolio? I mean how do you see the gross margin shaping up for the brand portfolio in the back half of the year?

Yes. On the brand portfolio side, I'm not seeing huge deviations on their gross margin in the fall versus the spring. It's not really been a change in posture from discounting or anything like that. It's really just more around the amount we want to bet on an inventory production side.

Okay. Thank you so much.

And Jay, one thing – this is Roger. One thing I wanted to add was if you look at the brand portfolio piece of our business, I know many of the analysts had suggested that we could not have success in that space. And I just want to emphasize again how proud I am of our team that have proven that we can play in this space and that if we build great product and we put great marketing behind it, we have good partners that want to buy product from us. And I'm really, really proud of our Camuto team and the work they've done to not just drive wholesale, but when you look at our direct-to-consumer business, it increased 45% to last year. That is remarkable. And it is because the combination that we have of an amazing store fleet and amazing digital experience and the ability to make design and source our own shoes. There isn't anyone else in our segment that we are aware of that has that same capability across 30 million people. And that's where we are having success. So again, I just want to give a shout out to my team at Camuto.

And then I would even add to that, we added a chart in the infographic. And hopefully, you all received that and you pulled it down from the website. But we wanted to take a look at how those brands were performing vis-à-vis their national brand competitors. And of course, three of ours are national brands. They're in the wholesale channels as you were talking about, Jay. You can see there when you look at all fashion footwear across the industry, we now have six of our brands that are in the top 50, one that is in the top 10 and only one of those even existed in 2019. So when you marry together the brand building and design and sourcing with the infrastructure of our DTC infrastructure, it really is a powerful combination.

And to Jared's point, I know you guys all follow other brands that we carry. And to see Kelly & Katie sitting in the same range as Steve Madden, Skechers, Doc Martens or Vince Camuto sitting next to Sam Edelman, HEYDUDE, BIRKENSTOCK, Timberland, or Jessica and Mix No. 6 right there with Crocs, Clarks, UGG and Cole Haan, like that was the vision we had years ago. And those investments we made four years ago are paying off and we're reaping those benefits right now.

Got it. Thank you so much.

Thanks.

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

Hi, good morning, everyone. As you think about the Reimagined store of the future, can you tell us any – expand on any updates there, what you're seeing and how you see the learnings from that translating into your other stores? And then also on inventory levels, how do you see that progressing through the third and fourth quarter? And then lastly, on the clearance customer, how is that strategy working to reacquire some of those customers? Thank you.

Hey, Dana. This is Doug Howe. Thanks for your question. The first one on Reimagined, I would just say just to remind you, we're only about 90 days into the concept, but the initial customer feedback that we're getting from the concept is incredibly positive. So as we shared, we opened this up as a laboratory. We want to continue to watch and iterate. There definitely been some learnings that we'll be able to scale. But again, we want to be mindful of just making sure that we really leverage those when we roll them out to the full fleet. In particular, I mean, we're really pleased with the shop-in-shop concepts that we've deployed there in partnership with some of our national brands. So again, just an opportunity to get more suit at storytelling in that store environment. So really pleased, but again, early days there. On inventory, we're really feeling confident about our inventory. Again, as we said in the remarks, this was part of our strategy to grow our inventory to reposition for the back half of the year, specifically, as we looked at this opportunity to expand our back-to-school business. And then as we gear into this very important time period for us, which we call Septober, the receipt levels will moderate as we go through the back half of the year. But again, we're feeling really good about the content and the flow of that inventory. And then lastly, the clearance customer, again, as we said, we acquired approximately two million more customers year-to-date. And that, again, was part of the strategy as well because those were customers that hadn't shopped with us for over a year. So again, critical component of our business model, it's a key differentiator, more important now than ever, probably just given the uncertainty in the macro environment, but definitely part of our strategy, and we're feeling really good about the momentum that we're seeing there as well.

Thank you.

Thanks, Dana. End of Q&A:

And ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.

Thank you. I just want to again say thanks to our team and reinforce what you guys have accomplished in the last six months. And if you think about what we've done, we've raised our guidance for the third time. We've bought back approximately 12% of our company's stock in the last six months. We've initiated a dividend of [nickel a quarter]. We've now built our owned brands to be in the top 56 of those in the top 50 fashion footwear, and we've done that in less than three years, and you guys are seeing the benefit right now. We've acquired Le TIGRE, which we didn't get a ton into that, but we will in the future. It's an opportunity for us to play in that athleisure segment. And then when you look at what Mary and Nancy and Eric and Eric, and I shouldn't say names because I'm leaving somebody out, Joe, our team in Canada is killing it. They are amazing. They are grabbing enormous amounts of market share and driving profitability. And we've done all of that because we have developed and acquired amazing people. So thank you for everything you're doing. Let's keep it up, and let's have a great back half. Thank you, and have a good day.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.