Good morning, and welcome to the Designer Brands Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Ashley Firlan with Edelman Smithfield. Please go ahead.

Good morning. Earlier today, the Company issued a press release comparing results of operations for the 13-week period ending October 28, 2023, to the 13-week period ended October 29, 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; Jared Poff, Chief Financial Officer; and Laura Denk, President of DSW. I will now turn the call over to Doug.

Good morning, everyone. Thank you for joining us today. The third quarter was difficult for our business. Macro headwinds continued to impact us, most acutely within our Retail segment traffic as consumers remain under pressure and the overall footwear market contracted for the first time since the pandemic. Because our business is heavily weighted towards dress and seasonal, unseasonably warm weather also had an outsized impact on our topline. We also faced headwinds that we believe demonstrate our need to operate with even greater speed while increasing the level of innovation, newness and fashion in our assortments. To this end, we have made several strategic decisions regarding leadership across our organization, and we will be diligent as we embark on the journey of backfilling these roles in order to best position our business for the future. During our second quarter earnings call, we communicated that our full-year guidance assumed we sat at a key inflection point and a retail comp performance would need to meaningfully improve, supported by a strong Septober throughout the balance of the year in order to meet our expectations. We also noted the possibility for headwinds to worsen further, something that could hamper the sequential improvement we required. During the third quarter, we experienced a sales shortfall within the fall season, specifically Septober, particularly related to broad-based weakness in seasonal and dress. Conversely, a casual portion of our retail business continued to perform well, delivering comp sales growth in the mid-single digits. We also see the retail customer continuing to lean into value and the intentional rebuild of our clearance business within our U.S. Retail segment helped to slightly offset broader declines. Clearance sales were down only 3%, significantly better than our total sales, which were down 9%. However, none of these were significant enough to…

Thank you, Doug, and hello, everyone. It's an honor to speak with you all today. In my first 100 days, my priority has been to work closely with the management team and great associates at DBI to learn the ins and outs of the business. I've also talked with customers and national brand partners and visited many stores throughout the country. There's a universal passion for DSW and it's been exciting to witness the power of our brand. It has also been important to me to hear firsthand where the biggest issues and therefore areas of opportunity are. As I boil this down, I believe that while DSW is certainly feeling the brunt of a very pressured industry, there are elements of our business where we can employ more focus and discipline. According to Circana, the total footwear market was down in the third quarter year-over-year, the first quarter that has seen a decline since Q4 of 2020, but DSW's performance also lagged the overall market. As I work to unpack why and what we need to prioritize, I'm intently focused on three key areas in the near-term to drive improvement. One, reinvigorating our assortment; two, optimizing our market investments; and three, enhancing our in-store and digital shopping experiences. First, our assortment, at DSW and across all of designer brands, it starts and ends with product. We can't lose sight of how important an optimal and differentiated assortment is. Our assortment, the size of which was historically unparalleled is what made DSW the dominant retailer it is today. And maintaining an energizing and trend-right assortment is even more critical today when the customer has substantially more options from brands that are moving more quickly than ever. Over the last few years, Designer Brands has contended with a number of unforeseen…

Thank you, Laura, and good morning, everyone. I want to reiterate Doug's comments as this is a difficult time for our business in the broader footwear industry. As he mentioned, the improvements that we were anticipating on both top and bottom line did not materialize and the net risk position that I had called out on our last earnings call came to fruition this quarter. The topline weakness ultimately flowed through, leading to operating deleverage against a largely fixed expense base and resulted in an adjusted EPS of $0.24. Our team is aware of the factors that led to this situation and is making progress on sustainable improvements across all elements of the business. Based on what we have seen through the fourth quarter to date, we do not expect these sales pressures to alleviate as we wrap up this year, especially given the ongoing uncertainty in the macro environment. Let me provide a bit more detail on our Q3 financial results. For the third quarter, sales decreased 9.1% from last year to $786.3 million. From a wholesale perspective, sales were down roughly 22.7% in line with expectations as we lap strong wholesale sales unlocked by pent-up demand in that channel last year following supply chain disruptions. U.S. retail comps specifically were down 9.8% in the quarter, while Canada posted comps down 7.7% in the quarter. One bright spot was our vincecamuto.com business, one of our premier DTC channels with comps up 7% in the quarter on top of a 27% comp last year and up 26.3% for the month of October. This quarter's success was largely driven by the brand's decision to lean into strong consumer demand for wide and extra wide shaft boots. Consolidated gross margin was 32.6% in the third quarter compared to 33% last year, a…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Gaby Carbone of Deutsche Bank. Please go ahead.

Hi. Thanks so much for taking my question. So maybe I just wanted to dig in on your brand awareness comments. You mentioned that's eroded a bit. Maybe can you dig a little further into the investments you're making to bring the customer back to the store? Do you think your target customer has changed at all? And then maybe how should we be thinking about the impact from the top of funnel marketing you mentioned on kind of SG&A moving ahead? Thank you.

Good morning, Gaby. This is Doug. Thanks for your question. Yes, as we talked about, we invested in top of funnel marketing, which was episodic video in the quarter. As you know, those take time to be able to measure the impact of that. We are encouraged by those initial results, and it's something that we'll continue to lean into as we move into first quarter and beyond. I don't know that our customer has changed dramatically other than just the continued strength of the penetration of the casual in the athletic area, which we have been leaning into, obviously. But we wanted to do that just based on the fact that we did see an erosion in kind of our awareness. So we wanted to continue to make sure that we were increasing our overall customer file as we move forward. We're still working through next year with regard to balance of top of funnel marketing as well as performance marketing, just knowing that there's a latency impact, obviously, with the top of funnel investments.

Got it. And then just a follow-up. I wanted to dig into casual and athletic a bit more. I think you mentioned last quarter that Nike came in about a month earlier than you originally planned. Maybe just how do the flow of Nike product transpire? How has the customer response been? And then has your other athletic kind of inventory competition changed at all with taking on more Nike products?

Yes. Great question. Thank you. Obviously, we're very pleased with the initial Nike results. To your comment, the product did come in a little bit earlier than we originally anticipated, which was originally planned for Q4. So it was about midway through the quarter where it started to flow in. The initial reaction has been quite strong. Within the first few weeks, it's become one of our top five brands handily. It's still represented just a little over 1% of the sales for the quarter, obviously. So we're still ramping up and in historical times, that was between 7% and 8%. So very encouraged by initial results. As we move through Q4, we continue to see really strong momentum in the overall athletic category, which, again, is part of our strategy as we try to deseasonalize our business moving forward.

And Gaby, one thing I would add, and I think we've talked about this as well. In addition to the Nike product itself that we're very excited to see resonate with the customer. We also feel that the loss of Nike certainly impacted other brands that people would find their way into DSW through Google searching or some other way of the Nike brand and ended up buying somewhere else. Hard to quantify the exact impact of that, but we definitely think that, that was a drag on our overall digital demand after we lost Nike across other brands. So being – seeing that also come back, it will take time. The algorithms have to pick it up and bring you back to the top, but we're excited for what that might mean as well.

Great. Thank you so much.

[Operator Instructions] The next question comes from Jay Sole of UBS. Please go ahead.

Super. Thank you so much. You mentioned that you expect some of these macro pressures to persist for a while. Obviously, you don't have a crystal ball, nobody expects that. But what would you think the macro pressures might alleviate? Is this something that's going to last into the first half of next year? Or I mean, how do you think about it?

Hey, Jay. This is Doug. Thanks for your question. Yes, to your point, we don't have a crystal ball. I would say kind of what we're seeing in Q4, which we've incorporated in our guidance is consistent with what we saw in Q3. There definitely was an outsized impact. We saw obviously in seasonal, we think partially attributable to warmer weather. As we move into spring and that pivots into sandals, obviously, our assortment dramatically changes. We also are seeing, like I said, buoyancy with the athletic trend, and we're being very opportunistic and chase into inventory there to take advantage of what the customers are looking for. Having said that, I would say the customers continue to be very choosy and very selective with regards to discretionary purchases. I think our clearance trends kind of indicates the fact that customers are still looking for value. That's always been a core strength of specifically DSW. We will continue to lean into that. But we're conservatively planning it, and we'll be in a position to react and reacting to it real time.

Got it. And maybe, Doug, just to put a finer point on it. Can you just talk a little bit about how the sales trended, say, the week before the Thanksgiving weekend? And then obviously, through Cyber Monday, how sales trended and then what you've seen sort of since then in the week post that. I mean, did you see that spike and then like in the last week has it been like a normalization back to the sales growth rates that you saw before? Or if you could give us maybe a little bit of color around that, that would be helpful.

Sure. Yes. Thanks for your question. We were very promotional because we wanted to make sure that we didn't lose share, specifically as we went into that Cyber Week. So we are very aggressive on promotions. We did see a nice performance there. So again, kind of mission accomplished with regard to not losing share. Having said that, there definitely has been a lull coming out of Cyber Monday and then even the continuation of those promos through Tuesday. So there's four weekends between Thanksgiving and Christmas. There's always historically been a bit of a lull between Black Friday and the holidays. And we're definitely seeing that. But what we're seeing obviously for the quarter still is obviously incorporated into our guidance. But I think customers are waiting until the very last minute. They're being very selective, as I said. We were pleased with what we saw coming out of Black Friday, but again, we were very promotional and leaning into that.

Okay. And then if I can ask one more. If you can just elaborate a little bit on the brand portfolio. Within the brand portfolio, which brands do you see the most strength? Maybe which brands, is there room for improvement? If you could just touch on the brands within the portfolio, that would be helpful? Thank you.

Yes. And as Jared said in his comments, I mean, that brand portfolio largely performed within our expectations. We were up against a pretty strong comp last year as it relates to just some timing opportunities. But we're very encouraged with what we're seeing certainly from the Keds business. We're very encouraged with what we're seeing from Topo. Two acquisitions, obviously, that were part of our strategy to distort towards the casual and athletic space. So we're very encouraged by that. Again, small businesses overall, but we're definitely encouraged by what we saw and the plans that we have going forward for those brands in particular. And then Le TIGRE, we launched that at DSW as part of our opportunity, obviously, to expand encouraged by initial results there as well. So again, early days, going through, obviously, the integration, but we're optimistic about those.

Got it. Okay. Thank you so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Howe for closing remarks.

In closing, I would be remiss not to mention the terrible tragedies that have unfolded in Israel and Palestine over the past several months. Our hearts and prayers are with those suffering and we recognize this is a very difficult and uncertain time for many of our associates, our partners and our customers. I'm proud of how our team cares for, supports and lifts those around us. We recognize the values that unite us have powerful positive impacts because that Designer Brands, we all belong. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.