Designer Brands Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Business Refresh: Over 1 year ago, began refreshing business with new leaders, modernizing assortments, marketing, and rightsizing brand portfolio; saw back half of fiscal 2024 improvement but macro environment caused Q1 challenges.
• Financial Performance: First quarter comps down 8%, operating expenses cut 6% vs first quarter last year; target $20 million to $30 million in savings in 2025.
• Customer Focus: Responding to value-conscious customer by evolving communication, optimizing assortment, diversifying sourcing, leveraging VIP Rewards Program (accounting for ~90% of transactions).
• Product Pillar: Laser focus on assortment optimization, strategic partnerships, data-driven insights; athletic/athleisure outperformed, DSW gained 10 basis points in athleisure market share; inventory allocation shifted for better in-store availability, with digital orders fulfilled through logistics center up 56% YOY and store in-stock levels up 13 percentage points.
• Brand Segment: Committed to private label and wholesale growth; Topo and Keds performing well; Keds saw gross margin improvement via transition from Wolverine Worldwide production to Designer Brands own production, resulting in ~700 basis points year-over-year improvement.

Segment Performance

• Retail Businesses:
  • U.S. Retail: First quarter comparable sales down 7.3%, total sales down 7.7% due to lower traffic, especially impacted by weather earlier in the quarter.
  • Canadian Business: Sales declined 2.9% with comps down 9.2%, difference due to addition of Rubino not in comp base; performance challenging as consumer conditions in U.S. affect Canada too.
• Brand Portfolio: Sales down 7.9%, but Topo grew 84% year-over-year; operational efficiencies led to operating income growth over 30% despite total sales decline.

Guidance

• Withdrew forward-looking guidance due to volatile macro environment and unpredictable consumer sentiment; will focus on disciplined execution of levers within control to navigate near-term environment.

Risks

• Macro environment volatility affecting consumer sentiment.
• Tariff impact on sourcing costs and supply chain disruption.
• Uncertainty in consumer demand due to economic conditions.

Q: Relationship between $20M-$30M savings and SG&A, where cutting?

A: $10M headwind from no bonus accrual in 2025, and additional $20M-$30M cuts in SG&A; bonus reversal to impact Q3, cuts across various line items of SG&A.

Q: Q2 trends and tariff impact?

A: Q2 similar to Q1 trend; tariffs impact customer sentiment indirectly, brand portfolio mitigated tariff pressure through factory negotiations, retail business working with brand partners on price increases.

Q: Topo size and 2025 expectations?

A: Topo grew 84% in Q1, diversified sourcing less subject to tariff pressure; cautiously optimistic, monitoring inventory and customer sentiment.

Q: Tariff mitigation options?

A: Accelerated diversification from China, aiming for less than 20% sourcing from China by end of year; some categories still rely on China for cheaper prices.