Designer Brands Inc (DBI) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to today's DSW Inc.

third quarter fiscal 2011 earnings conference call.

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

Following the presentation, we will conduct a question-and-answer session, instructions will be provided at that time for you to queue up for questions.

As a reminder, today's conference is being recorded.

And now, I would like to turn the conference over to Doug Probst, Chief Financial Officer.

Please go ahead.

Thank you, and good morning.

Welcome to DSW's third-quarter earnings conference call.

With me today in Columbus are Mike MacDonald, CEO; and Debbie Ferree, Vice Chairperson and Chief Merchandising Officer.

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

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.

Similar to the format of our presentation on our second-quarter call, I will be commenting on our reported results for the third quarter.

And then, Mike will provide his comments on our operating performance.

Earlier this morning, we issued a press release, detailing the results of operations for the quarter ended October 29, 2011.

Our reported net income was $53.7 million, and included $13.9 million in items related to our merger with Retail Ventures Inc., which was completed on May 26, 2011, the settlement of the Premium Income Exchangeable Securities or PIES, on September 15, 2011, and related items.

You can find these items detailed in the condensed consolidated statements of operations and reconciliation of adjusted results attached to our press release issued this morning.

Again, similar to our discussion in the second quarter, we thought it would be beneficial to walk you through the details of the costs and benefits associated with the merger and related items, and the specifics of where they are reflected on our P&L, so that you have a clear comparison of our operating performance to last year.

The $13.9 million in RVI merger and related items in the third quarter breaks down into the following five components.

First, $300,000 in costs included in SG&A, primarily related to RVI operating expenses.

Second, $20.9 million in a non-cash benefit related to the change in fair value of derivative instrument.

This reflects the change in fair value of the PIES from the beginning of the quarter to the settlement date, and the change in the fair value of the warrants for the entire quarter.

Although this is a benefit for reported net income, in accordance with GAAP, this item is excluded from net income for the reported, diluted EPS calculation.

Third, net interest expense of $1.5 million, related to the interest on the PIES.

Fourth, $300,000 in non-cash income tax expense due to the merger-related tax items.

And finally, a $5 million impairment charge, related to a leased office facility that DSW inherited in the merger with RVI.

The tables in our press release outline these adjustments in more detail.

Now that we have reviewed these items, the remainder of our discussion will refer to our adjusted results.

As we stated before, our guidance for the fiscal 2011 has been based and will continue to be based, adjusted results, excluding any impact from the merger with RVI and related items.

On an adjusted basis, third quarter 2011 net income increased 12% to $39.8 million or $0.88 per diluted share, compared to net income of $35.5 million, or $0.79 per diluted share in the third quarter of 2010.

We are very pleased with our third quarter performance, which continued the strong growth that we have achieved for the past nine quarters.

Net sales were $530.7 million, and comparable sales grew 5.2%, on top of a 10.1% comp increase last year, which represents a two year comp of 15%.

By segment, our comps for our DSW business, which includes DSW.com, were up 5.2%, and our comps for the leased business division were up for 4.9%.

Our total Company merchandise margin rate was 46.4% for the third quarter, and represented a 130 basis point improvement compared to last year.

In addition to increasing private brand penetration, we were able to achieve this margin expansion by working with our vendors to mitigate costs, selectively passing on price increases, and better markdown productivity.

On a total Company basis, we achieved occupancy leverage of 40 basis points, for a 10.6% occupancy rate, primarily due to the increased sales.

This was slightly offset by a 20 basis point of deleverage in our distribution and fulfillment centers to support our size replenishment initiative and DSW.com business.

Combined with the increase in merchandise margin, the net effect was a 150 basis point increase in gross profit margin.

Our adjusted SG&A rate, as a percentage of sales increased 40 basis points to 21.7%, due to increased spend in our new stores and marketing.

New store expenses were double what they were the third quarter of 2010, as we continued to increase our footprint in new and existing markets.

Marketing spend is higher than last year, primarily due to a shift into the third quarter from the fourth quarter.

This timing shift had been planned since the beginning of the year, it is more consistent with our historical marketing spend.

Strong sales growth, combined with expansion in gross profit margin resulted in an 18.5% increase in adjusted operating profit to $65.2 million, or 12.3% of net sales.

Our adjusted tax rate for the third quarter, which is based on a full-year view, was 39.3%.

As we have said before, one of the benefits of the merger with RVI is that we have the ability to utilize the NOLs assumed in the merger.

This cash benefit, which will be realized over the next two to three years was recognized for P&L purposes as a one-time item in Q2.

Given this treatment, our ongoing effective tax rate for this quarter and future quarters, is not impacted by this item.

On November 2, SimCorp, which operated under Sims and Filene's Basement banners, filed for bankruptcy protection, and indicated that the Company plans to close all stores.

We currently have leased shoe departments in 27 Filene's and Sims stores.

In the third quarter, we reserved $1.7 million for inventory related to Filene's Basement and Sims, and we continue to diligently manage the effects of the pending bankruptcy.

And as mentioned, adjusted EPS increased 11.4% to $0.88 per diluted share.

Our balance sheet remains strong, and we ended the quarter with cash and investments totaling $369 million.

Inventory for DSW stores increased 5% on a cost per square foot basis.

Capital expenditures for the quarter were $20.7 million, reflecting eight new stores opened, 17 store remodels, and various business and IT projects.

For the year, we continue to expect capital expenditures of nearly $80 million, which includes an investment in our fulfillment center to further support our growing DSW.com business, as well as one more new store, which opened last week, one additional relocation, and 12 additional remodels.

Now, turning to our guidance.

As most of you are aware, we will continue to present our guidance on an adjusted basis, excluding any impact from the merger with RVI and related items, as we believe this more accurately reflects the ongoing operations of the business.

Based on our strong year-to-date performance, we are raising our annual adjusted diluted earnings per share guidance for fiscal 2011 to a range of $2.90 to $2.95 on 45.3 million shares.

This is an increase to our previous range of $2.70 to $2.85.

The midpoint of this range represents a 22% increase over our 2010 earnings of $2.40.

We now expect comparable sales to increase between 7% and 8% for the year, which implies a low single-digit comparable sales increase in the fourth quarter of 2011.

I'd like to note, that we achieved a 14.9% comparable sales increase in the fourth quarter of 2010, making this the most challenging comparison of the year.

With that, I will turn the call over to Mike, to highlight our third quarter performance in more detail.

Thanks, Doug, and good morning, everyone.

I'm pleased to share with you another strong performance at DSW.

Our third quarter included increase sales, expansion in merchandise margin, and leverage in occupancy, all of which contributed to a record earnings performance.

Doug mentioned that our comparable sales rose 5.2% in the quarter, which we believe is pretty impressive because it follows two years of double digit comp sales increases.

Our comparable sales increase was driven by growth in traffic count, with more modest gains in AUR and UPT's.

We found that our customers are increasingly opting for DSW, because of our fashion relevance.

This, combined with our expanded assortment of brands, everyday value and the ease of our assisted self-select service approach, drove increased sales across all categories and genders.

Let me highlight our progress on some of our key initiatives.

First, we continue to grow sales productivity, the key driver of profitability.

On a trailing four quarter basis, our sales per square foot now totals $240.00, and that compares to just $196.00 per square foot in fiscal 2008, representing a 22% increase.

We continue to see opportunity to increase sales productivity further, as we improved our assortments, enhance our precision marketing, and further develop our supply chain initiatives.

Second, we successfully drove increased store and online traffic, through impactful, national advertising and through precision, direct mail and e-mail marketing that targeted our 18 million loyalty number base.

As you have seen, we continued our, where did you get those shoes, TV campaign for the fall, with new vignettes and updated fashion looks.

And the impact of our precision marketing is reflected in the fact, that Rewards members accounted for 88% of total sales in the quarter.

Speaking of marketing, let me say a couple of things about our marketing efforts for the upcoming Thanksgiving weekend.

First, we will have special offers, featured items and GWPs in both our stores and dot com channels for Black Friday through cyber Monday.

Also, in support of our fast growing gift card business, we will kick off our annual gift card promotion on Black Friday, and it will run through December 24.

However, we will not give the store away, and we will not open up in the middle of the night.

We are pleased that are everyday discount pricing model enables us to predictably record the biggest day of the year on Black Friday, without sacrificing margins or inconveniencing our customers and associates.

Getting back to our initiatives, the third major area where we continue to make progress is the addition of product excitement and innovation in all categories of merchandise.

This continuous injection of newness is helping us to evolve the DSW brand to fashion authority status for both footwear and accessories.

And fourth, we continue to expand our private brand penetration.

Year-to-date our private brands have represented 10% of total sales, compared to 7% in the first nine months of 2010.

This penetration increase was driven by growth in our existing brands and the addition of new brands.

Turning to category performance in the DSW segment, our comp sales performance was positive for all major categories, and included a strong, double digit comp performance in boots, for both women and men.

Our largest category, women's footwear, grew by 4.3%, led by a positive response to our boots selections, as our team did an excellent job in identifying trends and brands.

We also experienced very strong growth in dress shoes, especially pumps and anything with glitter, which should bode well for the holiday season when our customers are looking for festive dress shoes.

Mens, which is a strategic growth area, recorded a comp increase of 13.5%.

Men's boot sales actually outpaced women's, and I believe this reflects our growing ability to attract a more fashion forward male customer.

Athletic footwear had a 0.3% increase in the quarter, with technical athletic footwear leading our performance.

Excluding the toning category from both this year and last year, athletic grew by 13% over the prior year.

And accessories, which includes handbags, small leather goods, casual hosiery and fashion accessories, grew by 4.8%.

The big driver of that increase continues to be casual hosiery, which includes tights, leggings, boot liners and other fashionable legwear.

For the quarter overall, sales growth was relatively balanced across all regions, with comps ranging from plus 2% to plus 5%.

The weakest performing region was the Northeast, at plus 2%.

As you recall, this part of the country was affected by Hurricane Irene in August, and an early snowstorm in October.

Regarding our store expansion, during the quarter we opened eight new stores.

This included two stores in the smaller Alabama markets of Mobile and Montgomery.

As you will recall, our strategy is to open full size stores in smaller markets, but still achieve good returns by sharpening our real estate and build-out costs.

And just last week, we opened our seventeenth and final new store of the year in Lawrence, New York.

We also made further progress on our aggressive program for remodels and clearance wall removals.

To date, we've completed 46 of the approximately 60 stores planned for the year.

We've relocated two stores so far in 2011, with relocations being undertaking to either improve the quality of our location, or to achieve lower store occupancy costs or both.

Our eCommerce business remains strong in the third quarter.

The three new initiatives we implemented earlier this year are complementing the improved product assortment, leading to increased site traffic and higher conversion.

We continue to make refinements to our Shoephoria stock locator system, which as many of you are aware allows our in-store customers to buy product from eCommerce when it's not available in our stores.

Sales generated by our Shoephoria system continues to grow, and we believe this system is contributing to an overall positive customer service experience.

Our second DSW.com initiative, our mobile website that we launched in June, is driving traffic from smartphones and tablets as customers check the reward balances, research specific items and find stores in their area.

Since the launch of mobile, we've seen a significant uptick in traffic, and conversion has increased as well.

The third initiative is the addition of kid's shoes to our website offering at the beginning of the fall season.

Kid's represented 1.6% of dot com volume.

We expect this penetration to grow, as we begin to market kids shoes, and as we define this customer base.

And finally, we are excited to announce that by the end of the fourth quarter, we will have the capability to ship internationally from DSW.com.

Our leased business division had another good quarter, posting a 4.9% comparable sales increase.

This was our eighth consecutive quarter of positive comps in leased.

Our merchandise offerings are helping to drive sales across other areas of the host stores, which further solidifies DSW as a valued business partner.

Following quarter-end, we were disappointed to learn of the pending closure of SimCorp.

We remain confident that the strategies we have in place will lead to continued growth in the leased business.

And we remain focused on adding new partnerships to capitalize on our unique operating platform, in order to expand this business.

As Doug mentioned, we've completed the settlement of the PIES on September 15.

In addition, our Board approved the Company's second quarterly dividend of $0.15 per share.

We are pleased to be able to continue to return value directly to our shareholders.

Looking ahead to the remainder of the year, we remain confident in our ability to achieve the objectives we set for ourselves.

DSW is well-established as a destination for quality, value-priced footwear.

We are growing our brand awareness through our marketing efforts, and we are increasing our productivity through solid execution in merchandising, inventory management, and by virtue of our system's enhancements such as stock locator and replenishment.

These improvements in execution, coupled with our well-developed loyalty program, have us poised to continue to gain market share this holiday season.

As our guidance suggests, we continue to believe it's prudent to plan comparable sales to a modest increase.

I know you are well aware we are facing our toughest comparisons from last year, when comps rose 14.9% in the fourth quarter.

However, given our flexible business model, we're well-positioned to chase upside opportunities as they present themselves.

And with that, I will turn the call back over to the operator, to open the lines, so we can take your questions.

Thank you.

The question and answer session will be conducted electronically today.

(Operator Instructions).

We'll pause for just a moment.

We'll take our first question from Chris Svezia from Susquehanna Financial Group.

Good morning, everyone.

Nice job on the quarter.

Good morning.

Thanks.

I guess first -- on the product margins, some of your thoughts in and around that.

I think initially you probably expected to be kind of flat in the back half, maybe some opportunity to show improvement.

Obviously, did a great job here in the third quarter.

Any thoughts about how we should think about fourth quarter?

Or, just the trajectory on the product margin?

Do you really think there are still greater opportunities on product margins in this business?

Well, Debbie will probably have some comments here too, Chris.

From the beginning of the year, we knew that cost pressures would gradually increase as we got into the fall season.

So the cost pressures will be greater in the fourth quarter than they were in the third, and third was greater than second.

So, we anticipated some of this, but as we've planned since the beginning of the year, the private brand, the other things that we've talked about to mitigate those pressures, are there -- helped offset that and mitigate it.

But the pressures will continue to increase through the fourth quarter, and Debbie?

Yes.

Good morning, Chris.

We are seeing the cost pressures continue to increase.

We were able, as Doug pointed out, to mitigate most of that in third quarter.

We are seeing in the low- to mid-single digit cost increases in fourth quarter.

Q1 orders, that had been placed so far -- and certainly all of Q1 isn't put to bed yet -- look like it continues to have an additional mid-single digit cost increase as well.

So, now having said that, we still have a lot of work ahead of us, similar to what we looked at third quarter; like in working with our resources, balancing out our product brand against our domestic buys.

There still a lot of work yet to be done to try to alleviate some of that pressure, but that's the initial cost increases that we are seeing right now.

More specifically, what do you think in terms of the fourth quarter in terms of product margin?

Do you still expect to show an increase, or is that -- flatten out in the fourth quarter, assumed in your guidance?

I would say, it wouldn't be as strong as the third quarter, and it is baked into our guidance.

Okay.

Debbie, for you.

I guess Boots did a great job, great to see the comp performance there.

I guess whether any impact whatsoever you saw as the quarter unfolded or now?

Any thoughts to that?

Well certainly, there was a little bit of that in the third quarter -- I never like to use that as an excuse, though.

So I will just say I was really happy with our double digit comp performance in Boots.

And the same script that we called out early, that we thought would do well in third quarter, did.

And that was everything from riding boots, casual boots, engineer boots, and anything that had shearling or fur.

So those were the early indicators; those trends are continuing into the fourth quarter.

And now I kind of look forward to some of the real cold weather, the nasty weather heading, so that we sell our functional product.

So, there really wasn't any surprises for me in third quarter, in terms of how we did in Boots, and what fourth quarter is going to look like.

And, Debbie, I'm just kind of surprised on the athletic side, the business was a little bit softer than I thought.

I'm just curious but just from a Toning comparison -- do they ease significantly going into the fourth quarter?

Or did you take advantage -- I think last year, there was a lot of that discounting going on; I guess maybe you took advantage of that to sell some product?

Just what are your thoughts, where you stand right now?

And that comparison gets much easier in Q4?

Is that fair to say?

Sure.

So, Chris, let me just say that in third quarter last year, Toning was approximately 12% of our business.

This year it was 2.7%.

So, it was a significant difference.

What I'm really pleased about, is that we were able to pick up volume over last year in third quarter, in spite of the Toning erosion that we projected.

So, we were able to offset all of that Toning volume, and add additional volume to that category.

The comparisons get a little bit easier, but I will tell you that we still have that promotional business we were up against last year.

If you remember third quarter, that's when we started to accelerate things into rotation and take the markdowns, to kind of get ourselves clean from the Toning.

And I'm really happy that we did that, that early last year, because it meant for a better comparison for us this year.

And we're not up against quite the pressures in Toning that some other people are.

I think that we're going to continue to be up against some numbers in fourth quarter.

After fourth quarter, I think that's pretty much behind us.

But it looks like the strategies in place are enough to offset any of that promotional activity we will be facing.

Well, thank you very much.

And best of luck to you for the holiday.

Thanks.

Next we'll hear from Steve Marotta with CL King.

Good morning, everybody.

And let me offer my congratulations as well.

Doug, inventory was up 14% versus last year, with sales up 8.5%.

Can you parse out new stores and talk a little bit about your inventory position going into the fourth quarter?

Yes, that's why we break out cost per square foot.

Okay.

Which was a 5% increase.

And we like our inventory position and how we are managing it to our targets for the beginning of Q1.

So the balance of it is what you talked about -- new stores, et cetera.

So we like where we are.

Great.

I understand your normal reticence to talk about quarter trends to date.

But that said, has the Northeast accelerated from the up 2% that you realized in the third quarter?

We're going to continue to be reticent to responding to that.

It's really early.

But as Mike said in his script, the sales region by the country weren't that terribly different.

And, obviously, they are probably a little more pressure in the Northeast in that third quarter, because of the weather items going on.

But they all tend to even out over the course of a third quarter, and certainly a fall season.

Right.

And that's what I'm trying to drive at is, I would be surprised if that pendulum has swung a little bit, given the weather break in the fourth quarter here in the Northeast.

That's probably not a bad assumption; but, yes, we won't comment on that.

I understand.

Lastly, Doug, what you expect to year-end cash to be, please?

Close to $400 million.

That's cash and investments, of course.

Correct.

Thank you very much.

Appreciate it.

Next we'll hear from Claire Gallacher with Auriga Investments.

Great, thank you.

Good morning, everyone.

Just a follow-up on the inventory question -- could you comment on your clearance inventory levels?

Where you're at, at the end of the quarter this year versus last year?

Yes, good morning.

This is Debbie.

Our clearance inventory is actually in a fairly good position.

Let's just speak to the footwear clearance inventory.

The penetration is equal to what it was last year at this same time.

And we are only up about 1.4% per average store, in footwear clearance; which is about 72 units per average store.

So think we are pretty comparable, pretty flat to last year.

And then, you talked about the low single digit comp for Q3, essentially.

You came in a little bit ahead of that.

Was there one -- it looks like men's put up a really strong number.

Is that where you saw the upside?

Or, was it from the women's side as well?

Where did you see the upside for quarter?

Well, the upside was in men's -- obviously, as our strategies, they are continue to roll out and take hold.

But, also in the Boot area, we saw the really strong comps, which was about -- it was double digit comp increases.

Okay, great.

And then --

And I would just like to point out in the Dress area, Mike had made mention about some things happening in Dress.

We were very pleased that two of our biggest and strongest categories continue to perform well for us.

And that is in the Evening Shoes, where we really think that there is a category domination there, with all the assortment that we have that crosses a pretty broad lifestyle; and also in the plain pumps.

That doesn't seem to be letting up at all, which we talked about that on our last call.

Okay, great.

And then, lastly you mentioned shipping internationally for eCommerce by the end of the year.

Can you talk about the opportunity there?

Just kind of where you see that business going?

Yes.

I don't think we are public on our expectations.

I don't think we actually know.

We are going to open it up to about 200 countries.

So, I think we'll get some reads, but it will probably build gradually over time, and we'll see where it goes.

And, I think we've been on record as saying, that's where we want to judge the appetite for DSW internationally, first.

So we are still on that tack.

Okay, great.

Sounds good.

Best of luck.

Thank you.

Next we'll hear from David Mann with Johnson Rice.

Yes, thank you.

Great job.

A couple of questions.

In terms of Boots, can you elaborate on a percentage penetration, Q3 versus Q4?

Remind us what that is?

Yes, good morning, David.

So let me just say that Q3, as a percentage to our total fall Boot expectations, is 44% of the season.

So Q3 represents 44%, and Q4 represented 56%.

So we have more volume in Q4, for the back of the season, than we have in the front end of the season.

And, once again, we are up against some pretty strong comps going into the fourth quarter.

But that's how it breaks out.

And can you parse that out, in terms of a percentage of the mix, or revenues, in Q3, Q4?

Let me --

What that historically runs?

Yes, let me get back to you on that.

I think it's about 21, and maybe 24, something like that.

21, 24.5, something like that, about between 3 and 4

Okay.

That's very helpful.

On the rewards program -- can you just go a little deeper into the kind of penetration you're seeing?

How fast that is growing?

Is that accelerating, in terms of the acquisition of new rewards customers?

Yes, I think we ended last year at a little under 17 million, and we are now at 18 million in terms of members.

And I think in terms of penetration of sales, I mentioned we were 88%.

And my recollection is, it's been around 86%, 87%, 88% for the last several quarters.

So it's maintaining it's positioning, and growing slightly.

On the Dot-com Business, can you elaborate a little bit more on the pace of growth there?

And where do you stand in terms of that business, relative to the profitability?

If not specific, generally, how much money is that losing?

How far away from a break point, do you think you are?

Well, first of all, that Business has been contributing quite significantly to our total profitability for many quarters now.

So I want to clarify that.

Okay.

And in terms of the pace of growth, we don't break out that Business specifically.

Just because we believe there is so much interplay between both the brick-and-mortar channel and the dot-com channel.

And in fact, that is how we market it.

We market cross-channel shopping to both customer segments.

And particularly when you consider the implementation of our Shoephoria stock locator system earlier this year, we are really facilitating that cross-channel shopping.

So that's a long way of saying we don't break out dot-com sales.

But it is easy for me to say, it continues to be the fastest growing segment of our business.

And then lastly, on your -- what you've tried to do in terms of passing through price increases, can you just talk a little bit more about the elasticity there?

Where you've been able to pass through price increases?

And what you have been able to accomplish with that?

Yes, hi, David, it's Debbie.

So I'll tell you, the -- that the AUR in all areas of the business was up.

So, I think that, that the thing that is most notable to talk about is, specifically in the Boot category, where we saw the AUR up by a little less than 7% over last year, and still driving double-digit comp increases.

I think what we really have to go back to was, what the strategy was in addressing these cost increases, and how we were going to manage it.

And that was number one, to try to maintain our sensitive pricing on our core items.

And so, on our key commodity core items, we wanted to kind of maintain those sensitive price points, which I think we did a fairly good job on that.

And then, pass those cost increases on, in places that were more cutting-edge fashion, that had less price resistance due to the emotional buying of that product versus logical buying, or rational buying, I should say.

So there isn't any definitive pricing strategy we had across the entire mix.

We looked at each individual item, looked at the kind of increases we were having to absorb here.

And looked at the kind of prices we thought the retails we could get for that product.

So I think the strategy that we incorporated, which was looking at each individual item, and pricing each item based on what we thought we could get for it -- that actually is the big story.

And there's not one, one-size-fits-all strategy across the entire business in how we managed those cost increases and those retail increases.

Thank you.

You're welcome.

Next we will hear from Scott Krasik with BB&T Capital Markets.

Yes, hi, everyone.

Congratulations.

A few questions -- remind me, Debbie, did you actually capture cold weather boot sales last year, the Sorel look?

If I remember, it sort of happened a little late, and this would be incremental this year?

How do you feel about the cold weather product?

Could you repeat that question, Scott?

There was a few different questions in there, I think.

I'm sorry -- if I remember currently, the real cold weather product, the Sorel look, that hit a little later in Q4 or Q1, and you guys missed that last year, and it was going to be incremental this year?

No, I don't think so, Scott.

I think -- we always deliver a little bit of that cold weather product at the end of Q3, which we did this year as well.

So I don't really see a big difference.

I know we had fairly large, although the volume is small, comp decreases in third quarter, because the cold weather, the sloppy cold weather didn't come as early as it did last year.

But no, there's really not a big difference between Q4 this year and last year, in terms of our cold weather Boot expectation.

Private label sales at 10% now?

Where do you see that going, and how is that split between Bags, Accessories and Footwear?

Yes.

We continue to see opportunity for private brand.

We believe that over the next three to five years, that number could accelerate up to a penetration of close to 15%.

That's where the trend suggests it could lead.

So, as far as the split between Footwear and Accessories -- we're a lot more developed in Accessories than we are in Footwear right now.

But, that split is still primarily, mostly in Footwear versus Accessories.

And then, to the extent -- I don't think you spoke about conversion in the stores.

Was that up, Mike?

And what sort of impact are the inventory management systems having?

And remind us of what you expect to get?

Actually, our conversion in the stores was down slightly.

And, of course, I would think of conversion as being a barometer of the attractiveness of our assortment, the in-stock positioning, the value, and the in-store experience.

So, it's not any one thing, it's all of those things.

And as you might imagine, given that we had a slight decline in conversion, we're pretty focused on that, and our stores are focused on that.

One thing you should know, is that as our Shoephoria sales increase -- and that is, a customer coming in, finding a style she likes, but not the size; going up to the checkout area, and having one of our associates find it online.

That sale, which, prior to this year, may have resulted in a customer buying another style within the store --that sale is now being captured by the Shoephoria system, and the sale is credited to the dot-com business.

So that's an all new phenomenon this year.

And to the extent that's happening, and we are transferring business that would have otherwise happened in the four walls of the store to the Shoephoria system, it would have a depressant impact on the conversion.

Now, if you did the math, and you said every one of those sales that you did on Shoephoria is a sale that otherwise would have been transacted in the store, our conversion would have been about flat.

I don't think that's true.

I think there is true, incremental sales being generated by Shoephoria, and so we would still be left with a small conversion decline.

So, I can't tell you whether it's the customer being more selective, or our in-stock position -- which I can't imagine -- or one of those other factors, but we know it went down a little bit.

Okay.

The traffic was up, and I guess that leads to my next question.

The newer loyalty customers that you signed up in the last year or two -- are there any demographics, psychographic differences that you see, that tells you that you're pulling market share from other channels?

I don't have that data.

And we really classified our customers, not by demographic, but based on our purchase behavior, and that is how we market to them.

We call them clustomers, not clusters, not customers, but customer clusters or clustomers.

And so I can't tell you where it's coming from, I can just tell you how they behave, because that drives our marketing.

Okay.

Well, keep up the good work.

Thanks.

Next we'll hear from Jeff Van Sinderen with B.

Riley.

Good morning.

Let me add my congratulations.

Just to clarify, was there anything out of the ordinary outside of the weather that -- I know you mentioned about the sales progression on a monthly basis throughout the quarter?

And more specifically, was there anything unusual in October?

As you know, Jeff, and many of the people on the call know, we look at September and October together, and we term it Septober.

There's always oddities between those two months, but we find historically, that when you combine those two months or those nine weeks together, the patterns are pretty stable.

And I would say that again, for 2011.

Okay, good to hear.

And then I know, you briefly mentioned some of the things that you are doing for holiday promotions, loyalty customers, and so forth.

Overall, is the plan for you to be more or less promotional versus last year in the programs you are running?

I would say we will certainly not be more promotional, probably pretty comparable, maybe slightly less this coming weekend.

And then, as far as the most likely drivers of your same-store sales for holiday -- AUR, UPT -- do you think that those are going to be similar to Q3, for Q4?

Hard for me to say.

Yes, and there is no one significant contributor.

Even the conversion drop was very slight.

So, all those components -- AUR, UPTs, conversion traffic -- all of those will be probably slight contributors, but given our low, single-digit comp they will all be pretty close to flat, would be my guess.

And then finally, any more color you can give us on the Men's Business?

I know that's small, but it sounds like it is running pretty strong, especially in Boots.

Is there anything outside of Boots to note?

And then, is there any -- maybe you can just comment on sort of what you are learning in the Men's Business?

Yes, this is Debbie.

Good morning.

I think that the core item replenishment, size replenishment piece of our business, which is about a third of the business -- that continues to be strong.

And that ensures that we don't disappoint our core customers from finding their size, in what I call those non-negotiable, must-have items.

That continues to work well for us.

Number two, the fact that we continue to add great fashion to the Men's area, and the men's acceptance of buying some of these fashion items, I think really points to the fact that men are little bit more comfortable with making those choices for themselves right now, and not buying just the core, classic items -- really embracing some of the great new fashion that the men's market is showing us right now.

And, I think those are really the two big things.

And then, we continue to add new products, elevate new products within existing brands we have, and add some other brands into our mix.

And the customer is really responding very nicely to it.

So, this, to me, is just the beginning of a nice trajectory and then.

Okay, great.

Thanks very much, and good luck for the quarter.

Thanks.

Next we'll hear from Jeff Black with Citi.

Question on the AUR, given your comments around conversion.

And what's our level of comfort here, that we have additional price increases?

It sounds like in 4Q that we can take price up a little bit more in 4Q, if that's the plan?

And, even more important, in Spring, when we don't have the Fashion Boot category, what is our level of comfort we can continue to use the price lever there?

Thanks.

We do still continue to have headwinds in the pricing.

What we are finding right now, is using the strategy that we have, of maintaining prices on our core commodity items, and taking these increases in the fashion items, is working for us right now.

That's a strategy that we will continue to implement going forward.

But I do want to continue to stress that we will continue to work on mitigating those cost increases that seem to be coming at us right now, and trying to control those as best we can.

Right now, our private brand increase has been able to help us offset some of those cost increases, and having more balanced AUT assortment out there.

But there's no question, that we're up against those headwinds.

But I think that the strategies we are implementing right now will continue to be utilized through next year, and hopefully they will hold up.

The other part of Jeff's question was an implication that when we cross over into Spring, our floor is suddenly devoid of fashion, and therefore we don't have pricing power on a chunk of our inventory.

And I think you'd want to say that's just not true.

No.

We have fashion all the time.

Yes, fashion is a core component of our assortment strategy, and we are never devoid of fashion.

Well, I guess the question was really -- you don't have the Boot price points in Spring.

So higher prices on items that are lower-priced in general, might have more sensitivity.

That was the real question.

And then, Doug, did you say how much marketing shifted into 3Q from 4Q?

Thanks.

Hi, Jeff, the other thing you've got to recognize is, that although the price point in Spring is lower than it is in Fall, because of the Boot penetration, boots take up about 1.5 to 2 times as much space on the floor as do sandals or regular footwear.

So, in terms of dollars per square foot, it's pretty flat.

In terms of the marketing spend, the move -- Doug, did you want to comment on that?

It's about $3 million to $4 million.

All right.

Excellent color.

Thanks, and good luck.

Next we'll hear from Mark Montagna with Avondale Partners.

Just a follow-up on the Shoephoria.

If you were to credit all the sales of Shoephoria -- or the incremental sales of this year versus last year on Shoephoria -- how might that have impacted the comps?

It wouldn't have impacted the comps at all, because both the dot-com sales and the store sales are in the comp calc.

And then, just regarding clearance -- I imagine it is fairly low.

Is it flat to last year, or perhaps even lower than last year?

In Footwear, it is pretty flat to last year.

It's just up a little over 1%, about 72 units per average store.

And then, just looking at -- in the past you've spoken about try to grow the Performance Athletic.

I'm wondering how that's going?

What percentage of sales would Performance be, versus more the fashion Athletic?

And, is it really more targeted at women for the Performance Athletic, or also some men?

It really is a blend.

And I will just tell you that the percentage of -- and we really call that Technical Athletic, which is the performance athletic piece.

That is running around 25% of our total, and that has continued to accelerate.

If you look at Q1, Q2, and Q3, it continues to accelerate in terms of penetration to total.

So, we're really pleased with the performance there, because that allows us to get into some of the more technical, more fashionable, and higher priced goods of some of our core brands.

So on that piece of our strategy, is going very well.

How much higher than 25%, will it go?

I don't know.

We're kind of testing the waters right now, making sure that the customer is embracing all this new, exciting product we are throwing at her.

She seems to be accepting it well.

And so, I think that there could be more opportunity there, but we're real happy with that 25% of total.

Do include Lightweight Running in that figure?

Yes, Lightweight Running kind of crosses between that, and some of the other lifestyles.

So Lightweight, as a percent of total, is about 15% of the total Athletic business.

And then, last year in the fourth quarter, you had some expenses related to the distribution centers.

Are you expecting -- I'm assuming you are not really expecting anything related to that again this year?

Well, we continue to increase into our DC and FC, as the Businesses grow, and we support the initiatives that we have.

So it is actually a de-levering impact into our results in 2011 and into 2012.

Okay.

All right.

Thank you.

Next we'll hear from Patrick McKeever with MKM Partners.

Good morning, everyone.

Wondering if you might elaborate a little bit on the comments about international shipping.

And I think you said, at the end of the fourth quarter, you will be in a position to do that.

Are we talking about Canada and the UK, other places?

How might the logistics work there, and what kind of an opportunity do you see to do business internationally through your eCommerce site?

Thanks.

Yes.

We're doing it through a third-party called myusa.com, or myus.com, I think.

And I think the initial opening is going to represent about 200 countries, including Canada and the UK.

And we really don't know how big it is going to be.

I think it will be something that builds over time, as the customer recognizes is that we have that capability.

So that's as much detail as I can give you right now.

And then, any updated thoughts on the balance sheet, and all the cash and the no debt, now that you've completed the RVI merger, and settled the PIES, and paid the special cash dividend, and initiated the quarterly dividend?

That's a lot of cash on the balance sheet.

Any thoughts to potentially accelerating your store growth next year?

Possible acquisitions, those kinds of things for the cash?

Thanks.

Well, you went through a nice list of the activity that we've done in the last six months or so.

So thank you for crediting that.

But, first and foremost, it is to invest it back into our business, and if the real estate provides itself -- good real estate provides itself -- available to us, we will open more stores.

But we are not prepared to tell you how many that would be.

But certainly that would be an option for us.

And the other items that you mentioned would be secondary to the investment back into DSW.

Very good.

Thanks so much.

We'll take a follow-up from Chris Svezia with Susquehanna Financial Group.

Debbie, just a clarifying point -- earlier, when we just chatted briefly about Toning, you mentioned it was roughly about 12% of the business.

Is that just Athletic?

Yes, that was 12% of the Athletic business.

Last year, it was Toning, this year, 2.7%.

Okay.

That's what I wanted to make sure.

And then, would you expect -- and you know that Athletic is not a critical driver in the fourth quarter -- would you expect that Business to improve sequentially, in terms of the trend lines, just as you cycle through some of the Toning pieces?

Or no?

I think I would plan it pretty flat with what we've seen in third quarter, Chris.

And I like I said, we're up against, from a volume perspective, a little lighter Toning volume in the fourth quarter than we were in third quarter -- not by much, but a little bit lighter.

So I think we have to cycle through fourth quarter; and hopefully the strategies we have in place right now, with Technical and some of our other big brands, will hold against those Toning numbers.

And I think they will, through fourth quarter.

And how is the -- I know you are building out with Mackie on the Men's side specifically.

How's that been progressing for you?

Very well.

We have a great partnership with that brand, and the products that we are getting in from them are doing very, very well.

Okay.

And -- (Multiple Speakers).

And then Mike, for you -- size optimization.

I guess that has no impact here on the fourth-quarter, or did it?

And how would you characterize the opportunity for DSW, either from a comp perspective, being in stock in certain sizes, or from a margin perspective, and that type of thing?

I'm just trying to understand what that can do for you guys, and when we expect to start seeing some benefit from that?

First of all, size replenishment is the system capability we put in over a year ago, and that we have gradually been ramping up the percentage of our inventory that is able to take advantage of that capability.

And I think we are now at, like 30%, and that's fully penetrated at this point.

And I think what we said is, that the items that we put on size replenishment had about a 10% lift, as we put those items on replenishment.

And that's happened gradually over the last -- call it -- year or year and a half.

The second system is size optimization, which affects the proportion of styles that are allocated by size, by store, in accordance with the natural demand patterns in each store location, by size.

And, we've had no impact from that system yet, because we haven't put it in.

And I now believe we will not put that system in until probably the end of the first quarter of 2012, which is a little later than we may have signaled to you previously.

But that's a big system, and it's a big capability.

And it is one that will both increase our sales and reduce our markdowns, simply because we are going to more accurately allocate by size, by store.

So hopefully, that clarifies the two different systems and the timing of each.

Thank you very much.

Next we'll take a follow-up from Scott Krasik with BB&T Capital Markets.

You had just mentioned, Debbie, that you have been buying into Q1 already.

Are you seeing some of the same trends for Spring that you did last year -- preppy, and certainly the Technical Running?

Are there new trends that you are chasing at this point?

How do you think about that?

As far as the Women's business is concerned, I think it's less about new styling that is coming out than it is about new materials and new expressions in some of the existing styles we have.

For example, wedges will continue to be strong, but the way that wedges will be expressed, both through material and this new infusion, this wonderful infusion of color, that's going to be coming into the assortments -- will make it seem really, really fresh to the customer.

So it's more about taking some key existing patterns, and kind of re-energizing them with new materials and color.

So I'm really excited about that piece.

Whenever color comes into a season, it really does give the assortment a nice, exciting kind of lift.

And gives the customer a reason to buy, because color has not been big trend in the business for many years.

Naturals, which we talked about last year -- that's going to continue this year.

Naturals, you are going to see, not only in color, but in new materials as well.

So to me, there is enough freshness going on there that I think it will give the customer a reason to buy.

And let's not forget booties for first quarter.

And some of the new booties that you are seeing right now in fourth quarter, that are kind of ankle-grazing, the thicker, chunkier heel, are doing very well right now.

And that just continues into Q1, as you start to see all of the new prints, and the vintage, and all the crochet dressing that is going to be happening in Women's.

So I'm actually pretty excited, that there are things that we've got right now on the floor that really look to be very strong and could be the key items for us in first quarter next year.

As far as the Athletic, you brought that up, Scott.

I continue to see the ability for us to drive the Technical piece, the Lightweight piece, through the infusion of new products that are coming to us from our core resources.

And I don't think that, that's going to weaken at all.

I think that just gets stronger.

Okay.

That's great color.

And just on the Kids' Business -- now that you are through back-to-school, will that decrease as a percentage of the total penetration?

Or are you going to accelerate the branding there, and try to grow that, even off-peak?

Yes, Scott.

That would be a logical theory, but we are still so early into it, we don't even have our own history built.

With some kids' experience, you would suggest that or you would think that would drop off a little bit, but we will learn.

And it's a very small part of our business, so we've got to keep our focus on it.

We are not going to let it drive our decision-making too much.

We'll learn a lot about in the first year, and build on it after there.

And that is all the time that we do have for questions today.

At this time, I would like to turn things back over to management for any additional or closing remarks.

Thanks very much, and thanks to all of you for your interest in DSW and your support of DSW.

And we hope you have a great Thanksgiving.

Thanks again.

Thank you.

And that does conclude today's teleconference.

Thank you all for joining.