Good morning, and welcome to the Designer Brands Second Quarter 2023 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'd now like to turn the conference over to Justin Fischer, 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 ending July 29, 2023, to the 13-week period ended July 30, 2022. Please note that 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. Additionally, 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 the 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 Doug Howe, Chief Executive Officer; and Jared Poff, Chief Financial Officer. Now let me turn the call over to Doug.

Good morning, everyone. Before discussing this quarter's performance, I want to thank our team for their dedication and hard work during the quarter that played out against a challenging macroeconomic backdrop. Because of our team's commitment to improving results, I am pleased to share that we posted overall comps that improved throughout the quarter in addition to posting sequential improvement from the first quarter. Our gross margin also increased year-over-year as well as sequentially and marked the second highest Q2 rate over the past decade. Sequential improvement along though is not enough. Within our organization, we are committed to producing year-over-year growth across our top and bottom lines. As we work towards achieving that goal consistently, I'm pleased with our team's efforts to continue reading and reacting to a highly promotional environment while simultaneously managing our inventory to an appropriate healthy level in both our retail and brand segments. We are also showcasing consistent operational progress. From an own brand perspective, we are very excited to have launched a completely new athleisure brand, Le TIGRE in the first month of Q3, and we are rolling out new collaborations as we diversify and strengthen our portfolio, which will drive our profitability over the longer term. I also want to take a moment to highlight a very important hire we made during the month of July. I'm thrilled to announce that Laura Denk has been brought on board as the new President of Designer Shoe Warehouse. Laura joins us with an incredible resume that includes time at Macy's, Claire and Michaels stores, most recently as Michaels Chief Merchandising Officer. Laura will bring her extensive merchandising background, ability to forge strong vendor partnerships, knowledge of augmenting customer experiences and importantly positioning and elevating owned and national brands within our DSW specific channels. With…

Thank you, Doug, and good morning, everyone. I want to reiterate Doug's comments and say how excited I am to welcome Laura Denk as our new President of DSW. She will be a tremendous asset in driving our strategic vision for our DSW business, focusing on tactical merchandising, marketing and our overall experience, all of which will be anchored to our current and target customers. We believe that there is meaningful growth to be had at DSW and that Laura's leadership will help us unlock that growth. I share Doug's feeling of pride in our organization and this team's ability to continue managing through the increasingly challenging current environment, allowing us to deliver a second quarter adjusted EPS of $0.59, in line with our expectations. We saw sequential improvement over the first quarter in both our sales and gross margin. And as a result, we are reaffirming our current full year guidance despite continued industry and macro headwinds. Now let me provide a bit more detail on our financial results. For the second quarter, sales decreased 7.8% from last year to $792.2 million and an improvement from the first quarter's results. The continued pressure on consumers, high inventory across the industry and an extremely promotional retail environment, all contributed to this decrease. From a wholesale perspective, sales were up roughly 20%, driven by the acquisition of Keds, our launch of Le TIGRE and acquisition of Topo Athletic. In our retail segments, total retail comps were down 8.9% compared to last year, but improved sequentially from the first quarter. U.S. retail costs specifically were down 9.2% in the quarter, but also sequentially improved from a pressured Q1. While Canada posted comps down 7.3% in the quarter, this was on top of a very strong post-COVID recovery comp of just over 47%…

Thank you. [Operator Instructions] Today's first question comes from Gaby Carbone with Deutsche Bank. Please go ahead.

Good morning. Thanks for all the color today. So first, I was wondering if you could maybe discuss the changes you saw in category performance, if any, from 2Q versus 1Q. And then as we look to the fall season, obviously, the boot category becomes quite important. Just curious how you're thinking about inventory there. Thank you.

Yeah. Thanks, Gaby. This is Doug. There's really two category performance where we continue to see buoyancy in the casual category. Obviously, the capitalization trend just continues to gain momentum. [Indiscernible] reacting to that with managing the inventory. So again, we feel really good about that business in particular. Second point, we have a dominant penetration in the new category. It's very, very early on. We talked a lot about Septober, which is the key time for boot selling. So I think the majority of that season is ahead of us all. We are seeing some nice initial results on fashion goods, particularly driven by western. So we're cautiously optimistic about that. But again, the majority of the season is still ahead of us.

Got it. And if I could just sneak in one more. So moving ahead, obviously it's been promotional out there. Curious, just what kind of baked into your guidance on the promotion front. And then are there certain categories you're seeing more promotional activity? And then you mentioned that like you're still seeing high inventory levels across the marketplace. So curious if you have any view when maybe you think the marketplace will be a bit more clean.

Yeah. Good question. Yes, [indiscernible] done a really strong work with managing our margin and largely that is fueled by the fact that our inventory is in really good shape. So we didn't feel the need to get overly promotional. We are seeing the landscape improvement as we move through the back half, particularly in the athletic category. I think we'll start to see that inventory start to normalize, which hopefully will allow us to be less promotional. So we're saying very close to that. But as you said, it's a choppy macroeconomic environment out there. So we'll definitely stay close to it.

Great, thank you so much.

Thank you.

[Operator Instructions] Today's next question comes from Mauricio Serna with UBS. Please go ahead.

Great. Good morning. And thanks for taking our questions. First, I wanted to ask if you could provide maybe some color on what you see on quarter-to-date performance, in any particular segment versus Q2. And if we think about second half, should we see like any big difference between the sales growth in Q3 and Q4. Then just on the margins, you talked about SG&A probably the SG&A rate probably being a little bit more pressured because of the marketing and the launching of the website. So does that mean that SG&A dollar growth will accelerate in the second half? Or how should we think about that? And then just lastly, on the balance sheet, very encouraging to see all the buyback continuing in Q3. Is there like a potential for even more given how there's also the higher leverage on the balance sheet at this point? Thank you.

Yeah. Thanks, Mauricio. This is Doug. There's a lot to unpack there. I think you had four questions. So I'll take the first two on the current performance and then Q3 and Q4, and I'll hand it over to Jared to speak to SG&A and the balance of the year. As you know, we don't comment on sales in the current quarter. Having said that, we haven't seen anything that would lead us to change our guidance, which is why we're maintaining our outlook. We think about sales growth in Q3 and Q4 definitely a tailwind, we feel, certainly, as regard to we're up against softer comps in Q3 and most notably in Q4. Nice tailwinds are our fall campaign that we're going to be kicking off the DSW to really focus more on bringing awareness, which we're optimistic about. And then secondly, as we shared last quarter the return of Nike, we are very excited about continuing to elevate that partnership. So again those are two tailwinds. But again, as we navigate through choppy macroeconomic environment, we're balancing, obviously those tailwinds with those headwinds.

And I want to echo one thing that Doug had said to make sure it's clear, we've reiterated this a few times. In our current guidance, which we reaffirmed, we are assuming there is a pretty material change in the current trajectory that we've experienced year-to-date. That's always been the case, and we believe, especially as we get against easier comps, that is why we have belief. To date, we have not seen that, but we haven't planned to see that yet, but that is what is anticipated, but that is why we called out. There is certainly, I would say, a net risk position as it pertains to the macroeconomic conditions and turning -- seeing that turn to the degree that our current guidance has in there. But for now, it is on trend and that's why we've reaffirmed guidance. To your last two questions on the SG&A, I'm actually very glad you spoke or asked about that because in my mind, right now, where the consensus modeling is probably most disconnected for the fall. I want to take you back to a moment to our initial guidance for SG&A for the year. And what we had said was that we have done the reorg that we talked about and some cost savings initiatives that stripped about $25 million year-over-year out of our legacy business. But we also have about $50 million of SG&A to add into the overall company because of Keds, Topo and the 53rd week. And right now, I'm not seeing consensus reflect that on a total year basis. In fact, it's looking like most consensus has that SG&A dollars below LY [ph]. So I think that's one of the biggest disconnects that are currently out there in consensus. So that and the new interest within…

Great. Thanks so much for all the details.

Thank you. [Operator Instructions] Our next question today comes from Dylan Carden with William Blair. Please go ahead.

Thank you very much. Jared, just sticking with that last, the IRS refund, primary use of addition to that [ph] or how you think about that in full?

Yeah, the lion's share of it is on our revolving credit facility to adjust mechanically. As soon as that comes in that will immediately be used to pay that down. We will always assess as we always do current stock price versus liquidity and overall capacity to buy. So we aren't committing to deploy that in one particular fashion. And on day one it would be used to pay down our ABL debt. But there's no commitments or earmarked for those funds at this point.

Okay. And then I just want to make sure I understand kind of the balance of guidance. So you have a lot of tailwinds between comparisons in Nike, et cetera. But if the consumer sort of takes a leg down here, would that be sort of detrimental to guidance at this point, just given some of the rhetoric on?

Yeah. So Dylan and you hit it on the head. As we look out for the year and how we built that guidance range, we are anticipating a pretty material shift in overall year-over-year performance than what we've experienced in the spring. That's always been the case, and that's what we've always communicated. And we do have some tailwinds and you hit them on the head. We've got easier comps. We've got Nike coming in. We've got some new branding advertising going on that I just talked about. So there certainly are tailwinds. At the end of the day, though, and we've been seeing it across the entire retail lens, especially people who sell to the consumer, the discretionary consumer, we're seeing a lot of caution. And right now, I call it -- I feel like we're in a net risk position even as it pertains to our current guidance. But it really lies square with that discretionary consumer and how they're feeling it going into fall.

And the last one, we haven't talked about sort of the loyalty program in a while. I'm just kind of curious how these new brands interact with or essentially built on the back of the lower number that you had and how much of your sales would happen [indiscernible]? And anything part of retail?

Dylan, this is Doug. Again, we're pleased with the progress of the brands that we mentioned in the remarks, Keds and Topo Athletic. And then most recently Le TIGRE, very early days on, obviously. We're excited about that as we were the first launch partner at DSW, but we believe that there's opportunity to expand that outside of DBI channels of distribution, which is a broader opportunity as we move forward in general. So everything is performing to our expectations. We feel really good about that. And I think that just goes back to the strength of our business and the fact that we have the brand segment as well as the retail segment that we did realize those sales in our own channel. So just more confidence in the strategy that we're going to be deploying going forward.

The one thing I would add to that, Dylan, is -- and I mentioned it with our SG&A, this month, we will be basically fully off that transition services agreement, actually a little ahead of schedule with Keds. So while, this has been a pretty transition late in the year for Keds, they've been performing at their acquisition model. We're really excited to have them now on our infrastructure for wholesale, for DTC and really excited about positioning them to start having strategic growth now that they're actually on our systems.

Got it. And then just another one quick one here. Nike, can you just [technical difficulty] what the business was historically. But I think I'm right in sort of a new relationship with Nike to reengage this channel. How are you thinking about the scale of the pace of the dynamics of that relationship kind of on -- I think it launches this fourth quarter, right?

Yeah. Dylan, this is Doug. Again, we continue to be very optimistic about that integrated partnership with Nike. We actually are going to be delivering the product a little bit earlier than we originally anticipated, about a month earlier. We actually have some products available on our site, and we'll have a significant amount of units rolling out to our stores in the next couple of weeks. And again, that's about a month earlier than we had anticipated. So again, that is definitely a tailwind. So we feel good about that. We haven't shared specific with you with regards to how that brand would be. We shared obviously what it was historically, but we manage that very carefully as we manage all of our portfolio of brands. And it will really be informed obviously by what the customer is demanding and where we're seeing the top-line.

Okay, that's all I got.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Doug Howe for any final remarks.

Well, thanks everyone, for tuning in today, and I just want to reiterate thanks to our team for all their dedication as we move throughout very challenging macroeconomic backdrop. We look forward to keeping you updated on our progress as we move through the back half of the year next quarter. So thanks again.

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.