Good morning, everyone, and welcome to the Designer Brands Incorporated Reports Fourth Quarter and Fiscal Year 2021 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Stacy Turnof with Edelman. Ma'am, please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the thirteen-week and 52-week period ended January 29, 2022, for the thirteen-week and 52-week period ended January 30, 2021. 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. The company assumes no obligation to update any forward-looking statements. Joining us today are Roger Rawlins, Chief Executive Officer; and Jared Poff, Chief Financial Officer. Now, let me turn over the call to Roger.

Good morning, and thank you, everyone, for joining us today for Designer Brands fourth quarter and full year 2021 earnings call. We are extremely pleased with strong end to our fiscal year during which we set several records. Our team did an incredible job all year, delivering results that exceeded our initial expectations, while strengthening the long-term fundamentals of our business. As always, we want to thank our associates for their dedication to the business because of their hard work DBI exited 2021 in a position of strength, despite the challenges in the operating environment. We've returned the business to a growth trajectory, delivering our highest operating income since 2014, and this growth is expected to continue as Jared will share with you a little later. As we continue to lean into the pivots we've made during the pandemic and return to strategic growth in our owned brands and our direct-to-consumer or DTC business. As I take a moment to pause and reflect, the pandemic created unprecedented changes in consumer behavior from the types of products they buy to how they shop. Prior to the onset of COVID-19, we had begun to evolve our strategy, but the market conditions over the past two years forced us to grow and change at an accelerated pace. Because of the actions we took, we now believe that we are well-positioned strategically and financially. We have grown our market sharing categories for the consumers demanding a broader selection, such as athletic, kids, and men's. We've retained our historic market leadership in dress and fashion as these categories make their post COVID-19 recovery. We've coupled these with our award-winning digital and omnichannel capabilities. And we now see the ability to turn the engines of our in-house design and sourcing capabilities back on to be a…

Thank you, Roger and good morning, everyone. We are incredibly pleased with our strong fourth quarter and year, which set multiple financial and operational records along the way. We are exiting the year in a strong financial position and ready for the next phase of our growth. Please note that the financial results that we will reference during the remainder of today's call, exclude certain adjustments recorded under GAAP unless specified otherwise. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. Turning to our results. For the fourth quarter, sales increased 35% to $822.6 million compared to the same quarter 2020. For the full year, sales increased 43% to $3.2 billion. For the fourth quarter, total comps were up 36.9% versus last year's 20.1% decline. For the full year, total comps were up 51.6% compared to a 34.2% decrease in 2020. In U.S. Retail, comp sales were up 36.3% during the fourth quarter versus down 19.7% during the same quarter last year. And for the full year, comps were up 55% compared to a decrease of 34.9% in 2020. These results have been driven by our near-term strategic initiatives and our unique ability to quickly flex our assortment as customer habits and preferences shift. Our U.S. Retail store traffic continued a strong post-COVID recovery and was up 47% versus the same quarter last year. We continued to see store traffic improve, with February store traffic for our U.S. Retail business up 46% compared to 2021. Category comps continued impressive growth and improved sequentially compared to both 2020 in 2019. Athletic comps were up 35% compared to Q4 2019 and up 14% compared to Q4 2020. Also in the quarter, women's athletic was up 26% versus 2019. And men's athletic was up 53% compared to 2019…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question comes from Steve Marotta from C.L. King & Associates. Please go ahead with your question.

Roger and Jared, good morning. Wanted to just talk a little bit about the current supply chain and incremental cost that may have been incurred in the fourth quarter. What does incrementals will be you expect in, say, the first and second quarter and maybe for the total year? How that could net -- on a net basis effect gross margin, and also just the timing of flow of product into the stores? In other words, your ability to increase penetration of owned units and to the benefit of gross margin, timing on that for the year. Thanks.

Hey, Steve. Thank you. Good morning. From a quantification standpoint, in 2021, we had roughly -- just under $20 million of incremental freight expense versus 2020. And again, almost versus 2019 as well, and about $12 million to $14 million of that was in Q4. Camuto, obviously, has a lot of direct expenses. So, we saw that, that really materialize in that segment. We are anticipating a similar posture, not really much incremental to that for the total year, but we are assuming that as we get into the back half of the year, there's a little bit of relief on that in total. I also would say from a receipt standpoint, you heard us say during the com -- during my script that we were able to divert some of our wholesale sales that we had initially projected to external parties into our own channels, because we saw the opportunity there, and we saw an opportunity in Q1 and we wanted to have the inventory to be able to meet that. And so that also is what drove the very, very slight miss on the sales. Instead of being flat, we were down $7 million in sales on a 800 -- large $800 million quarter, so less than 1%. But that's because of the eliminations, because we strategically chose to take product that was going to go in the wholesale channel and put it into our own DTC channels, especially as we get ready for Q1. So, that -- I'm actually really, really excited about.

And then Steve, as it relates to just general supply chain, I think, as I said in our statement that the fact that we have inventories flat to where we were in 2019, strong position in our sandal business. I feel pretty good about how our inventory is positioned. And as you know, every single day it's fighting to get your inventory. And that's not really -- it's not any different than it's been for the last years. So, feel pretty good about our ability to still obtain inventory.

That's very helpful. And just to follow up, talking about two and maybe related topics. Is one of the reasons why Q2 and Q3 maybe flattish against a year ago from an operating income standpoint, the fact that sales in the year ago period materially benefited from stimulus, or is there another dynamic going on there? And then maybe you can talk about the benefits to the categories that are growing more rapidly to gross margin. In other words, it's fantastic that you increased your exposure to athleisure, particularly considering how under indexed you were previously and now with dress and seasonal become seemingly a little bit of the larger percentage of consumer wallet, that should also be to the benefit of gross margin in the current year, I would assume. Thanks.

Yeah. Steve, I think, I'll take that second part and let Jared take the first. But I think the exciting thing for us is we've grabbed share in the athletic men's and kids space, really driven by our athleisure investments and that's new market share for us as the NP data demonstrates. But what's really exciting is that we're getting now our sandal and dress business back in a meaningful way, and it's not back to the 2019 levels. But I think if you listen to the call, if you think about in Q1 of last year, we were down 57% compared to the prior year. In Q2, we were down 40%; Q3, we were down 34%; and in Q4, we were only down 19%. So, you can see there's this continued progress that has been made. And we're seeing that continue to step as we've headed into 2022. So, being able to retain that share we've created in athleisure, while now getting back after some of those other categories that is huge for us. And as you know, that is where our bread is buttered with our Camuto acquisition is, that's the product we can make and we can drive the significant margin enhancement that we know that can get for us.

And on the first question, Steve, we have looked every time from the current macro situation to all the ones prior on what our correlation is to public stimulus. We don't see strong direct correlations. We've got an above average income household. And while there are sometimes, some smaller correlations, especially maybe in our kids' business and things like that, we don't see extremely strong. What's really driving the differences is just when the recovery started and how it impacted us across our segments, you're seeing our year-over-year sales growth almost double in the spring versus what we are anticipating in the fall. And that's just because we had such strong, strong recoveries in the fall, and yet to come in the spring. The last thing I would add, and I mentioned it in my script, we have assumed that by fall, we have a little higher clearance penetration, which to be honest is actually a strategic advantage of ours. We have a clearance proposition that really, if you look at and listen to our last few calls, you hear how low that clearance penetration has gone. That in actuality could turn out to be upside. If we continue to see the industry in massive chase mode and really driving rate price sales, as soon as people get access to products, we may not hit those penetration levels, but that means that we're hitting it on the full price. We're continuing to hit it on the full price side, so we could see upside in that fall a little stronger than what we're thinking.

Got it. Thank you very much. I'll take the balance offline.

All right. Thanks, Steve.

[Operator Instructions] And ladies and gentlemen, we do have an additional question. This comes from Gabby Carbone from Deutsche Bank. Please go ahead with your question.

Hi. Good morning, and thanks for taking my question. So, I believe you mentioned that traffic here in February up, I believe you said 46%, quite impressive. Just was wondering if you could provide us with any color on how you expect sales trends to play out through the year, particularly here in 1Q. Thanks.

Yeah. As I mentioned in my script, we think -- and actually, as I just answered with Steve, we think sales year-over-year comparisons are materially stronger in spring than they are in fall. They continue to be strong and positive as we go through the year in total. But certainly, the strongest year-over-year growth is in spring. And in spring, Q1 by far is the strongest. And again, that is almost entirely because of just when the recovery really took hold. And as I mentioned in the script, DSW wasn't until Q2 in a big way, Canada wasn't until Q3 and Camuto, it really was - is late Q3 and into Q4. And then they had supply chain challenges on that, on top of that.

And Gabby, I think one of the things that again, that we're really excited to see is the customer coming back to the physical location. And we think that will -- get that customer that has historically come to us through store only back into our brand, which is what we've experienced really in fourth quarter is as we -- as well as, as we've entered into 2022. And if you think about last year, some of the things we were doing digitally with the large Gucci buy we had, and obviously with a lot of promotional things we were doing with the Swoosh at that time, we see that there's going to be a more material shift toward our physical location selling and away from digital as we -- at least as we get into the first half of the year.

Got it. That's very helpful. And then, in the past you've mentioned you've identified a number of stores reclosure. Just wondering how we should be thinking about that over the next two years.

Yeah. I think I mentioned on the last call that initial indication -- which again, we run the models every single quarter. And when we ran it and I put out that number of 65, that was before we really saw the recovery take hold. Once we saw that recovery take hold, and those longer range models get adjusted, that number came down quite a bit. What I would say is, and we're actually really excited to lay out our long range plan on April 8th at the New York Stock Exchange. And we'll have some color around our store fleet. What I would say is, I think you're more going to see a reduction in square footage that's coming from strategic shrinking of some of our stores, but still staying in neighborhoods, because we do see the omni benefits that having a store locally provide, not just for our DTC business, which is huge, but also as we leverage that for some of our branded partners, like we're doing already with the vincecamuto.com returns, and we're getting ready to launch with a couple other external brands, the ability to be their kind of omnichannel infrastructure in those local markets. So, more to come on that, and I certainly hope you can dial in on April 8th.

Yeah. Gabby, it would be great to see you in New York. And I think we're going to -- at our Investor Day, we're going to show you what our store of the future looks like. That allows us to get the same kind of capacity we would've been getting in 20,000 to 25,000 square feet into 15,000 and tell different stories with these brands, because as Jared said, that's our real opportunity. And that could open all kinds of opportunities for us as we have competitors talking about opening stores, if we can get smaller and more efficient with inventory that creates other opportunities.

Great. Thank you so much. Looking forward to it.

Thank you.

And our next question comes from Dylan Carden from William Blair. Please go ahead with your question.

Thanks. I'm sorry for some background noise here. I had a different question, but I want to stick with that question, Roger, shrinking the store. Does that mean -- is that code for effectively taking some square footage and dedicating it more to online fulfillment? Or would you actually be thinking of relocating some of these?

Yeah. Dylan, I'm guessing you're at St. Patty's Day party. So -- but it's a couple of things. One is, we believe that to achieve some of our long range plans to get the cost per square foot that we need, or I should say the occupancy costs that we think we can get to, we need to get smaller in certain locations, which will either get smaller in the building we're in, or we will -- we'll look to relocate. And it's really about efficiency of inventory. As it relates to using those stores as fulfillment centers, we've had a lot of success with these hub stores, meaning we're able to flow key items into a group of stores, have depth behind them and take days out of the fulfillment cycle, as well as cost out of the fulfillment cycle. So, I think, it's really a combination of things is what I would say.

Excellent. And then my actual question was, can you provide any detail around kind of you're thinking about the category mix that underpins your guidance for the year, as far as sort of the continued recovery of dress and as events theoretically come back this year, what athletic ultimately lands the year at, anything to kind of help us understand the environment that you see out there?

Yeah. No, we think that with the recovery that we are seeing in, let's just say non-athleisure footwear, which as you know that's our -- that has been our core business for the last 25 years. We might get back to more historical rates is what I think you would see. But that doesn't mean that we still can't get after the athleisure business. So, we're still anticipating we will grow athleisure as it relates to last year, but the real recovery and what we're excited about is what we're seeing in sandals and our plans we're putting in place for the boot fashion category as we go into the fall season. So, we'd say it'll be -- it would be closer to levels that you would've seen in 2019 more than it was in 2020.

Gotcha. And then, Jared, a modeling one here. The deleverage on the royalty dollar amount in the Camuto business, when do you lap that and how does that trend, I guess?

We pretty much start lapping that in 2022, because as I mentioned our non-wholesale or our non-DBI wholesale growth is expected to be up 20% to 30%. So, we should start seeing leverage on those numbers, as we go through 2022.

Awesome. I got a card [ph] with my name on it. I'll talk to you guys later.

[Operator Instructions] Our next question comes from Jay Sole from UBS. Please go ahead with your question.

Great. Thanks so much and good morning. Maybe Jared, I'm just wondering if you can talk a little bit about some of the little lines of the P&L that could be impacted by inflation. Freight, for example, store labor, rent. And maybe you could talk about marketing, what's your plan for marketing as percent of sales is, what's baked into the guidance? Thank you.

Yeah. Happy to Jay. So, let me tell you, what's already baked in and then where I see opportunity and where I see some potential risk. We are assuming a similar kind of percentage of sales in marketing baked -- already baked into the P&L now. And again, as we saw in 2021, that's assuming we can fund that with the projected -- continuation of strong margin. If we are not seeing that play out the same way, then we'll pull the levers and make some changes there. But as of now, we're not expecting leverage or deleverage on the marketing line. On the store labor line, and I mentioned this in the call, we are expecting some deleverage, primarily it's because so many of our stores weren't open or not fully open for all the hours in 2021, as well as we just couldn't staff them the way we wanted to, especially in the fall when the labor market really, really tightened. And we are assuming that those are able to stay fully open and fully staffed, as well as we've baked in what is now a relatively healthy increase in our average hourly starting rate. So, that's already baked in there. On the other lines, I would tell you, we're pretty much holding the line. We do have some leverage on incentive compensation, because we always start the year assuming that we've got pretty much at par incentive compensation and anything above or below that is based on performance and what's actualizing. Where I see upside? I'm not sure we're going to see a massive freeing up of the labor market. So, while we've budgeted to be fully staffed and have all of those hours fully accounted for, I'm not sure we'll be able to place those for the whole year. And as I mentioned, I do think we've got some -- a lot of work to look at to make sure we're still getting paid the same way on those marketing investments. And that could free up some dollars, but I hope it doesn't, because we want to see the same kind of gross profit generation, that those are delivering.

Jay, I think the other piece too, is when you think about channel shifts, as I had mentioned that the recovery of the physical plant and how we're seeing customers come back to the store, because you get that leverage of the fixed cost. Historically, that is a much more profitable channel for us, and that could create upside for us as we move throughout the year.

Got it. Understood. Thank you so much.

Yeah. Thanks Jay.

Ladies and gentlemen, at this time, I am showing no additional questions. I'd like to turn the floor back over to the management team for any closing remarks.

Yeah. Thanks. Thanks everybody for listening in on St. Patrick's Day. And to all of our associates, we greatly appreciate everything that you have done to, to get us to this point and let's keep the momentum rolling in 2022. And we look forward to seeing all of our shareholders and interested parties at our Investor Day coming up in early April. Everybody have a great day.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.