Good morning and welcome to the Designer Brands second quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Dustin Hauenstein, Senior Vice President of Finance. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended August 3, 2024 to the 13-week period ended July 29, 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 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 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’m pleased to report that during second quarter, we made continued progress on our plan to return Designer Brands to growth. As anticipated, we did see consistent improvement in our top line performance throughout the quarter and have now experienced three consecutive quarters of sequential comp improvement. However, with consumers being increasingly mindful of their discretionary spend, that improvement has been more muted than anticipated. In spite of this, as expected, our comps have now turned positive as we’ve moved into the back half of the year and reached our anticipated inflection point. We expect positive comps to continue in the back half, supported by our strategic initiatives. We’ve been particularly pleased with our back-to-school business, which has carried its momentum into the third quarter supported by our expanded athletic and athleisure offerings. Turning to our results, in the second quarter our sales were down approximately 3% versus last year. We saw a roughly 1% decline in comparable sales versus last year, a sequential improvement as our efforts to reinforce and grow relationships with our key national partners are paying dividends. Our top eight brands, all in the athletic and athleisure categories, continued to generate outsized growth in the second quarter, up over 30%, which was in line with the growth that we saw from them in Q1 and showcases the benefits of developing deeper relationships with key brand partners. Further, the penetration from these top eight partners climbed to 39% of sales in the quarter, a significant increase over the prior year penetration of 30%. While our assortment pivot is gaining traction, our over-penetration in dress and seasonal once again pressured results. We remain committed to reducing our reliance on these categories and we’re encouraged by the continued comp improvement as we…

Thank you Doug, and good morning everyone. Turning to our financial performance, we were pleased with the results of our investment areas, primarily our continued penetration growth into athletic and athleisure, which supported notable market share gains in the quarter. According to Circana, athleisure grew 4% in the second quarter versus last year in the footwear market, while fashion declined by 6% to last year. Driven by our strategic assortment changes, DWS drove athleisure sales growth of 8% to last year, outpacing the athleisure market by over four percentage points and thus grabbing share in this important and growing category. This helped us deliver another quarter of sequential improvement in our retail comp sales, and while comps sequentially improved for the third consecutive quarter, the level of improvement was below what we were anticipating as the consumer further pulled back on discretionary spend in dress and seasonal footwear which, in spite of our pivot towards athletic and casual, still weighed heavy on our overall results. Let me provide a bit more detail on our financial results for the second quarter, followed by an update to our annual guidance. For the second quarter of fiscal 2024, net sales of $772 million were down 2.6% versus the prior year period, as reported, and were down 1.4% on a 13-week comparable basis. In our U.S. retail segment, comps were down 1.1% in the second quarter, an improvement compared to down 2.3% in the prior quarter, down 7.4% in Q4 of last year, and down 9.8% in Q3 of last year. As mentioned, our performance was led by strong double-digit comps in both our athletic and kids categories, which was offset by negative comps in our dress and seasonal categories. Our Canada retail segment comps were down 3.1% in the second quarter driven by…

We will now begin the question and answer session. [Operator instructions] Our first question comes from Dylan Carden with William Blair. Please go ahead.

Yes, hey guys. This is Alex Faske [ph] on for Dylan. Thanks for taking our questions. Firstly, just how would you describe the risk in the guide for the back half? You mentioned inflecting positive in comp with boots planned down double digits on the easier compares, which appears to have been relatively de-risked. Could you just give a bit more color on what is contemplated in the larger inflection planned for the second half?

Yes, this is Doug. Thanks for the question. I would start by just saying again, we’re encouraged by what we saw materialize through Q2 from a momentum perspective, and then in particular the fact that we moved to a positive comp as we got into Q3, so a lot of that was driven by obviously the penetration growing of athletic and athleisure. But the most significant change we’ve made as we’ve moved through fall is we feel like we have de-risked that demand plan because we’ve significantly planned down the seasonal boot category. Again, that’s a pretty seismic shift with regard to how we’re thinking about evolving that assortment as we move through the back half, and probably the most dramatic move we’ve made.

Got it, okay. Thank you. Then secondly, how are you, or could you adjust or shape the branded portfolio to reflect the trends that you’re currently seeing in the business? You mentioned earlier in the prepared remarks de-emphasizing dress and seasonal products. Is it within the realm of possibility to buy or get rid of any existing brands as you re-work the branded portfolio? Thanks.

Yes, this is Jared. What I would say is if you kind of look at the investments we’ve made most recently, they have been in brands that are in the growing part of the footwear market, so when you look at Topo, when you look at Keds, squarely in the athletic and athleisure side, and we’re actually very energized with what we’re seeing on that front. When you look at our legacy dress brands, one, they are licensed brands, so we are still very much in the middle of most of those licenses. However, we have done certain things to even lean into where we are winning with those brands, so when you look at our Vince Camuto brand specifically and, while boots is declining, the wide cap boot and the oversized boot is actually something we’re winning in, so in those particular areas we are finding some opportunities for wins while still being relatively conservative from overall growth. Then lastly, I would comment and Doug may want to chime in, we are seeing a lot of traction with Jessica Simpson at the moment, and ironically that’s a dress-focused brand - she very much has a vibe and an esthetic that right now is really resonating, so we’re doing quite well with that brand.

Yes, I would agree with everything that Jared said. Again, we look at this portfolio as continuing to evolve. Again, there are components of that assortment that we’ll continue to lean in and differentiate. Jared mentioned wide cap boots - that’s kind of an ownable component that we did very well with last year on the wholesale side, we’re getting more aggressive about that this year. Again, the investment in Topo, we obviously feel really good about that. Just to remind everyone, Andrea is relatively new to the organization, she started early this year, but really impressed with the progress that we’ve made and she’s made with the team so far to date.

Perfect, thank you. Very helpful. That’s all from me. I’ll pass it on.

Again, if you have a question, please press star then one. The next question comes from Mauricio Serna with UBS. Please go ahead.

Great, good morning, and thanks for taking my questions. Maybe could you quantify how the quarter to date is performing, and just how comfortable will you feel about second half guide, just given the Q4, I guess--like, I don’t know if the implication is that it could be slightly down just because of the--as you lap the 53rd week?

Yes, I’ll start - this is Doug. I would say again, we don’t want to get into a lot of detail on the third quarter, but we did comment that we’ve moved to a positive comp, which was the first time that we’ve seen that since September of 2022, so again we think that’s a critical inflection point. The majority of the back-to-school business still occurs in the quarter. That athletic business and athleisure continues to be very buoyant, so that’s definitely something we feel very positive about. It’s very early in the seasonal business, obviously. While we’re encouraged by some very early reads and it is very early, we have the majority of this season ahead of us, so we’re focusing on controlling what we can control. I’m pleased with how the team has evolved the product portfolio assortment. There is a little bit of caution out there just with regards to the macro environment, but again really focusing on what we can control, [indiscernible] the categories that are working, and we’re positioned in a very good place because of how we planned seasonal.

I would add, Mauricio, to answer the end of your question, we do anticipate positive comps throughout the fall. But to your point, we do lose the 53rd week in the fourth quarter - that was about a little over $40 million in total sales. While we still feel pretty strongly even at the lower end of our guidance around Q4 positive comps, depending on where within that guidance we lie, you could see flattish or a bit more pressure on the sales side, just given we’re losing that $42 million week.

Got it, and then just very lastly on the gross margin, you talked about you expect for the year SG&A to be flat to slight deleverage. How should we think about the gross margin for the full year?

Yes, I mean, when we look at full-year margins, we kind of have two things going in opposite directions. We continue to see pressure on our IMU, just given the move into a higher penetration of national brands, specifically athletic brands, and as we’ve always talked about, those certainly come with a bit more pressure on IMU than the dress brands do. But on the flipside, especially as we move into the fall, we start seeing leverage on our markdowns. If you recall, fall of last year was when we really had to clear out boots because we had invested in growth and certainly did not see that materialize, and so we’re kind of seeing those offset to deliver an overall year that is a bit flattish in gross profit.

Understood, very helpful. Thank you so much.

The next question comes from Dana Telsey with Telsey Group. Please go ahead.

Hi, good morning everyone. As you think about inventory levels and where you expect them to be by the end of the year, both on your own branded side and wholesale, how are you thinking about, and with the components of the comps in each of the channels, drivers of each, what are you seeing - ATV or conversion traffic, transactions, what are you seeing there, and how do you think about it going forward given the inflection point that you’ve seen already? Thank you.

Yes, thanks Dana for your question. This is Doug - I’ll start and Jared can add some color. Again, we’re encouraged by the momentum that we’re seeing with regards to the change in the trajectory. Again, we’ve commented on the fact that we saw digital increase for third consecutive quarter. We definitely have seen an improvement in traffic at the store component of that as well. Again, it’s a little more muted than we would have anticipated, but it’s encouraging and definitely moving in the right direction. We did see an uptick in AUR, so again that kind of explains a little bit the negative on traffic and positive AUR was the result. We’re again encouraged by that. The team has done a very good job of managing inventory. Again, we pulled forward some athletic receipts in order to be able to position ourselves for back-to-school, and obviously that’s paying off in dividends as we move to a positive comp in Q3 so far.

Great, and just any update on freight expenses?

Yes, you know Dana, we are monitoring that closely. Obviously direct importing is not a huge piece of DBI total business. It impacts our segments differently. We actually are seeing a bit of a different level of impact on our brands business versus the little bit of importing our DSW business does. DSW, pretty much what they do import arrives on the west coast, and we aren’t seeing nearly the type of container pressures for those deliveries. When you look at what we receive in for our brands business, because of where those infrastructures are located in the U.S., we actually receive those on the east coast, and we are seeing a pretty substantial increase on a per-container load. Again, overall it’s not putting in a lot of volatility to DBI, just given direct importing is not as huge for all of DBI, but within our segments, we are seeing some of that pressure.

Thank you.

We have a follow-up from Mauricio Serna with UBS. Please go ahead.

Hey, just wanted to follow up on SG&A. I want to understand, given that you lowered the [indiscernible] sales guidance, is there any change on the SG&A front, just because of lower sales expectations, or is that really essentially what is driving the--I just want to understand if that is what is essentially driving the lower guidance on the EPS level.

Yes, we’ve kind of talked a little bit about we’ve got a relatively fixed expense structure, especially when you look across our segments and the way that those businesses are organized. I would say, however, that should we start to see performance come in a little more challenged, start to pivot towards the lower end of our guidance, we do have a bit of flexibility - I’d call it probably between $5 million and $10 million of SG&A dollars to flex with that, but overall not a lot of wiggle room. That is why, as I mentioned in my prepared remarks, we have engaged an outside consultant to really look at our overall expense structure in what I’m calling physical therapy, just kind of looking to say how should we be wired a little bit differently. Our expense structure has been dramatically changed over the last few years as we have added new brands that came with entirely existing infrastructures, like Topo, like Keds, and so we are looking at that and anticipate putting together a pretty robust multi-year execution plan to really get more efficient and look at how we should be wired for SG&A.

Got it, and then just lastly, what are your expectations for interest expenses?

Our interest is relatively in line. You know, right now we’re projecting just under $40 million of full year interest expense for ’24.

Got it. Thank you.

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

Well, thanks again everyone for joining us today. I just want to reiterate that we are energized by the fact that we are seeing the turnaround begin to come to fruition. Again, I am grateful to all our team members who continue to pursue those strategic initiatives to get us to this place. We look forward to updating you on our progress as we move through the balance of 2024. Thanks again for joining us.

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