Designer Brands Inc. Class A Aktie

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.

Good day, and welcome to the Designer Brands Inc., 4Q '25 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded.

I would now like to turn the conference over to Matthew Crummy, SVP of Strategy and FP&A. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week and 52-week periods ended January 31, 2026, to the 13-week and 52-week periods ended February 1, 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. 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 the 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. I'm very proud that our fourth quarter and full fiscal 2025 results reflect disciplined execution and the meaningful progress we've made in strengthening our business.

I want to recognize the commitment of our Designer Brands associates who have remained focused on serving our customers and advancing our strategy. Before discussing our results, I want to give a warm welcome to Sheamus Toal, our new Executive Vice President and Chief Financial Officer, who joined us last month. Sheamus brings decades of financial and operational leadership experience across complex organizations and his expertise will be critical as we advance our strategic priorities and drive long-term shareholder value. I'm pleased to have him with us today.

Building on the momentum we established throughout the year, we were pleased to deliver another consecutive quarter of sequential improvement. Net sales were flat year-over-year in the fourth quarter and consolidated comparable sales improved sequentially by 50 basis points.

For the full year, total company sales declined 3.9% compared to last year, coming in towards the high end of our guidance range and comp sales were down 4.3%. Notably, we delivered full year adjusted operating income of $65 million, significantly above our guidance range of $50 million to $55 million, driven by an improvement in fourth quarter sales trends, continued gross profit expansion and disciplined expense management that resulted in a $26 million reduction in adjusted operating expenses compared to last year.

As I reflect on 2025, I want to acknowledge that the year began with a level of macroeconomic volatility and pressured consumer sentiment that few could have anticipated. I am proud of how our team responded. We executed disciplined pivots to meet the needs of our business while remaining committed to our strategy, ultimately closing the year on a strong note.

Over the last year, we continued to enhance our retail product strategy by elevating our assortment, improving inventory productivity and cultivating our relationships with strategic national brand partners.

We launched a new DSW brand positioning campaign this past fall and are highly encouraged that it is resonating meaningfully with customers, strengthening brand perception and driving engagement. In 2025, the DSW brand generated 79 billion total impressions, up 10% year-over-year, signaling strong sustained interest. Our new brand positioning is beginning to come to license stores as well, with several remodels and new store openings completed this past fall that incorporate updated creative and visual elements. Customer feedback and financial performance in these locations have been encouraging.

In our Brand Portfolio segment, we are pleased with the progress we've made to refine our go-to-market strategies and improve the profitability of the business, driving an $8 million increase in segment operating income for the year as we navigated an incredibly complex tariff environment.

Before turning to a review of our financial performance, I'd like to share an update on a recent organizational change we implemented in the business, designed to accelerate execution across key priorities while maintaining a focus on reducing operating expenses. We recently brought our U.S. and Canada Retail businesses under a streamlined reporting structure, which will enable better collaboration and integration of operations across our businesses. As part of these changes, we have rightsized our shared services organization to appropriately support the business moving forward.

Now let's review the financial highlights from the fourth quarter and full year. Starting with our Retail segment, which reflects the aggregation of our U.S. Retail and Canada Retail operating segments, our total sales for the fourth quarter were flat year-over-year with comparable sales down 1.7%, an improvement from down 2.1% in the third quarter. This improvement was driven by strength in the boots category, affordable luxury and accessories. For the full year, total sales declined 3.4% with comparable sales declining 3.9%. Comp sales improved throughout the year, driven by positive in-store sales trends.

In addition to the momentum we saw in existing stores, we were encouraged by the early learnings from our new stores that opened in 2025. Over the course of the year, we opened 13 stores and remodeled 4 stores in total. While not all of these projects included the full suite of experimental features, each incorporated enhancements to improve merchandise, customer flow and overall store experience. The initial customer reaction has been strong with notably higher conversion and traffic. We will continue refining these concepts as we move forward by leveraging data and customer feedback to scale what works to further elevate the DSW in-store experience across our footprint.

In the fourth quarter, we delivered Retail operating profit expansion, driven by a gross margin improvement of 140 basis points compared to Q4 of 2024. For the full year, gross margin improved 30 basis points.

Turning to our Brand Portfolio segment, in the early phases, our focus was on margin enhancement and cost discipline. And in 2024, we achieved profitability in the segment for the first time. 2025 was centered on foundational work to refine go-to-market strategies and despite significant tariff-related disruption, we drove an $8 million increase in segment operating income.

On the top line, fourth quarter sales were up over 5%, driven by Topo which was up 42% and Jessica Simpson which grew 17% versus last year. We remain encouraged by the underlying growth trajectory inherent in each of these brands.

For the full year, total sales were down 9%, reflecting headwinds in the first half of the year, with performance improving as the year progressed. A clear standout with Topo, which continued to drive impressive growth, up 46% on the year and more than doubling the size of the business compared to 2 years ago.

We further strengthened and diversified our supply chain this year, which enabled us to proactively mitigate the impact of tariffs and external cost pressures and deliver an 80 basis point expansion in brand gross margin for the year.

Now I'd like to spend a few minutes discussing our strategic priorities for 2026. As we move forward, we are laser focused on the following: first, winning with the merchandise that matters most to our customers; second, amplifying and expanding our DSW brand positioning; third, elevating our in-store customer experience; and finally, building and scaling our brand portfolio.

Let's start with our product strategy and winning with the merchandise that matters most. Our refreshed merchant leadership team has made incredible progress in shaping our 2026 assortment. We are doubling down in areas of strength and leaning into encouraging trends in fashion across dress, boots and affordable luxury. These categories are resonating with our customers. This will be supplemented by our efforts to build and scale our brand portfolio. We are also planning strong growth in categories adjacent to footwear such as beauty, wellness, hydration, socks and sunglasses.

To further support our initiative to add newness to our product offerings, we're excited to be working closely with a consumer-focused investment bank focused on emerging consumer brands called Consensus, which runs the Great Brands program, a preeminent platform for emerging consumer brands in North America. This partnership enables us to thoughtfully identify and introduce new relevant brands within our leading categories while also expanding into adjacent non-footwear categories that encourage customer discovery and exploration.

Through this relationship, we gain early access to emerging brands that align closely with our customer and our brand vision. By infusing our assortment with this targeted newness, we reinforce our Let Us Surprise You brand positioning, strengthen differentiation and ensure our assortment remains dynamic and aligned with evolving customer preferences.

These product strategies are enabled by a heightened focus on end-to-end inventory optimization across planning, allocations and digital order fulfillment. These efforts are designed to drive healthier margins, improve in-stock rates, support store conversion and lower supply chain costs in 2026.

We've made great strides in amplifying and expanding our DSW brand positioning, energized by the success of last fall's DSW brand campaign. To open 2026, we launched our Let Us Surprise You campaign for spring, designed to broaden our reach, strengthen customer connections and ignite meaningful brand engagement, anchored by new, fresh creative that debuted on March 1. At the same time, we continue to invest in strengthening relationships with our most loyal customers.

This fall, we are relaunching our loyalty program, which continues to represent roughly 90% of our transactions. With this revamp, we're poised to deliver an even more compelling differentiated experience that drives long-term engagement in growth.

Our stores remain the foundation and an important point of differentiation in our strategy, and we are continuously working to elevate the in-store experience. In 2026, we are bringing our brand positioning and product strategies to life in new and exciting ways across our store base.

We're also planning new store openings as well as several remodels. Early indications from last year's work are encouraging, demonstrating how we can deepen engagement through a more immersive, differentiated shopping experience.

Finally, turning to our brands portfolio, we are now entering the third year of the transformation journey that we outlined in 2024. In 2026, we will continue to build and scale our portfolio, a strategy which will in turn, supplement our strategic priority of focusing on merchandise that matters. We're very excited about the renewed focus on our exclusive brands, which are only sold at DSW. These brands serve as a strategic tool for us to increase profitability via vertical integration and strengthen the DSW brand. We believe we are well positioned to deliver meaningful sales growth in 2026, highlighted by opportunities to amplify trends in the dress and boot categories.

Topo's sales trajectory continues to be strong as the brand executes against ambitious growth plans. We're confident this momentum will continue in 2026. Growth will be driven by core franchises as well as new product launches that further elevate Topo's brand positioning. We expect to continue expansion of the brand's footprint within existing partners as well as opening additional points of distribution with new customers, with a particular focus on specialty running.

With Keds, 2025 was the year where we sharpened our product design to improve comfort and fit across the assortment while also focusing on building the profitability of the brand. We're now looking forward to accelerated growth in 2026. We plan to drive this through expanded wholesale distribution with a focus on value as well as from our direct-to-consumer digital business where we are seeing positive signs so far this year.

Jessica Simpson has capitalized on the recent resurgence of trends in the dress category. Additionally, we have diversified into the boot category and lowered heel heights in key dress styles in an effort to strategically appeal to a larger audience. We are confident that this evolved product strategy will continue to drive momentum with this brand in 2026.

Throughout the brand's portfolio, we are pleased with the progress we've made in building a profitable foundation and are looking forward to advancing our efforts to drive sustainable growth in 2026 and beyond.

Before I conclude, I want to share a few thoughts on our 2026 guidance. We are currently operating in a volatile macro environment that includes evolving tariffs dynamics and conflict in the Middle East, the latter of which may introduce increased inflationary pressure moving forward. We will continue to monitor these situations closely and remain nimble and adaptable as the year progresses.

While there is some uncertainty in the current external environment, in 2026, we do expect to build on the improving trends we generated in the back half of 2025. We anticipate that total sales will be between negative 1% and positive 1%, driven by strength in our brand portfolio sales, which are anticipated to grow double digits. We also expect to deliver meaningful operating income and EPS growth on the year. Sheamus will take you through our 2026 outlook in more detail.

Before I close, I want to reiterate how proud I am of our team's disciplined execution and unwavering commitment, which drove sustained sequential improvement throughout the year. Despite a dynamic operating environment, we stayed focused on what we can control and executed against our priorities, and I'm excited to see this momentum continue in 2026.

With that, I'll turn it over to Sheamus.

Thank you, Doug, and good morning, everyone. I'd like to begin by expressing my excitement about joining the team as Chief Financial Officer, and thanking the Designer Brands Board and the leadership team for their trust and warm welcome. My first month has been exciting, and I look forward to supporting our strategy to drive long-term growth and value creation. I'm eager to engage with our investor community and hear your perspectives as we continue to execute our strategy.

I'm pleased to share Designer Brands' fourth quarter and full year results. The team successfully executed against its strategic priorities and delivered significantly improved performance as the year progressed. Let me provide a little bit more detail on the financial results.

We were pleased to see another quarter of continued sequential improvement with net sales of $713.6 million, flat to last year and comps down 1.9%. Full year net sales decreased 3.9% to $2.9 billion, and comps were down 4.3%. In our Retail segment, sales were roughly flat to last year, and comps were down 1.7% in the fourth quarter. From a category perspective, boots, affordable luxury and accessories were our top performers.

In our Brand Portfolio segment, sales were up 5.3% in the fourth quarter, driven by strong performance in both Topo and Jessica Simpson. Consolidated gross margin in the fourth quarter was 42.4%, a 280 basis point improvement year-over-year, driven by stronger IMU, fewer markdowns and lower shipping costs. This resulted in a $20.1 million gross margin improvement compared to last year. Full year consolidated gross margin was 43.6%, a 90 basis point improvement year-over-year, driven by favorable merchandise margin and increased efficiency in our digital order fulfillment operations.

For the fourth quarter, adjusted operating expenses were up $6.4 million compared to last year, representing 44.4% of sales. This reflects a deleverage of 90 basis points over last year on lower sales. It's also worth noting that the fourth quarter operating expenses were impacted by $9 million of incentive compensation in the quarter compared to none in the fourth quarter of last year. And absent the impact of incentive compensation, fourth quarter operating expenses would have leveraged 40 basis points versus last year. For the full year, adjusted operating expenses represented 41.7% of sales, an 80 basis point deleverage from last year.

Amid a challenging macro backdrop, we remain focused on disciplined cost management across operating expenses, inventory and capital allocation throughout the year. Our total adjusted operating expenses declined by approximately $26 million for fiscal 2025 compared to 2024. We also ended the fourth quarter with total inventories down mid-single digits from prior year and decreased our debt by nearly $60 million compared to last year.

For the fourth quarter, adjusted operating loss was $11 million compared to a loss of $23.5 million last year. The improvement was mainly driven by gross margin expansion of 280 basis points. For the full year, adjusted operating profit was $65.2 million compared to $67.3 million last year. While full year adjusted operating income declined slightly year-over-year, we were encouraged by the progress we made in the back half of 2025, delivering an increase in adjusted operating income of over $15 million versus 2024 across Q3 and Q4 collectively to come in at above the high end of our guidance range for the full year.

In the fourth quarter of 2025, we had $10.4 million of net interest expense compared to $11.1 million last year. For the full year, net interest expense was $45.3 million, flat to last year.

Our effective tax rate in the fourth quarter on our adjusted results was 31.3% compared to 38.6% last year. For the year, our effective tax rate was 54.3% versus 31.6% last year. Fourth quarter adjusted net loss was $15.6 million or $0.31 per diluted share compared to a loss of $21.3 million or $0.44 per diluted share in the prior year. Our full year adjusted net income was $8.3 million or $0.16 per diluted share compared to $15 million or $0.27 per diluted share in fiscal 2024. The full year decrease was largely driven by higher taxes as 2024 included onetime reversals of tax reserves.

Turning to our inventory. We ended the fourth quarter with total inventories down 6% versus the prior year. We are planning to tightly manage inventory throughout the year as we focus on the brands, styles and choices that matter most to our customers.

We ended fiscal 2025 with $50.9 million in cash. Our total liquidity, which includes cash and availability under our ABL revolver, was $152 million at the end of the year. We continue to prioritize balance sheet strength in the quarter, applying excess cash towards debt repayments and closing the year with total debt outstanding of $435 million, a decrease of nearly $60 million compared to the prior year.

Turning to our guidance for the full year. As Doug mentioned, the macro environment remains dynamic, with the conflict in the Middle East introducing uncertainty that could drive inflationary pressures and impact consumer sentiment. Conversely, while there may be some net upside for our business performance as a result of tariff policy evolution, this is not currently contemplated in our guidance.

We currently anticipate net sales to be in the range of down 1% to up 1% for the year, with sales in the Retail segment flat to declining slightly, offset by double-digit growth in the Brand Portfolio segment. In 2026, we expect to drive operating income growth through gross profit expansion and a continued focus on increasing efficiency in the business. Our guidance contemplates actions taken to rightsize our workforce in 2025, partially offset by a return to a normalized level of incentive-based compensation in 2026. This guidance assumes an effective tax rate of approximately 40% for the year. We plan to deliver EPS between $0.28 and $0.38 per diluted share on an average diluted share count of 58 million shares compared to an adjusted EPS of $0.16 in 2025.

I'd also like to provide some commentary on intra-year performance. Aside from some unfavorable weather impacts early in the quarter, we have seen a continuation of the positive momentum in Q1. We anticipate sales to be flat to up low single digits and EPS to be breakeven to slightly positive in the quarter. As we look across the year, we're anticipating sales and earnings growth to be stronger in the first half of the year. As we shift into the back half of the year and anniversary actions implemented during 2025 that drove margin expansion and cost reductions last year, the comparisons become more difficult.

To conclude, I'm proud of the progress we've delivered in the fourth quarter and across the full year. I am confident in the foundation that has been built and our ability to continue building momentum throughout 2026, and I'm excited to be working alongside such a disciplined and strong team.

With that, we will open up the call for questions. Operator?

[Operator Instructions] Today's first question comes from Mauricio Serna with UBS.

A couple of things. First, could you comment on what you saw in performance in the top 8 national brands? I believe that had been a focus for the company in the previous quarters.

And then maybe just to understand the shape of the revenue guide. You mentioned first quarter revenue should be flat to up slightly, but then like up low single digits, but then like the guidance for the year is actually calls for like flat at the midpoint. So just trying to understand like what drives like the implied slowdown as you move on after Q1.

Yes, Mauricio, this is Doug. Let me take the first question on the top 8 brands, we're actually evolving that to top 10 brands for 2026 would be those brands plus our 3 exclusive brands, which we saw only at DSW, and we're really excited about the growth that those brands represent given they're only sold in our channels of distribution. The top 8 brands for 2025 drove a comp increase. We were very happy with that, roughly 40% of the total business. So the team's continued focus on deepening those relationships with the merchandise that matters most and deepening our planning with those strategic brand partners has definitely paid off, and we see that continuing to pay dividends into 2026 as well.

As it relates to your second question on guidance, I'm internal optimist. There could be some upside in there. We just want to acknowledge that given the uncertainty of the macro environment, we want to be mindful of that, particularly as it relates to the back half, which as Sheamus said in his prepared remarks, we come up against stronger comps.

Very encouraged by quarter-to-date trends that we're seeing in Q1. That momentum that we experienced in Q4 has continued, particularly in the store channel, which has been a big focus for the teams, and we feel like that's our biggest point of differentiation. We got a little bit of challenging weather impact as we started the quarter, but it's kind of come around that.

And coming up against the shift of Easter, we feel really encouraged by that. So in large part, just a little bit of a conservatism probably in the back half when we come up against those higher comps. On the overall side, obviously, we're going to see a strong double-digit increase on the wholesale business throughout the year. So that's kind of how it balances out for total.

Got it. And that is the increase in wholesale is just driven by the strength in like some of the exclusive brands that you sell, right, Topo, Jessica, is that the right way to think about it?

Yes. The whole portfolio is going to drive significant growth. Obviously, Topo is a significant driver of that growth. Jessica Simpson is a big growth driver. Keds will have a nice increase in 2026 as well. And again, those are largely -- our largest clients are either not DSW at all or the largest customers are outside DSW. And then the exclusive brands piece will be driving growth in our channels of distribution. So it's pretty well-rounded growth internal and external.

Got it. And one last housekeeping item. In the guidance, you included share count being $58 million. I think that's like $8 million -- sorry, not million dollars, just 58 million shares outstanding for fiscal '26, that's like 8 million higher, 16% versus last year. I just want to understand what drove that increase? And how should we think about the interest expenses for the year?

Mauricio, it's Sheamus. I'll take those questions. So first, in terms of the share count, I think if you look back at the history, the lower share counts were in periods in which we had a loss. And in those periods from a GAAP accounting standpoint, we do not include the full impact of potential dilutive shares. As we move into the future, we are anticipating and based upon our guidance, anticipating that we will shift back into profitability. And as such, we need to include the full impact of potentially dilutive shares in our diluted share calculation. So that's what's driving the increase. It's not really incremental shares, it's just the fact that now that they are included in periods of income.

In terms of the interest for the year, I think as we disclosed on the call, we're expecting to see significant reductions in debt levels as we completed this year. So we completed this year with debt levels down approximately $60 million to last year. So that is helping us from a -- certainly from an interest perspective in controlling interest costs as we move into the fiscal year this year. So those are built into -- those expectations are built into our numbers for the year.

In terms of the total dollar value, we're anticipating about $40 million of interest for the full fiscal year, which takes into account that lower level of debt. Also, I would point out in terms of our interest calc, you might have noticed that we have tremendous partnership with our banking partners. We negotiated an extension of our ABL revolver. So we're really pleased with those partnerships, and that will continue for us into the future.

[Operator Instructions] And our next question today comes from Dana Telsey at Telsey Group.

Can you talk a little bit about on the inventory side and tariffs? As you're bringing in inventory now, what rate of the tariffs being brought in by? And how are you thinking about the tariff impact flowing through with rates where they are and how they were? How is that changing and the impact on margins?

And then just lastly, Doug, category-wise, what are you seeing category-wise? How is it shifting and promotional landscape of how you're seeing the environment?

Thanks, Dana. Appreciate your questions. First of all, to address your tariff questions, it's still an evolving tariff environment. We thought we had kind of gotten through all of that in 2025, but there's still quite a bit of evolution that's happening there. Our guidance is built on the assumption that the new tariffs are largely going to be inactive, will replace the IEEPA tariffs. So there's definitely favorability that we're seeing right now with regards to year-over-year comparisons, but there potentially could be some upside if the enacted tariffs don't replace those IEEPA tariffs. So that could prove to be conservative, but we want to just be clear about the fact that there's ever-changing dynamics there, so we want to stay close to that. So again, it could be some net upside in there. But again, just continues to be so much volatility.

On the category perspective, I'd say it's pretty broad-based. We feel really good about the dress category. We've always had leading market share penetration in that category. We're seeing nice increases there. For fall, we planned boots down significantly. We actually had an increase. So that was a big rebound. Sandals for spring are off to a really good start. So it's pretty broad-based.

We talked about affordable luxury. It's a business that is providing incredible growth for us and fits into that Let Us Surprise You component of our product assortment. So -- and then the accessory business in adjacent categories has given us very significant growth as well. And we feel really good about all those continuing momentum through 2026.

From a promotional perspective, I'm really proud of the team and the evolution that the new refreshed merchandising team has made on the product assortment. You heard about our margin expansion of 280 basis points in -- for last year's performance. We are being much more surgical with regards to promotions. We've focused a lot on channel profitability, specifically on digital, pulling back on some of those unprofitable promotions. And as a result, we've reduced our markdown rate tied to the fact that we're very conservatively managing our inventory. We ended with inventories down 6%. So all that has led to a pretty nice expansion in margin that we feel really good about.

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

Thank you all for your continued interest in Designer Brands. Before we close, I just want to again recognize the dedication and the commitment of our teams, really proud of the determination and the resilience that they demonstrated this past year. I would also share that we continue to be encouraged by the momentum we're building in the business, driven by the strategic priorities that we shared, and we look forward to continuing to update you on our progression throughout the year. Thank you.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good day, and welcome to the Designer Brands, Inc. Third Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Ashley Furlin, Investor Relations. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended November 1, 2025, to the 13-week period ended November 2, 2024. 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. 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 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; Mark Haley, SVP, Controller, Principal Accounting Officer and Interim Principal Financial Officer; as well as Matt Crummy, our SVP of Strategy, overseeing FP&A and Investor Relations. Now let me turn the call over to Doug.

Good morning, and thank you, everyone, for joining us today. We're looking forward to discussing our third quarter results with you. I'd like to begin my prepared remarks by saying how encouraged I am to be posting another quarter of sequential improvement made possible by the hard work, resilience and commitment of our Designer Brands associates.

Joining me on the call today is Mark Haley, Senior Vice President, Controller and Principal Accounting Officer, who has also assumed the role of Interim Principal Financial Officer. I'd also like to introduce Matt Crummy, our Senior Vice President of Strategy, who is now leading FP&A and Investor Relations. As we continue the search for our next CFO, I am confident that Mark and Matt's deep knowledge of our business and strategy will ensure a seamless transition as we execute against our transformation. Building on the improvement from Q2, the third quarter represented another step forward with continued progress across key metrics. We delivered on our strategic priorities throughout the quarter, and I'm pleased to share that this positive momentum has carried through the early part of the fourth quarter, and I believe we are positioned well as we close out the year.

Our results are an encouraging indicator that we are effectively communicating our value proposition admits the ongoing uncertainty in the external environment. In Q3, we delivered another quarter of sequential improvement supported by healthier traffic, higher store conversion and disciplined expense and inventory management. Our total sales for the quarter were down 3% year-over-year with comparable sales down 2.4%, a 260 basis point sequential improvement from second quarter comparable sales, reflecting strengthening consumer demand and improved in-store execution. In addition to driving improved top line trends, we continue to diligently manage markdowns and operating expenses. As a result, gross profit dollars exceeded last year by $5.8 million. a 210 basis point improvement, highlighted by a 100 basis point increase in merchandise margin.

We also posted adjusted operating income of $46.5 million for the quarter. which exceeded last year by nearly $3 million despite the prior year period, including a $9 million benefit from the timing of an incentive accrual reversal. As a result, for the quarter, we delivered adjusted EPS of $0.38, up notably from $0.27 last year. Our performance in Q3 drove strong cash flow generation and allowed us to pay down $47 million of debt in the quarter, and we will continue to fortify our balance sheet moving forward. With that said, now let's review some highlights from each segment in the third quarter. Starting with our retail businesses. For the third quarter, the U.S. retail comparable sales decreased 1.5% and with total sales down 1% year-over-year, an increase from the second quarter when both comps and total sales were down roughly 5%. This continued sequential improvement reflects strong execution driven by improved in-stock levels as well as rising demand across key categories.

On recent calls, I've emphasized the importance of our DSW stores performance. and I'm pleased with the positive momentum we saw from that channel in Q3. Our Let Us Surprise You brand campaign has performed well. driving strong awareness, generating $2 billion earned media impressions as of the end of October. We are continuing to optimize our marketing and media mix as we move forward with this refreshed platform and imagery. In addition, we're seeing encouraging trends across multiple product categories, indicating that enhancements we are delivering in our broad, balanced assortment are resonating with a wide range of consumers. Our top 8 brands continued to outperform the balance of the assortment, posting a positive 4% comp for the quarter. Penetration of these brands expanded by 200 basis points year-over-year to 42% of total sales, underscoring the strength and relevance of our most strategic brand partners.

We're also encouraged by the strong performance of our key focus areas within the fashion business. Boots have generated a strong start to the season, delivering an 8% increase in regular-priced product sales in the quarter with our inventory well positioned to capitalize on this trend as the business peaks. Our assortment is clearly resonating. We've seen brown being the hot color this season with high-quality tall shaft boots trending. In fact, according to [ SECANa,] DSW outpaced POS by 6 points in boot sales for Q3, driven by women's, which were up 2% to prior year. In our affordable luxury offering, while currently a modest portion of sales achieved impressive year-over-year growth in Q3, underscoring the opportunity to expand and regain market share in this segment. Lastly, our athletic category performance continued to improve, delivering a 1% comp in adult athletic, a 300 basis point increase from last quarter and an 8% comp in kids athletic and [indiscernible] basis point increase from last quarter, highlighted by the strong back-to-school performance. We believe these positive trends broadly across our business are evidence that our curated and differentiated assortment is an area of strength and a key differentiator we will continue to amplify.

Turning to U.S. retail profitability. We saw strong regular price selling throughout the quarter. As a result, markdown rates improved by 140 basis points. All of the above, plus the strategic pullback on unprofitable digital promotions led to an improvement in adjusted operating income for the U.S. Retail segment of $5.7 million compared to Q3 last year. our adjusted operating income flow-through improved by 100 basis points. Turning to our Canadian business. Total sales for the quarter were down 8%, with comp sales down 6.6%, largely due to unseasonable warm weather that softened demand for seasonal products. While macro pressures remain, our teams are managing the business with agility and discipline and we remain focused on items in our control and delivering value to the customer. Encouragingly, performance in Q4 is rebounding as weather has normalized over the past several weeks. Now to our Brand Portfolio segment. Total sales for the quarter were down 9%, driven by a decline in our external wholesale business due to temporary sourcing-related delivery delays which we expect to recover in Q4.

Operating income for the quarter increased by $0.5 million year-over-year despite a lower top line, a result driven by our disciplined expense management and tariff mitigation efforts. We continue to be excited by the growth of the Topo business, which delivered 25% growth over Q3 last year and has more than doubled on a 2-year basis. Additionally, Jessica Simpson delivered another strong quarter with external wholesale sales increasing roughly 8%, a continuation of last quarter's growth. Let's turn to our key priorities for the near term. As a reminder, we remain focused on the 2 pillars of customer and product within our retail businesses. Within brands, we are working to drive growth by scaling private label, building a more profitable wholesale model and investing in strategic growth brands. Our customer remains at the center of everything we do. and we remain focused on delivering an expansive assortment of relevant products to exceed expectations across core categories. Building on the successful launch of our DSW brand repositioning earlier this year, we're moving into Q4 with a holiday-centric execution of our Let Us Surprise You campaign, a natural opportunity to amplify DSW as a gifting destination. Our campaign features traffic driving activation and exciting ways for our customers to engage with the brand while emphasizing style, quality and value.

We've been encouraged that the momentum we generated in Q3 have carried into the fourth quarter, and we're optimistic that the trends will carry forward through the balance of the season. Shifting to our product pillar. We remain focused on elevating and refining our assortment while continuing to improve inventory productivity and availability across channels. sound execution of our inventory management strategies fueled margin expansion and higher in-store conversion rates in Q3 compared to last year. These efforts have placed us in a strong position heading into the holiday season. We continue to diligently refine our assortment, ending the quarter with approximately 30% lower choice counts compared to last year. At the same time, we have maintained a sharp focus on key item in stock levels, which are up 460 basis points year-over-year to nearly 80%. This enhanced availability allows us to capture demand in our highest performing categories while maintaining a leaner, more productive assortment.

We also continue to drive efficiency in our digital fulfillment operations. Compared to last year, we fulfilled 15% more of our digital demand directly through our logistics center, enhancing operational efficiency and customer satisfaction. This approach enhances the in-store experience that defines the DSW brand by providing better product availability for in-store consumers, which is contributing to increasing in-store conversion. As noted on our last call, we recently unveiled our reimagined DSW store in Framingham, Massachusetts, which showcases immersive experience-driven elements that fully embody our Let Us Surprise You brand positioning. The store was designed to drive retail differentiation through discovery, personalization and technology enhanced engagement. Building on this success, we are rolling out this elevated experience to 2 additional stores: Union Square in New York City and [ Easton ] in Columbus, Ohio. And more importantly, are evaluating which innovation pilots can be scaled across the broader fleet. These efforts further reflect our commitment to evolving the DSW brand deepening customer loyalty and leveraging our stores as a true point of differentiation in the marketplace.

Turning to our brand segment. Our sourcing team continues to do an exceptional job navigating a dynamic global environment, mitigating the impact of tariffs while advancing our strategy to further diversify our supply chain. We remain focused on expanding sourcing capabilities across multiple regions to reduce risk related to overreliance on any single country and strengthen our supply chain resilience. As the tariff landscape remains uncertain, our disciplined approach to diversification helps us to maintain flexibility while supporting supply continuity and protecting margins. Turning to our brands themselves. [Copa ] remains a standout performer with continued expansion in door count and shelf space, along with strong direct-to-consumer growth and product innovation. Other brands, including Keds and Jessica Simpson, also continued to make steady progress, supported by improved storytelling, design focus and channel discipline. We are advancing efforts to scale our private label business and maintain a balanced wholesale strategy and look forward to sharing more about these initiatives in the near future.

Before I conclude, I want to share a few thoughts on the remainder of 2025. The momentum established in the third quarter has continued into the fourth quarter, underscoring the effectiveness of our strategic actions. Mark will share more about our guidance for the full year in a moment. But as we move into the holiday season, I'm proud of the progress we've made in advancing our strategy and encouraged by the consecutive quarters of sequential improvement. While there is still a lot of uncertainty in the external environment, we remain optimistic about our ability to close out the year on a strong note. I continue to be inspired by the dedication and determination of our teams across the organization. Their focus on execution, willingness to adapt and commitment to our strategy have been instrumental in driving our progress this quarter. With this foundation, I'm confident we are well equipped to capture the opportunities ahead and build sustainable momentum for the long term. With that, I'll turn it over to Mark. Mark?

Thank you, Doug, and good morning, everyone. I'm excited to share our third quarter results, which were marked by another strong step forward in our transformation, building on the progress we made in the second quarter. We executed well against our strategic priorities and continue to see meaningful improvement across key metrics. Let me provide a bit more detail on our fiscal 2025 3rd quarter results. We were pleased to see another quarter of continued sequential improvement with comps down 2.4% and net sales of $752.4 million, a decline of 3.2% year-over-year. In our U.S. Retail segment, sales declined 0.8% year-over-year with comp sales down 1.5%. Both metrics reflect another quarter of sequential improvements from Q2, demonstrating the continued increase in customer engagement, strength of our product assortment and improving sales productivity in our U.S. Retail segment.

In our Canada Retail segment, sales declined 7.5% in the third quarter compared to last year with comps down 6.6%. As Doug mentioned, this decline was mainly due to warmer weather stifling demand for seasonal product. We have seen this trend beginning to reverse in the fourth quarter. Finally, in our Brand Portfolio segment, total sales were down 8.6% to last year, largely driven by a shift in sales from external wholesale activity from the third quarter to the fourth quarter due to shipment timing. As a result, we expect higher sales year-over-year from external wholesale in the fourth quarter. Consolidated gross margin was 45.1% in the third quarter, a 210 basis point improvement versus the prior year, driven by strategically fewer markdowns in the U.S. retail segment and an increase in fulfillment of orders through our East Coast logistics center. This resulted in gross margin dollars increasing $5.8 million year-over-year despite lower sales.

For the third quarter, adjusted operating expenses were up $2.5 million compared to last year, representing 39.4% of sales. This reflects deleverage of 160 basis points over last year on lower sales. It's important to note that last year's third quarter benefited from the timing of a $9 million reversal of a bonus accrual. Amid ongoing macro volatility and the associated impact on consumer demand, we've maintained a strong disciplined approach to managing operating expenses, inventory and capital investments. We now expect total expense savings to reach nearly $30 million for fiscal 2025 compared to 2024.

For the third quarter, adjusted operating income was $46.5 million compared to $43.6 million last year. We are encouraged by the year-over-year improvement in operating income driven by disciplined execution by our teams across the business. In the third quarter of 2025, we had $11.4 million of net interest expense compared to $11.6 million last year. Our effective tax rate in the third quarter on our adjusted results was 44% compared to 55% last year. Our third quarter adjusted net income was $19.6 million versus $14.5 million in the prior year. Adjusted diluted earnings per share was $0.38, which was notably above last year's earnings per share of $0.27. Turning to our inventory. We ended the third quarter with total inventories down 2.7% to last year. For year-end, we are continuing to strategically manage inventory levels to align with underlying sales trends. This disciplined approach positions us to respond quickly to demand and should allow us to close the year with a healthy inventory position.

During the quarter, we utilized excess cash to further strengthen our balance sheet, paying down debt and ending the quarter with total debt outstanding of $469.8 million. We will continue to reduce debt as we move towards the end of the year. We ended the third quarter with $51.4 million in cash. Our total liquidity as of the end of the third quarter which includes cash and availability under our ABL revolver was $218.3 million, providing us with solid financial flexibility as we close out the year. As Doug noted, we have seen our Q3 momentum carry into Q4, and we believe we have enough visibility to share our expectations for the fiscal year. At this point, we expect total net sales for the year to be down in the range of 3% to 5% with adjusted operating income in the range of $50 million to $55 million. Our forecasts are contemplating tax expense for the year in the range of $8 million to $10 million.

To conclude, I'm pleased with the progress we achieved in the third quarter delivering a year-over-year improvement in operating income, expanding gross margin and strengthening our balance sheet. As we close out the year, our improved profitability and solid liquidity position gives us confidence in our ability to advance our strategic priorities. With that, we will open the call for questions. Operator?

[Operator Instructions]

The first question today comes from Mauricio Serna with UBS.

Great. First, on the commentary about the momentum continuing into the fourth quarter. Could you elaborate a little bit more about what your trends are quarter-to-date? And if I just look at the guidance for the full year, I think the implied guide for Q4 is roughly minus 5% to up almost 4%. Could you maybe explain like a little bit more why you have like this wide range for the Q4 sales guidance?

Mario, this is Doug. Thanks for your question. Yes, we are encouraged, obviously, as we said in our prepared remarks with regards to the sequential improvement we saw -- and October was actually the strongest month of that period. And that momentum has continued into Q4. I don't want to get into a lot of specifics in the current quarter, but the key categories, the key brands, the classifications that we're giving momentum in Q3 have continued, namely the top 8 brands continue to outperform. The boot category in particular, as I mentioned, it was off to a very strong start, specifically as it relates to regular price selling that has definitely continued.

The teams have done an amazing job to be able to react to that trend as well. The affordable luxury business, while small and overall volume is almost double what it was last year. So we're seeing some really nice momentum there as well. And all of that is baked into the guidance that we provided for the full year. There's a little bit of noise if you think about the difference between the retail sales and brands. As I mentioned, brands had a bit of a decrease in Q3 based on some temporary timing shifts of delivery, but that will be rebounding and we're forecasting positive sales there. So that creates a little bit of noise in the in the Q4 results for total net retail sales.

Got it. And in terms of gross margin, nice to see the progress. How are you thinking about the gross margin in Q4? And maybe just any high-level commentary on what you're seeing in terms of the promotional environment?

Yes. Thanks for the question. We're continuing to be encouraged by how the teams have managed gross margin, specifically at DSW. As I mentioned, in Q3, we had [indiscernible] basis point improvement in markdown rate. And we see similar favorability in Q4. We're anticipating that as well. The gross margin in Q4. There is a promo environment, but we're not seeing a lot of resistance from our customers as it relates to higher prices.

Our AUR was up nicely. Some of the categories that are strongest performing are the higher AUR categories as well. We, as I said, have been mindful of walking away from some unprofitable digital promotions, and we'll continue to do that. Seeing a little bit of pressure on digital top line, but significant expansion in operating income in that channel.

[Operator Instructions]

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

Thank you all for joining us today and for your continued support. It's clear that we are encouraged by the sequential improvement that we delivered in Q3 that we remain confident in our strategy, our team and the opportunities ahead to build sustainable momentum for the long term. We're focused on execution and our willingness to adapt in order to best serve our customers and drive value for our shareholders. We appreciate your time today, and we look forward to updating you next quarter. Thank you.

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

Good morning, and welcome to the Designer Brands Second Quarter 2025 Results Conference Call. [Operator Instructions] Note this event is being recorded. I would now like to turn the conference over to Ashley Firlan, Investor Relations. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended August 2, 2025 to the 13-week period ended August 3, 2024. 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. 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 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. We demonstrated 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 sign-ups for our VIP rewards program happened in stores. So as store traffic improves, you 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 have seen positive results from the collateral and branded in gaps 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. 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 working stock 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 8 brands also continued to outperform the balance of chain with a positive 1% comp for the quarter.

Penetration of our top 8 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 we will continue to focus on the 2 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 and Kess.

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 percentage 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 8 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 boots, 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 Brands 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 overreliance 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. [ Coco ] was early in raising prices as we saw tariff risks materialize, and they have helped to mitigate a significant portion of these costs. And 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 brands 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 2-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 continue to see challenges throughout the quarter, [ Topo ] remains a standout in our assortment, posting 45% growth in sales year-over-year. Within our dress and seasonal assortment, Jessica and Vince 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 on 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 debt, 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 macro 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'm confident that we are well positioned to advance our strategy. With that, we will open the call to questions. Operator?

[Operator Instructions] The first question comes from Mauricio Serna from UBS.

Great. I guess I wanted to ask if you could elaborate on the intra-quarter trends, it seems like things really got better as the quarter progressed. Could you give us a sense of like what were the comps -- the comp sales looked during the quarter? And how to think about that considering that you mentioned the momentum continued into August so far?

Yes. Mauricio, this is Doug. Thanks for your question. Yes, we saw a sequential improvement as we move through the quarter. And as we said in the prepared remarks, we're obviously very encouraged by the trend that we saw in athletic, both in kids and adults. But 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 a core area of strength for us, obviously. That has continued even as we've advanced in August, as we've said. So we're very encouraged by that. And I mentioned it's very early on, but the initial boot selling, specifically regular price is very encouraging as well. So we think that bodes well for not only the -- 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. And I guess, just wondering, like at the end of the quarter, were you still on negative comps? Or just trying to -- or like were you actually like positive as a total company?

Still slightly negative. And then again, we've seen sequential improvement as we've now moved into 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. And so 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.

And so we're really focused on where we can provide a differentiation, which is our stores and are seeing some really strong trends there. And as Doug mentioned in his script, we saw that turn to positive in August in our stores comp. So 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.

And then to Jared's point, I mean we are seeing positive conversion in stores as a result of both the assortment and the inventory fulfillment strategy that we've spoken about. So that was actually very encouraging to see that the assortment is resonating with customers, specifically in stores.

And then just one quick follow-up on the topic of profitability. Could you maybe give us a little bit more detail on the Q3. Like how much of pressure are you foreseeing because of tariffs? I guess at this point, like you already have that inventory. So you probably have an idea of like what's like the weighted average tariff or the incremental costs just related to that in the -- in your Q3? Yes.

Yes, Mauricio, let me kind of give you some high level and Jared can add the color here as well. I just want to remind everyone that the overwhelming concern that we've had from the onset has not been the direct impact of tariffs, because when you look at it in the grand scheme of things, like our brands portfolio, only import about 20% of product, the rest of it, we land domestically. And at DSW, obviously, we're largely reliant on our brand partners.

So we are -- have always been most concerned about the indirect impact of tariffs. We've been working very closely on the retail side. We've had brand partners strategically, 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.

So we're cautiously optimistic, but that's why we have concern, but 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 a negative reaction to that. But again, it's early days, and we are kind of cautiously optimistic as we move through the balance of the back half.

Again, the next question comes from Dana Telsey at Telsey Group.

As you just put out the new marketing campaign would let us surprise you what are the markers that you're looking for, given that 70% of your customer-based shops in stores, and you mentioned the store in Framingham, how are you thinking of draw of 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 and marketing as a percent of sales, how are you thinking about that this year?

Dana, this is Doug. Yes, we're very excited about the brand campaign. It is really early days. We just launched that actually in Q3. So it went live on September 2. I'd say anecdotally, the feedback has been very, very positive from both customers interaction, certainly from our associates. We are very happy with just the positioning of it. It a bit of a blink 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. It's been well over 30 minutes in the store. So we're happy about that. But it's very early days. as it relates to the reaction. That's got a lot of impressions and pick up on the press. That's all been very overwhelmingly positive as well. And then 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, so we want to make sure that we're continuing to focus on optimizing that marketing investment.

And we'll be happy to report out as we get a little bit further along, but it's fairly anecdotal at this point. But again, very encouraged by the work. And it was all informed by qualitative and quantitative research. So we took the appropriate time to actually get to the messaging -- but to me, it feels like kind of reminiscent of DSW's core strength. Surprising by great brands, great value, great assortment in our stores. So again, we look forward to reporting out on the specifics, but it's a bit premature to do that at this point.

Dana, from the marketing as a percentage of sales, I would say we have -- 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 chain 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.

But 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. So 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.

But 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. And then you had mentioned Burton stock is 1 of the brands at an activation that performed well. What are you seeing from brands? How is Nike performing? And any highlights of what you're expecting for brand activations or performance in Q4?

Yes, Dana, that's a great question. Birkenstock was among the top 8 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. So that 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 creating right now, and that will continue to be our focus going forward.

But 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 8 brands, of which Nike is obviously one of them.

And we have a follow-up from Mauricio Serna of UBS.

Great. Just a quick follow-up. I think I recall you mentioned you're planning to have like deeper assortment. Could you elaborate a little bit more on what you're bringing maybe from a brand perspective or category perspective? Like where is this steepening in assortment taking place?

And just as a reminder, maybe on the puts and takes on your expectation of SG&A dollars to be down $20 million to $30 million for the full year. Like could you break that out like into what are the different buckets that are driving that decline?

Yes. 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 to our in-stock. So that applies to the top brands at a price that applies to the top categories. But as I said in my prepared remarks, our choice count for the back half is down 25%, but our debt is up 15%.

And that's a meaningful change and is driving a pretty strong results in store conversion. When we do customer intercept interviews, the #1 reason a store -- when a customer leaves a store without a purchase if they didn't find their size. So again, 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. So that's the benefit we're actually seeing on the inventory productivity.

And on the $20 million to $30 million, I would kind of bucket it this way. About 1/3 of that is professional fees, consultants and things like that, that we had been using for various initiatives that 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. So 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. And then the balance is just some puts and takes along lines like depreciation of occupancy, things like that.

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 close 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. And I want to say thank you again to all of our team members for their unwavering commitment and they're focused as they continue to operate with a sense of urgency to move the business forward. And thanks to all of you for joining us today.

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

Good morning, and welcome to the Designer Brands First Quarter 2025 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ashley Firlan, Investor Relations. Please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended May 3, 2025, to the 13-week period ended May 4, 2024. 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. 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 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. I'll now turn the call over to Doug.

Good morning, and thank you, everyone, for joining us. I'd like to begin by saying a special thank you to our associates for their continued hard work and dedication to Designer Brands throughout the first quarter. Over 1 year ago, we began to refresh our business, bringing in new leaders, modernizing our assortments, implementing a more compelling marketing approach and rightsizing our brand portfolio organization. We've moved decisively to reset and transform our business and our team to focus on the customer.

We began to see the fruits of those changes materialize in the back half of fiscal 2024, posting 2 consecutive quarters of year-over-year adjusted operating income growth and the first positive sales comp at DSW in 9 quarters. Heading into fiscal 2025, we were confident in our plans to build on this momentum. However, as the macro environment has evolved rapidly, it has introduced increased uncertainty and reduced planning visibility, particularly around consumer behavior. We are responding with agility and adjusting accordingly to navigate these shifting dynamics.

As a result of these dynamics, we experienced a softer start to the year with first quarter comparable sales declining 8%, directly reflecting continuing weakening in consumer sentiment. February was the weakest month of the quarter with unfavorable weather causing further challenges. We saw sequential improvement as the quarter progressed, and I am proud of our team's efforts to navigate through this unprecedented environment. Specifically, we have thoroughly evaluated our cost structure and implemented expense cuts, which helped to deliver a 6% reduction in our operating expenses for the quarter versus first quarter last year.

In total for the year, we are implementing cuts that are expected to deliver between $20 million to $30 million in savings over the course of 2025 compared to last year. Jared will provide more color about these savings a little later. As part of our response to this volatility, we have shifted our near-term focus to opportunities to amplify value in our retail channels, preserve margins, control costs as well as evaluate tariff mitigation strategies. I will share more color on these pivots later.

Let's first review some of the financial highlights of each segment from the first quarter. Starting with our Retail businesses. For the first quarter, U.S. Retail reported comps were down 7.3% and total sales were down 7.7%, driven by lower traffic, especially earlier in the quarter where weather had a more material impact. This led to a challenging seasonal business across all demographics in the quarter.

Turning to our Canadian business. For the first quarter, sales declined 2.9% with comps down 9.2%. The difference reflects the addition of Rubino, which is not yet included in our comp base. Overall, performance remains challenging as many of the conditions leading to a depressed U.S. consumer are also affecting the Canadian consumer. We are actively evaluating ways to better connect with the Canadian consumer in today's environment.

Now to our Brand Portfolio segment. Although sales were down 7.9%, we saw strong underlying performance in several key areas. Topo continued its impressive growth trajectory, growing at 84% year-over-year, reinforcing its momentum as an emerging growth brand. In addition, the focus on operational efficiencies that began last year enabled the brand's portfolio to grow operating income by over 30% over last year despite the decline in total sales.

Turning to our near-term areas of focus. As I mentioned earlier, we were encouraged by the progress we made in the back half of fiscal 2024. Importantly, we remain confident in our strategy and we'll continue to focus on the pillars of customer and product within our retail businesses while driving brand portfolio growth by scaling private label, building a more profitable wholesale model and investing in strategic brands like Topo and Keds.

However, near-term volatility necessitates that we adapt our focus on clear tactical actions across the business, prioritizing value, optimizing our assortment and diversifying our sourcing and leading into growth brands. Our customer remains our first priority, and we are committed to delivering meaningful, consistent value to them across all channels. Today's customer is more value conscious, and we are responding with a multifaceted approach to meet that need. Sales declines have closely tracked with lower traffic, which we view as a direct reflection of consumer sentiment.

In response, our team is evolving our approach to how we communicate our value proposition across pricing, promotions and messaging. As is consistent with our past approach, we have continued to monitor and aggregate weekly customer data to inform a more targeted and effective approach. We're emphasizing simplicity and more clearly positioning our offerings in a competitive marketplace, which includes more visible and purposeful in-store marketing that reinforces our value proposition across the assortment.

We're also focused on reinforcing the value we provide beyond price from being a one-stop shop for family footwear to our differentiated assortment and growing our non-footwear accessory offering. Our VIP Rewards Program, which accounts for roughly 90% of transactions has been a key platform for testing our enhanced value messaging.

We plan to leverage loyalty even more strategically to deliver targeted promotions, enabling us to deliver greater value with fewer exclusions to our most engaged customers while driving marketing efficiency. Our goal is to deepen customer relationships beyond transactions and create a rewards experience that feels both meaningful and unique.

As mentioned last quarter, we are preparing to transform and relaunch the program next year. Shifting to our product pillar. We continue to operate with a laser focus on elevating and optimizing our assortment through strategic partnerships and data-driven insights, helping to improve inventory availability and productivity.

Compared to last year, we are meaningfully reducing our choice count while simultaneously increasing our depth on key styles throughout the year. The work we've done so far has meaningfully improved store conversion rates, up 60 basis points year-over-year, underscoring both the strength of our product offering and how it is resonating at the point of sale.

Athletic and athleisure continue to outperform relative to other categories with minimal disruption, supported by resilient global demand and a well-diversified sourcing network. As a result, we see notable opportunity for these categories to grow organically and expand their penetration in the current environment. In fact, according to Circana data for Q1, DSW gained 10 basis points in athleisure footwear market share.

As it relates to our new product inventory, we are pursuing strategic expansion focused on full family premium product launches with top brand partners and the introduction of digitally native brands. Additionally, we're growing our footprint with well-known designers, offering a more exciting assortment for our customers. Ensuring strong product availability at the store level remains a key priority.

To support this, we have begun to shift inventory allocation in the U.S. between digital fulfillment centers and our store locations to optimize in-store product availability. Specifically, we are improving the customer experience through better in-store product availability and faster fulfillment. The percentage of digital orders fulfilled through our logistics center increased by 56% over Q1 last year, which has helped increase store in-stock levels by 13 percentage points compared to Q4.

This adjustment has allowed us to maintain broader assortment levels in store where improved availability is directly contributing to higher in-store conversion. This has also delivered efficiencies on our digital order fulfillment with fewer packages per order being mailed as more fulfillment is routed through our single point fulfillment center.

Overall, we remain focused on inventory management, productivity and buying flexibility, which are foundational elements to better serve our customers. As we look to our brand segment for 2025, we remain committed to reestablishing our private label brands as margin drivers and building a more profitable wholesale business, which includes investing in our core growth names like Topo and Keds to drive top and bottom line.

As we've adjusted within retail, we similarly redirected our near-term focus in the Brands segment towards proactive sourcing diversification strategies. While we previously expected tariffs to be a headwind, they have emerged as a significantly more substantial cost than anticipated across the industry, and we are actively managing the potential impact on our business.

We've accelerated our sourcing diversification efforts, rebalancing and optimizing production to mitigate risk, maximize flexibility and decrease cost as we work to ensure we are not overly dependent on any one country. Recognizing that the trade and tariff negotiations are fluid, we have built in optionality and have activated plans to minimize cost exposure and supply chain disruptions.

The environment remains unpredictable with our exposure fluctuating significantly within the quarter and continuing to shift into the second quarter, while the potential for significant cost headwinds, supply chain disruption and demand volatility remains. We will continue to monitor the environment and our supply chain closely and adapt as needed.

Regardless, we currently expect less than half of our sourcing will come from China by the end of the year, down from 70% at the start of the year. We continue to view private label as a long-term margin driver and truly a unique differentiator for DBI given our design and sourcing capabilities and our commanding retail distribution and market share at DSW and The Shoe Co.

Turning to our brands themselves. We continue to advance our brand strategy for our wholesale brands and continue to invest in key brands such as Topo and Keds that are well positioned to long-term growth. Topo continues to perform exceptionally well with sales up 84% during the quarter. This was primarily built on the brand's continued strategic distribution expansion as well as strong sell-through in reorders from existing accounts.

As of the end of the quarter, the brand was in over 1,200 points of domestic distribution, an increase of 43% versus the first quarter of 2024. Topo also saw great results in new product launches, most notably the Phantom 4, the brand's top road shoe and Mountain Racer, the brand's top trail shoe. In addition, the brand had already begun diversifying out of China before the current tariffs took effect, leaving it well positioned to drive margins while continuing to scale revenue.

Keds continues to see increased momentum as we have cleaned up the marketplace of excess inventory and relaunched some key styles and franchises with new comfort features. Although this produced top line headwinds, it resulted in gross margin improvement of approximately 700 basis points year-over-year. This improvement was primarily driven by the transition from Wolverine Worldwide production to Designer Brands own production in the first quarter, resulting in a significant reduction in landed cost.

We believe that both Topo and Keds demonstrate pricing power and expect demand for these brands to withstand anticipated pricing increases. We are also reviewing pricing across our portfolio, including our exclusive brands as one lever to help mitigate the impact of tariffs and increased sourcing costs.

Additionally, we are focused on managing other items that we can control, including preserving and enhancing liquidity by reducing planned CapEx and tightly focusing on inventory levels. Before I conclude, I want to share a few thoughts on our 2025 guidance. As you know, the current environment remains volatile, bringing heightened anxiety to an already cautious discretionary consumer.

Consumer sentiment reached its second lowest point on record in May. This volatility makes any future forecast highly unpredictable. As a result, we, like many companies in this space, have determined that forward-looking projections are likely to evolve as we navigate through this time of extreme uncertainty. Therefore, we have made the decision to withdraw our guidance for the time being.

We will continue to focus on disciplined execution of the levers within our control to navigate the near-term environment. I'm confident that in doing so, we are building a business rooted in the strength of our brands, focused on the customer and well positioned for long-term value creation. Before I close, I want to emphasize that we remain committed to our strategy and our transformation. I am incredibly proud of our team members who have worked hard to advance our near-term priorities, and I am confident that we are putting ourselves in a strong position to navigate the near term while building on our long-term strategy.

With that, I'll turn it over to Jared. Jared?

Thank you, Doug, and good morning, everyone. Amidst a tough quarter, I want to commend our team for staying focused and executing against our strategic priorities. As Doug noted, our results came in softer than anticipated, reflecting the ongoing macro environment and pressure on consumer discretionary spending. Despite these headwinds, we remain committed to advancing our strategy. Let me provide a bit more detail on our first quarter financial results.

For the first quarter of fiscal 2025, net sales of $687 million were down 8% and comps were down 7.8%. In our U.S. Retail segment, sales were down 7.7% with comps down 7.3%. Both in-store and online traffic were pressured through the period, but improved sequentially on a monthly basis. We also saw fewer returns during the quarter, which we believe underscores the strong work we've done with our assortment.

Sales of our top 8 brands achieved a flat comp compared to the first quarter last year, performing much stronger than the balance of the assortment and increased penetration growing to 43% of sales from 40% last year. Our seasonal product remained pressured and even our strongest categories like athletic experienced compression with sales down 4%.

In our Canada Retail segment, sales were down 2.9% in the first quarter compared to last year, with comps down 9.2%, primarily due to lower traffic due to the compressed consumer spending. Total sales benefited from the addition of the Rubino business, but also faced exchange rate headwinds, resulting in a decline in total sales versus last year.

Finally, in our Brand Portfolio segment, total sales were down 7.9% to last year as most retailers in this space are approaching the year with the same level of conservatism that we are at DSW. However, thanks to the expense efficiency work that began last year, the Brand Portfolio segment saw a 23% reduction in operating expenses, allowing operating income to grow by over 30% despite the challenging top line.

While it was a challenging quarter for many of our brands, we are pleased that the Topo brand continues to be a stronghold in our assortment, posting 84% growth in sales year-over-year. Jessica also remained a bright spot in our dress and seasonal assortment with sales up 6% in wholesale sales to partners outside of DSW.

Consolidated gross margin of 43% in the first quarter decreased by nearly 120 basis points versus the prior year, primarily driven by increased markdowns compared to last year deployed to respond to the weaker traffic and clear through inventory. For the first quarter, adjusted operating expenses dropped $20 million versus last year, but deleveraged by 80 basis points to 43.4% of sales given the sales decline.

Nearly half of that decline was related to the annual bonus still being accrued in Q1 of last year. However, with no accrual occurring this year, given the current performance, we will have a headwind of roughly $10 million in the third quarter of this year.

Additionally, as Doug mentioned earlier, in light of the highly volatile macro-environment and the impact it is having on our business, we have been looking aggressively at our expense structure and capital expenditures. General reductions in spend across various line items are anticipated to deliver approximately $20 million to $30 million in expense dollar savings across fiscal 2025 as compared to 2024.

For the first quarter, adjusted operating income was essentially breakeven compared to operating income of $14.7 million last year. In the first quarter of 2025, we had $11.9 million of net interest expense compared to $11.6 million last year. Our effective tax rate in the first quarter on our adjusted results was negative 1.7% compared to negative 53.3% last year.

Our first quarter adjusted net loss was $12.5 million versus a gain of $4.8 million last year or a loss of $0.26 in diluted earnings per share compared to a gain of $0.08 last year.

Turning to our inventory. We ended the first quarter with total inventories up 0.5% versus the prior year as we move to deliver product ahead of tariff increases. Given the current environment, we feel we have the right mix of inventory and have the flexibility to chase into demand where we are seeing momentum. We ended the first quarter with $46 million of cash. Our total liquidity, which includes cash and availability under our revolver was $171.5 million.

Total debt outstanding was $522.9 million as of the end of the quarter. Before I conclude, I would like to echo Doug's comments regarding the highly volatile forward-looking environment we are facing. While we feel it is appropriate to withdraw our forward-looking guidance at this time, rest assured we are doing everything within our control to operate the business as optimally as possible during this time.

The operating expense cuts I noted earlier have been implemented and every dollar of spend is being highly scrutinized. Additionally, we have pulled down our anticipated annual capital spending from $50 million to $40 million. We are closely monitoring inventory investments to ensure we have the products available for the demand that is generated, but are maintaining a highly flexible open to buy to respond to a dynamic consumer environment.

And as Doug noted earlier, we are leaning into the value we offer our customers through inventory pricing and strong messaging. While this is a challenging time, I believe we will emerge from this leaner and more nimble and ready to deliver even more strongly on our strategy once the environment stabilizes.

With that, we will open the call to questions. Operator?

[Operator Instructions] Today's first question comes from Dylan Carden with William Blair.

Jared, I think you kind of addressed it there towards the end, but the $20 million to $30 million in savings related to the $50 million that you'd anticipate sort of increasing SG&A into this year. Can you kind of just speak to the relationship between those 2 numbers and where you're cutting?

Yes, for sure, Dylan. So initially, when we started the year, we knew we had close to a $30 million headwind coming our way because we didn't have a bonus accrued for FY '24. And of course, we start every year assuming we're going to be able to pay a bonus. The way that, that materialized in '24 was we were accruing it fully in Q1, partially in Q2, but then we reversed it all in Q3. And so for the year, we had 0, but it did show up as part of our expense structure throughout that year last year. Given the complete turnaround of the business this year in Q1, there was no bonus accrual at all. So that provided about $10 million, just under $10 million of year-over-year favorability in expenses in Q1 of this year.

But as I mentioned in the script, we will see the reverse of that or headwinds of that come out in Q3 when we had our bonus reversal last year get reversed. So like-for-like, that incremental expenses that we referenced last year at our original guidance related to bonus is not going to be there. In addition, we have implemented cuts of about $20 million to $30 million below last year. So while we're not giving guidance for the year, if you do look at our SG&A for the full year, the cuts we've made, we believe, will result in $20 million to $30 million below that number for all of 2025.

And then just -- can you just add a little bit more on the reversal in the Canadian and brand portfolio, and particularly on sort of like the comp side for the brand portfolio. Was that mostly Keds? And in Canada, it's been weak. Some other Canadian retailers are talking about that situation with particularly sort of the adjustable mortgages getting better. Just kind of what you're seeing between those 2 segments?

Yes. Thanks, Dylan. This is Doug. I mean on the Canadian market, I'd say a lot of the consumer sentiment that we're seeing in the U.S. is obviously very consistent with what the Canada business is seeing as well. Just downward pressure on the volatility and the uncertainty in that environment has driven the negative comp. We had a little bit of noise in there, as you know, because Rubino was not in our last year comp. But again, very similar kind of customer sentiment that's happening in the U.S. is also happening in Canada.

And then on the brand side, I mean, it was a little bit of a mixed bag. Obviously, the Topo business continues to be really strong. It's up 84% in the quarter. And then as I said in the script, Keds had a little bit of headwinds on the top line, but that was because we were up against some liquidation for last year, and they actually had quite an expansion on the gross margin side.

[Operator Instructions] The next question comes from Mauricio Serna with UBS.

Maybe could you talk a little bit about what you're seeing quarter-to-date? And sorry if I missed this, if you talked about any expectations if like for Q2, you're already anticipating an impact from tariffs? Yes, that would be my first 2 questions, sorry.

Yes. Thanks, Mauricio. This is Doug. We are experiencing a similar trend in Q2, similar to how we exited Q1. So that would be my comment on Q2. And then the tariff impact, as we had shared earlier, the biggest concern we have overall as Designer Brands is the indirect impact that tariffs are having on just the uncertainty and the volatility on customer sentiment. If you think about the brand portfolio, which is less -- well less than 20% of our overall business, the team has done a really good job of mitigating what at one point, we thought was $100 million of pressure on the gross profit line has mitigated that down significantly through factory negotiations, resourcing product, taking very select pricing increases to be able to mitigate that.

Again, but our retail business is heavily reliant on our national brand partners, and we're obviously working very closely with them as they are also selectively passing on price increases. Our overall approach is to maintain our IMU. But again, we're working very closely with our brand partners to closely manage any price increases.

Got it. Very helpful. And then on Topo, exceptional growth and very good performance. Could you remind us like how are you thinking about -- how big the brand is right now for you? And what are your expectations for 2025? Like how much revenue do you expect from that business in 2025?

Well, again, as we shared, it grew 84% in the quarter, just exceptional growth. The team has done a really good job. [indiscernible] optimistic about that. I just would balance that with kind of the ongoing uncertainty and the volatility that the discretionary consumer is definitely under pressure. But the teams have done a really nice job of managing the inventory there. As you know, that category is much more diversified from a sourcing perspective. So a little bit less subject to the pressure of tariffs. And we'll carefully monitor the inventory. But again, the team did a really good job navigating that in Q1 as well.

That's always been kind of a strong suit of the company, specifically at DSW. And then as it relates to holiday, I mean, we'll obviously stay very close to it. The teams are monitoring it every day with regards to reading and reacting to consumers and how they're responding in the moment. But there's -- any relief in this, I mean, we'll be well positioned to take advantage of that. But -- and again, that was a strong suit for us last year as we really leaned into gifting and the messaging and marketing of how that actually showed up in store as well. So we have that playbook ready to execute again this year. And I'd say, overall, we're cautiously optimistic. It's just the uncertainty of what's happening with customer sentiment.

And Serna, on your second question around the mitigation options on tariffs, the one thing I would reiterate is we certainly were already looking even before the tariff announcements to diverse -- start more aggressively diversifying outside of China. We certainly accelerated that. We've got options that could take us all the way down to almost 5%. But on the flip side, there's still a much more stable and cheaper supply chain in China for nonathletic footwear. So being something more than 5% might be more desirable, but it really will depend on where things shake out. But lower than where we started is certainly where we will end up the year.

I will just remind you, only less than 20% of the products that we sell do we actually control where they're made. The rest of them, we buy from someone else and certainly are not part of this decisions.

I'd just add to what Jared said, I mean, our team has done a really nice job accelerating our diversification efforts so that we have greater optionality on those categories. But we want to stay close to it because, again, in many cases, the prices in China are still quite a bit favorable, particularly in the dress category where we overpenetrate.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Howe for any closing remarks.

In closing, I'd like to just say thank you again to all of our Designer Brands associates for their continued hard work and dedication throughout the quarter. And thanks to everyone who joined us today. We look forward to updating you in future months as we advance through the balance of the year. Thank you.

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