Designer Brands Inc. 2027 Q2 Earnings Call

Earlier today, the company issued a press release comparing results of operations for the 13-week period ended August 1, 2026, to the 13-week period ended August 2, 2025. Please note that the financial results that we will be referencing during the remainder of today's call exclude certain adjustments recorded under GAAP, unless specified otherwise. Additionally, please note the 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 Seamus Toal, Chief Financial Officer. I'll now turn the call over to Doug.

Good morning, and thank you, everyone, for joining us today. We're pleased to share our second quarter results, where we delivered a meaningful improvement in profitability versus last year, highlighted by the strength in our brand portfolio segment. Before I discuss our business performance in more detail, I want to recognize our Designer Brands associates for their continued dedication, focus, and commitment to our customers and strategic priorities. I'm proud of how our teams executed throughout the second quarter and remain focused on the areas within our control as we continue to deliver against our priorities. In the second quarter, net sales decreased 1% year over year, with comp sales down 2%. Our brand portfolio segment delivered another quarter of strong growth, up 18% versus the prior year. Retail segment sales decreased 2%, primarily due to softness in seasonal.

We delivered a significant improvement in adjusted operating income, benefiting from tariff claim refunds that were received in the quarter. However, even excluding this benefit, we delivered gross profit expansion versus last year on a dollar and rate basis through our elevated assortment, disciplined sourcing, and our continued focus on promotions and markdown management. On a year-to-date basis, adjusted operating income was $59 million, more than doubling the same period last year, which we believe reflects the meaningful progress we are making in strengthening the underlying profitability of the business as we execute against our strategic priorities. In a few minutes, Seamus will provide more detail on the tariff refunds, financial performance, and the outlook for the year.

Before reviewing our results and strategic priorities in more depth, I want to take a moment to reinforce what we believe is a key differentiator of our business model and central to our long-term value creation opportunity. The combination of our brand portfolio and scaled physical retail footprint creates a unique model that we internally call the power of the pair. The strength of our store base gives our brands reach, visibility, and support as we leverage our scale, sourcing, and logistics capabilities. Our stores are our largest channel of new customer acquisition, providing a scaled platform to introduce and build our brands. At the same time, the brands we produce provide our stores with differentiated product and greater control over our assortment, creating opportunities to drive greater customer relevance at DSW.

This combination of our retail and brand portfolio gives us greater flexibility in how and where we distribute our product, creating diverse opportunities to drive growth and margin expansion as we remain excited by the long-term potential and value creation inherent to this business model. Now let's take a moment to review our second quarter results. I want to start with our retail segment, which as a reminder, reflects the aggregation of our U.S. retail and Canada retail operating segments. As I mentioned earlier, retail segment sales were down 2% in the period, exacerbated by softness in seasonal categories. Sandals, our largest seasonal category, were pressured by early weather-related headwinds and never fully rebounded. Given their high seasonal penetration, this accounted for approximately 200 basis points of the retail sales decline. Excluding the impact from sandals, retail sales in Q2 were approximately flat versus last year.

We ended the quarter with sandals inventory in a healthy position and are confident in the team's plans to enhance the assortment for next year's peak selling season. Our athletic business was also softer overall in Q2. That said, performance was materially stronger with brands that leaned into innovation and where we had greater access to lifestyle and premium product. Within the category overall, we remain disciplined in our markdown cadence and delivered margin improvement amidst a very promotional environment. Encouragingly, athletic demand improved sequentially by 400 basis points in August. We see a clear opportunity to improve our top-line retail performance and are continuing to take actions intended to strengthen the business, further improve our customer value proposition, and drive more consistent, profitable growth. These include delivering focused and differentiated benefits for our customers through compelling assortment, engaging marketing, and a distinctive in-store experience.

We are seeing signs of progress, with retail trends improving and our stores returning to positive comps quarter to date. From an assortment perspective, we are being much more deliberate about where we invest, concentrating on the brands, categories, and key styles where we see the greatest customer response, while also narrowing the breadth of our assortment. We are seeing encouraging results from this approach. Our top ten brands improved sequentially versus Q1 and outperformed the balance of the assortment during the quarter. Importantly, we drove this performance with meaningfully less promotional activity than last year, reflecting the progress we are making toward a healthier and more productive assortment. We also built momentum in women's dress, posting sales growth in the high single digits for the quarter. Our affordable luxury assortment continued to resonate, nearly doubling last year's volume.

While categories adjacent to footwear remained an area of strength, with sales up approximately 10% in the quarter. We are also seeing encouraging trends in both dress and boots quarter to date. Importantly, we entered the season with healthy boots inventory, which should better position us to capture demand following the tariff-related inventory delays we experienced last year in the third quarter. Our DSW brand repositioning continues to play an important role in deepening consumer engagement through more relevant, culturally connected advertising. Campaign work in the second quarter reinforced the brand's renewed positioning while creating stronger touchpoints with both existing and prospective customers. Our partnership with Ciara Miller from Bravo's "Summer House" further highlighted DSW's cultural relevance, driving 7 billion earned impressions and the all-time highest-performing social content for the brand. Excitingly, we are relaunching our rewards program this month as another important step in our brand evolution.

As we have shared, nearly 90% of our transactions come from our approximately 30 million VIP members, and we have significantly modernized the program, enhancing the value we provide to our VIPs while improving the effectiveness and efficiency of our CRM efforts. The updated program is designed to increase frequency and retention by reducing friction in the customer experience through quicker access to rewards, extended reward redemption timing, and a more personalized experience with enhanced engagement and special perks. This relaunch is an important milestone and one we believe can drive benefits for both our customers and the business. Finally, as I noted earlier, we continue to believe that our physical footprint is an important competitive advantage. We opened five new stores in Q2 and are pleased with the early performance of these locations, which are expected to be accretive to earnings in their first year.

We are also encouraged by the performance of stores remodeled since 2025, with comp sales outperforming the balance of chain in these locations. In addition, this fall, we are excited to pilot a new store-within-a-store concept called The Edit at DSW. The Edit at DSW is a curated, elevated destination showcasing key affordable luxury and elevated fashion brands in an open, experiential environment that is between 1,000 and 1,500 square feet. We are piloting The Edit at DSW within four existing locations this fall and plan to use these pilots to evaluate customer response and inform how we can evolve this concept going forward. Taken together, these initiatives will continue to enhance our efforts to deliver a more elevated, distinctive, and convenient in-store experience. Turning to our brand portfolio segment.

We were pleased with another quarter of strong performance in Q2, with sales increasing 18% versus last year. The brand portfolio continues to become an increasingly important growth engine for Designer Brands, driving both top-line growth and profitability, and our focus is on building distinctive brands with strong consumer relevance and scaling them profitably over time. Our vertically integrated model brings together brand building, product development, and sourcing, and our retail footprint serves as a catalyst to introduce, scale, and expand these brands across our portfolio. We continue to see this benefit in our exclusive brands, with wholesale sales up double digits year to date, demonstrating the opportunity to grow our brands across multiple channels of distribution. We achieved continued momentum across our brand portfolio, with outsized growth in Q2, led by Topo Athletic and Jessica Simpson.

Topo continued to be a standout, with revenue growth of more than 24% during the quarter, in line with our expectations. We expect the brand to generate over $100 million in 2027 and remain bullish on the brand's long-term growth potential, with significant opportunity anticipated both in existing and new channels of distribution. We are also encouraged by the progress of our recent actions to integrate Topo sourcing into the broader DBI platform and expect meaningful profitability improvement from sourcing optimization and further business integration moving forward. Jessica Simpson also delivered another outstanding quarter, with sales up approximately 24% versus last year and impressive growth across all major accounts. As our strength in dress continues to resonate with customers, Keds performed in line with our plan in Q2, highlighted by strong direct-to-consumer performance across the assortment. We continue to expect robust double-digit growth for full year 2026.

Across the portfolio, we remain focused on supporting profitable, sustainable growth while leveraging the strategic advantages of vertical integration, sourcing and distribution capabilities, and our strong retail partnerships to create value across the business. Before I conclude, I want to share a few thoughts on our quarter to date performance as well as 2026 guidance. Our third quarter is off to a strong start. While back to school had a later start this year due to the timing of Labor Day, it is performing ahead of our expectations, and retail sales are slightly positive quarter to date. For the full year, we are now anticipating total company sales to come in flat to up 1% versus last year, which is above our previous guidance range.