DBI

Overall Business Performance

• Q1 2026 got off to a strong start to fiscal 2026, with net sales growth matching planned expectations, adjusted EPS of 7 cents exceeding forecasts, and 240 basis points of gross margin expansion year-over-year.
• Gross profit grew by $20.8 million year-over-year, driven by stronger initial markup (IMU), fewer markdowns, optimized promotional strategy, and channel profitability improvements. Adjusted operating expenses leveraged 50 basis points to 42.9% of sales, following 2025 cost reduction and organizational restructuring.
• Total inventory ended Q1 down 6% year-over-year, with clean inventory composition concentrated in high-growth categories. Ending cash was $50 million, total liquidity hit $189 million, and total debt was reduced to $475 million from $523 million in Q1 2025, strengthening the balance sheet.

Retail Segment Operations

• Unfavorable seasonal weather hurt the sandals business (down low single digits) and disproportionately impacted Canada; casual and athletic categories saw softness as consumer demand shifted back to fashion and occasion-based products after years of elevated casual/athletic demand.
• Positive performance highlights include 4% growth in the dress category, ongoing double-digit growth in affordable luxury, and double-digit sales growth in footwear-adjacent categories (led by accessories).
• Marketing expanded the "Let Us Surprise You" platform, launched an updated influencer storytelling strategy to reinforce DSW's positioning as a seasonal occasion-based footwear destination, and increased engagement across PR and social channels. The company plans to proceed with scheduled new store openings and remodels in 2026 to elevate the in-store customer experience.

Brand Portfolio Segment Operations

• New product assortment launches across exclusive brands resonated with consumers at DSW, and the segment continues to leverage vertical integration, sourcing capabilities, and existing retail partnerships to drive profitable scalable growth.
• Topo's growth stemmed from strong core franchise demand, successful new product launches, momentum in specialty running, and expanded distribution partnerships. Jessica Simpson's growth was driven by strong dress category trends, consumer approval of assortment updates (including lower heel heights on core styles), and expanded distribution across digital and wholesale channels.

• Full-year 2026 net sales are expected to remain in line with the original guidance range provided on the prior earnings call. After a strong Q1 performance, full-year adjusted EPS is now expected to trend toward the high end of the previously announced guidance range.
• Q2 2026 sales are anticipated to be flat to slightly up year-over-year, with retail segment sales expected to be slightly positive and the brand portfolio segment expected to continue its strong double-digit growth trend. Sequential sales improvement in May offset early Q2 unfavorable weather impacts.
• Full-year sales and earnings growth are expected to be concentrated in the first half of 2026. Q3 2026 earnings will face pressure from lapping the prior year's strong performance and the return of normalized incentive-based compensation, while Q4 2026 adjusted EPS is expected to see notable year-over-year improvement.
• The full-year adjusted effective tax rate is expected to land in the low 40% range, with fully diluted share count expected to average approximately 58 million shares for the full year.

Consolidated net sales for Q1 2026 (ended May 2, 2026) was $696 million, a 1.4% year-over-year increase, with consolidated comparable sales down 1.1%.

1. Retail Segment (aggregated U.S. and Canada retail): First quarter sales were approximately flat year-over-year, with comparable store sales down 1.2%. This segment contributed roughly 79% of total consolidated net sales (after eliminating intercompany sales from the brand portfolio segment). Comparable traffic improved 500 basis points sequentially from Q4 fiscal 2025, and average unit retail remained strong. U.S. revenue ticked up slightly, with DSW holding footwear market share year-over-year per Thirda data, while Canada retail faced larger weather-related headwinds.

2. Brand Portfolio Segment: First quarter sales increased 19.4% year-over-year, with operating income improving by $13 million year-over-year. This segment contributed roughly 21% of total consolidated net sales (after intercompany elimination). Key sub-segment performance: Topo grew 32%, Jessica Simpson grew 35%, and Keds also delivered meaningful growth. External wholesale sales drove much of the segment's growth, with intercompany sales up 24% (eliminated in consolidation).

• The macroeconomic environment remains dynamic and uncertain, creating uncertainty around consumer demand trends.
• Potential new Section 301 tariffs set to take effect in August 2026 create meaningful uncertainty. Any expected tariff refunds are largely assumed to be offset by the new tariffs' impacts. Many of the company's partner national brands also have tariff exposure, and it is unclear how these partners will adjust their businesses in response to new tariff developments. Current earnings guidance explicitly excludes potential impacts from these tariff dynamics.
• Consumer preference shifts between casual/athletic and fashion/occasion-based product categories create cyclical headwinds for underperforming categories, though management notes the company's broad assortment positions it to adapt to these shifts.

Q: Mauricio Serna of UBS asked how the Q2 flat-to-slightly-up sales outlook breaks down between the retail and brand portfolio segments, and how much additional gross margin improvement can be expected from the company's recent operational initiatives. / A: Management confirmed early Q2 unfavorable weather disproportionately impacted Canadian retail, but sequential sales improvement through May has offset those headwinds. Retail sales are expected to be slightly positive in Q2, while the brand portfolio segment will continue its strong growth trend matching Q1's performance. 240 basis points of Q1 gross margin expansion was driven structurally by 65% lower markdowns from tighter inventory management, and 35% higher IMU from optimized promotional strategy. Continued margin expansion is expected in Q2, but year-over-year margin improvements will become more challenging in the second half of 2026 as the business laps last year's large cost and margin improvements.

Q: Serna followed up asking for modeling details on full-year interest expense, the effective tax rate, and fully diluted share count. / A: Q3 2026 operating expense will face roughly $10 million in upward pressure from the return of normalized full incentive and stock-based compensation programs, which had near-zero expense in the prior year's Q3. Q1 2026's unusually high 54.5% tax rate was driven by fixed state and local taxes and non-deductible executive compensation hitting a low base of taxable income; the full-year tax rate is expected to land in the low 40s, unchanged from prior guidance. Fully diluted share count is expected to be approximately 58 million for the full year 2026.