Morning and welcome to the Designer Brands Inc. Second Quarter 2025 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 Ashley Furlan, Investor Relations. Please go ahead. Ashley F

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ending August 2, 2025, to the 13-week period ending August 3, 2024. 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 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. Now let me turn the call over to Doug.

Good morning and thank you everyone for joining us. I'd like to begin by saying how proud I am of the improvements we've made throughout the quarter, due in no small part to the hard work and dedication of our associates. We are pleased with the meaningful progress against our strategic initiatives throughout the second quarter and are excited to report this positive momentum has carried forward into August. In the second quarter, we delivered sequential improvement over Q1, reflecting the impact of targeted operational efforts and the resilience of our team. Our total sales for the quarter were down 4% year over year, with a 5% decline in comparable sales. This was a 280 basis point improvement from the first quarter comps, and despite remaining volatility and uncertainty, we believe this reflects the effectiveness of our strategies and gradual improvement in consumer sentiment. On the expense side, adjusted operating expenses were down over $14 million last year, and we achieved 350 basis points of leverage compared to Q1, demonstrating disciplined cost management and supporting year-over-year EPS growth. Let me review some highlights from each segment with the second quarter. Starting with our retail businesses. For the second quarter, U.S. retail comps were down 5%, with total sales also down 5%. These declines were an improvement from the first quarter, correlated with slightly improved consumer sentiment and sequential improvement in store traffic as we move through the quarter. While broader macroeconomic pressures persist, these trends offer encouraging signs that some headwinds may be starting to ease. Additionally, we know that the largest number of signups for our VIP rewards program happened in stores. As store traffic improves, it should have a positive impact on the program, whose members drive over 90% of our transactions. Store conversion was up 1% versus last year, as our strong assortment and improved in-stock levels resonated with customers. To support further improvements in traffic and conversion, we are continuing to invest in marketing both in and outside of stores, meeting our customers where they are, with the styles they are seeking. In stores, we've seen positive results from the collateral and branded in-caps that have echoed consistent improved messaging. Our simplified pricing strategy also helped drive clearance sales up 3% versus last year. Delivering value has always been a core part of our model, and this approach reinforces our commitment to making it even easier for customers to find. As we utilize marketing to acquire new customers, we've also successfully launched a new partnership with DoorDash. While it's early in this relationship, we're encouraged that approximately 85% of our transactions from the DoorDash marketplace so far represent customers that are new to DSW. We believe this is also helping to bolster interest in our stores across local geographies. Within our stores, we launched several trend-driven campaigns with key national brands this summer. Specifically, we executed a Birkenstock front-of-store takeover across all locations. The campaign was fully integrated across all channels, reinforced by a revitalized digital storefront and VIP program integration. Additionally, social engagement continued to climb in Q2, fueled by stronger content strategies and creator partnerships that continue to build relevancy with the consumer. We are excited to continue to leverage these partnerships throughout the back-to-school season. In our U.S. retail business, a few categories meaningfully outpaced the balance of the business. This was led by strength in the women's dress category, which delivered a positive 5% comp, a 900 basis point improvement from the first quarter. Our top eight brands also continued to outperform the balance of chain with a positive 1% comp for the quarter. Penetration of our top eight brands grew 300 basis points over last year, accounting for 45% of total sales in the quarter. On the athletic side, our adult business showed sequential improvement, and Kids Athletic posted a flat comp, representing a 500 basis point improvement over the prior quarter, underpinned by a strong start to the back-to-school season. As we discussed last quarter, we have been leaning more overtly into our back-to-school marketing to reinforce our position as a true destination and see this resonating as we continue to see positive momentum in August, with further sequential improvement in comps. We spoke last quarter about our improved distribution strategy and increased focus on enhancing digital profitability. We made progress on this in the second quarter, optimizing our marketing spend and placing stronger focus on cultivating customers across channels. Looking ahead, we plan to continue leaning into our omnichannel approach to deepen relationships and enhance customer lifetime value. Turning to our Canadian business, total sales in the second quarter showed sequential improvement over Q1 and held flat year over year. The trajectory continued to sequentially improve throughout the quarter, with July turning to a positive comp. Overall, this steady progress gives us cautious optimism as we look ahead. Now to our brands portfolio segment. Although sales were down 24% compared to last year, this was largely driven by lower internal sales as anticipated. Importantly, wholesale activity across all other external retail partners delivered year-over-year growth. Turning to our near-term areas of focus, we remain confident in our strategy and will continue to focus on the two pillars of customer and product within our retail businesses. In brands, we will drive growth by scaling private label, building a more profitable wholesale model, and investing in strategic growth brands like Topo Athletic and Keds. Our customer remains our first priority, and we are committed to delivering meaningful, consistent value to them across all channels. With our customer squarely in mind, we are excited about the DSW brand repositioning that we recently launched. This includes implementation of newly branded customer-facing assets, including an updated DSW logo, a refreshed fall marketing campaign, gift cards, and evergreen signage. As part of our brand repositioning, we were excited to unveil our new tagline, "Let Us Surprise You." This marks a pivotal step in reinvigorating our DSW brand identity and leans back into what truly differentiates the DSW shoe buying experience. We are actively bringing the campaign to life with an optimized marketing approach, which will help to balance spend between top-of-funnel and personalized activations, raise brand awareness, and deepen customer engagement. We're also consistently focusing on highlighting the value we provide. As we discussed before, we have moved clearance pricing to a flat % off versus the multiple discount levels we used in the past. We are selectively offering additional discounts on clearance, marketed as buzzworthy, as well as rolling out exciting limited-time events. While it's early, we're encouraged by the trends we are seeing, particularly as average clearance markdown rates are trending lower than in prior periods. Shifting to our product pillar, we continue to operate with focus on elevating and evolving our assortment while driving improvement in inventory availability and productivity. We are meaningfully reducing our choice count while simultaneously increasing our depth on key styles throughout the year. Our choice count for the back half of 2025 is planned down 25% versus last year, and our depth is planned up 15%, underscoring our focus on inventory productivity. Looking ahead, we are adding depth in our core styles, including our top eight brands, ensuring we are focusing on the areas of highest demand. Going into fall, we are also seeing positive signs as it relates to regular price boosts, which we believe may signal potential strength in our seasonal merchandise this fall. On the product availability side, we have continued to shift inventory allocation in the U.S. between digital fulfillment centers and our store locations to optimize in-store product availability. Our in-stock levels of regular priced products materially improved to approximately 70%, a clear sign of progress in our inventory availability. We are seeing this strategy validated by our DSW store customers, who are driving our positive conversion comps. We continue to optimize our digital fulfillment through our distribution center, which is operationally more efficient than fulfilling from stores, while also protecting store inventory to ensure the shoe she wants is in the store when she visits. In the second quarter, we fulfilled over 80% more of our digital demand through our logistics center compared to last year. Overall, this adjustment has allowed us to protect our in-store inventory, focus on cost efficiencies, and post higher store conversion rates, all of which are foundational elements to better serve our customers. As we continue to focus on the pillars of customer and product in our retail businesses, we recently unveiled a reimagined DSW store in Framingham, Massachusetts. This store is the first within the DSW fleet to fully integrate the DSW brand positioning of "Let Us Surprise You," with immersive, playful elements designed to drive deeper customer engagement and discovery within our curated assortment. As we pilot new and emerging technologies for potential integration across our retail footprint, this store location will be an important testing ground for modern and innovative shopping experiences. Aligned with our larger retail strategy to transform and differentiate our retail experience, this new store format features a suite of services, including Fitfinder technology, shoe protection services, and a dedicated try-on area with augmented reality-enabled try-on kiosks that allow customers to build complete outfits from toe to head. A customization station further elevates the experience, enabling customers to personalize their purchases through embroidery, engraving, and digital printing. We believe this initiative represents a meaningful step forward in our efforts to evolve the DSW brand, deepen customer loyalty, leverage our stores as differentiators, and unlock long-term value. Turning to our brand segment, our sourcing team has done an admirable job mitigating the impact of tariffs and has made meaningful progress in our strategy to continue to diversify our supply base. Moving forward, we will continue to prioritize diversification to avoid over-reliance on any one country of origin, as the tariff environment remains highly unpredictable. Turning to our brands themselves, at Topo, we continue to meaningfully expand door count and shelf space in existing locations. Additionally, our DTC business continues to deliver outsized growth. Topo was early in raising prices as we saw tariff risks materialize, and they have helped to mitigate a significant portion of these costs. We have seen no impact on sales or growth rates by doing so. Before I conclude, I want to share a few thoughts on our 2025 guidance. Given the ongoing volatility with the recent tariff increases extended and the continued consumer caution around discretionary spending, we decided to continue to withhold our guidance. We will remain focused on disciplined execution across the areas within our control as we navigate the near-term environment. By doing so, I'm confident we're building a business grounded in the strength of our brand, centered on the customer, and positioned to drive sustainable long-term value. I want to emphasize that we remain committed to our strategy and our transformation. We are encouraged by the early signs of positive momentum and pleased with the sequential improvement we've delivered. We remain cautiously optimistic for the remainder of the year, as there is still a lot of macro uncertainty. As always, I am deeply proud of our team members, whose commitment, resilience, and focus have been the driving force behind our progress. Their ability to navigate challenges while continuing to deliver excellence exemplifies the culture and strength of our organization and will position us well for long-term growth. With that, I'll turn it over to Jared. Jared?

Thank you, Doug, and good morning, everyone. I want to begin by echoing Doug's comment that the sequential improvement we've seen this quarter is a significant step forward. Despite ongoing macroeconomic headwinds and continued pressure on consumer discretionary spending, our focus on advancing our strategy is delivering improved results. Let me provide a bit more detail on our second quarter financial results. For the second quarter of fiscal 2025, our net sales of $739.8 million declined 4.2% year over year, with comp sales down 5%. This represents a significant improvement from Q1, where net sales were down 8% from last year. In our U.S. retail segment, sales declined 4.8% year over year, with comp sales down 4.9%. This represents another significant improvement from Q1. We are also encouraged by our women's dress performance, which posted a 5% positive comp in the quarter and represents a significant part of the business at almost 12% of total sales. While athletic sales were a slightly negative comp of down 2%, we did see a two-point comp improvement from the first quarter. In our Canada retail segment, sales were up 0.4% in the second quarter compared to last year, with comps down 0.6%, another significant improvement from the first quarter. Finally, in our brand portfolio segment, total sales were down 23.8% to last year, largely driven by the anticipated decline of internal sales to DSW. I would like to echo Doug's comment about the strength of our brand's external wholesale business, which was up 7%. While we continued to see challenges throughout the quarter, Topo Athletic remained a standout in our assortment, posting 45% growth in sales year over year. Within our dress and seasonal assortment, Jessica Simpson and Vince Camuto continued to be strong performers, achieving sales growth of 12% and 17% in wholesale sales to partners outside of DSW. Consolidated gross margin was 43.7% in the second quarter and decreased by 30 basis points versus the prior year, primarily driven by lower IMU due to increased penetration of the athletic category, but leveraged 70 basis points from the first quarter. For the second quarter, adjusted operating expenses dropped $14.1 million versus last year, slightly leveraging by 20 basis points year over year. As we discussed in our last call, in response to the highly volatile macro environment and its impact on our business, we have taken an aggressive, disciplined approach to managing our expense structure and capital expenditures. With these actions, we currently are on track to deliver approximately $20 million to $30 million in expense dollar savings across fiscal 2025 as compared to 2024. As a reminder, our third quarter will include a headwind of $9 million compared to the prior year from our bonus accrual reversal last year during Q3. For the second quarter, adjusted operating income was $30.3 million compared to operating income of $32.5 million last year. In the second quarter of 2025, we had $11.7 million of net interest expense compared to $11 million last year. Our effective tax rate in the second quarter on our adjusted results was 10.1% compared to 20.6% last year. Our second quarter adjusted net income was $16.7 million versus $17.1 million last year, and $0.34 in adjusted diluted earnings per share for the quarter, which I'm happy to report was above last year's EPS of $0.29. Turning to our inventory, we ended the second quarter with total inventories down 5% to last year. During the quarter, we utilized excess cash to pay down debts, ending the quarter with total debt outstanding of $516.3 million. Subsequent to the end of the second quarter, we have further paid down debt to end fiscal August with outstanding debt of $476.1 million. We ended the second quarter with $44.9 million of cash, and our total liquidity as of the end of the second quarter, which includes cash and availability under our revolver, was $149.2 million. While we are encouraged by the progress made since Q1 and remain cautiously optimistic about the second half of fiscal 2025, there is still work ahead. Persistent macroeconomic headwinds and uncertainties related to tariffs have led us to the decision to continue to withhold full-year guidance as we focus on the factors within our control. To conclude, I'm encouraged by the progress we achieved during the second quarter, and as the macro environment stabilizes, I am confident that we are well positioned to advance our strategy. With that, we will open the call to questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Mauricio Serna at UBS. Please go ahead.

Great. Good morning. Thanks for taking my question. I guess I wanted to ask if you could elaborate on the interquarter trends. It seems like things really got better as the quarter progressed. Could you give us a sense of what were the comps, how the comp sales looked during the quarter, and how to think about that, considering that you mentioned the momentum continued into August so far? Thank you.

Yeah. Hi, Mauricio. This is Doug. Thanks for your question. Yeah, we saw a sequential improvement as we moved through the quarter. As we said in the prepared remarks, we're obviously very encouraged by the trend that we saw in athletics, both in kids and adults. Most notably, the dramatic improvement that we saw in women's dress, which was a 900 basis point improvement in the quarter, that's always been an explorer area of strength for us, obviously. That has continued even as we've advanced in August, as we said. We're very encouraged by that. I mentioned very early on that the initial boot selling, specifically regular price, is very encouraging as well. We think that bodes well for not only the, you know, it's really a fashion inning, so we feel really strongly about that assortment and are cautiously optimistic as we move through the back half of the year.

Got it. I guess just wondering, at the end of the quarter, were you still on negative comps, or were you actually positive as a total company?

Still slightly negative, we've seen sequential improvement as we've now moved through August.

Mauricio, one thing I would remind you, and we talked about it on the last call, we are taking a very different approach than we historically have towards our digital business, recognizing there's a large part of that that it's very difficult to make actual money on. We have been very deliberately pulling back the marketing we spend to chase some of those empty calorie sales as well as the sales themselves. We're really focused on where we can provide a differentiation, which is our stores, and are seeing some really strong trends there. As Doug mentioned in his script, we saw that turn to positive in August in our stores' comps. When you do look at the total, you do need to make sure and understand there's a piece of it that we're okay with negative comps on, on the digital specifically, as long as we're improving our profitability.

To Jared's point, we are seeing positive conversion in stores as a result of both the assortment and the inventory fulfillment strategy that we've spoken about. That was actually very encouraging to see that the assortment is resonating with customers specifically in stores. Just one quick follow-up on the topic of profitability. Could you maybe give us a little bit more detail on Q3, like how much of a pressure are you foreseeing because of tariffs? I guess at this point, you already have that inventory, so you probably have an idea of what's the weighted average tariff or the incremental cost just related to that in Q3, in your Q3, yes.

Yeah, Mauricio, let me kind of give you some high level, and Jared can answer the color here as well. I just want to remind everyone that, you know, the overwhelming concern that we've had from the onset has not been the direct impact of tariff. Because when you look at it in the grand scheme of things, like our brand's portfolio, only import about 20% of product. The rest of it, we land domestically. At DSW, obviously, we're largely reliant on our brand partners. We have always been most concerned about the indirect impact of tariff. We've been working very closely on the retail side. We've had brand partners strategically, you know, very selectively pass on price increases. We've largely passed those on and maintained our IMU. The majority of those are just now coming customer-facing in the last couple of weeks. We're cautiously optimistic, but that's, you know, why we have concern. It's always been more around that indirect impact that it would have on overall consumer sentiment as opposed to the direct impact. We've selectively taken price increases in some of our private label products. Haven't had, you know, a negative reaction to that. Again, it's early days and we are kind of cautiously optimistic as we move through the balance of the back half.

Thank you so much.

Again, if you have a question, please press star then one. The next question comes from Dana Telsey at Telsey Group. Please go ahead.

Hi, good morning, everyone. As you just put out the new marketing campaign with "Let Us Surprise You," what are the markers that you're looking for given that 70% of your customer base shops in store? You mentioned the store in Framingham, Massachusetts. How are you thinking of store productivity with this campaign? How are you thinking of openings and closings? Is there any real estate bent to it that you'll get from the enhanced marketing? Marketing is a percent of sales. How are you thinking about that this year? Thank you.

Yeah, good morning, Dana. This is Doug. Yeah, we're very excited about the brand campaign. It is really early days. We just launched that actually in Q3. It went live on September 2. I'd say anecdotally, the feedback has been very, very positive from both customers' interactions, certainly from our associates. We are very happy with just the positioning of it. It's a bit of a wink and a nod. It's whimsical. It just feels like encouraging her to come in and kind of enjoy shopping in our stores, which again, we believe are very much our core differentiator. You walk into one of our stores, there's 2,000 choices of footwear. We want her to really enjoy that experience. They spend well over 30 minutes in the store. We're happy about that. It's very early days as it relates to the reaction. That's gotten a lot of impressions and pickup on the prep. That's all been very overwhelmingly positive as well. To your point, I mean, we're going to be very thoughtful around how this shows up in-store in our CRM and all of our marketing channels. We're obviously, as Jared said, really focusing on channel profitability. We want to make sure that we're continuing to focus on optimizing that marketing investment. We'll be happy to report out as we get a little bit further along, but it's fairly anecdotal at this point. Again, very encouraged by the work. It was all informed by qualitative and quantitative research. We took the appropriate time to actually get to the messaging. To me, it feels kind of reminiscent of, you know, DSW's core strength. Surprising by great brands, great value, great assortment in our stores. We look forward to reporting out on the specifics, but a bit premature to do that at this point.

You know, Dana, from the marketing as a % of sales, I would say we are certainly cognizant. We are probably at the higher end of much of our peer set, but we think it's important to highlight where the differentiation is for DSW versus other shoe chains and shoe stores that are out there. We have mentioned when we kicked this off, it has been a minute, a very long minute since we have done some DSW brand marketing. Also, we just talked about how we are pulling back on aggressively chasing some of those empty calorie digital sales, which has freed up some marketing dollars on that front. Overall, we're not seeing or expecting significant deleverage on our marketing SG&A line. We think it's more of an optimizing and kind of pivoting. As long as it's getting the returns that we're seeing and we're tracking that and we're tracking it very closely, we'll continue to fund that where it makes sense.

Got it. You had mentioned Birkenstock is one of the brands with an activation that performed well. What are you seeing from brands? How is Nike performing? Any highlights of what you're expecting for brand activations or performance in Q4? Thank you.

Yeah, Dana, that's a great question. You know, Birkenstock was among the top eight brands that we're tracking. We're really encouraged by the fact that those brands, as we said, delivered a 1% comp and their penetration increased to 45% of total sales. Birkenstock is one example, but the team has done a really good job of providing more brand collateral in stores, really telling a brand story, getting behind those brands that the customers are craving right now. That'll continue to be our focus going forward. We're fortunate to have great partnerships with those key brands. We're maintaining better in-stock levels with them, getting more access to product, and continue to be very encouraged by those top eight brands, of which Nike is obviously one of them.

Thank you.

Sure.

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

Great. Thanks. Just a quick follow-up. I think, you know, I recall you mentioned you're planning to have like deeper assortment. Could you elaborate a little bit more on what you're bringing, you know, maybe from a brand's perspective or category perspective? You know, like where is this deepening in assortment taking place? Just as a reminder, maybe on the puts and takes on your expectation of SG&A dollars to be down $20 to $30 million for the full year. Could you break that out into what are the different buckets that are driving that decline? Thank you.

Yeah, thanks, Mauricio. I'll take the first part of that and then I'll let Jared answer the SG&A piece. From an inventory perspective, as we've shared earlier this year, the teams are really focused on increasing our product availability, so our in-stock. That applies to the top brands, it applies to the top categories. As I said in my prepared remarks, our choice count for the back half is down 25%, but our depth is up 15%. That's a meaningful change and is driving a pretty strong result in store conversion. When we do customer intercept interviews, the number one reason when a customer leaves a store without a purchase is they didn't find their size. This goes squarely at that with regards to making sure that we have the style she wants and the size she wants when she comes into the store. That's the benefit we're actually seeing on the inventory productivity.

On the $20 to $30 million, I would kind of bucket it this way. About a third of that is professional fees, consultants, and things like that that we had been using for various initiatives that, you know, we have certainly ratcheted that down to things that are just absolutely critical. We're getting an immediate payback. We've got roughly around half of the savings from personnel-related type of actions. There were some corporate actions taken earlier in the year, as well as the flex that goes with the comps that we're seeing out in the store land. The balance is just some puts and takes along lines like depreciation, occupancy, things like that.

Understood. Thank you very much.

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

I just closed by saying that we are encouraged by the early signs of positive momentum, and we were pleased with the sequential improvement that we delivered throughout the quarter. I want to say thank you again to all of our team members for their unwavering commitment and their focus as they continue to operate with a sense of urgency to move the business forward. Thank you to all of you for joining us today.

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