Designer Brands Inc. (DBI) Q2 2027 Earnings Report, Transcript and Summary

Good morning, and welcome to the Designer Brands Second Quarter 2026 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Crummy, Senior Vice President at Designer Brands. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended August 1, 2026, to the 13-week period ended August 2, 2025. Please note that the financial results that we will be referencing during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise. Additionally, please note the 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. Except as may be required by applicable law, the company assumes no obligation to update any forward-looking statements. Joining us today are Doug Howe, Chief Executive Officer; and Sheamus Toal, Chief Financial Officer. I'll now turn the call over to Doug.

Good morning, and thank you, everyone, for joining us today. We're pleased to share our second quarter results where we delivered a meaningful improvement in profitability versus last year, highlighted by the strength in our Brand Portfolio segment. Before I discuss our business performance in more detail, I want to recognize our Designer Brands associates for their continued dedication, focus and commitment to our customers and strategic priorities. I'm proud of how our teams executed throughout the second quarter and remain focused on the areas within our control as we continue to deliver against our priorities. In the second quarter, net sales decreased 1% year-over-year with comp sales down 2%. Our Brand Portfolio segment delivered another quarter of strong growth, up 18% versus the prior year. Retail segment sales decreased 2%, primarily due to softness in seasonal. We delivered a significant improvement in adjusted operating income, benefiting from tariff claim refunds that were received in the quarter. However, even excluding this benefit, we delivered gross profit expansion versus last year on a dollar and rate basis through our elevated assortment, disciplined sourcing and our continued focus on promotions and markdown management. On a year-to-date basis, adjusted operating income was $59 million, more than doubling the same period last year, which we believe reflects the meaningful progress we are making in strengthening the underlying profitability of the business as we execute against our strategic priorities. In a few minutes, Sheamus will provide more detail on the tariff refunds, financial performance and the outlook for the year. Before reviewing our results and strategic priorities in more depth, I want to take a moment to reinforce what we believe is a key differentiator of our business model and central to our long-term value creation opportunity. The combination of our brand portfolio and scaled physical retail footprint creates a unique model that we internally call the Power of the Pair. The strength of our store base gives our brands reach, visibility and support as we leverage our scale, sourcing and logistics capabilities. Our stores are our largest channel of new customer acquisition, providing a scaled platform to introduce and build our brands. At the same time, the brands we produce provide our stores with differentiated product and greater control over our assortment, creating opportunities to drive greater customer relevance at DSW. This combination of our Retail and Brand Portfolio gives us greater flexibility in how and where we distribute our products, creating diverse opportunities to drive growth and margin expansion as we remain excited by the long-term potential and value creation inherent to this business model. Now let's take a moment to review our second quarter results. I want to start with our Retail segment, which, as a reminder, reflects the aggregation of our U.S. Retail and Canada Retail operating segments. As I mentioned earlier, retail segment sales were down 2% in the period, exacerbated by softness in seasonal categories. Sandals, our largest seasonal category, were pressured by early weather-related headwinds and never fully rebounded. Given their high seasonal penetration, this accounted for approximately 200 basis points of the retail sales decline. Excluding the impact from sandals, retail sales in Q2 were approximately flat versus last year. We ended the quarter with sandals inventory in a healthy position and are confident in the team's plans to enhance the assortment for next year's peak selling season. Our athletic business was also softer overall in Q2. That said, performance was materially stronger with brands that leaned into innovation and where we had greater access to lifestyle and premium products. Within the category overall, we remain disciplined in our markdown cadence and delivered margin improvement amidst a very promotional environment. Encouragingly, athletic demand improved sequentially by 400 basis points in August. We see a clear opportunity to improve our top line retail performance and are continuing to take actions intended to strengthen the business, further improve our customer value proposition and drive more consistent profitable growth. These include delivering focused and differentiated benefits for our customers through compelling assortment, engaging marketing and a distinctive in-store experience. We are seeing signs of progress with retail trends improving and our stores returning to positive comps quarter-to-date. From an assortment perspective, we are being much more deliberate about where we invest, concentrating on the brands, categories and key styles where we see the greatest customer response while also narrowing the breadth of our assortment. We are seeing encouraging results from this approach. Our top 10 brands improved sequentially versus Q1 and outperformed the balance of the assortment during the quarter. Importantly, we drove this performance with meaningfully less promotional activity than last year, reflecting the progress we are making toward a healthier and more productive assortment. We also built momentum in women's dress, posting sales growth in the high single digits for the quarter. Our affordable luxury assortment continued to resonate, nearly doubling last year's volume, while categories adjacent to footwear remained an area of strength with sales up approximately 10% in the quarter. We are also seeing encouraging trends in both dress and boots quarter-to-date. Importantly, we entered the season with healthy boot inventory, which should better position us to capture demand following the tariff-related inventory delays we experienced last year in the third quarter. Our DSW brand repositioning continues to play an important role in deepening consumer engagement through more relevant, culturally connected advertising. Campaign work in the second quarter reinforced the brand's renewed positioning while creating stronger touch points with both existing and prospective customers. Our partnership with Ciara Miller from Bravo's Summer House further highlighted DSW's cultural relevance, driving 7 billion earned impressions and the all-time highest performing social content for the brand. Excitingly, we are relaunching our rewards program this month as another important step in our brand evolution. As we have shared, nearly 90% of our transactions come from our approximately 30 million VIP members, and we have significantly modernized the program, enhancing the value we provide to our VIPs while improving the effectiveness and efficiency of our CRM efforts. The updated program is designed to increase frequency and retention by reducing friction in the customer experience through quicker access to rewards, extended reward redemption timing and a more personalized experience with enhanced engagement and special purpose. This relaunch is an important milestone and one we believe can drive benefits for both our customers and the business. Finally, as I noted earlier, we continue to believe that our physical footprint is an important competitive advantage. We opened 5 new stores in Q2 and are pleased with the early performance of these locations, which are expected to be accretive to earnings in their first year. We are also encouraged by the performance of stores remodeled since 2025, with comp sales outperforming the balance of chain in these locations. In addition, this fall, we are excited to pilot a new store-within-a-store concept called The Edit at DSW. The Edit at DSW is a curated, elevated destination showcasing key affordable luxury and elevated fashion brands in an open experiential environment that is between 1,000 and 1,500 square feet. We are piloting The Edit at DSW within 4 existing locations this fall and plan to use these pilots to evaluate customer response and inform how we can evolve this concept going forward. Taken together, these initiatives will continue to enhance our efforts to deliver a more elevated, distinctive and convenient in-store experience. Turning to our Brand Portfolio segment. We were pleased with another quarter of strong performance in Q2, with sales increasing 18% versus last year. The brand portfolio continues to become an increasingly important growth engine for Designer Brands, driving both top line growth and profitability, and our focus is on building distinctive brands with strong consumer relevance and scaling them profitably over time. Our vertically integrated model brings together brand building, product development and sourcing and our retail footprint serves as a catalyst to introduce, scale and expand these brands across our portfolio. We continue to see this benefit in our exclusive brands with wholesale sales up double digits year-to-date, demonstrating the opportunity to grow our brands across multiple channels of distribution. We achieved continued momentum across our brand portfolio with outsized growth in Q2, led by Topo and Jessica Simpson. Topo continued to be a standout with revenue growth of more than 24% during the quarter, in line with our expectations. We expect the brand to generate over $100 million in 2027 and remain bullish on the brand's long-term growth potential with significant opportunity anticipated both in existing and new channels of distribution. We are also encouraged by the progress of our recent actions to integrate Topo sourcing into the broader DBI platform and expect meaningful profitability improvement from sourcing optimization and further business integration moving forward. Jessica Simpson also delivered another outstanding quarter with sales up approximately 24% versus last year and impressive growth across all major accounts as our strength in dress continues to resonate with customers. Keds performed in line with our plan in Q2, highlighted by strong direct-to-consumer performance across the assortment. We continue to expect robust double-digit growth for full year 2026. Across the portfolio, we remain focused on supporting profitable, sustainable growth while leveraging the strategic advantages of vertical integration, sourcing and distribution capabilities and our strong retail partnerships to create value across the business. Before I conclude, I want to share a few thoughts on our quarter-to-date performance as well as 2026 guidance. Our third quarter is off to a strong start. While back-to-school had a later start this year due to the timing of Labor Day, it is performing ahead of our expectations and retail sales are slightly positive quarter-to-date. For the full year, we are now anticipating total company sales to come in flat to up 1% versus last year, which is above our previous guidance range. We are also raising our earnings per share outlook, reflecting an improvement in sales and the team's continued discipline in driving margin expansion and managing expenses. Sheamus will share more detail on our updated guidance in a few minutes. Overall, we are pleased with the progress we are making across the business. We are encouraged by the trends we see in the strategic areas where we are concentrating our efforts and in particular, the notable improvement in overall profitability we have delivered year-to-date. The opportunity to improve our retail top line will further improve these results. We remain focused on disciplined execution, the merchandise and brands that matter most to our customers and profitable growth across both our Retail and Brand Portfolio segments. I'm proud of the work our teams are doing to strengthen the foundation of Designer Brands, and I am confident in our ability to finish 2026 strong as well as the long-term opportunity ahead. With that, I'll turn it over to Sheamus.

Thank you, Doug, and good morning, everyone. Second quarter consolidated net sales were $730.6 million, down approximately 1% versus last year, with comparable store sales down 2.4%. In our retail segment, second quarter sales decreased approximately 2% versus last year with comparable store sales down 2.6%. While top line performance was slightly below our expectations, average unit retail and average dollars per sale remained strong as we focused on driving margin dollar expansion while navigating a sequential traffic headwind during the quarter. In our Brand Portfolio segment, second quarter sales increased approximately 18% compared to last year, reflecting continued growth across the portfolio. As Doug mentioned, this was supported by intercompany sales up double digits for the quarter. As a reminder, these sales are eliminated through consolidation, but the integrated partnership between our brand and retail segments is critical to the success of these brands. Adjusted consolidated gross margin in the second quarter was 47.9%, representing a 430 basis point improvement versus last year. Tariff refund claims of $20.2 million retained by the company contributed 280 basis points of the margin improvement. The remaining gross margin improvement versus last year of $7 million or 150 basis points was primarily from the expansion of segment margins in both Retail and Brand segments due to the improved effectiveness of our product assortment and inventory management strategies. For the second quarter, adjusted operating expenses were 42.9% of sales, deleveraging 300 basis points versus last year, driven by increased performance-based compensation and marketing investments in the quarter. As we have mentioned on prior calls, fiscal 2026 reflects normalized incentive compensation program expense compared to no variable incentive compensation expense recorded in the second quarter of last year. Adjusted operating income was $39.4 million in the quarter, representing a significant increase over Q2 of last year, with adjusted operating margins improving 140 basis points. As I mentioned earlier, second quarter results included the benefit from tariff refunds received during the quarter, which were partially offset by the impact of increased cost of goods sold as a result of higher tariff rates previously in place. On a year-to-date basis, adjusted operating income was $58.8 million, up $30 million over the prior year period, which highlights the significant progress the teams have made advancing our strategies in 2026. In the second quarter, we had a total of $25.4 million of reported net interest expense, which included onetime interest of $16.1 million related to tariff claims sold and $9.3 million of recurring net interest expense as compared to $11.8 million last year. Our effective tax rate for the quarter was 32.8% compared to 23.9% last year. Second quarter adjusted net income was $19.2 million or $0.34 per diluted share compared to $16.4 million or $0.33 per diluted share last year. Turning to inventory. We ended the quarter with total inventories down 2.6% compared to last year as we continue to tightly manage inventory levels and focus on improving productivity across the assortment. Importantly, we remain disciplined in our inventory approach as we enter the third quarter, continuing to invest in key items and top brands while managing clearance and seasonal inventory appropriately. We ended the quarter with $51.6 million of cash compared to $44.9 million in Q2 of last year, with $146.2 million available for borrowings under our senior secured asset-based revolving credit facility, resulting in total liquidity of approximately $198 million. We continue to prioritize balance sheet strength during the quarter and further reduced debt levels with total debt outstanding of $423.1 million compared to $516.3 million at the end of Q2 last year, a reduction of over $93 million. Now I'd like to spend a few moments on our outlook. As Doug mentioned, our sales trends have improved and Q3 is off to a strong start. We are now anticipating sales for the fiscal year to be flat to up 1% compared to our previous guidance of negative 1% to positive 1%. We continue to expect retail sales to be flat to down slightly versus last year and double-digit sales growth in our Brands segment for fiscal 2026. As you think about the cadence of the balance of the year, we expect greater year-over-year pressure on profitability in the third quarter, primarily reflecting certain benefits in the prior year period that are headwinds in the current period, such as the impact of incentive-based compensation. Given our improved sales outlook, continued progress on gross margin expansion and disciplined expense management, we are meaningfully raising our full year earnings per share expectations compared to our prior guidance range. We now anticipate adjusted diluted EPS between $0.47 and $0.52 compared to our prior guidance of between $0.28 and $0.38 per diluted share. This guidance assumes an effective tax rate of approximately 41% and an average diluted share count of 57 million shares for the year. To conclude, we are making significant progress across the business and have delivered notable improvements in overall profitability year-to-date. We remain focused on disciplined execution and driving profitable growth across both our Retail and Brand Portfolio segments. We believe the progress we are making continues to strengthen the foundation of the business and positions Designer Brands to finish 2026 strong while creating a path towards sustainable, profitable growth over the long term. With that, we will open the call for questions. Operator?

[Operator Instructions] The first question comes from Mauricio Serna with UBS.

I guess just to start on Topo. It sounded that you're getting a lot of progress with that brand, a lot of traction. I think you mentioned you expect this year for revenues to go over -- reach over $100 million. Where do you see that brand going in the long term? And what are you doing right now in terms of, like, continuing to scale that brand and just make it bigger because it does seem to have, like, a significant growth potential. And then just maybe on the broader commentary, what you're seeing in footwear trends. Can you elaborate again just, like, what you're seeing across the different categories? If you put all things together, I think you talked about sandals and dress shoes and athletic wear, like any additional details that you can provide us about industry trends that you're seeing that will be very helpful.

Yes. Thanks, Mauricio, for your question. Start with Topo first. I mean, obviously, we continue to be very excited about that brand, delivered another 24% increase in sales for the quarter. So we believe that there's tremendous runway there, obviously. We did share that we expect the brand to exceed $100 million in sales in 2027. So again, we think that the sky is the limit with regards to very long runway on the brand. Still is in relatively modest distribution, about 1,600 doors. So lots of opportunity with our existing customers, lots of opportunity in new points of distribution. And as a reminder, it's not actually sold in DSW. So there's a large runway to be able to continue to build that out in specialty run specifically. The brand continues to do very, very well. As it relates to overall footwear trends, we are definitely encouraged by the increase that we saw in dress. We talked about a little bit of softness, obviously, in the sandals business. When you isolate for that, our comps would have essentially been flat in Q2. And then athletic was a little bit softer in Q2 than the balance of chain, but we are pleased that, that has seemed to reverse as we've now moved through Q3 moved through the timing of back-to-school. So we feel like the penetration of the athletic business diminishes a little bit as we move through the back half. Dress actually increases. And then we're very optimistic about the boot category. We see some growth there. Just as a reminder, there was some unfavorability last year in boots just given some of the delivery delays that we were experiencing based on tariffs. So we think that will give us a little bit of an earlier start this year than last year. So it's kind of a general recap of the trends by subcategory.

And the only thing I would add, Doug -- is to Doug's commentary on Topo, tremendous potential in terms of the top line, but we also see potential in terms of margin expansion through the further integrations that are underway in our business right now to integrate that Topo business into the broader DBI platform. So we feel that there's tremendous opportunity both on the top line as well as leveraging the expense structure and margin structure in that business.

Very helpful. For what it's worth, I have seen the Topo shoe coming up more in different social media and accounts of people who review running shoes and seeing a lot of highlights, but definitely getting a lot of traction. A quick follow-up just on the guidance for the year. Just -- obviously, you raised the EPS outlook. Is it fair to assume that a majority of this increase is coming from better gross margin expectations? Anything that you can provide on that regard? Because you've been expanding gross margin very meaningfully even this quarter with the -- excluding the tariff refund, it was a very impressive expansion. So I was just wondering if it's fair to assume that's maybe, like, a driver that continues throughout the back half of the year?

Yes. So thanks, Mauricio. Yes, I think we definitely have benefited from margin expansion throughout the year. That continues to be a strength. So we are seeing, obviously, in this quarter, further margin expansion. We do start to come up against more difficult comparisons from a margin standpoint in the back half of the year. So we're obviously monitoring that, but we have taken up the guidance based upon the performance that we've seen as well as the expectations in the back half of the year. And also, as Doug said, driving some of that guidance improvement is the stronger top line sales that we're anticipating and have raised top line expectations for the year. Finally, what's helping that to a certain degree as well is we have reduced debt levels significantly. So we're seeing some benefits in terms of the expense structure on that lower debt as well. So really, I think strong margin, strong top line and then further enhancements in terms of the expense structure, enabling us to drive to that higher guidance range.

Great. Thanks for the detail and congrats on the results.

Yes. And Mauricio, I would just add to what Sheamus said. We are seeing the expansion across both segments. And I just would remind you, specifically in retail, the merch margin expanded by 140 basis points in the quarter. About 40 points of that was due to IMU, but 100 basis points of improvement was related to less markdowns. So in a very promotional environment. Our team has done an amazing job of pulling back on the promotions, managing the inventory very effectively. So we're encouraged by that.

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

Thank you again for joining us today. Our results this quarter highlight the unique advantage of the Power of the Pair and the value created by the combination of our Retail and our Brand Portfolio segments. We remain focused on executing our strategy and are confident in our ability to deliver sustainable growth and long-term value creation for our shareholders. We look forward to providing further updates as the year progresses. Thank you.

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