Good morning everyone, and welcome to the Designer Brands, Inc. Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Dustin Hauenstein, SVP of Finance. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 14-week and 53-week periods ended February 3, 2024 to the 13-week and 52-week periods ended January 28, 2023. Please note that the financial results that we will be referencing during the remainder of today's call exclude 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 future expectations, plans and prospects of the company constitutes 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.

Thank you for joining us this morning. I'd like to begin by recognizing all of our associates for their continued hard work and dedication to Designer Brands. They effectively executed on our priorities, quickly adapted inventory to shifting sales trends, and worked to manage spending levels amidst a challenging macroeconomic backdrop. While we are pleased with where we ended the year, we fully recognize that we are not operating at our full potential. However, as we enter 2024, we do believe we have the right people and processes in place to move our strategy forward. This provides us with renewed confidence during what will be a transitional year as we begin to see the benefits of new leadership and simultaneously work to right-size our cost base in anticipation of future growth. In fiscal 2023, we saw a 7.3% year-over-year decline in total sales, though we were still able to deliver EPS at the upper end of our guidance range. During the year, we saw industry weakness across the market. According to Circana, dollar sales in the footwear industry contracted year-over-year for both the fiscal third and fourth quarters consecutively; the first time we have seen a quarterly decline since 2020. This impacted us most within our U.S. retail and Canada retail segments as our footwear offerings are highly discretionary. Within our U.S. retail segment, sales declined 9.2% for the full year compared to 2022 as we continued to operate with a seasonal mix approximately 50% above the market. The unseasonable warm weather we witnessed in the back half of the year contributed to softness in our seasonal offerings and as a result, we instituted necessary promotions to ensure that we exited the quarter with healthy levels of inventory. During the fourth quarter, we achieved sales of $754.3 million, a decrease…

Thank you, Doug, and good morning everyone. I would like to echo Doug's excitement regarding the addition of Andrea to our team and the strategies that she and Laura are already driving across the organization. Their combined expertise and proven experience in the U.S., along with that of Mary Turner in Canada, are tremendous assets to Designer Brands. Turning to our financial performance. We delivered solid fourth quarter results that contributed to full year 2023 performance at the upper end of our guidance. We saw a sequential improvement in our comps from the third to fourth quarter with the improvement accelerating in the month of January specifically. Despite these improvements, fourth quarter adjusted earnings per share was a loss of $0.44, negatively impacting our full year adjusted earnings per share of $0.68. Let me provide a bit more detail on our fourth quarter and full year financial results. For the fourth quarter of 2023, net sales of $754.3 million were down 0.8% versus the prior year period and were down 7.3% on a 13-week comparable basis. Notably, our 53rd week generated $42.5 million in sales. Full year 2023 net sales of $3.075 billion were down 7.3% versus the prior year period and down 9% on a comparable 52-week basis. We attribute this shortfall to continued macro pressures, a highly promotional retail environment and the impact of warm weather on our seasonal footwear business. In our U.S. retail segment, comps were down 7.4% in the fourth quarter, an improvement compared to down 9.8% in the third quarter of 2023. The negative comps were primarily driven by weaker performance in our seasonal business, slightly offset by stronger sales in our casual, athletic and athleisure offerings. As Doug mentioned, this was all against a backdrop of year-over-year contraction in the overall footwear market…

[Operator Instructions] And our first question today comes from Mauricio Serna from UBS. Please go ahead with your question.

Great. Good morning and thanks for taking my questions. First, I wanted to maybe you could talk a little bit more, about what you're seeing on a quarter-to-date. You mentioned you were pleased, with the comp sales performance so far, but maybe you - could give us a little bit of insight. How does that compare to the comp sales that you had in Q4? And then, maybe you - could provide a little bit more, details on the guidance for the interest expenses. How should we think about interest expenses for 2024? Thank you.

Hi, Mauricio. This is Doug. I'll start and then I'll turn it over to Jared. Yes, we are pleased, as we said, with the results that we're seeing season to-date. It's largely driven, by strength that we're seeing in the casual area, as well as athletic and in kids. And it's, again, a significant improvement to what we saw coming out of Q4. So early days, so a lot of volatility, obviously, in the market. But we're very pleased with how the quarter is starting to play out.

And Mauricio, this is Jared. On the interest, given that we will have the full amount of the term loan, over the entire balance of the year, but then offsetting a little bit with earned cash flow paying down the ABL, we are anticipating relatively the same interest, yearly interest expense, maybe just a couple of million dollars, more than last year in totality.

Got it. Very helpful. And then maybe, if I'm thinking about the operating margin, it seems that gross profit could be like, sorry, gross margin could be flat. But you're mentioning maybe some slight expense leverage. So, if I put those things together, I think like you're expecting, like a modest expansion, on a year-over-year basis. Just wanted to make sure, I understand that right. And lastly, if you could just remind us, or talk a little bit more about, how the Nike business has been going. You said like it's near its pre-COVID level penetration. Maybe like, could you remind us how much that used to be and any additional detail would be very helpful? Thank you.

Yes, I will start with answering your first question, and that is, yes, a modest expansion on the up-income rate line. And then I'll turn it over to Doug for Nike.

Yes, on Nike, as we said in the remarks, the brand went to one of our top national brands pretty quickly in the quarter. We're very pleased with the results. They continue to be great partners. It's nearing the penetration that it was pre-pandemic. So again, we feel really good about that. Continuing to get access to product that we've never had before. Again, they've been great partners. Very pleased with the progress that we're seeing there, as well as overall active. And Nike, that's kind of a positive halo effect, on some of the other businesses as well. Really strong driver of the kids' business. We're seeing nice trip drivers coming out of driven by Nike kids that are actually positively impacting, the women's business as well. So again, couldn't be more pleased with the partnership today.

Got it. Very helpful. Thank you.

Our next question comes from Dylan Carden from William Blair. Please go ahead with your question.

Thanks a lot. Just trying to kind of simplify this a little bit. For the kind of sales guide on the year, I know you're not going to guide component pieces of it. But as you start lapping maybe a full branded portfolio, provided you don't make any other acquisitions. Is the idea here that DSW banner, is going to be doing more of the heavy lifting, until that portfolio kind of finds footing? Or just - given the beat kind of on sales, or sort of the expectation on sales this quarter, versus the comp, just trying to kind of set expectations appropriately for the year, if that makes sense?

Yes, yes, Dylan. Certainly just given the sheer size of DSW vis-a-vis the Brand segment, the sales growth and comp growth we guided to would indicate, you've got more just actual dollar volume coming from that segment. However, we did guide that the Brand segment will actually grow mid-single digits. And we do have a full year worth. I mean, we acquired both Keds and Topo, at the beginning of last year. So, with all of that put into the mixer, we are seeing mid-single digit growth on the brand side or single-digit growth in our comp, for retail businesses.

Sorry, I missed that. But the mid-single digit brand side, that's more, or less given time into acquisitions, closer than that to organic growth, I guess?

I'm sorry, you broke up there. What was the question?

One, I just apologize for missing that commentary. But the mid-single digit growth on the branded side, given the timing of acquisitions, is closer than that to organic growth, sounds like?

Correct, yes. Yes, that's organic growth.

Got it. And is there anything, I guess, when should you start seeing potentially, I guess, kind of to reset, or to level set some of the merchandising architecture within the DSW banner, the idea of pulling out these ancillary brands and kind of adding your own brand of portfolio, some of the shift has maybe shifted to, these other purchase brands. Just - how does the assortment look next year at the DSW level, as far as sort of own brand mix, and how that kind of, helps the overall banner?

Yes, Dylan, this is Doug. Laura has already made, meaningful progress with the team, obviously just, as her focus is continuing to revitalize the assortment. Most notably, that's really leaning into the areas where we're seeing consumer demand growing and we're underpenetrated, specifically athletic. So that's where we're seeing some really nice growth there. Seeing a really nice growth in the kids' area as well. And a lot of that is on the back of the return of Nike, obviously. But we're maintaining our commitment in own brands. The penetration was essentially flat. That'll evolve, obviously, and the portfolio has evolved, with the acquisition of Keds, Topo, talk about Hush Puppies as well. So again, we'll continue to evolve, but feeling really good about the green shoots, we're seeing already, with the changes that the team has made in this format.

Thanks for that. And then final one from me, whether, presumably, it can continue to be volatile, any kind of incremental ways you can mitigate that, either between kind of being leaner on inventory, or athletic penetration?

This is Doug. I mean, we're going to continue to focus on what we can control. So, the team has done a really good job of managing inventory. We have opened a buy, to take advantage of opportunistic buys, to chase categories and products that are working as well. That's one of our key strengths, honestly, and we're certainly not walking away from that. So, I'd say that's the biggest thing that - we could do. And so, we just stay really close to what's happening, obviously, as we progress through 2024.

Great. Thanks a lot, guys.

Yes. Thank you.

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

Hi, good morning, everyone. As you think about just the health and the state of the consumer, whether it's in the U.S., or whether it is in Canada, what are you seeing that are the same, or the differences, and how has it changed exiting '23 and into 2024 so far, whether online, or in-store? And speaking about stores, how are you thinking about your store base in 2024, whether it's openings, or closings? And lastly, very good, very nice hire and welcoming, Andrea, to the fold. As you think about the assortment and category assortment and margin profile, what looks different a year from now than what it is today in attracting customers and gaining market share? Thank you.

Great. Thanks, Dana. This is Doug. As it relates to your first question on the consumer health, as we said, we are encouraged by the trend change that we've seen, obviously, in Q1, as it compares to Q4. Overarching, I would say, the customer is definitely responding to newness. And that has been a dedicated focus, obviously, driven by Laura in the U.S. and then Mary Turner in Canada. So the team has been maniacally focused on that, leaning into categories that were underpenetrated, and where we're seeing really nice demand, specifically athletic. The casual businesses, had a nice buoyancy as well. And then the kids' businesses is coming on strong as well. We talked about the positive impact of Nike, but it's definitely broader than that. So, I'd say overall, it's really around we're seeing a trajectory change from what we saw coming out of Q4. Still early on, obviously, and still volatility. As we think about channel growth, we really think agnostically about that, between stores and digital. The digital business has been stronger, from a comp perspective than stores. But again, we're big believers in stores. We are definitely seeing an increase, modestly in traffic there. We're continuing to invest in top of funnel marketing, which had a really positive holdout result, to increase the traffic there. So, we're feeling good about that. We're leveraging stores in a different way. And we think it's very much this ecosystem. 60% of our digital demand, is fulfilled by our stores. 90% of our e-commerce returns, are made in stores. So there's a lot of footsteps in the confluence, of those two channels. So, we really think about those holistically. We talked about the eight net new stores in Canada. So, we're excited about that. And we don't have any plans to make any material differences in DSW. Again, it really goes back to the work that I mentioned that Laura's focusing on. How do we update those stores in a very thoughtful way, with LED lighting, paint, hardwood flooring, and think about making the experience, even more inviting and enjoyable? So lots of focus on that, but no major change in the store count. And then as it relates to your last question, it's early days with Andrea. But I've been really pleased, with the progress that she's making, already with the team. She's maniacally focused on profitability, as well as prioritizing the brands that, we see significant upside growth. There's been some meaningful changes, through investments in the brand portfolio in the last 12 to 15 months, obviously, with the Keds acquisition, Topo, Hush Puppies, and Le TIGRE. So again, there's a lot of net new in the portfolio that, she has arsenal to work with. But very, very early days. We'll come back, with more specifics, as she's had a little bit more time in the role. Thanks for your question.

Thank you.

And ladies and gentlemen, with showing no additional questions, we'll conclude the question-and-answer session. I'd like to turn the floor back over to Doug, for any closing remarks.

Thank you all again, for joining us this morning. We look forward to continuing, to update you on our progress, as we progress through 2024. Thanks again.

And 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.