Designer Brands Inc (DBI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Second Quarter 2010 DSW Inc.

Earnings Conference Call.

My name is Kecia and I will be your conference operator for today.

At this time, all participants are in a listen-only mode.

We will conduct a question and answer session towards the end of this conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms.

Leslie Neville, Director of Investor Relations.

Please proceed.

Thank you, and good morning.

Welcome to DSW's second quarter 2010 earnings conference call.

With me today in Columbus are Mike MacDonald our CEO, Debbie Ferree, our Vice Chairperson and Chief Merchandising Officer and Doug Probst, our CFO.

Before we proceed, please note that earlier this morning we issued a press release detailing the results of operations for the quarter ended July 31, 2010.

Various remarks we make about the future expectations, plans and prospects of the Company constitute forward-looking statements.

The actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those listed in today's press release and in our public filings with the SEC.

So, with that, I will turn it over to Doug.

Thanks, Leslie.

Good morning, everyone.

I will cover the financial performance for the second quarter, discuss our current outlook for the remainder of 2010 and at that point, I will turn it over to Mike to tell you why we're excited about our progress and give you an update on our growth initiatives.

As previously reported, net sales for the second quarter increased 12.3% to $415.1 million.

Same-store sales increased 12% for the comparable period versus a decrease of 2.9% a year ago.

By segment, our comps for our DSW business, which includes DSW.com, were up 12.5% and our comps for our lease business were up 5.7%.

The merchandise margin rate for the second quarter increased 210 basis points to 45.2%, compared to last year's 43.1%, driven by significant regular price selling throughout the quarter.

The occupancy expense rate decreased significantly, due to the large positive comp in the quarter and the reduction of non rent- related expenses in DSW stores.

As you would expect, the combination of a significant increase in merchandise margin and an overall decrease in occupancy expense resulted in a gross profit rate increase of 380 basis points to 30.3%.

The SG&A rate decreased 230 basis points to 21.1% in the quarter, due to the increased sales and overall concerted effort to control expenses and a shift of marketing expenses to the second half of the year.

Operating income for the second quarter was $38.1 million or 9.2% of sales, compared to $11.4 million a year ago.

Net income for the quarter tripled to $23.5 million, compared with $7.6 million last year, equating to an increase in diluted earnings per share of $0.52 versus $0.17 a year ago.

Regarding our balance sheet, you will recall that at this time last year, inventory was down 12% on a cost per square foot basis.

This year, we ended the second quarter with inventory up approximately 17%, meaning our two-year inventory level is up about 5%.

The net 5% increase is due to the intentional decision to move up some delivery dates for the fall product.

Capital expenditures in the quarter were approximately $9 million and are estimated to be approximately $50 million for the year, primarily for new stores, remodels and investments in IT.

And finally, we ended the quarter with cash and short term investments of $272 million and no debt.

Overall, our second quarter performance exceeded our expectations.

As a result, we increased annual comp and EPS guidance four weeks ago.

Today we are reiterating our annual guidance for 2010.

The following are the key assumptions.

First, our comp expectation for the year is an increase of approximately 7% to 9%, our highest comp store sales increase since we became a public company.

Second, we expect to open nine stores in the year, with five already opened in the first quarter.

And finally, as we stated at the beginning of the year, we expect to leverage SG&A in 2010 with an annual increase in expenses of less than 3%.

Given these assumptions,we are reiterating our annual estimated annual diluted EPS guidance of $1.80 to $1.95 per share.

With that, I will turn it over to Mike.

Thanks, Doug.

Good morning, everybody.

We were pleased with our ability to sustain our performance at a very high level in the second quarter.

It was the fourth consecutive quarter in which we've recorded positive comp store sales and significant earnings increases.

We're pleased with these results and we believe there's more to come as we more fully implement our strategic initiatives in the areas of systems, precision marketing and new store growth.

Now let me briefly add some further details on our second quarter sales performance and then I'll continue with an update on some of our more important strategic growth initiatives.

The strong comp sales performance in Q2 was driven by healthy increases in both traffic and conversion.

We've now recorded four consecutive quarters of increased conversion rates over the prior year.

We believe this is very significant, because it means we're doing a better job of meeting the customers expectations in the areas of assortment, sizes, value and the in-store experience.

If you look at business by category, our sales performance was quite balanced.

Women's footwear was up 12%, Men's was up 15%, Athletics was up 9% and the Handbag Accessories complex was up 6%.

Key business drivers included sandals in Women's, casual footwear in Men's, and toning in Athletics.

Also, our business benefited from our emphasis on key items and the increased utilization of our size replenishment capabilities.

We now have about 15% of our inventory on the size replenishment system and we expect to increase that to approximately 25% over the next year.

On a geographic basis, business was also quite balanced.

All 30 store districts posted comp sales increases and our four store regions all had comp increases ranging from plus 10 to plus 13.

The five new stores that we opened in the first quarter continue to perform at or above the volume levels forecasted when they were approved for opening.

I'm also quite pleased with the way our stores are performing operationally.

We've recently standardized our operational practices at the store level using a best practices model.

As a result, we're getting merchandise to the floor faster, we're maintaining our sales floors better and we're engaging our customers more consistently.

On the subject of inventory levels, Doug has already explained that our increase in inventory is due to some intentional shifts in receipt timing.

We are comfortable with our inventory ownership, but as always, we'll monitor it closely to ensure it's aligned with sales trends as they develop.

We have delivered many styles of boots early this year and the response so far has been good.

Also, we've begun to receive men's performance athletic footwear from Nike for the first time and we're excited about the impact this addition can have over time on our entire athletic business.

In terms of our strategic initiatives, we're making progress on all fronts.

DSW.com channel continues to grow quite rapidly.

We added 2.6 million new DSW Rewards members in the first half of the year, and we now have approximately 15 million members who have been active within the last 24 months.

We're also developing a deeper understanding of our customers' purchase preferences which allows us to communicate with them on a more targeted and relevant basis.

We are on track to implement our stock locator system by the end of the 2010 fiscal year.

We're continuing with our aggressive store remodel program which we anticipate will touch 15% of our stores this year alone.

In terms of additional new stores, as we said, we will open up four in the back half of to 2010 and we are on track to open 10 to 15 new stores in 2011.

We're also working on plans to open up a few new stores in smaller markets beginning next year which, if successful, could provide the opportunity to add at least 50 new stores in markets were previously not on our radar.

As we enter the fall season, we have reasons for both caution and optimism.

We're cautious because the economic climate and consumer sentiment remain weak.

In addition, we're facing much tougher comp sales, comp margin and profit comparisons in the back half.

Conversely, we've already been operating in this challenging environment for over a year now and our results have been very good.

We believe these good results reflect the increasing relevance of our unique retail concept to a growing number of value-conscious customers.

And that belief gives us reason for optimism.

So, I know what many of you are thinking.

You're thinking that our expressions of optimism are in conflict with our full-year earnings guidance that implies an earnings decline in the back half.

So, let me respond to that apparent contradiction.

The full-year sales guidance implies a low single digit comp sales increase this fall and that comes on top of an 11% comp increase in the fall of 2009.

Our fall merchandise margin rate projection is higher than the highest fall margin DSW achieved in the four years from 2005 to 2008.

But it is below the new high watermark we set in the fall of 2009.

We believe these assumptions are reasonable.

You may think they are overly conservative and I really hope you turn out to be right.

Regardless, I can assure you that we plan to manage the business to maximize our financial results.

With that, I'll turn it back to Leslie.

Okay.

Now let's go to the question and answer.

Please limit yourself to one question and one follow-up on the first round.

You are more than welcome to get back in the queue in the same manner as you did originally.

Kecia, could you please instruct how the callers can indicate a question?

Thank you.

(Operator Instructions).

Your first question comes from the line of Chris Svezia with Susquehanna Financial Group.

Please proceed.

Good morning everyone, and great job.

Debbie, a question for you if I may start there.

Just on the inventory, one point of clarification, can you just maybe just talk about where either categories or areas of where you've emphasized the inventory, boots or any special buys or things of that nature?

Can you just maybe quantify what areas you built up and your comfort level with those inventory levels?

Morning, Chris.

Morning.

So first of all, I would tell you that as we look to position our inventories in a stronger manner this year going into Q3 out of that, going into Q2, what we did is we looked at the categories that we felt the strongest about.

And I would tell you that there were many across the board.

So, we positioned our inventories in the places that we thought were going to have the biggest increases and strongest paybacks going forward into the back half.

Where I will not quantify or comment by category, I will tell you that the places that I am feeling the strongest about continue to be in the boot area, the fashion area in Women's and selected places in the athletic business.

So, it was really a little bit across the board.

But we did pick our spots where we thought we were going to get the biggest payback.

Okay.

Thanks.

And then, just it seems like, Mike, going off your observations here, it seems like your business has outperformed most of your peer group and it seems like based on our checks as we've gone through August, it seems like the momentum in your stores continues.

I guess September-October is more impactful from a seasonal perspective.

What point do you guys look at the business and say okay, I mean we're performing maybe better than we thought?

Where's that inflection point?

And where do you think, where you can see profit growth or flat earnings in the back half of the year?

What kind of comp do you need to do that?

That would be helpful.

Well you know, Chris with we've had four good quarters.

This is the first time we're really coming up against our good numbers.

So, I like to say that it's gut check time for us.

In terms of monitoring the business, we're monitoring the business every single day.

And of course the September-October period is the key time.

But we're already reading how our selling is going.

The key to our margin performance last year was the fact that we were continuously chasing inventory because our sell-throughs were so rapid at regular price.

And we were only half a step behind the sales trend with our receipts.

And we were lucky enough to get our hands on receipts to feed that sales trend, receipts that were the right goods and right timing, thus we had enough time to sell through.

So, this year as we approach the fall, we've taken a little different approach.

We don't want to have to rely on chasing receipts throughout the fall.

We want to inventory our stores to a level that's consistent with our sales expectation for the fall and then if it gets better, we'll chase them.

I do think that our margin rate assumptions for fall are more reasonable given our inventory positioning and given the fact that there's going to be better alignment between inventories and sales trends.

So, to answer your question directly, I don't think we'll have good visibility to what our fall margin performance is going to be, which is the key to our fall profit performance.

I don't think we have visibility to that until we get through September-October.

Okay.

And then any thought about -- thanks, Mike -- any thought about what kind of comp you would need to get to a flat earnings?

Or do you just need to see what the merchandise margin rate before you can make that observation?

Yes.

It depends on the quality of the comp, obviously.

But I think we have to achieve more than our implied fall sales guidance to achieve higher margin rates.

Sure.

Okay.

All right.

I'll get back in queue.

Thanks, guys.

Appreciate it.

And your next question comes from the line of Scott Krasik with BB&T Capital Markets.

Please proceed.

Thank you, everybody.

Good morning.

Can you just dig in a little bit further on your commentary on good boot sales so far this year?

We've heard as early as July that boots were selling.

So, is it in line with your already high expectations?

Is it exceeding your expectations?

And what sort of styles, is it broad-based in terms of what's performing for you?

Good morning.

Yes, thank you.

So, I will tell you that July started out very strongly for us in boots as we started to approach the back-to-school time period.

We did take a position that we wanted to receipt certain types of boots a little bit earlier than we did last year and we did that.

I'm pleased to report that we're really getting some very strong sell-throughs across the board in most categories.

So, it isn't specific to one particular style of boot.

And that's always healthier than relying on one look and everything else falls short of your expectations.

So, that's the positive that's coming out of July.

We're seeing that trend continue into August, and yes, boots are beating my expectations not only for July, but the early indicators for Q3 also suggest that as well.

And are the AURs up year-over-year?

And up if so significantly?

The AURs are relatively flat.

Okay.

And then, just a follow-up on your comment on selective athletic, you've had some of the other off mall retailers report and say that toning is still an important part of the business, but maybe not at the hyper level it was this spring.

Is that consistent with what you're seeing as well?

And how is that reflected in your inventory?

That's fairly consistent.

We're at about a 2% to 2.5% penetration to our total Company business and toning right now for Q2 it ran about 14% to the athletic business.

Where it has and I'll say this -- how should I say this, I'll say it in a very delicate way it has toned down a little bit.

So, toning has toned down just a little bit.

It's calmed down just a bit.

It's still a very important part of the business.

There are -- there's a good solid core foundation for toning and we all know who those players are.

There are new brands and new styles that are entering the toning arena, which is causing the assortment to be a little bit more robust than with just the one or two players that originally entered into it.

It's a strong category for us.

I think it has added new energy to an athletic category that was really suffering from staleness and lack of freshness from over the last couple of years.

This category, I want to be sure to point out to you, is evolving.

And I think it will seek it's own levels as these new players, the new brands and the new styles come in.

But it continues to be an important part.

What we're also finding is that there are other parts of the athletic business that we see tremendous opportunity in, and everyone knows what that is and that is specifically the technical running category.

And so, while toning is a very important piece of it, I'm happy to report that there are other categories and classifications within athletic that also show a tremendous amount of upside opportunity and we are capitalizing on those as well.

Excellent.

Just one last follow-up to that, in terms of the pricing strategy that you're taking to toning or athletic or wellness, do you feel comfortable focusing on that $100 price range?

I know you have some $60 to $80 product in there as well.

As you know, in toning, there are manufacture suggested prices and I will tell you that we're honoring those MSRPs with our vendor partners.

Sure.

Sure.

But are you seeing more success from the Dr.

Scholl's or the Avias at $60 to $80 versus the Reebok or Skechers at $100?

We offer toning anywhere from $70 to $100.

And I will tell you that the sell-throughs are pretty consistent across the board for all of those brands.

All right.

That answers my question.

Thanks so much.

And your next question comes from the line of John Zolidis with Buckingham Research.

Please proceed.

Hi.

Good morning.

Morning.

Good morning.

I just wanted to follow up on Chris' earlier question a little bit and try to press you if you can provide us with an answer.

What do comps have to be to get to earnings flat year-over-year?

Right now, you're saying comps are at a positive low single digit.

You're going to see significant merchandise margin erosion on a year-over-year basis due to the higher inventory position going into the back half.

Do you need a high single digit comp for earnings to grow in the back half?

And then can you also please quantify the marketing dollars that shifted from Q2 into the second half?

Thanks.

Yes.

Sure.

To Mike's point -- this is Doug -- to Mike's point, there's an important consideration as to the quality of those sales.

So, we do believe that on a two-year basis, which we performed about a plus 10 in the first half, inherent in our guidance is that the second half implies a higher two-year comp already in the back half.

So, what that means is that yes, there has to be more than a low single digit increase in comps to start approaching that last year earnings number, and it would be a significant increase to our two-year comp that we achieved in the first half of the year.

So, instead of maybe a 13 or 14 two-year comp, we would need, have to be closer to 16, 17 maybe 18 to do that.

But again, there's a variable in there in the merchandise margin rate that would determine our performance to last year's earnings.

Regarding the marketing, it's really just timing.

Where we believe the rate for the year will still be close to the same as last year, about 2.6%, there's going to be about $4 million of incremental spend to last year, all of that coming in the second half.

And that $4 million shifted out of 2Q?

First and second quarter.

Okay.

Thank you.

Your next question comes from the line of David Mann with Johnson Rice.

Please proceed.

Thank you.

Good morning.

I think last year in the back half you talked about your boots business was comping up or comped up about 40%.

Can you just give us a -- can you quantify what your plan is for boots in the second half this year?

Morning, David.

Good morning.

Thank you.

So yes, we did have a strong comp increase last year in boots.

The view that we took this year is that we planned for flat to a low single digit increase in boots.

It's early in the game, and where I am encouraged by July and early August selling in boots right now, I wouldn't be able to call the season on that.

I'd be really happy if we continue with the rates we have gotten July and August, but I'm not ready to call the season on that.

So, my position is still to continue to try to achieve a low single digit increase on top of that 40, and if we get something higher than that, if indications are that this trend is continuing, we will chase that inventory throughout the season.

Okay.

Great.

And then, in terms of the areas of the business where you have implemented size replenishment, can you give us a sense on how those categories have been performing on a comp basis relative to the rest of the assortment?

Well, the biggest place that we've implemented size replenishment has been in the Men's area.

And as Mike pointed out, we had a plus 9 -- or I'm sorry plus 15 in Men's for Q2.

So, it's actually -- it's performing well for us right now.

But once again, we're early in game.

We have a little over 100 styles, about 125, 130 styles on size replenishment in Men's right now.

We're adding to that.

We're also going to start putting some Women's styles on size replenishment.

So, we're pleased with our early results in that.

It's doing what we hoped it would do and that's staying in size on our best items, the core items of the season.

But still a little bit early to call.

Great.

Thank you.

Your next question comes from the line of Patrick Mckeever with MKM Partners.

Please proceed.

Thank you.

Good morning, everyone.

I'm just wondering about sourcing from China and how much of your product you source directly from China, how much is sourced indirectly?

And just generally, how much flexibility you think you have to navigate any forthcoming pricing pressures, that all of us I guess are talking about?

Thanks.

Good morning.

This is Debbie.

So, I'll take that question.

First of all, most of the footwear that we have here in DSW is from China.

Most of the business we do from China is done through our branded partners here in the United States.

So, we are not relying heavily on our own direct sourcing from China at this moment.

So, we're hopeful and we work closely with our partners that we continue to manage those deliveries so that our deliveries are on time and that's how we're managing that piece of the business.

As far as cost increases are concerned, which I guess was your second question, we're seeing mid-single digit cost increases.

The brands -- we work very closely with our brands -- the brands are just as concerned about cost increases as we are.

I would tell you that there is a collaborative effort to try to make sure that both share a set burden of cost increases and also, that our manufacturers are working very, very closely with the factories to try to minimize how much of that pressure gets passed through.

So, we're seeing about mid-single digit cost increases right now, and the brands that I've spoken to would validate that.

Okay.

Very helpful.

How much off-price buying are you doing these days versus what you might have done a year ago?

And how much flexibility is there in that area to flex that higher?

So the off-price lines, the percent of our business that's in off-price buying is pretty consistent this year to last year.

So, there was no big shift there.

I will tell you that DSW is always looking for off-price opportunity buys to continue to add to the strong value proposition that we want to pass to our customer every single day.

So, we have liquidity, we have flexibility to go ahead and maximize any opportunities that we think are appropriate from a content point of view, and a pricing point of view for our customers.

Okay.

Then just a last quick one, thinking into the back half, what are some other individual categories or styles that you would expect to be strong in the back half of the year, in addition to boots and toning?

Thanks.

So, the fashion category, Women's fashion is very well for us both in Q2 and in Q1.

So we have a very, very strong position in that.

That's continuing to prove through in early indicators from the August numbers as well.

So, fashion will continue to drive the business.

Boots, like I said, we had a very strong July and early August acceptance from our customer.

I believe that even though we're planning boots to be low single digit comps, it appears that there could be, and like I said it's too early to call just from a few weeks, but it appears that there could be some upside there.

And we're looking at certain items within boots that are checking out very well for us and we're in the process of chasing those right now.

We continue, as I mentioned before to Chris, is in the athletic area, there appears to be some opportunity in the technical running area.

There's pockets of opportunity in the athletic business, in addition to toning, which we're really excited about because it's part of the category of the business that we really haven't played in, in a big way before.

So, those would probably be the three areas that I feel the most strongly about.

We are getting some good early indicators also in our Accessories area in handbags and specifically, in hosiery.

The whole legging, jeggings trend right now, we really put a big bet on that, we placed a fairly large bet on that.

And we're getting very significant sell-throughs on at that category as well and we continue to support that and fund that through reorders as that continues to play out in the season.

So, as I mentioned before, I'm happy that there seems to be strength in the business across the board.

It's not just one category.

We all, in retail, relied on the boot trend last year and it played out that was a very strong category for us.

I think we have more that we can count on this year to help generate the comps that we need.

Great.

Thank you.

Your next question comes from the line of Steve Kernkraut with Berman Capital.

Please proceed.

Hello.

Congratulations on a great quarter.

Mike, I just had a quick question.

If you can just describe the pipeline, since some department stores are getting nervous and they're canceling goods, is the pipeline flush with goods that you should be able to buy things in the off-price market?

I assume toning and boots are hot, so there's probably not a lot in the pipeline there, but in terms of the other categories, do you have access to goods so that if sales continue to be robust or even just good rather than being robust, that you're able to chase goods?

I'll go ahead and take that question.

This the Debbie.

Hi, Debbie.

Hi.

First of all, it's early right now in the season to have a lot of opportunistic buys and deals, I will say, present themselves in the marketplace.

So, I think what will happen there, is what we're hearing is those deals and those opportunities will probably start to show themselves in the middle of September.

You'll have one season under your belt, retailers will either feel strongly or weakly about third quarter and some of the delivery challenges, which there are some delivery challenges, where retailers will either cancel goods or get extensions, that has yet to be determined.

So, I think you're going to start to see some of those opportunities show themselves in the middle of September.

Are we in a position to chase those?

Absolutely.

Vendor relationships are very, very strong, and we're on the phone every single week talking to manufacturers about what potential opportunities there are out there to capitalize on.

I will stress though, that the product has to be right.

DSW is an on-trend value retailer.

We want to make sure that the values we pass to our customers are exceptionally strong values we pass to our customers in this economic time is on the right product.

Sometimes there isn't a price for wrong product.

So, we want to make sure that both of those things are consistent; right product, right price.

Okay.

Thanks very much.

Your next question comes from the line of Heather Boksen with Sidoti and Company.

Please proceed.

Good morning, guys.

Maybe ask the inventory question a different way here.

But, just curious, when were the fall deliveries last year?

And if you exclude the shift in timing of taking them earlier, about how much higher would the inventories be year-over-year?

We're trying to figure out the best way to answer that question, but most of the inventory is due to timing.

And based on some of the other comments Debbie has told you, we believe that's the appropriate situation we should be in at this stage of the fall season.

But the inventory is definitely in line with our sales expectations.

We did take some earlier deliveries versus last year, but just to re-emphasize, we are comfortable with our inventory position, given our sales plans and given the trends that we see in the business thus far.

Okay.

Then just switching gears a little bit.

You have about $6 a share in cash on the balance sheet it looks like at the end of the quarter.

Now, I realize you might be limited here in what you can do with it, but just curious what the plans are for the cash at this time?

Not trying to evade that question.

We recognize our cash balance.

We like the fact in this environment we have a lot of cash.

It gives us a lot of options.

It gives us a lot of chance to invest into our own business, as well as take some opportunities outside our business perhaps.

But at this stage, we're focusing on the base business, getting it running as well as we can and focusing on that.

So, I can tell you that any investment we make with our cash is going to be sure not to distract us from the base business of DSW and lease businesses.

So, we have a lot of options.

We're happy with our position, but there are no public plans right now that we've communicated with regards to our plans to our cash.

All right.

Thanks.

Your next question comes from the line -- we have a follow-up from Chris Svezia with Susquehanna Financial Group.

Please proceed.

So, I have a couple follow-ups here.

First, on the product side, with regard to the Men's business, and you're talking about getting -- finally getting Nike, I know it's been an ongoing effort there -- but, obviously that's new business on the Men's side.

Can you maybe talk about, if you can, to what you're getting to a degree?

I mean is it Shocks, is it Air, is it technical running, is it casual?

Just maybe just a little color about what you're getting.

And then, secondly on the Men's business, it's performed really well for about a year or so.

And I know the size, the replenishment piece is working there as well.

But, is that, to what degree is that type of growth sustainable?

Or do you start to get into tough comparisons?

I'm just trying to understand how the athletic piece plays into it, what you're doing there?

And overall in the Men's business, can that continue in terms of the strength in that category?

Chris, on the athletic piece in Nike, we have been running with Nike Women's for some time now.

The Nike Men's athletic product is new for us, and we've been very, very pleased with our early results in that, which have been high single to low double-digit sell-throughs.

So, how much more can we get with Nike?

As you know, Nike tiers their distribution.

And we are in -- we're bought in the department store tier.

So, the kinds of product we get would be similar to any other department store.

So, are we getting Shocks?

No, we're not getting Shocks.

Am I unhappy we're not getting Shocks?

That seems to be -- it's not the newest part of the business.

So, I'm pleased with the kinds of product we're getting right now.

Is there an opportunity based on our sell-throughs that we could look at higher tier product at highest AUTs?

Yes, it appears that we have the ability to sell more product up in that price point architecture.

So, but that will be a collaboration between us and our phenomenal Nike partners to continue to manage our business, based on these early results that we've gotten in the Men's product, and to take the next step.

We're going to take baby steps right now and we'll continue to feed into that as the success story plays out.

Outside of the athletic piece, can the Men's category continue this trajectory of growth or does it become more of a challenge?

In other words, there are things that you're doing, either going deeper in select items and changing up the assortment that give you confidence outside of athletic, you can continue to comp on the Men's side?

Yes.

The men's business overall, we used to have almost a 20% penetration in Men's, and this was probably about four or five years ago.

As our focus turned to Women's business and the Accessories business, we took our eye off the ball a little bit in Men's, to be very honest with you.

We are committed, as we talked about on the last two earnings calls, to really get back into that Men's business and support that to the level that our customer has told us they want it supported.

So, those increases you're seeing now, I think are sustainable for quite some time.

We're only at about 15% penetration in Men's right now.

If you look at just getting back to the old levels of 20%, we have a lot of growth ahead of us.

Okay.

That's good to hear.

And then, the last question I have here is just on the dress business, you might have answered this question a little bit earlier but I just want to clarify something.

Dress and casual, first just on the dress, are you seeing any meaningful changes year-over-year on the type of product that you're getting, how the customer is responding, pricing, the assortment?

And then, just on casual, I know that was a point of de-emphasis last year on the inventory piece as you were chasing boots, casual seems to be pretty strong right now.

Any thoughts about how you're thinking about that category?

Thanks.

Yes .

So the fashion piece, actually the dress piece is pretty consistent this year with last year in terms of the kinds of products that are being sold.

Plain pumps are very strong for us, evening is very strong for us and this whole up the front almost dress booty is very strong for us.

So, what I particularly like is that the market seems to have really taken the challenge to freshen up and update those categories.

So, they do look different from last year.

So, what I like about that is the constructions and the styles are different enough this year to where the customer doesn't have it in their closet and it does cause them to take money out of their wallet and buy something new.

So, I'm really excited about that, even though the basic looks, basic styles are the same.

In the casual category, we really dissect that into a couple different places; it's the sport category and flat category.

Both of those categories are doing very, very well for us.

They were, and they're doing better this year than they did last year.

And there's also a lot of freshness there.

So, I think there's enough newness in the marketplace and if you edit your assortments properly and you're really disciplined about the brands that you bring in and the styles you bring in, I think that there is a tremendous amount of upside in both of those areas go forward to the back

Okay.

Terrific.

Thank you and best of luck.

You're welcome.

We have a follow up question from the line of John Zolidis with Buckingham Research.

Please proceed.

Hello.

Good morning.

A question on the dot-com business, clearly that's growing much faster than the overall business.

Can you just give us a sense of the merchandise margins on that?

Are those equivalent to the core, or are they, are they better, are they worse, where are they?

Can you talk directionally on that?

And then, second, with regard to dot-com, is that business big enough now that it's profitable given the infrastructure investment that you had to put in place?

And then I have one other question.

To the profitability of the dot-com channel, we just don't look at it that way.

Because we don't get into the allocation game and trying to figure out what expenses are truly attributable to that particular channel, which is why we've combined it almost since its outset with the DSW business because there is so much cross benefit from those two channels, the stores and dot-com.

So, certainly if we were measuring it, it would be a heck of a lot more profitable than in the past because it has been growing.

As far as the merchandise margin rates, they're a little lighter than the base business, but we anticipate that getting better all the time.

And as we get the inventory mix right and start to determine what particular type of DSW customer shops online that will continue to improve.

But we're consistently moving goods back and forth between the channels depending on what's selling better.

And we really look at it as a multichannel customer where we see them shopping both online and in the store.

We're learning more all the time.

So it is a nice contributor to our business, the DSW segment and we're very happy with it and we do expect more growth from it.

Okay.

Thank you for that answer, and then just -- I don't know if I missed this or not.

Did you guys comment you were running in line with that low single digit plan for August, I guess that's the first month of the quarter is through?

And then just looking -- toning has been contributing, I think you said 2% to 2.5% in the third quarter and I think it was about 3% in the first quarter.

Are you planning a low single digit year-over-year increase in toning?

Is that included in your guidance for the second half as well?

Thank you very much.

First, regarding August, John, as you know, we don't comment on monthly performances, but I will give you this reminder that four weeks ago we gave guidance and four weeks later, we are giving the same guidance.

So, that should give you some comfort that our August is performing at our plans that we had about four weeks ago.

Debbie, you want to take the --

Yes.

And on the toning, what I would tell you is that I'm looking to really maintain approximately about a 2% penetration to our total company in toning.

As we talked about before, there are some new products and new players in the game and I think that this just has to settle down and look and see what the impact of these new products are going to have on the marketplace.

But right now, it seems they're settled in at about 2%, and we're pleased with that.

Okay.

And then toning really got going last year in the fourth quarter.

So, that would be a 2% contributor to 3Q and then flattish year-over-year in the 4Q?

Hold on.

Let me take a look at that.

John, we can probably follow up on that.

When we're talking about a category as small as it is in relative terms, to break that down by quarter I'd be a little hesitant to try to shout out a number at this point.

Okay.

And the reason I'm asking is you are giving a low single digit comp plan and it looks like toning could be the whole increase.

So, I'm just trying to tease out what you're expecting for the core business.

We understand your viewpoint, but let us get back to you on that.

Thanks and good luck for the rest of the season.

We have a follow up question coming from the line of Scott Krasik with BB&T Capital Markets.

Please proceed.

Thanks.

Doug, housekeeping question, can you give us the gross margins by segment?

I know it is going to be in the Q.

But --

Between the lease segment and the DSW segment?

Correct.

Yes, can we get back to you on that one, Scott?

We'll make sure we follow up specifically.

As you said, it's going to be in our Q which we are going to file in the next couple days.

Okay.

And then Mike, just a clarification on your door growth comments, did you indicate that there are 50 additional potential locations that weren't in your prior outlook?

What we said is we will look at some smaller markets, something under 400,000 trade area (inaudible) and open some stores hopefully as soon as next year.

And if those are successful then it would extend our new store horizon to at least 50 additional markets that weren't previously part of our longer term view.

Right, so 400 plus that incorporates 50 additional for that?

Yes.

Then this is -- you ticked up next year as well 10 to 15, that's really just because of the testing in the new markets?

That would be part of it, sure.

Okay.

And just generally speaking, how does the real estate availability look?

You had one other off-mall guy, very different type of company from you but -- say that 2011 action looks better at least the back half of the year for potential real estate.

Is that opening up for you guys as well?

Or are the sites still fairly limited?

What I'd say is the better we do and the more consistently we perform, the more deals come our way because developers see us as a traffic driver and therefore we're more attractive.

So, I would say generally, there has been an upward momentum in the numbers and the quality of the deals that we've seen.

That's great.

And then just one follow up on those smaller markets, is this still, I don't know what your average store now these days is, 16 to 17,000 square foot box?

Our average store right now is 22,000.

I think more recently we've said we want to open up stores that are 17,500 or bigger.

And we wouldn't go much below that because we still want to convey to the customer that it's a really compelling assortment that we're offering.

What we would try to do is in smaller markets cut even sharper financial real estate deals and perhaps economize our build-out costs so that we can still generate the same level of investment return that we demand of all of our stores.

Great.

All right.

Thanks for the color.

We have a follow-up question coming from the line of David Mann with Johnson Rice.

Please proceed.

Yes.

Thank you.

Can you elaborate on the performance of remodeled stores?

How they're doing relative to the last couple of quarters?

I guess what I'd say is that I think historically, when we've remodeled stores, we've gotten about a 3% sales lift out of the stores versus what would have happened had we not done anything.

And what we've been doing so far this year is tinkering with our new store design and the takedown of that new store design into the remodeled stores.

So, I would say that the results of the remodels we've done so far and there's probably a handful of them that are meaningful to look at and have more than a month's worth of sales results behind them, I would say the results are mixed at this point.

But it's probably quite early to draw any conclusion.

But I'd say it's mixed.

And the plans for additional remodels into next year?

We're going through that right now, but we have a number of stores that are tired and yet we're committed to the real estate, so we want to update them.

There's a number of stores remaining that still have a clearance mall that we think covers up an important part of our value proposition that we want to remove.

So, we'll probably be -- we certainly have the cash and the wherewithal to do it.

So, I think we'll be equally aggressive next year, although we haven't finalized those plans just yet.

Okay.

And then on the lease departments, I think you've talked in the past about trying to get new companies to sign on, can you give us any sense on how that pipeline is coming along?

Absolutely.

That is our plan and I can tell you that the first step of that plan was to make sure our existing businesses were running very well because they will be our first and best references.

So, we believe we would get good references there and we are now in that next phase of looking for companies, partners if you will to grow that business.

Because we think we do a pretty good job of it and once we get our story out, we believe we will be able to land somebody.

But we do not have any specific companies that we're going to talk about, but we are pursuing that next phase.

Thank you.

With no further questions in the queue, I would like to turn the call back other to Leslie Neville for closing remarks.

You may proceed.

Thank you very much for joining us today.

As always, we will be accepting follow-up calls all day today at our home office.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.