Designer Brands Inc. ($DBI)

Good day, and welcome to the Designer Brands, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matthew Crummy, Senior Vice President. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended May 2, 2026, to the 13-week period ended May 3, 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. Contemplated within the results are immaterial corrections to prior year periods related to inadvertent errors due to a misapplication of duty rates applied to our Topo-branded products imported into the United States as outlined in our press release. 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. 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 are pleased with our start to fiscal 2026 with first quarter net sales growth in line with our plans and earnings per share exceeding our expectations, driven by strong margin expansion. Importantly, we continue to build on the momentum we generated in the back half of fiscal 2025, highlighted by solid execution across our strategic priorities and strong growth in our Brand Portfolio segment. Before I get into some additional detail on our business performance, I'd like to thank our Designer Brands associates for their continued hard work, focus and commitment to serving our customers and advancing our strategic priorities. I'm proud of how our teams executed throughout the first quarter while continuing to navigate a dynamic consumer environment. For the first quarter, net sales increased 1% year-over-year and consolidated comparable sales decreased by 1%. Performance was led by our Brand Portfolio segment that delivered strong growth of 19% versus the prior year and Retail segment sales were stable, approximately flat to last year. In addition to improved sales trends, we drove meaningful gross profit expansion with gross margin increasing 240 basis points versus last year and gross profit increasing by $21 million. We also leveraged adjusted operating expenses by 50 basis points year-over-year as we continue to drive efficiency throughout the business. Importantly, the margin improvement we delivered in the first quarter reflects more than just favorable mix. It is being driven by the structural changes we've made across inventory management, pricing, disciplined sourcing and channel profitability over the last several quarters. We believe these actions are helping create a more durable earnings model for the business going forward. Notably, we generated adjusted operating income of $19 million and adjusted EPS of $0.07, representing a significant improvement versus last year and ahead of our expectations. I'm encouraged by the strong start to the year and the progress we are making in implementing our strategic initiatives amid an uncertain external environment. Now let me discuss our results in a bit more detail. Starting with our Retail segment, which, as a reminder, reflects the aggregation of our U.S. Retail and Canada Retail operating segments. Our total sales for the first quarter were approximately flat year-over-year with comparable sales down slightly. Sales in seasonal categories were impacted by unfavorable weather in the quarter, which was more prevalent in Canada. In the U.S., revenue was up slightly and according to Circana data, in Q1, DSW held in footwear market share versus last year. Traffic trends improved, and we also continue to see strong regular price sales, supported by our enhanced assortment and effective inventory management. From a product perspective, we shared on our last call that in 2026, we are focused on winning with the merchandise that matters most to our consumers, and we saw encouraging response across several categories in the first quarter. Our dress business was strong in Q1, up approximately 4%. Affordable luxury continues its significant growth trajectory with a category-enhancing relevance and driving differentiation within the assortment. On our last earnings call, we also spoke about an opportunity to increase market share in categories adjacent to footwear, and we were pleased to drive double-digit sales growth in these categories during the first quarter, led by strong performance across the accessories assortment. At the same time, weather-related headwinds impacted our seasonal sandals business, which was down low single digits in the quarter. We also saw softness in the casual and athletic categories as consumers shifted back towards fashion and occasion-based products following several years of elevated demand in casual and athletic. These trends are not unique to our business, and we are confident that our assortment breadth positions us well to capitalize on the cyclical shifts in consumer preferences. Performance of our top 10 brands was generally in line with our retail trend during the quarter with growth across several strategic partners offset by the category headwinds I mentioned earlier. These strategic brand partners continue to play an important role in driving customer engagement and reinforcing the strength and relevance of our assortment. Our marketing team amplified our assortment strength by building on our Let Us Surprise You platform in Q1. We continue to curate our DSW brand positioning throughout the quarter, driving increased engagement and impressions across TR and social channels. We also rolled out an evolved influencer strategy with elevated storytelling-driven campaigns intending to strengthen DSW's authority as the destination for seasonally relevant occasion-based dressing through trusted influencer recommendations. We intend to continue building on these marketing initiatives through Q2, driving brand relevance as we support key seasonal categories across the business. We were encouraged to see positive momentum in our stores with improving traffic and sales trends and demand that outpaced the broader footwear market in the quarter. We believe these trends reflect the progress we are making in refining our assortment and enhancing the customer experience across our store base. As we've mentioned, we are planning several new store openings as well as several remodels this year as we continue focusing on delivering a more elevated and distinctive in-store experience. Turning to our Brand Portfolio segment. On our last call, we talked about our focus on building and scaling our brand portfolio in 2026, and we were pleased with the strong start to the year with Q1 sales increasing 19% and operating income improving by $13 million versus last year. Within our exclusive brands business, we continue to build on our strong partnership with the DSW team. Newness across the assortment resonated well with consumers during the quarter, and we remain confident in our ability to build on momentum in categories where we are seeing meaningful growth opportunities at DSW throughout the year. Topo continued its strong momentum and grew 32% during the quarter, in line with our expectations. Growth was driven by strong demand across core franchises, successful new product introductions, momentum in specialty running and expanded distribution partnerships that further strengthen the brand's positioning within the category. Jessica Simpson also delivered another strong quarter, growing 35% versus last year, benefiting from continued strength in dress trends and positive response to the evolution of the assortment, including lower heel heights across key stocks. Keds generated encouraging growth of 35%, benefiting from expanded distribution and momentum from newness across the assortment in both digital and wholesale channels as we entered the year with a sharper assortment and cleaner inventory levels. Across the portfolio, we remain focused on supporting profitable, sustainable growth while leveraging the strategic advantages of vertical integration and sourcing capabilities as well as our strong retail partnerships. As we continue scaling the Brand Portfolio segment, we believe this diversified operating model enhances both profitability and flexibility across our organization. Before I conclude, I want to share a few thoughts on our 2026 guidance. Based on our strong first quarter performance, we now expect full year EPS to trend toward the high end of the guidance range we shared on our last call. We have also had a solid start to Q2 with results trending in line with our expectations. Sheamus will share more detail on the assumptions underlying guidance in a moment. Overall, we are pleased with the progress we are driving across the business. Importantly, we continue to deliver sequential improvement in both top line trends and profitability while remaining disciplined in our execution. I'm proud of the work our teams are doing to strengthen the foundation of Designer Brands, and I remain confident that our strategic actions position us well for long-term profitable growth. With that, I'll turn it over to Sheamus.

Thank you, Doug, and good morning, everyone. We were pleased to deliver a strong start to fiscal 2026 with another quarter of improved operating performance trends. First quarter consolidated net sales of $696 million were up 1.4% versus last year, with comparable store sales down 1.1%. In our retail segment, first quarter sales were approximately flat versus last year with comparable store sales down 1.2%. We continue to see strength in average unit retail and traffic trends improved meaningfully with traffic comps improving sequentially by over 500 basis points compared to Q4. As Doug mentioned, we experienced some weather-related headwinds in Q1 that impacted sales trends, particularly in our Canada retail business. In our Brand Portfolio segment, first quarter sales increased 19.4% compared to last year, driven by strong growth in external wholesale sales and continued momentum across Topo, Jessica Simpson and Keds, with each brand contributing meaningful growth during the quarter. In addition, inter-company sales were also up 24% for the quarter. And as a reminder, these inter-company sales are eliminated through consolidation. Consolidated gross margin in the first quarter was 45.3%, representing a 240-basis point improvement versus last year, driven primarily by stronger IMU, fewer markdowns and continued optimization of our promotional strategy. We also continue to see benefits from our focus on channel profitability and fulfillment optimization within retail. As a result of these drivers of margin expansion and the strong increase in Brand Portfolio sales, consolidated gross profit increased by $20.8 million compared to last year. For the first quarter, adjusted operating expenses were 42.9% of sales, leveraging 50 basis points versus last year, driven by the cost reduction actions and organizational changes implemented during 2025 and diligent expense management during the quarter. For the first quarter, adjusted operating income was $19.4 million compared to an adjusted operating loss of $1.1 million last year, with the improvement primarily driven by gross profit expansion, as discussed earlier. In the first quarter, we had $10.1 million of net interest expense compared to $12 million last year. Our adjusted effective tax rate for the quarter was 54.5% compared to 0% last year. First quarter adjusted net income was $3.8 million or $0.07 per diluted share compared to an adjusted net loss of $13 million last year or a loss of $0.27 per diluted share in the prior year. Turning to inventory. We ended the first quarter with total inventories down 6% compared to last year as we continued to tightly manage inventory levels and focus on improving productivity across the assortment. Importantly, inventory remains clean entering the second quarter with healthy composition across key growth categories. We ended the quarter with $50 million of cash compared to $46 million in Q1 of last year and total liquidity of $189 million. We continued to prioritize balance sheet strength during the quarter and further reduced debt levels with total debt outstanding of $475 million compared to $523 million at the end of Q1 last year. Now I'd like to spend a few moments on our outlook. As Doug mentioned in his remarks, while we continue to expect sales for the fiscal year in line with our original guidance, given the strong results in Q1, we now expect full year earnings per share to trend towards the high end of our annual guidance range. In Q2, quarter-to-date performance is supportive of our approach to our annual sales guidance. The quarter began with unfavorable weather that impacted demand for seasonal products, but results improved sequentially week-over-week in May as weather has normalized, and we anticipate total sales to be flat to slightly up for the quarter. That being said, there remains a moderate amount of uncertainty with tariffs and the macro environment. We are taking a cautious approach to the potential impact of tariff dynamics on our business and assuming a substantial portion of any potential refunds will be offset by increased risk from the new Section 301 tariffs that may begin in August. Given that a significant portion of our business relies on partnerships with national brands who have their own tariff exposure, it also remains to be seen how they will respond to the latest developments on tariffs. Therefore, we have remained cautious in our approach, and we want to clarify that our earnings guidance excludes these potential impacts. Looking ahead to the balance of the year, as a reminder, we continue to anticipate sales and earnings growth to be stronger in the first half of the year. Within the second half of the year, we expect earnings to be pressured in the third quarter as we lap strong performance and return to a normalized level of incentive-based compensation. We anticipate adjusted earnings per share in the fourth quarter will improve notably year-over-year. To conclude, we're encouraged by the continued improvement in our operating performance and the momentum we have built over the last several quarters. While the macro environment remains dynamic, we remain focused on disciplined execution, inventory productivity, expense management and driving profitable growth across both our Retail and Brand Portfolio segments. We believe that the progress that we've made over the last year continues to strengthen the foundation of the business and positions Designer Brands for 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.

Just a couple of things to start. The Q2 outlook you just laid out flat to slightly up. How does that look between the retail segment and brands portfolio? How are you thinking about that when you think about the 2 segments? And then nice to see the very strong performance on the gross margin and new initiatives really coming to fruition. On that front, how much more room do you see for gross margin improvement due to all these initiatives that you've implemented over the last year?

Mauricio, this is Doug. Thanks for your question. I'll start, and then I'll turn it over to Sheamus to add a little bit of additional color on the financial aspect of it. As it relates to May, we have been encouraged by the trend that we've seen sequentially through the month. As we said, similar to Q1, there was a pretty large headwind, more impacted in the Canadian business, obviously, more prevalent in the Canadian business than it even was in the U.S., but we did see that start to rebound with pretty significant sequential improvement as we move through May. So again, I think we're prudently cautious with regards to our outlook for Q2, which, on the retail side would be flat to slightly positive. Still seeing a pretty nice increase on the brand side for Q2. That was a pretty stellar performance that brands delivered in Q1, obviously, up 19%. And again, we see a similar trend continuing into Q2. On the gross margin piece of it, a lot of it is structural with regards to the actions that the team has been working on, 240 basis point expansion on overall consolidated gross margin. But on the retail side of note, about 65% of the favorability was related to lower markdowns and about 35% related to IMU, so it's not just mix. It's a combination of really focusing on channel profitability, removing some of the stacking of the promotions that we're doing that were just not OI accretive, taking a look at the shipping threshold on the digital platform. And then obviously, the teams have done a stellar job managing inventory. We ended the quarter with 6% less inventory than last year. So just lower reliance on clearance markdowns and pulling back on a little bit of the promotionality of it as well. So that's kind of the high level as it relates to the GM aspect. Anything to add, Sheamus?

Yes. I think as Doug mentioned, the great thing about the margin improvement is we've seen it from a number of different areas, whether it's improved IMU, improved markdowns, improved promotional cadence. What we've talked about consistently is we see that as a bigger opportunity in the first half of the year. So we're seeing that in Q1. We expect to see that in Q2 as we move into the back half of the year and begin to lap some of the significant improvements that we had last year, those margin improvements relative to prior year results become a little bit more challenging. But in Q2, we are expecting to see continued margin improvement.

Got it. Very helpful. And then a couple of other things. Just below the operating line, how should we think about interest expenses, tax rate and share count just for housekeeping of our model?

Yes. So in terms of the overall guidance, obviously, we gave expectations for the full year in terms of EPS to give you some color in terms of the OpEx expenses. There are some puts and takes as you think about it relative to last year. As I commented on margin, I think we see a similar trend in terms of OpEx in the back half of the year, where last year, we had some significant benefits and reductions. And we are anticipating that there will be some pressure on those expenses as we move into the back half of the year. For example, in Q3, as we layer in our full incentive compensation programs and stock comp programs, there's upwards of a $10 million impact in terms of OpEx in the quarter relative to putting some of those programs back in full effect. They're obviously variable based upon results and profitability, but last year had no expenses in the quarter. So we are anticipating the gross expense to increase as a result of that. In terms of tax rate, this quarter was a relatively unusual quarter in terms of the tax rate being 54.5%. And that's due to a combination of factors, one being some fixed state and local taxes and the second being as we, again, layer in various executive comp expenses that are excluded for tax deductibility purposes and become permanent differences, those permanent items when calculated on a relatively low taxable income, can skew the rate to a higher-than-normal rate. And that's what we saw in Q2. For the full year, we're anticipating some impact of that, but it lessens. So I would expect our full year tax rate to be in the low 40s in terms of a percentage. And that's what we have built into our guidance expectations that we laid out earlier in the year. And as you know, we are continuing to reiterate those expectations for the full year in terms of EPS.

Got it. In terms of the share count?

Share count, we're continuing to anticipate based upon shifting back to profitability this year that the share count will include the fully diluted calculations. So we're expecting share count to be approximately 58 million shares as we move through the year.

[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.

In closing, I just want to reiterate that we are successfully transforming our business. The strategic actions that we're taking are delivering results, and we're seeing clear momentum across those priorities. Our strategy is working, winning with the merchandise that matters most to our customers, amplifying DSW's brand positioning, elevating our in-store experience and building a scalable, profitable brand portfolio. None of this progress would be possible without the dedication and the hard work of our associates. Their commitment continues to drive our success, and I want to express my sincere appreciation for everything that they do every day. I'd us, I'd like to thank everyone who joined us on today's call for your continued interest and your support. We remain focused, we are confident in our direction, and we're excited about the opportunities ahead. Thank you.

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