Designer Brands Inc (DBI) 2013 Q2 法說會逐字稿

Good morning, and welcome to the DSW, Inc.

2Q 2013 earnings conference call.

All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note that this event is being recorded.

Now I would like to turn the conference over to Christina Cheng.

Ms. Cheng, please go ahead.

Thank you.

Good morning, and welcome to DSW's second-quarter conference call.

Earlier today we issued a press release detailing the results of operations for the 13-week period ended August 3, 2013.

Please note that various remarks made 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 due to various factors, including those listed on today's press release and in DSW's public filings with the SEC.

Joining us today are Mike MacDonald, President and CEO; Debbie Ferree, Chief Merchandising Officer; and Doug Probst, Chief Financial Officer.

Doug will start with a short discussion of our reported results, then highlight the details of our adjusted results for the second quarter.

He will elaborate on our full-year guidance, which we released earlier this month.

Mike will provide details on our operating performance.

He will also provide an update on our strategic initiatives.

After prepared remarks, we will turn the floor over to Q&A.

With that, I turn the call over to Doug.

Thanks, Christina, and good morning, everyone.

Our reported net income for the 13 weeks ended August 3 was $34 million or $0.73 per share, which included an after-tax loss of $1.5 million, or $0.03 per share, from our luxury test, and an after-tax charge of $9 million, or $0.20 per share, from the termination of RVI's pension plan.

This compares to last year's reported net income of $29 million, or $0.65 per share, which included a net charge of $700,000, or $0.01 per share, related to our merger with RVI.

Excluding these two items, the adjusted net income for our base business was $44.6 million, or $0.97 per share, an increase of 47% over last year's adjusted net income of $30 million, or $0.66 per share.

The balance of my comments this morning refers to our adjusted results.

Sales for the second quarter increased by 9% to $558 million, with a comparable sales increase of 4.4% on top of a 4.2% comp increase last year.

For the DSW segment, which includes DSW.com, comps also increased by 4.4%.

The comparable sales performance was driven by increases in conversion, average unit retail, and units per transaction.

In our Affiliated Business Group, comps increased by 4.3%, after growing by 3.5% last year.

Total revenues increased by 3.9% to $31 million.

We opened 4 locations for a total of 351 at the end of the quarter.

We look forward to working with our new partner, Loehmann's, starting with 10 stores this December.

Our gross profit rate increased by 190 basis points to 33.2%, due mainly to the improvement in our merchandise margin, which also increased by 190 basis points to 46.4%.

The improvement was driven mainly by lower markdowns.

This is in contrast to our first-quarter merchandise margin rate, which contracted last year.

For the Spring season, or the first and second quarter combined, our merchandise margin rate increased 70 basis points over last year to 46.4%.

Importantly, this seasonal rate was achieved on 1% comp sales growth in a very choppy environment, and equaled our 2011 rate that was achieved on a nearly 12% comp.

We believe this performance reflects our agility, and the impact of systems improvements.

Our SG&A rate in the second quarter improved by 140 basis points to 20.5%, driven by lower pre-opening and marketing costs, and leverage in store, home office, and IT expenses.

Our operating profit increased by 340 basis points to 12.8%, making this the fifth quarter in which DSW has achieved operating margin in excess of 12%.

Net income grew by 48% to $44.6 million.

Again, adjusted earnings per share was $0.97 per share, up from $0.66 last year.

Turning to our balance sheet, our total inventory at the end of the second quarter increased by 10.2% to last year, mainly driven by new store openings.

On a cost-per-square-foot basis, store inventories were up 2.7%.

We are pleased with the level and content of our inventories.

Capital expenditures for the second quarter increased to $23.4 million compared to last year's $22.1 million, of which $8.4 million was for opening and remodeling of stores, and the balance for IT projects.

We ended the quarter with cash and investments of $500 million, an increase of 3% over last year's $485 million.

As stated in our press release, our Board recently declared the payment of the Company's quarterly dividend of $0.25 per share.

We did not purchase any shares under our $100-million share repurchase authorization.

Separately, our Board has called a special shareholders meeting for October 14 to vote on a proposed two-for-one stock split.

If approved, we plan to execute the stock split at the end of Q3.

The proposed stock split will increase our float from 81% to 92% of shares outstanding, and reduce voting power of Class B shares from 55% to 46% post split.

Turning to our full-year outlook, our guidance assumes low-single-digit comp growth.

With the opening of 30 new DSW stores, we anticipate total revenues to increase in the range of 5% to 7% for the year.

Excluding the $32 million in sales from last year's 53rd week, the expected increase equates to a range of 6% to 8%.

As we announced on August 5, we expect full-year adjusted EPS to range between $3.60 to $3.80 per share, with the midpoint representing 10% growth over last year's $3.35 per share.

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

Thanks, Doug, and good morning to everyone.

As you've seen, we ended the first half of 2013 with a comp sales increase of 0.8%.

However, within that full season, there was a great deal of volatility.

Comps were down 2% in Q1, and they rebounded to a plus 4% in Q2.

As you might imagine, the peaks and valleys were even more pronounced if you look at the Business on a monthly basis.

In that environment, the DSW team responded very decisively.

We managed merchandise receipts down early in the season, and up later in the season.

We adjusted our customer communications to reflect a stronger emphasis on value, and we kept the lid on expenses.

This agility allowed us to escape Q1 with flattish earnings, and then to post a really strong 47% EPS improvement in Q2.

When the dust settled, we finished the first half of fiscal 2013 with a 20% EPS increase, and with inventories that are current and in line with forward sales expectations.

In short, we made the best out of a difficult situation.

Turning to sales by category, for the last few years we've been targeting two specific categories -- accessories and men's footwear -- for outsized growth.

I'm pleased to report that these two categories led our sales growth in the second quarter.

Accessories, which includes handbags, hosiery and other accessories, grew comp sales by 15%.

These results reflect the continued fine tuning of our offerings by store in handbags, and the explosion of opportunity areas within the fashion accessories category.

This accessories area also includes jewelry.

And as for the jewelry business, it's still a relatively small business because it operates in only 25 stores.

We plan to expand our jewelry footprint to 44 additional locations in Q4 of this year, and roll it to the chain in 2014.

We see jewelry as an easy pick-up item that represents a service to our customers, and an incremental sale to DSW.

The other focus area of men's footwear recorded comparable sales growth of 12%.

We attribute this to a continuous upgrading of our fashion content, reduced style duplication, better in-stock positioning, and better size availability.

Athletic footwear grew by 5%, which was driven by product innovation and price range expansion.

Comparable sales in women's footwear grew by 1%.

Sandals rebounded strongly in the quarter.

Also, we have continued to carry key sandal styles through August to take advantage of sales opportunities that we may have missed in prior years.

Casual footwear also recorded strong growth in the quarter, reflecting an increased preference by the customer for casual versus dress styles.

For the Fall season, we are making two important shifts in inventory mix within women's footwear.

First, we are shifting investments from dress to casual, to respond to the changing customer demand.

Second, for Q3 in the boot category, we are shifting meaningful inventory dollars into short booties and shooties, and out of tall-shafted boots.

We believe these moves respond to customer preference, and provide significant newness in our assortments.

Looking at the Business geographically, all regions posted positive comps.

Consistent with Q1, the strongest Q2 results came out of the West and the South, with more moderate increases in the Northeast, Midwest and Mid Atlantic.

During the quarter, we opened 1 new store, bringing our store count to 377.

We remain on track to open 30 new stores this year.

Two of the new stores to be opened this Fall will be smaller-format stores of roughly 10,000 square feet in size.

These smaller-format stores will cover all footwear categories, but will offer an edited assortment within categories.

We will tailor these assortments to meet the needs of the local market.

If successful, these small-format stores will create a new growth vehicle for DSW, which could significantly expand our store count potential.

I also want to mention that within days of right now, we will have completed the project to remove clearance walls at all of our stores that had them.

We've talked about this project before, and it's a project that's really helped us stimulate sales of clearance merchandise, and at the same time, reduce shrink.

As previously announced, DSW's Affiliated Business Group has entered into an agreement with Loehmann's to be their exclusive footwear supplier.

This arrangement will function in a manner similar to our other three ABG client relationships.

We'll get started in a few doors later this year, and expand to all Loehmann's locations in 2014.

We expect this business to be earnings neutral in fiscal 2013.

Now let me provide an update on our luxury initiative.

As we noted in our Q1 call, our attempt to significantly expand the luxury category was not successful, and we are working now to reduce our luxury inventories.

We have made good progress on this front, and we believe we've taken adequate valuation reserves on our remaining inventory.

As mentioned last quarter, we are evaluating our go-forward plans for luxury.

We want to stay in the luxury business at some reduced level, but only if we can project breakeven or better performance.

Turning to our systems initiatives, there's three things I want to brief you on.

First, we believe we are beginning to see the benefits of size optimization, which allows us to be more precise in how we allocate footwear by size, by store.

This system was activated about a year ago, but orders written with size optimization intelligence didn't start hitting our distribution center until this Spring.

Our in-stock rates on items most directly affected by size optimization have increased, which we believe has favorably impacted sales of those items.

In addition, we believe we have reduced inventory imbalances by size.

This is undoubtedly one of the reasons for our margin expansion in the first half of the year.

I also believe it contributed to our cleaner clearance position this year compared to last year.

The second systems topic relates to our customer-facing technology at the point of sale.

In Q2, we made a number of enhancements to our POS platform that have created new capabilities.

These include, first, mobile POS capability.

We now have tablets in all of our stores.

Our associates use these tablets to ring sales, look up reward certs, access DSW.com, clock in and out, and monitor key store performance statistics.

Second, electronic certificates or eCerts, which allows our associates to look up and apply unredeemed reward certificates for our rewards customers.

Previously, our associates had to make a phone call to our shoephoria!

center to obtain this information.

Third, returns management.

This enables our associates to look up receipts when customers return merchandise without their original receipt.

This is both a customer service and a fraud prevention tool.

Fourth, eReceipts, which gives us the capability to eMail customer receipts.

Many customers appreciate this service, and we like it because it gives us another chance to capture eMail addresses from our rewards customers.

Finally, much work has been expended on our upcoming charge/send initiative.

To remind you, this will give us the ability to send merchandise from store inventories, in order to fulfill orders from DSW.com when the wanted product is not in stock at our fulfillment center.

It will also allow us to meet demand from a customer in one store by utilizing inventory from another store.

We expect to pilot this new capability early in Q4, with full rollout complete by year end.

It goes without saying -- this is an important step in our omni-channel journey.

We're excited about all of these systems initiatives, many of which respond to specific requests from our customers.

Another big customer request was for us to develop a wish-list capability for online shoppers.

A wish list helps customers systemically keep their favorite picks top of mind until they're ready to purchase them.

We implemented this new capability in Q2, and it's being actively utilized by our online shoppers.

We believe all of these systems enhancements will help us serve our customers better, while also improving financial performance.

In summary, we've delivered solid performance during a volatile Spring season.

We believe the DSW model is increasingly relevant to customers who are concerned with fashion, value, and shopping efficiency.

We also believe our strategic initiatives will continue to provide strong operational improvements, as well as good financial returns.

And finally, we're excited about our ability to continue to grow the DSW business.

As we move into the QA phase of this call, I would like to advise you that my colleague, Ms. Debbie Ferree, is here with us today, and she is celebrating her birthday.

So, I hope you'll please keep that in mind as you formulate your questions, particularly in the area of merchandise.

So with that, I'll turn the call back to the operator to open it up for questions.

(Operator Instructions)

Mark Montagna from Avondale Partners.

Hi.

Just a question in terms of, with the productivity gains that I'm assuming you're getting at the DC, I think in January you really kicked off all the reorganized DC, I'm hoping you can give us some metrics in terms of unit productivity per hour, how much costs per unit may have declined.

Because I've got to think that you're getting a lot of EPS benefit out of that DC.

From a rate perspective, the DC has improved its expense rate to last year as it relates to DSW store sales.

Obviously the mix change going to the fulfillment center, because of a growing dot-com business, you're not going to see an overall leverage on that DC/SC expense based on that shift in sales.

So we're certainly seeing productivity gains but from a benefit to the bottom line and the operating profit rate, you're not seeing a material impact there.

Mike?

Yes, I would say the big change in the DC is the implementation of the high-speed sortation system.

And what this really did is dramatically increase our capacity to allocate by size, by store, and to replenish at size level by store.

Previously, I think we put up our unit replenishment system, I don't know, two years-plus ago.

And as we ramped that up, it was largely a manual process in the DC.

And as a consequence there was a limited number of items that we could put on our unit replenishment system.

And so, what the sortation system has effectively done, is taken the lid off that capacity constraint.

And as a consequence, we are putting a lot more product through that sortation system.

I'd defer to Doug on the numbers, but I think what we're doing is we are processing a lot more precisely because of our automation.

Okay.

And then just as a follow-up, in the past you've spoken about gross margin being at its peak.

And it would seem as though, with all of the systems that you've got rolling out now and in the future, that there's got to be more to go in terms of gross margin rate.

Perhaps 200 basis points over the next four, five, six years.

And I just was hoping you could comment on that, whether you really have hit peak.

It just seems like that's not quite possible that you would hit peak yet.

Yes, I'm not sure we said that we were at the peak.

Maybe we did.

I think we're pleased with our margin progress and our margin performance.

I think I mentioned in the prepared remarks that size optimization is helping us.

We think it's helping us on the sales line and we think it's helping us on the gross margin line.

I think we're a couple of years out from assortment planning and that will provide further margin help.

We're not fully mature in terms of growing our private brand to its ultimate penetration target.

So that represents an additional opportunity.

And then when we get really smart about managing the charge/send project, we will be able to select product from other stores to fulfill orders, either from dot-com or a given store where a customer is shopping.

And do it intelligently such that we would select product that's most likely to turn into a markdown as opposed to a full-price sale.

So I do agree there is more margin rate potential ahead of us.

The question becomes how does that get utilized.

Does it get utilized by going to the bottom line for the shareholders, or does it allow us to become even sharper in our pricing, which is a constant challenge that we're very mindful of, or some combination.

And I think that's the issue.

But I agree, Mark, I think there is probably further margin rate potential ahead of us.

Okay, great, thank you.

Kelly Chen from Telsey Advisory Group.

Hi, guys.

Congrats on the nice quarter and happy birthday, Debbie.

One of the questions that I had was in regards to just new store productivity.

I know that you guys have a couple of different things affecting it with the high-volume stores and the mix of small-format stores.

Could you just give us a sense of how the new stores are performing this year relative to your expectations?

And talk about when that spread or that new store productivity goes back to normal.

I'll let Doug talk about the returning to normal, but so far the 13 new stores we've opened this year are performing slightly above the aggregate sales projection that we established when we approved each of them.

So they're not all performing equal to their pro forma, and they typically don't.

But the ones that are outperforming are more than offsetting the couple that are underperforming.

And as an aggregate they're doing slightly in excess of our expectations.

And I'll have to admit as far as returning to normalcy and their productivity, I'm not certain I know exactly what you mean other than there is a initial lift when we have the grand opening, if you will.

There is a little bit of pullback after that.

But they quickly get back to the normal operating levels halfway into their first year.

So we do see some growth and maturity in those stores, depending on where they're opened, but I can't say they are materially off their, quote, normal levels very dramatically.

Okay.

So it sounds like in 2014 we should see that spread between the comp and the total sales get back to a more normal spread versus this year?

Yes, I see what you mean now.

The point is, you have to remember how we calculate our comps here, is that it has to be open 13 months at the beginning of the fiscal year.

So, in many cases stores are open already 18 months, and that tends to dilute that impact to our comp number.

Also, another difficult thing to model out for you guys is the fact that we opened a lot of stores in the second half last year and they were all open for that fourth quarter.

So, 39 new stores were open in the fourth quarter last year and we also had a 53rd week.

So I think there's some difficulty in modeling that and you'll see a big distortion of sales increase versus comp increase.

Great, thank you so much.

And then just a really quick question on the outlook for -- it sounded like -- could you talk a little bit about what you're thinking in terms of, with systems it sounds like you're feeling a little bit better about that.

Do you still think that it's enough to offset what you're expecting for cost increases going forward?

And just an update on what you're looking for in terms of cost increases for the back half and early thoughts for 2014.

Thank you.

Yes, I wouldn't want to project out cost increases beyond what we can see, because that is volatile and it's obviously a function of what happens internationally.

What we're seeing right now and what we project for the back half is low single-digit cost increases, call that 3%-ish, something like that.

Does that answer your question?

Yes, thank you.

Seth Sigman with Credit Suisse.

Thank you and congrats on a great quarter.

Just a follow-up question on the comps this quarter.

You pointed to some positive trends in store conversion, which you saw in the first quarter, as well.

Can you quantify the benefit that that had on comps?

And any other detail on the improvement in the in-stock levels that you're seeing in the store.

Or how should we be thinking about that?

Thanks.

I'll let Mike talk to the in-stock levels, but we believe we're pretty transparent of giving you the components of our comp increases.

We have to be careful to start slicing that much further and giving the details on conversion.

Particularly in the case where we have more dot-com traffic, and the transition between stores, we can only measure certain things and those conversion rates and UPTs and AURs tend to get influenced by that dot-com traffic.

But all I can tell you is that in the second quarter the conversion improvement that we saw was equal to that of the first quarter.

And it was very significant, the most significant component of our comp increase.

I'd just add that conversion is not a fine-tuning knob.

It's a gross-tuning knob.

Conversion rate is a function, first and foremost, of the attractiveness of our merchandise assortment.

Secondly, it's a function of our in-stock position.

Thirdly, it's a function of the quality of the customer experience inside the store.

So there's a whole lot going on.

Having said that, for example, on size optimization, about 50% of our product, say 40% of our product, we order and we never order it again, because we're a fashion business, it's fast turn, it's in and it's out.

There's another 10% of our product that we order that is opportunistic buys or close outs.

And we don't order that by size.

We get it in the way we get it because it's opportunistic.

The other 50% is product that we order and then we either replenish it once or twice or indefinitely.

And it's that 50% of our assortment that is really benefiting from the systems initiatives, particularly size optimization.

When I slice it a little further and I look at the items within that 50% that are replenishment, that's probably 35%.

And then if I take core items, which are items within replenishment that are going to live for six months, that's probably more like 25% or 30%.

So on those items, those core items that are going to be most impacted by size optimization, because we're going to buy back into them by size and allocate them precisely by size, and we're going to buy them in solids and not in musicals, our in-stock rate in Q2 was up about 7%.

And we know what the sell-through rates associated with various in-stock levels are, so we can project what the sales impact was.

And it was meaningful.

So, I hope that gives you some additional flavor as to how we're looking at and evaluating the impact of systems.

But in terms of translating that into a specific impact on conversion, that's dicey.

That's very helpful and it's certainly an encouraging trend.

I just wanted to follow-up, Doug, a question on the SG&A.

Really good control this quarter.

And I'm just wondering, that low single-digit growth that we saw in terms of dollars, is that a sustainable level?

Like, what are some of the moving pieces we should be thinking about for the rest of the year?

After our first-quarter start we made some decisions to delay some expenditures.

We just made some changes to the plan.

We want to leave ourselves some room in the back half to make offensive moves, too.

So I wouldn't want to define a trajectory that's similar to the first half until we get a read of the business in the second half.

We may want to spend some things on marketing.

We may want to pull back on some other ideas.

We want to give ourselves some flexibility there.

But, as we said in the beginning of the year, significant leverage, even on a low single-digit comp, was in front of us for 2013 and we still believe that's the right target for the year.

Okay, thanks again.

Congrats and good luck the rest of the year.

Chris Svezia from Susquehanna Financial Group.

Good morning, everyone.

Happy birthday, Debbie.

I have a question -- product margin.

I'm just curious, how much, if you can quantify, is really coming from systems?

How much is just coming from Debbie and her team executing from an inventory management perspective?

And the sustainability of some of that.

If maybe you can just talk in and around, that would be helpful.

And then secondarily to that, Doug for you, just as I think about for the year, when I think about your guidance that you've given, it's in the mid point of the range, seems flat earnings for the back half of the year.

I would just think -- is that just being somewhat conservative on your part?

Maybe some puts and takes on gross margin and SG&A for the year.

You mentioned SG&A leverages but any thoughts on gross margin would be helpful.

Thanks.

Let me say this, Chris.

Parsing out the basis points of margin attributable to systems versus the attractiveness of the assortments is hard.

But let me just say one thing.

I think one of the things that happened to us in Q2 that was very dramatic was the performance of our reg price business versus our clearance.

And we consistently -- I can remember a year ago we were fretting to ourselves that we were not selling through clearance at sell-through rates that were satisfactory to us.

This year, particularly in Q2, we had consistently lower levels of clearance.

And, on that lower level of clearance unit ownership, we were selling through at rates that were faster than the prior year.

So there's two ways that that can happen.

One is by buying it better by location, by size and all of that.

That's the systems piece.

And we know that we bought it better because we've looked at selling by size.

And we see spikes in our selling of fringe sizes at either end of the size spectrum, which is exactly what we were expecting would happen out of size optimization.

But the other thing that happens is, when you buy it better, and you have more attractive product, it sells out faster.

And that means fewer units go to the clearance racks.

The other thing that I think is obvious but I'll say it, is the fact that we were able to manage our overall inventories on a basis consistent with sales in a time frame when sales were about as volatile versus the prior year as I can ever remember.

That also has favorable impacts on margin performance just because you're not dealing with the bulges of inventory that are created when you don't sell through at adequate rates.

So, I haven't really answered your question because I can't, but I do recognize that it's all three of those things that are really helping us grow margin.

And, Debbie, if you want to say anything on your birthday about how great your assortments look in Q2, this would be a good time.

No comment.

(laughter)

Actually, Debbie, I have a quick question for you.

Just the move to extend sandals was really the right move coming into August.

I'm just curious, the movements in boots, any early reads, your thoughts about that?

And then, Doug, I just want you to answer my other question about the guidance and the thought process in the back half.

Yes, sure, Chris.

We did make a decision to extend our sandal season, predominantly in the casual category, by four weeks, early into the August time period.

This paid off very well for us.

What we saw was, on new styles that we purchased, that we wanted to make sure they were the it items of the season, and we had good sizes in them, we saw sell-throughs double that of the balance of the assortment in sandals.

So, that worked very well for us and so we were really pleased with that.

As far as what we're seeing early in boots, during this transitional time period, we have made, as we called out, I believe, on the last call, made a distortion toward booties versus boots.

And that has been checking out very nicely for us.

So we're pleased with the movement that we saw there.

It's early to call the season, as you know, three weeks into it, but we've been pretty pleased with that.

So both strategies, both to extend the sandal season and to distort from boots into booties, and try to capitalize on a little bit of the early back-to-school business, has been good and we are pleased with the early results.

Thank you.

And, Chris, as it relates to your other question, I think it's important to remind everybody again that the season was a tale of two quarters.

And that while the second quarter was outstanding from an expectation standpoint, we did have a 1% comp in the spring.

And our margin rates were better and our SG&A was significantly better.

But we have to look at the spring season in total.

So, as we look outward, we have to consider the spring season and not just the second quarter.

I hope it does turn out that it looks very conservative when we're all done with this year, but we do have to look at the spring season as we look at our outlook.

I would tell you that gross profit, we still see some opportunity there in that low single-digit comp as it relates to last year in the back half.

And SG&A, we have some investments we're going to do.

We're going to continue to spend toward our omni, and open stores the best we can.

And obviously the metrics look a little difficult because of the 53rd week and the extra leverage we got in SG&A last year because of that.

So, I hope you're right and it is conservative, but we think it's the right way to project the business externally at this point.

Okay, terrific.

All the best, congratulations.

Thanks.

David Mann from Johnson Rice.

Yes, thank you.

Good morning.

When we look out at the second half I'm curious in terms of the comp drivers.

You didn't call out traffic for the first half.

So, in terms of the second half, anything you're looking to do to drive traffic or should we expect traffic to be the same?

Yes, I'll try that, David.

We did have a traffic decline in Q2, similar to what just about every other retailer in America has reported.

And we've looked at it and I think it falls into several buckets.

Some things relate to what we've done.

One thing, for example, is we know we have cannibalized some business in existing markets where we opened up new stores, particularly the ones that opened up in the back half of last year.

So that's one influence.

Another influence is some changes we made to our marketing program specifically related to TV.

And we think that that may have hurt us a little.

And so we have reversed that direction beginning with the TV that started to run yesterday.

I think also it's hard to measure traffic into our brick-and-mortar stores.

It's becoming harder and harder.

We've already blurred the lines between the two channels with our shoephoria!

system that lets our in-store customers find and buy the product from our online fulfillment center when they can't find their size at the store they've shopping in.

So, if you think about that, in that instance the store is getting the traffic and the dot-com channel is getting the sale.

It's just another indication that it's harder and harder to just look at traffic alone.

And, obviously, when we activate charge/send later this year that's going to blur the lines ever further.

I think another thing I think about is that more and more customers are using their smartphones to do pre-shopping.

And maybe that means the trips that they do make to our brick-and-mortar stores are more efficient and more successful, which would reduce traffic and increase conversion.

And that's exactly what we saw in the first half of the year.

It's a long way of saying some of the traditional statistics that we've looked at to measure things that are business drivers, like customer traffic and conversion, they are becoming harder to interpret, is what I'd say.

And that's precisely why, when Doug made his prepared remarks, he gave you total sales guidance regardless of what channel it happens in and where it happens, and comp versus new.

In terms of drivers for fall, given all of that preamble, it's always about product, it's always about improving the customer experience, it's always about driving superior value that the customer recognizes.

And those are the things that we're focusing on.

I think, as we mentioned and Debbie reiterated, we've made some fairly significant shifts in the women's business that we think will activate that business and give customers new reasons to buy that footwear.

Athletic has been solid, men's has been fantastic, and handbags and accessories has been continuously strong.

So, we've got to just keep doing what we're doing in those businesses.

Mike, very helpful.

For the follow-up, how should we think about AUR in the back half given that it was a driver in the second quarter?

Will the shift in the boot business, do you expect that to be significant pressure?

And then, also, just comment on the shift you're doing from career to casual.

How do you think that will play out in AUR?

I think the boot to bootie shift will probably put some pressure on AUR within women's.

On the other hand, men's has a much higher AUR than women's, and that's a countervailing influence.

Countervailing to that is the growth of our accessories business, which has hosiery and small leather goods and fashion accessories and scarves and wraps and umbrellas, and all that stuff.

And, as that business goes ahead, that tends to lower the AUR, as well.

It's all cancels itself out in Q2, and we ended up with what, Doug?

-- a 1% or 2% AUR increase.

In terms of the dress versus casual shift, Debbie, I'll let you comment on whether that's going to drive any changes in AUR.

I don't really think it will drive any changes in AUR, but it is a significant shift in the strategy as we continue to respond to customer demands.

We had strong double-digit comp increases in casual.

There are some things that we're doing in dress, though, to try to minimize that downturn and protect it.

Trying to change up heel heights and change materials, so that we really capitalize on that customer that is leading more of a casual lifestyle.

I think that the downturn in dress has probably reached the level right now that it's going to hit.

And I'm actually looking for a modest upturn in that category, as I've just come out of three trade shows where the market looks to be presenting us with some really fresh new faces, which we're really going to need in dress.

Great, thank you.

Good luck in the fall.

Scott Krasik with BB&T Capital Markets.

Hi, everyone, and happy -- what is it 34th birthday, Debbie?

Yes, thank you.

(laughter)

You referenced the trade show.

Are any of the big trends that have been happening for spring -- canvas or boat, flats were good this year -- any of those big trends, do you think they are getting a little bit tired and we're going to have a fashion shift?

Or do you think it's going to be a continuation of the big trends?

There are some new trends that actually just started to take hold at the end of Q2, and are going to be getting stronger in Q3 and I see continuing in Q4.

And that's all the up-the-front looks.

I think we're just at the beginning of the life cycle.

And up-the-front could be in dress shoes, it could be in sandals.

So, it is anything from gladiators to more foot covering.

And I see that as an evolution of the trend.

And I think that the market kept that fresh enough to where I was pretty excited about what I saw, looking at for spring '14.

The flat category, as you know, we've talked about that quite extensively, is category distortion for us, as it is for most people.

There's a lot of new freshness there, as toe characters change -- pointy toes, Oxfords, two pieces.

And smoking slippers are doing very well for us.

So, I see that as something that customers don't have in their closet, which actually helps us get dollars out of their wallets.

I actually saw enough new things in terms of styling, construction and how shoes were detailed that I think there's enough freshness that if you buy it correctly, and you don't duplicate yourself and over assort, that we should be in for a nice run for spring.

Okay.

And then if I could just sneak in two quick ones.

Number one, did you actually buy tall-shafted boots down again for this year?

And then, Doug, can you help us understand what the sales shift capturing that first week in November means for the third quarter?

I assume that's a big week for you guys.

Thanks.

Yes, let me take the tall-shafted question.

We did a category distortion for Q3 into booties and away from tall boots.

In Q4 you'll see that the tall-shafted boots actually have a distortion higher than last year.

I think it's a timing between the quarters.

But overall tall-shafted boots were bought down a little bit overall to last year.

We are actually getting some very early strong indications going into the first part of August that suggests that we might have left some dollars on the table there because they are checking actually very well.

And I think part of it is due to the fact that everybody ran after booties and may have maybe left a little bit of sales on the table for tall-shafted boots.

So I'm pleased with the early indicators.

I think it could be an opportunity for Q4.

And we'll be looking at what brands can help us recover if, in fact, the customer continues to buy the way that they are buying it now.

And, Scott, from the shift basis, I would estimate about $10 million out of the fourth into the third.

Okay, thanks.

Jeff Van Sinderen from B. Riley.

Good morning.

Maybe you could just comment on, I think you mentioned the choppy environment and sales volatility, but maybe you can give us more color on what you've seen in traffic and conversion versus last year over the last couple of months.

I know you don't really have a big back-to-school business, except kids online.

Debbie mentioned back-to-school.

But just wondering if there's anything else to highlight there in terms of any change in traffic conversion the last couple months.

On a monthly basis looking at traffic and conversion, especially in the second quarter, that's a real thin analysis.

Because, as you already said, we don't have a big back-to-school business.

But we slowly build our sales so we get to that September/October time frame.

So, even if we are in the habit of breaking out monthly comps or conversion or traffic, I wouldn't extrapolate those numbers given the second quarter in our business.

I hate to be evasive but I think it would be misinformation if we gave you that kind of data.

Understood.

And then relevant to just the overall promotional environment, how would you characterize that?

What's your thinking about the overall promotional levels out there versus last year?

Do you feel like it's getting better or worse?

Any color there?

I'll take that question.

I think value is important, even more now than it ever has been before.

And we're continuing to pass good value on to our customers, both from our everyday value and some of the opportunistic buys that we're doing.

What am I seeing just from a competitive point of view?

I am seeing customers, I think, hit the value message harder than I've ever seen, both in brick-and-mortar and in dot-com.

But, how is DSW going to handle that?

We'll continue to put strong values on the floor for our customer that offers a great product at some really fair prices.

Okay, good.

And then anything new that you're learning in some of the new markets you're opening in?

I know you said there were a couple stores that might have performed a little softer than you expected.

Although the other ones, it sounds like they were performing better to offset.

Any conclusions you can draw on that, that might be shaping your real estate planning going forward?

I wouldn't say there's anything over-arching that we're learning.

Most of the volatility or surprises one way or the other is market specific.

We put in place responsive actions to address either shortfalls, and we try and take advantage of situations where the demand is higher than we had anticipated by buying back into that for those locations.

So, I wouldn't say there's anything over-arching that we've learned.

Okay, fair enough.

Thanks very much and good luck for the rest of the quarter.

Kate McShane with Citi.

Thank you, good morning.

We've heard from other retailers during this earning season that some vendors are trying to push more costs on to the retailers.

Is that something that you're seeing or anticipating for the next 12 months?

No.

I don't really see it.

We have low single-digit cost increases.

Look, everybody has margin pressure.

And manufactures are trying to figure out on the wholesale side how they remain profitable.

And so are we.

So, I think it really comes down to the negotiation and the partnership that we have with our brands, and really trying to hit the right price points for our customers and working back into cost.

We haven't seen any significantly big cost pressures, really, in any category.

So I would say no, we really haven't been seeing that at all.

Okay, great.

And as a second question, with the omni-channel strategy getting more and more prevalent, I wondered if you could talk a little bit about how you're handling returns from online and into the stores.

And does that require more systems investment as time goes on?

We really like it when online customers bring their purchases back to us in store because it gives us a chance to turn that return into an exchange.

And so we encourage that.

We have ever since we fired up the dot-com channel in 2008.

And the multi-channel shopper spends more than two times the single-channel shopper.

With our charge/send initiative, I think we'll just welcome that kind of cross channel behavior even more.

Ultimately the goal of omni-channel is to make all of our products available to our customers regardless of where they're shopping, how they are shopping, and when they're shopping.

And that's really the challenge of omni-channel.

Charge/send is a step in that direction but it's still basically what I call reactive omni-channel.

It's where you see a product in one place and you get it from another place.

What we need to get better at is making our full 20,000-plus assortment available to all of our customers regardless of whether they're shopping in a Manhattan store or in a store in North Dakota.

That's what I call proactive omni-channel, and that's the direction we're going in.

I don't need to under-play the charge/send initiative.

It's an important one and I think it will be a meaningful one to our financial performance, but it's just one step in a multi-year journey.

But relative to your specific question about handling returns in store that are bought online, we've been doing that for many years now and it's a good thing.

It's not a bad thing.

Camilo Lyon with Canaccord Genuity.

Thanks, good morning, everyone.

Debbie, I had a question about the decision to shift a little bit away from the dress category to casual.

I think you touched upon it a little bit earlier on in the Q&A.

But you said something that was interesting to me.

If you're starting to see that category bottom, I would imagine that you'd probably want to be ahead of that a little bit and lead your customer to get into that category in a little bit bigger way.

So I'm just curious around the thinking about that and your ability to increase the inventory allocation inter-season if you do see that trend accelerate.

Thank you for that question because I've always been a big dress shoe proponent.

And I think I've found myself sometimes this season trying to push that million-pound boulder uphill on the dress shoe conversation.

But I believe that there's a lifestyle shift that customers are making, moving from a dressier lifestyle to a more casual lifestyle.

Having said that, there are two things to keep in mind.

The young customer still wants to wear high heels and platforms, and wants to dress up even in their casual ready-to-wear.

And we're making sure that we support that.

Number two, the career customer doesn't want to get out of heels.

She wants to stay in heels but she doesn't quite dress up the way she used to.

So that causes us to think about heel heights coming down just a little bit, and using more casual materials in the dress shoes.

As my merchant team will tell you, I'm always pushing to try to say -- what can we do to minimize the downturn of dress.

We talk about that every single day.

So, we are ahead of that, and we continue to test and react and trial the new things that the market is showing us.

And things that we think of ourselves in trying to make sure that we minimize the erosion of the dress shoe business.

It's a fact, though, that customers have really started to shift to more of a casual lifestyle.

So, in Q1 you saw strong double-digit comps in the casual category.

So, we will fuel that business to the degree that the customer demand suggests, but we're constantly pushing the envelope in dress.

So, thank you for that question.

And we are trying to stay ahead of it and we are trying to buck the trend a little bit.

And we will be out ahead of it when that category turns the corner.

And your ability to meet that demand should it shift quicker than you're anticipating -- would you say that that's a possibility in Q3 and Q4?

Or do you really need to get to the 2014 fall season to get a better allocation?

That really depends.

Some of the manufactures are taking some inventory positions in certain shoes that are selling really well.

There are certain things in dress that we're doing really well with right now.

I talked about up-the-front and strappy and gladiator kinds of looks.

So we went ahead and we placed a bet.

We placed bets in that category and we've planned that all the way out through the fall season.

But I think that's the reason why you need to be pretty vigilant about testing and reacting, so that you're going to capture that new trend.

There's some manufactures that will be able to get us back into it quickly.

There's other ones that won't be able to.

So it just really depends on the brand.

Sam Poser with Sterne, Agee.

Good morning.

It's Ben Shamsian for Sam.

Thanks for taking my call.

And happy birthday, Debbie.

Just on the back half, can you just talk about the same-stores algorithm that you're thinking about?

You're looking for maybe a flattish traffic, and ASVs look to be flattish, as well, just given some of the shift.

Is it all going to be conversion?

Or can you just parse that out for us a little bit?

It's difficult to slice a low single-digit comp into four categories.

But I would tell you that we believe a lot of the things we've done and are working on are positive to each one of them.

From accessories for UPT, from the markdown management and inventory management and AUR, to the marketing ideas that we have, and utilizing our database for traffic.

And then conversions all the way from putting the right assortment into the right stores, and having the right size assortment.

But also the execution of our field associates, making sure they are making the appropriate contact with the customer.

We like to think whatever our comps are, divide it by four and that's where each component is.

Because that's what we believe could happen.

But it's difficult to project that specifically for a fall season.

Got it.

And then, just lastly, was there a benefit in the second quarter because of the week shift in the calendar?

Not so much on a sales basis, but a little bit on a margin basis.

It was actually, in the margin basis we had a pressure on our margin rate with that shift.

But on a sales basis it's less impactful.

Got it.

Thank you so much.

Thank you.

This concludes our question-and-answer session so at this time I'd like to turn the call back over to management for any closing remarks.

Okay, thanks very much, operator.

And, as always, we appreciate your interest and your support of DSW.

And we really appreciate your participation on the call today.

So thank you and have a great day.

Thank you.

The conference is now concluded.

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