DBI - NYSE

Good morning, and welcome to the Designer Brands First Quarter 2025 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ashley Firlan, Investor Relations. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended May 3, 2025, to the 13-week period ended May 4, 2024. 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. 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. 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 Jared Poff, Chief Financial Officer. I'll now turn the call over to Doug.

Good morning, and thank you, everyone, for joining us. I'd like to begin by saying a special thank you to our associates for their continued hard work and dedication to Designer Brands throughout the first quarter. Over 1 year ago, we began to refresh our business, bringing in new leaders, modernizing our assortments, implementing a more compelling marketing approach and rightsizing our brand portfolio organization. We've moved decisively to reset and transform our business and our team to focus on the customer. We began to see the fruits of those changes materialize in the back half of fiscal 2024, posting 2 consecutive quarters of year- over-year adjusted operating income growth and the first positive sales comp at DSW in 9 quarters. Heading into fiscal 2025, we were confident in our plans to build on this momentum. However, as the macro environment has evolved rapidly, it has introduced increased uncertainty and reduced planning visibility, particularly around consumer behavior. We are responding with agility and adjusting accordingly to navigate these shifting dynamics. As a result of these dynamics, we experienced a softer start to the year with first quarter comparable sales declining 8%, directly reflecting continuing weakening in consumer sentiment. February was the weakest month of the quarter with unfavorable weather causing further challenges. We saw sequential improvement as the quarter progressed, and I am proud of our team's efforts to navigate through this unprecedented environment. Specifically, we have thoroughly evaluated our cost structure and implemented expense cuts, which helped to deliver a 6% reduction in our operating expenses for the quarter versus first quarter last year. In total for the year, we are implementing cuts that are expected to deliver between $20 million to $30 million in savings over the course of 2025 compared to last year. Jared will provide more color about these savings a little later. As part of our response to this volatility, we have shifted our near-term focus to opportunities to amplify value in our retail channels, preserve margins, control costs as well as evaluate tariff mitigation strategies. I will share more color on these pivots later. Let's first review some of the financial highlights of each segment from the first quarter. Starting with our Retail businesses. For the first quarter, U.S. Retail reported comps were down 7.3% and total sales were down 7.7%, driven by lower traffic, especially earlier in the quarter where weather had a more material impact. This led to a challenging seasonal business across all demographics in the quarter. Turning to our Canadian business. For the first quarter, sales declined 2.9% with comps down 9.2%. The difference reflects the addition of Rubino, which is not yet included in our comp base. Overall, performance remains challenging as many of the conditions leading to a depressed U.S. consumer are also affecting the Canadian consumer. We are actively evaluating ways to better connect with the Canadian consumer in today's environment. Now to our Brand Portfolio segment. Although sales were down 7.9%, we saw strong underlying performance in several key areas. Topo continued its impressive growth trajectory, growing at 84% year-over-year, reinforcing its momentum as an emerging growth brand. In addition, the focus on operational efficiencies that began last year enabled the brand's portfolio to grow operating income by over 30% over last year despite the decline in total sales. Turning to our near-term areas of focus. As I mentioned earlier, we were encouraged by the progress we made in the back half of fiscal 2024. Importantly, we remain confident in our strategy and we'll continue to focus on the pillars of customer and product within our retail businesses while driving brand portfolio growth by scaling private label, building a more profitable wholesale model and investing in strategic brands like Topo and Keds. However, near-term volatility necessitates that we adapt our focus on clear tactical actions across the business, prioritizing value, optimizing our assortment and diversifying our sourcing and leading into growth brands. Our customer remains our first priority, and we are committed to delivering meaningful, consistent value to them across all channels. Today's customer is more value conscious, and we are responding with a multifaceted approach to meet that need. Sales declines have closely tracked with lower traffic, which we view as a direct reflection of consumer sentiment. In response, our team is evolving our approach to how we communicate our value proposition across pricing, promotions and messaging. As is consistent with our past approach, we have continued to monitor and aggregate weekly customer data to inform a more targeted and effective approach. We're emphasizing simplicity and more clearly positioning our offerings in a competitive marketplace, which includes more visible and purposeful in-store marketing that reinforces our value proposition across the assortment. We're also focused on reinforcing the value we provide beyond price from being a one-stop shop for family footwear to our differentiated assortment and growing our non-footwear accessory offering. Our VIP Rewards Program, which accounts for roughly 90% of transactions has been a key platform for testing our enhanced value messaging. We plan to leverage loyalty even more strategically to deliver targeted promotions, enabling us to deliver greater value with fewer exclusions to our most engaged customers while driving marketing efficiency. Our goal is to deepen customer relationships beyond transactions and create a rewards experience that feels both meaningful and unique. As mentioned last quarter, we are preparing to transform and relaunch the program next year. Shifting to our product pillar. We continue to operate with a laser focus on elevating and optimizing our assortment through strategic partnerships and data-driven insights, helping to improve inventory availability and productivity. Compared to last year, we are meaningfully reducing our choice count while simultaneously increasing our depth on key styles throughout the year. The work we've done so far has meaningfully improved store conversion rates, up 60 basis points year-over-year, underscoring both the strength of our product offering and how it is resonating at the point of sale. Athletic and athleisure continue to outperform relative to other categories with minimal disruption, supported by resilient global demand and a well-diversified sourcing network. As a result, we see notable opportunity for these categories to grow organically and expand their penetration in the current environment. In fact, according to Circana data for Q1, DSW gained 10 basis points in athleisure footwear market share. As it relates to our new product inventory, we are pursuing strategic expansion focused on full family premium product launches with top brand partners and the introduction of digitally native brands. Additionally, we're growing our footprint with well-known designers, offering a more exciting assortment for our customers. Ensuring strong product availability at the store level remains a key priority. To support this, we have begun to shift inventory allocation in the U.S. between digital fulfillment centers and our store locations to optimize in-store product availability. Specifically, we are improving the customer experience through better in-store product availability and faster fulfillment. The percentage of digital orders fulfilled through our logistics center increased by 56% over Q1 last year, which has helped increase store in-stock levels by 13 percentage points compared to Q4. This adjustment has allowed us to maintain broader assortment levels in store where improved availability is directly contributing to higher in-store conversion. This has also delivered efficiencies on our digital order fulfillment with fewer packages per order being mailed as more fulfillment is routed through our single point fulfillment center. Overall, we remain focused on inventory management, productivity and buying flexibility, which are foundational elements to better serve our customers. As we look to our brand segment for 2025, we remain committed to reestablishing our private label brands as margin drivers and building a more profitable wholesale business, which includes investing in our core growth names like Topo and Keds to drive top and bottom line. As we've adjusted within retail, we similarly redirected our near-term focus in the Brands segment towards proactive sourcing diversification strategies. While we previously expected tariffs to be a headwind, they have emerged as a significantly more substantial cost than anticipated across the industry, and we are actively managing the potential impact on our business. We've accelerated our sourcing diversification efforts, rebalancing and optimizing production to mitigate risk, maximize flexibility and decrease cost as we work to ensure we are not overly dependent on any one country. Recognizing that the trade and tariff negotiations are fluid, we have built in optionality and have activated plans to minimize cost exposure and supply chain disruptions. The environment remains unpredictable with our exposure fluctuating significantly within the quarter and continuing to shift into the second quarter, while the potential for significant cost headwinds, supply chain disruption and demand volatility remains. We will continue to monitor the environment and our supply chain closely and adapt as needed. Regardless, we currently expect less than half of our sourcing will come from China by the end of the year, down from 70% at the start of the year. We continue to view private label as a long-term margin driver and truly a unique differentiator for DBI given our design and sourcing capabilities and our commanding retail distribution and market share at DSW and The Shoe Co. Turning to our brands themselves. We continue to advance our brand strategy for our wholesale brands and continue to invest in key brands such as Topo and Keds that are well positioned to long-term growth. Topo continues to perform exceptionally well with sales up 84% during the quarter. This was primarily built on the brand's continued strategic distribution expansion as well as strong sell- through in reorders from existing accounts. As of the end of the quarter, the brand was in over 1,200 points of domestic distribution, an increase of 43% versus the first quarter of 2024. Topo also saw great results in new product launches, most notably the Phantom 4, the brand's top road shoe and Mountain Racer, the brand's top trail shoe. In addition, the brand had already begun diversifying out of China before the current tariffs took effect, leaving it well positioned to drive margins while continuing to scale revenue. Keds continues to see increased momentum as we have cleaned up the marketplace of excess inventory and relaunched some key styles and franchises with new comfort features. Although this produced top line headwinds, it resulted in gross margin improvement of approximately 700 basis points year-over-year. This improvement was primarily driven by the transition from Wolverine Worldwide production to Designer Brands own production in the first quarter, resulting in a significant reduction in landed cost. We believe that both Topo and Keds demonstrate pricing power and expect demand for these brands to withstand anticipated pricing increases. We are also reviewing pricing across our portfolio, including our exclusive brands as one lever to help mitigate the impact of tariffs and increased sourcing costs. Additionally, we are focused on managing other items that we can control, including preserving and enhancing liquidity by reducing planned CapEx and tightly focusing on inventory levels. Before I conclude, I want to share a few thoughts on our 2025 guidance. As you know, the current environment remains volatile, bringing heightened anxiety to an already cautious discretionary consumer. Consumer sentiment reached its second lowest point on record in May. This volatility makes any future forecast highly unpredictable. As a result, we, like many companies in this space, have determined that forward-looking projections are likely to evolve as we navigate through this time of extreme uncertainty. Therefore, we have made the decision to withdraw our guidance for the time being. We will continue to focus on disciplined execution of the levers within our control to navigate the near-term environment. I'm confident that in doing so, we are building a business rooted in the strength of our brands, focused on the customer and well positioned for long-term value creation. Before I close, I want to emphasize that we remain committed to our strategy and our transformation. I am incredibly proud of our team members who have worked hard to advance our near-term priorities, and I am confident that we are putting ourselves in a strong position to navigate the near term while building on our long-term strategy. With that, I'll turn it over to Jared. Jared?

Thank you, Doug, and good morning, everyone. Amidst a tough quarter, I want to commend our team for staying focused and executing against our strategic priorities. As Doug noted, our results came in softer than anticipated, reflecting the ongoing macro environment and pressure on consumer discretionary spending. Despite these headwinds, we remain committed to advancing our strategy. Let me provide a bit more detail on our first quarter financial results. For the first quarter of fiscal 2025, net sales of $687 million were down 8% and comps were down 7.8%. In our U.S. Retail segment, sales were down 7.7% with comps down 7.3%. Both in-store and online traffic were pressured through the period, but improved sequentially on a monthly basis. We also saw fewer returns during the quarter, which we believe underscores the strong work we've done with our assortment. Sales of our top 8 brands achieved a flat comp compared to the first quarter last year, performing much stronger than the balance of the assortment and increased penetration growing to 43% of sales from 40% last year. Our seasonal product remained pressured and even our strongest categories like athletic experienced compression with sales down 4%. In our Canada Retail segment, sales were down 2.9% in the first quarter compared to last year, with comps down 9.2%, primarily due to lower traffic due to the compressed consumer spending. Total sales benefited from the addition of the Rubino business, but also faced exchange rate headwinds, resulting in a decline in total sales versus last year. Finally, in our Brand Portfolio segment, total sales were down 7.9% to last year as most retailers in this space are approaching the year with the same level of conservatism that we are at DSW. However, thanks to the expense efficiency work that began last year, the Brand Portfolio segment saw a 23% reduction in operating expenses, allowing operating income to grow by over 30% despite the challenging top line. While it was a challenging quarter for many of our brands, we are pleased that the Topo brand continues to be a stronghold in our assortment, posting 84% growth in sales year-over-year. Jessica also remained a bright spot in our dress and seasonal assortment with sales up 6% in wholesale sales to partners outside of DSW. Consolidated gross margin of 43% in the first quarter decreased by nearly 120 basis points versus the prior year, primarily driven by increased markdowns compared to last year deployed to respond to the weaker traffic and clear through inventory. For the first quarter, adjusted operating expenses dropped $20 million versus last year, but deleveraged by 80 basis points to 43.4% of sales given the sales decline. Nearly half of that decline was related to the annual bonus still being accrued in Q1 of last year. However, with no accrual occurring this year, given the current performance, we will have a headwind of roughly $10 million in the third quarter of this year. Additionally, as Doug mentioned earlier, in light of the highly volatile macro-environment and the impact it is having on our business, we have been looking aggressively at our expense structure and capital expenditures. General reductions in spend across various line items are anticipated to deliver approximately $20 million to $30 million in expense dollar savings across fiscal 2025 as compared to 2024. For the first quarter, adjusted operating income was essentially breakeven compared to operating income of $14.7 million last year. In the first quarter of 2025, we had $11.9 million of net interest expense compared to $11.6 million last year. Our effective tax rate in the first quarter on our adjusted results was negative 1.7% compared to negative 53.3% last year. Our first quarter adjusted net loss was $12.5 million versus a gain of $4.8 million last year or a loss of $0.26 in diluted earnings per share compared to a gain of $0.08 last year. Turning to our inventory. We ended the first quarter with total inventories up 0.5% versus the prior year as we move to deliver product ahead of tariff increases. Given the current environment, we feel we have the right mix of inventory and have the flexibility to chase into demand where we are seeing momentum. We ended the first quarter with $46 million of cash. Our total liquidity, which includes cash and availability under our revolver was $171.5 million. Total debt outstanding was $522.9 million as of the end of the quarter. Before I conclude, I would like to echo Doug's comments regarding the highly volatile forward-looking environment we are facing. While we feel it is appropriate to withdraw our forward- looking guidance at this time, rest assured we are doing everything within our control to operate the business as optimally as possible during this time. The operating expense cuts I noted earlier have been implemented and every dollar of spend is being highly scrutinized. Additionally, we have pulled down our anticipated annual capital spending from $50 million to $40 million. We are closely monitoring inventory investments to ensure we have the products available for the demand that is generated, but are maintaining a highly flexible open to buy to respond to a dynamic consumer environment. And as Doug noted earlier, we are leaning into the value we offer our customers through inventory pricing and strong messaging. While this is a challenging time, I believe we will emerge from this leaner and more nimble and ready to deliver even more strongly on our strategy once the environment stabilizes. With that, we will open the call to questions. Operator?

[Operator Instructions] Today's first question comes from Dylan Carden with William Blair.

Jared, I think you kind of addressed it there towards the end, but the $20 million to $30 million in savings related to the $50 million that you'd anticipate sort of increasing SG&A into this year. Can you kind of just speak to the relationship between those 2 numbers and where you're cutting?

Yes, for sure, Dylan. So initially, when we started the year, we knew we had close to a $30 million headwind coming our way because we didn't have a bonus accrued for FY '24. And of course, we start every year assuming we're going to be able to pay a bonus. The way that, that materialized in '24 was we were accruing it fully in Q1, partially in Q2, but then we reversed it all in Q3. And so for the year, we had 0, but it did show up as part of our expense structure throughout that year last year. Given the complete turnaround of the business this year in Q1, there was no bonus accrual at all. So that provided about $10 million, just under $10 million of year-over- year favorability in expenses in Q1 of this year. But as I mentioned in the script, we will see the reverse of that or headwinds of that come out in Q3 when we had our bonus reversal last year get reversed. So like-for-like, that incremental expenses that we referenced last year at our original guidance related to bonus is not going to be there. In addition, we have implemented cuts of about $20 million to $30 million below last year. So while we're not giving guidance for the year, if you do look at our SG&A for the full year, the cuts we've made, we believe, will result in $20 million to $30 million below that number for all of 2025.

And then just -- can you just add a little bit more on the reversal in the Canadian and brand portfolio, and particularly on sort of like the comp side for the brand portfolio. Was that mostly Keds? And in Canada, it's been weak. Some other Canadian retailers are talking about that situation with particularly sort of the adjustable mortgages getting better. Just kind of what you're seeing between those 2 segments?

Yes. Thanks, Dylan. This is Doug. I mean on the Canadian market, I'd say a lot of the consumer sentiment that we're seeing in the U.S. is obviously very consistent with what the Canada business is seeing as well. Just downward pressure on the volatility and the uncertainty in that environment has driven the negative comp. We had a little bit of noise in there, as you know, because Rubino was not in our last year comp. But again, very similar kind of customer sentiment that's happening in the U.S. is also happening in Canada. And then on the brand side, I mean, it was a little bit of a mixed bag. Obviously, the Topo business continues to be really strong. It's up 84% in the quarter. And then as I said in the script, Keds had a little bit of headwinds on the top line, but that was because we were up against some liquidation for last year, and they actually had quite an expansion on the gross margin side.

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

Maybe could you talk a little bit about what you're seeing quarter-to-date? And sorry if I missed this, if you talked about any expectations if like for Q2, you're already anticipating an impact from tariffs? Yes, that would be my first 2 questions, sorry.

Yes. Thanks, Mauricio. This is Doug. We are experiencing a similar trend in Q2, similar to how we exited Q1. So that would be my comment on Q2. And then the tariff impact, as we had shared earlier, the biggest concern we have overall as Designer Brands is the indirect impact that tariffs are having on just the uncertainty and the volatility on customer sentiment. If you think about the brand portfolio, which is less -- well less than 20% of our overall business, the team has done a really good job of mitigating what at one point, we thought was $100 million of pressure on the gross profit line has mitigated that down significantly through factory negotiations, resourcing product, taking very select pricing increases to be able to mitigate that. Again, but our retail business is heavily reliant on our national brand partners, and we're obviously working very closely with them as they are also selectively passing on price increases. Our overall approach is to maintain our IMU. But again, we're working very closely with our brand partners to closely manage any price increases.

Got it. Very helpful. And then on Topo, exceptional growth and very good performance. Could you remind us like how are you thinking about -- how big the brand is right now for you? And what are your expectations for 2025? Like how much revenue do you expect from that business in 2025?

Well, again, as we shared, it grew 84% in the quarter, just exceptional growth. The team has done a really good job. [indiscernible] optimistic about that. I just would balance that with kind of the ongoing uncertainty and the volatility that the discretionary consumer is definitely under pressure. But the teams have done a really nice job of managing the inventory there. As you know, that category is much more diversified from a sourcing perspective. So a little bit less subject to the pressure of tariffs. And we'll carefully monitor the inventory. But again, the team did a really good job navigating that in Q1 as well. That's always been kind of a strong suit of the company, specifically at DSW. And then as it relates to holiday, I mean, we'll obviously stay very close to it. The teams are monitoring it every day with regards to reading and reacting to consumers and how they're responding in the moment. But there's -- any relief in this, I mean, we'll be well positioned to take advantage of that. But -- and again, that was a strong suit for us last year as we really leaned into gifting and the messaging and marketing of how that actually showed up in store as well. So we have that playbook ready to execute again this year. And I'd say, overall, we're cautiously optimistic. It's just the uncertainty of what's happening with customer sentiment.

And Serna, on your second question around the mitigation options on tariffs, the one thing I would reiterate is we certainly were already looking even before the tariff announcements to diverse -- start more aggressively diversifying outside of China. We certainly accelerated that. We've got options that could take us all the way down to almost 5%. But on the flip side, there's still a much more stable and cheaper supply chain in China for nonathletic footwear. So being something more than 5% might be more desirable, but it really will depend on where things shake out. But lower than where we started is certainly where we will end up the year. I will just remind you, only less than 20% of the products that we sell do we actually control where they're made. The rest of them, we buy from someone else and certainly are not part of this decisions.

I'd just add to what Jared said, I mean, our team has done a really nice job accelerating our diversification efforts so that we have greater optionality on those categories. But we want to stay close to it because, again, in many cases, the prices in China are still quite a bit favorable, particularly in the dress category where we overpenetrate.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Howe for any closing remarks.

In closing, I'd like to just say thank you again to all of our Designer Brands associates for their continued hard work and dedication throughout the quarter. And thanks to everyone who joined us today. We look forward to updating you in future months as we advance through the balance of the year. Thank you.