Designer Brands Inc (DBI) 2013 Q3 法說會逐字稿

Good morning and welcome to DSW's third-quarter 2013 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Christina Cheng, Director Investor Relations.

Please go ahead.

Thank you, Emily.

Good morning and welcome DSW's third-quarter conference call.

Earlier today, we issued a press release detailing the results of operations for the 13-week period ended November 2, 2013.

Please note that the 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 in today's press release, in our public filings to 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 third-quarter reported results, highlighted details of our adjusted results, and provide an update on our full-year guidance.

Mike will then elaborate on our operating performance and provide an update on our strategic initiatives.

After our prepared remarks, we will open the floor for Q&A.

With that, I turn the call over to Doug.

Thanks, Christina, and good morning, everyone.

Before I get started, let me remind you that we completed our two-for-one stock split on November 4, and as a result, I will discuss our quarterly results on a post-split basis.

Our reported net income for the 13-week period ended November 2, 2013 was $55 million, or $0.60 per share.

This includes after-tax income of $1.4 million, or $0.01 per share, from our luxury initiative.

This compares to last year's reported net income of $50.1 million, or $0.55 per share, which included a net credit of $3.5 million, or $0.04 per share, related to the favorable settlement of our 2005 credit card litigation.

Excluding these items, adjusted net income for our base business was $53.6 million, or $0.58 per share, compared to last year's net income of $46.6 million, or $0.51 per share.

The balance of our comments this morning refer to our adjusted results.

Sales for the third quarter, excluding luxury, increased by 5.4% to $625 million, with a comparable sales decrease of 0.7%, versus last years 6.3% comp increase.

For the DSW segment, which includes DSW.com, comps decreased by 1%.

Store traffic declined, but was mostly offset by an increase in store conversion.

As you know, we do not typically report intra-quarter trends, but like other retailers, store traffic strengthened during the month of October.

We continued to see traffic increases on both our online and mobile e-commerce sites.

In our Affiliated Business Group, comps increased by 3.6% after growing by 1.8% last year.

Total revenues for the quarter increased by nearly 7% to $35.7 million.

We have been pleased with how the business responded to our merchandising and marketing strategies this season.

We opened a net 5 new locations in the third quarter, bringing our total to 356, and we also started supplying footwear to SteinMart.com in November.

This December, we expect to launch our first 10 locations in our new partnership with Loehmann's.

Total gross profit decreased by 20 basis points to 33.6%, due to a slight decrease in merchandise margin and occupancy deleverage.

Our merchandise margin rate for the quarter was 45.9%, just a 10-basis-point decrease despite a promotional environment and lower comps.

As we expected, our SG&A rate in the third quarter was down significantly and improved by 130 basis points to 19.9%, driven by lower overall pre-opening, IT, and overhead expenses, as well as leverage in our marketing and store support expenses.

As a result, our operating profit increased by 120 basis points to 13.8%, making this the highest level of profitability in a single quarter and the seventh quarter in which DSW has achieved operating margin in excess of 12%.

In total, adjusted net income grew by 15% to $53.6 million.

Turning to our balance sheet, our inventory position at the end of the third quarter was virtually flat.

On a cost per square foot basis, inventories were down 2.2%.

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

Capital expenditures for the third quarter were $22.4 million, of which $16 million was for the opening and remodeling of stores, and the balance was for business IT projects.

The total CapEx is significantly less than last year's $38 million due to the opening of a record 27 locations in the third quarter last year.

We ended the quarter with cash and investments of $522 million, an increase of 21% over last year's $430 million.

We declared our regular dividend of $0.125 per share, bringing our cumulative payout to $262 million since we began paying dividends.

We did not repurchase any stock this quarter.

Turning to our full-year outlook, we are maintaining our full-year post-split EPS guidance to range between $1.80 and $1.90 per share on an assumed flat comparable sales.

At the midpoint of this range, this represents approximately 10% growth over last year's earnings.

Total adjusted revenues is expected to grow in the range of 4% to 5% for the 52-week period, compared to the 53-week period ended February 2, 2013.

Excluding the sales of the $32 million 53rd week last year, full-year revenue growth for the fiscal 2013 is expected in the range of 6% to 7%.

As we stated previously, we anticipate the new Loehmann's partnership to be earnings-neutral this year.

We also anticipate our luxury test to produce a loss of approximately $0.15 per share on a split-adjusted basis for the year, consistent with guidance given at the end of the first quarter.

And with that, I'll turn it over to Mike.

Thanks, Doug.

There were some striking similarities between our sales performance in Q3 and that of Q1.

In Q1, temperatures stayed unseasonably cool through the first two months of the quarter, and our sales trend was weak.

When weather broke in April, our sales trend improved and we finished the quarter with a 2% comparable sales decline.

The sales momentum continued into the second quarter and we were able to fully offset the Q1 decline.

In Q3, weather stayed unseasonably warm through all of August and September and through the first week of October.

We also had the unsettling budget impasse that led to a partial government shutdown in early October.

Not surprisingly, our sales trends were weak.

We responded by taking selective price reductions and sharpening our value messaging to the customer.

The government went back to work and the weather broke in the second week of October, and our sales trend, once again, bounced back.

We finished Q3 with a 1% comparable sales decline.

And of course, it remains to be seen whether that end-of-Q3 sales momentum will continue through Q4 as it did in Q2.

Category performance in Q3 was consistent with what we experienced in the first half of the year.

The focus areas of men's footwear and accessories once again posted very strong comparable sales growth.

Both businesses posted increases of 9%.

Athletic footwear was flat, while women's footwear posted a comparable sales decline of 5%.

The results in women's footwear were disappointing, and as you might imagine we are putting that business under the microscope to identify the adjustments required to re-stimulate growth.

In terms of geographic results, the west, the south and the northeast regions all posted low single-digit positive comp sales growth, while the mid-Atlantic and the midwest recorded mid-single-digit comp sales declines.

Results in the Northeast were favorably affected by the impact of Sandy in the prior year.

During the quarter, we opened 16 new stores, bringing our year-to-date new store openings to 29 and bringing our store base to a total of 393 stores.

As a group, these new stores are exceeding their collective sales plans.

We expected to open one more store before the end of the year.

And given opportunities in the real estate market we now anticipate opening 35 new stores in 2014.

I should mention that 2 of the 16 new stores opened in Q3 were small format stores with a footprint of approximately 12,000 square feet.

Those stores are located in Bloomington, Indiana and Muskegon, Michigan, both of which have MSA populations of fewer than 200,000.

As you may recall, DSW has traditionally targeted markets of 400,000 or more.

Results for these two stores are in line with our expectations, but both stores opened in October, so it's really very early to make a judgment as to their long-term sales potential.

We plan to test several more of these smaller stores in order to determine if we can be successful in smaller markets with smaller stores.

Obviously, if we can prove this concept, it can add quite substantially to our ultimate store unit build-out potential.

Also, we can utilize the smaller-format stores to fill in voids in larger markets, where we can't justify opening a 20,000 square-foot or larger store.

Let me now talk about our progress on our omni-channel initiative, which is a very important priority.

The customer expects us to be able to get her the shoe she wants, regardless of how she is shopping, and regardless of where the shoe is located in our system.

Full omni-channel capability will allow us to move seamlessly between channels and will allow us to make our full assortment available to the customer regardless of whether she's shopping from her house, from her mobile device, or from one of our stores.

That capability will make our small-format store strategy even more powerful.

But today, we operate our store and DSW.com businesses separately.

We need to break down the systemic, organizational, and process barriers that separate these channels.

It will require a significant commitment of resources by our Organization, but we believe our omni-channel capability will make us an even more formidable competitor in the footwear space.

Over the past several months, we've been working with two high-profile consulting firms to help us validate our omni-channel plan, to develop business cases for each element of the plan, and to develop a timetable for implementing the plan.

We expect to complete that work by the end of the year.

We have already taken an important step in our omni-channel journey with the launch of our charge-send capability.

This system allows us to fulfill dot-com orders out of our stores and to satisfy unmet store demand from stock held in other stores.

We piloted this new capability in Q3 and rolled it out to all stores at the start of Q4.

We simultaneously created marketing collateral support in our stores to announce this new capability.

We're excited about how the customer is embracing charge-send and we're proud of its fairly seamless implementation.

Let me now briefly tick through some of our other recently-implemented systems initiatives that we are benefiting from.

We continue to improve our size in-stock rate as a result of our size optimization system.

In Q3, we think this capability improved our in-stock rate by 2 percentage points on those items most directly affected by the system.

We are now up with one vendor on our drop ship system that allows us to sell product through DSW.com but fulfill it out of our suppliers warehouse instead of actually owning the product ourselves.

We hope to get another 10 suppliers up on drop ship next year.

Rewards certificates are now electronically accessible at the point-of-sale in all stores.

This provides a better service to our customers that we believe will lead to increased loyalty over time.

We also can electronically send receipts to our customers, which provides a better service and give us another chance to get their e-mail addresses.

Return transactions are easier to process now that we've implemented our returns management system, which allows us to look up receipts electronically at the point-of-sale.

It also allows us to identify fraudulent returns more easily.

And all of our stores are now using mobile POS units for line busting, for product and reward certificate lookups, for associate clock-in and clock-out, and to monitor store performance statistics.

We think all of these systems initiatives are helping us serve the customer more efficiently and effectively.

As Doug mentioned, the Affiliated Business Group at DSW had a very nice quarter.

ABG, to remind you, acts as the sole footwear supplier to shoe departments of approximately 2,000 square feet inside the stores of three different multi-category retailers operating 356 locations.

DSW owns the inventory and controls the pricing, while the host store puts the product on the floor and serves the customer.

In Q3, ABG grew its total sales by 7% and made strong profit contributions in each of our three affiliated businesses.

Finally, let me update you on our luxury initiative.

Very shortly, we will declare our test of Luxe810 to be complete.

We entered the 2013 year with a significant investment in luxury inventory, but over the course of the year, we have dramatically reduced that investment through both retail sales and job-outs to other retailers.

The remaining luxury inventory represents less than 0.5% of our total inventory ownership.

Most of this inventory will be offered on DSW.com on an ongoing basis and at prices that will allow us to breakeven.

We expect the financial charges related to this unsuccessful test will fall within the estimates we established at the end of the first quarter.

To sum up, we've weathered another choppy and unpredictable quarter in terms of its volatile sales patterns.

But as you have come to expect from us, we adjusted quickly and effectively to rebalance inventories and adjust expenses in line with the changing sales trends.

As a result, we were able to post another earnings increase for the quarter.

We also continue to make good progress on our strategic initiatives and growth objectives that will give us the opportunity to further increase our market share, going forward.

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

(Operator Instructions)

Kate McShane, Citi.

Thank you, good morning.

My question is on conversion; I know conversion has been increasing sequentially over the last couple of quarters.

Can you provide us any details on what the conversion rate was during Q3?

Yes, basically it was up the same it was in the first two quarters, which is mid-single-digit and we continue to see that improvement month in, month out.

Okay, thank you.

And I was wondering if any of your marketing plans change as we enter into Q4 as a result of some of the weaker results in Q3 and what can we expect from that going forward?

Hi, I'll take that question.

This is Debbie.

There's a few things that we've done to, I would say, shift to maybe strengthen our marketing a little bit more than we found it in Q3.

Three things that we've done.

Number one, we really have increased our value messaging.

So if you looked at our commercial, for example in Q3, it was very on track, on trend, brand appropriate, and really drove a brand awareness in DSW, but may have suffered a little bit in terms of how much we talked about the value method.

So we actually did a value overlay -- voice overlay at the end of -- right about the middle of October and that actually continues into Q4.

Number two, we're really distorting more of our marketing dollars to digital.

We're finding that to be very effective and actually supports the trends of what customers are requiring.

And lastly, a little bit more from a joint merchandising and marketing point of view, we are sharpening our pencil to put more value on the floor and so the value messaging will be consistent with some of the changes that we're making in our merchandising assortment pricing.

Okay and if I could just follow up to that -- and this will be my last question -- is with the promotional environment, you noted in your comment that things were getting maybe a little bit more aggressive and you deciding to put more value on the floor, is that how you're going to respond to the more promotional environment or can we expect to see more of an effort on the price side to be more promotional and compete with others?

Sure, our business model is really everyday value and we strive to put up the best value on the floor every single day for the consumer.

Having said that, it is a heavily promoted, competitive environment out there and what we are doing is we are negotiating some tougher prices and putting some sharper price points on the floor.

When you look in the fourth quarter, actually in November, you've already started to see a little bit of that, especially in our boot messaging, in the last few weeks you've seen that.

And, you will see more about going forward.

We'll also tried to buy some more opportunistic buys in season and we'll try to balance our assortment with more what we call the surprise and delight, the special deals that we will pepper the floor with.

So that how we'll really addressed the promotional environment but you will not see any POSing or deep discounting or promoting -- number one because it is not our model, and number two, our inventories are really in such a position, they're in a really strong position, and we actually have a pretty significant amount of open-to-buy liquidity, that we really don't need to deeply discount and throw the baby out with the bath water, if you will.

Thank you.

Mark Montagna, Avondale Partners.

Hi, Mike, you had mentioned some significant investments in omni-channel.

Is that going to delay future roll-outs of other initiatives?

Is that going to cause SG&A expense and D&A to ramp up into next year?

Good question.

As I mentioned in the prepared remarks, we're working with our consultants to put together both the business cases and the priorities, which will lead to an implementation schedule.

I do anticipate that it will require shifting dollars, at least out of other activities into omni, which will involve both capital and expense.

But exactly how that's going to shake out, we simply don't know yet until we finish the consultancy.

But I expect that as we develop those more precise estimates, we will share that with you and incorporate it into our earnings guidance and hopefully, we'll be able to time the implementation of the various capabilities in such a way that the benefits tend to mitigate the impact of higher investments.

But we should assume that if you put more there, you're going to neutralize that, so that we don't see a sudden spike that for overall SG&A and overall D&A, that you'll mitigate that through, taking away from some other initiative?

That will certainly be our objective.

Okay and then just the last question is throughout the year you've really gotten some outsized SG&A leverage for pretty much flattish type comps.

I'm wondering how you're able to do that and should we expect that to continue into next year?

Well, we always try to, and if you recall, the main reason that we were so confident about the leverage was the fact that pre-opening expenses were going to be down significantly, just based on the store count.

So roughly $10 million of that improvement was related to pre-opening expenses.

But, on top of that we also have been pretty diligent on how we're managing our overhead, spending the IT dollars at the right time and sequencing and efficiently and, as I also mentioned in the prepared remarks, is that store expenses and marketing expenses were both slightly leveraged to last year.

We're doing everything we can regardless of the top line to manage the Business as efficiently as possible.

When you do that, you can get that leverage.

But as Mike [teed] heat up, we have to see how long that will continue, going forward, as we have to make investments in the omni-channel and other things, so we're not a slave to the SG&A rate but we're always mentioned the Business to the most efficient levels we can.

Doug, I might just add that while our comps through Q3 are relatively flattish, our total revenue, even excluding luxury, is up 6% or 7%, and that's from the 39 stores we opened in 2012 and the 29 we've opened so far this year.

That provides us also some source of leverage on some of our fixed overhead expenses.

And maybe one more point on top of that, just to be clear with everyone, we do not expect to see that kind of expense leverage in the fourth quarter quite simply because of having 14 weeks last year and only 13 weeks this year.

So we will not see SG&A leveraging in the fourth quarter.

Okay, thanks.

[Espir Padilla],Susquehanna.

Good morning, everyone.

[Doug], managing the quarter in a tough environment.

I just want to circle back, Debbie, for you.

Maybe if you could just parcel through the women's business down 5% in the quarter, just maybe walk through how boots performed relative to plan, dress, casual on the women's side and what adjustments you're making to better position it in the fourth quarter?

Sure, good morning, Chris.

Let's just start with a macro view.

Women's down 5%.

The components of that were dress was down in the low double-digits and that's been a trend we've seen in the last four quarters.

Casual, down in the mid- single-digit and this was, I will say, somewhat of a surprise to us because we've had 10 quarters of positive comps in the casual zone.

Sandals continued to comp in the high single-digits so that trend actually continued well into third quarter, and you could say, there probably maybe was even a little bit more volume to be done there.

Boots were relatively flat and the distortion that we put into boots moving more mix into booties versus boots actually worked very well for us and we actually achieved a 10-point penetration distortion in booties to boots relative to last year.

[So it'll] tell you the strategy in boots for third-quarter work for us.

Having said that, I still think there's more upside in the boot category, specifically riding boots.

We're starting to see that play out in fourth-quarter and, by the way, Chris, we're going to extend that into first quarter as well because we see that trend not really stopping.

Sandals, they are what they are.

The biggest thing I can tell you about sandals is I'm pleased about the third-quarter performance.

Would with there have been a little bit more?

Possibly.

We maximized our opportunity in our warm weather states.

Could there have been a little bit more in the other areas?

Potentially but I was pretty pleased with our sandal performance.

Now, let's get to the two tough categories.

Dress, number one.

As I said, we've had four quarters of negative comps.

Few things under the covers there.

We have seen -- so dress has been weak but I have seen signs of dress starting to turn the corner.

There are some categories that are performing exceptionally well for us right now.

The components of that should ease the opened up category, which is up the front look that the fashion brands are showing us, contemporary fashion -- all three of those are doing exceptionally well.

Our contemporary business in dress is actually very strong and we have seen season-to-date plus high single-digit comps in contemporary, and just to give you a sneak peek into November, those comps are going into the high double-digits.

So I'm starting to see a turnaround in the dress category.

There are items that are starting to elevate themselves that are very, very strong and so I actually think we've seen the bottom of the dress weakness.

We have already started to turn the corner and we've gone back on the things that we've learned right now.

We've made adjustments in fourth quarter and we have plenty of time to really capitalize those in first quarter.

So that's a general overview of dress.

In casual, as I said, we had 10 quarters of positive comps so this was a bit of a surprise to us, that we would have a mid-single-digit comp decrease.

A couple of things happened there.

Number one, some of the more predictable categories that we've done business on in the casual category really took a very late start for us.

So when you take a look at that whole classic moderate business, that customer shops right on top of time of need.

We didn't see her shopping in August or September; she started shopping in the middle of October.

So we're starting to see a little bit of a turnaround, a little bit of a shift there, but I'm going to watch that category very carefully because it needs an infusion of freshness and we're going to work with our brands in the market in December to try to talk about that.

So we've identified where the weaknesses are; we've made the appropriate shift to try to stabilize that and capitalize on what is working.

I think we're going to start to see that women's business shift as we go through fourth quarter and definitely into first.

Thank you very much, Debbie.

As always, with all the detail.

Last question, just Mike, for you, [orgs og] I know you don't like to comment intra-quarter but it just seems like as third quarter unfolded October, you saw a pick up in the business, weather was working, and suffice it to say that November seems like weather is working a little bit.

Is more your concern about going forward or just the fact that you haven't seen a pick-up as you come through November and therefore you're still being very cautious?

Maybe just give us any color [on] what you're seeing as you step into the fourth quarter if you could?

Yes, Chris, you're right.

We don't like to speak about intra-quarter results and we won't break from that right now.

On top of that, the way we look at our Business is on a shifted week basis, which in the current month is really difficult because we're comparing our current week against a week that's not -- that doesn't line up with Thanksgiving week of last year so it's pretty difficult right now.

But, yes, we don't want to talk about intra-quarter results.

I hope you respect that.

Okay, thank you very much, and all the best.

Appreciate it.

Seth Sigman, Credit Suisse.

Okay, thanks.

Hello, guys.

How are you?

A couple questions on store growth.

You mentioned 35 stores planned for next year, which seems like a bit of an acceleration.

Any color on where the incremental opportunities may be coming from?

And then the second part of the question would be just how to think about the costs associated with that growth for next year, especially given that you mentioned $10 million of savings this past year from pre-opening costs?

Thanks.

Yes, what you ought to consider is about seven or eight of those stores are going to be small-format stores?

Okay, so they are going to be in those smaller 200,000 and under MSA-population cities.

That's what I referenced when I said we plan to do more extensive testing of the small-format concept.

The other 25 or so stores are more normal, full-size DSW stores that are being located in those areas that we have identified as being voids in our service to the customer.

We have a build-out potential of, say, 450, 500 stores, and we know precisely where those stores are because we know what the locations are that have the demographics that drive our business in other markets that we already served and we can project out sales growth or sales generation from unserved markets and generate a pretty accurate forecasts of sales results so we know exactly where all those voids are and that's what we're filling in with the big stores.

I haven't actually looked at the geographic distribution of those stores but I would suspect it's probably a little more skewed to east coast, just like our total business is a little more skewed to east coast today.

But the plus up is really the small format stores that we're going to continue to test next year.

Okay.

As it relates to pre-opening, one thing to remember as you're -- and we'll get more color on this as we turn the corner into 2014, but we don't -- 2012 was slightly inflated because of the large volume stores the we opened up in New York, Chicago, San Francisco so the numbers were a little bit inflated because of those large volume stores so we'll provide that color as we turn the corner.

Okay, thanks.

Just a quick question on the gross margin.

Based on the sales outlook for the fourth quarter, the implied comps that are provided, can you just maybe talk about the puts and takes for merchandise margins in the fourth quarter?

Thanks.

Well, as far as total goes, we expect that last year -- or that the merchandise margin should be in line with last year, generally.

That's the target -- last year's 41.3% is nothing to be ashamed about in a quarter that's generally a time frame for us to liquidate inventory and get it all cleaned up for the spring season.

I would just go with those assumptions.

As we move through the quarter, we may have to make some adjustments to our plan but we're really happy with the inventory position going into the fourth quarter -- as we mentioned, down 2.2% on a cost per square foot basis.

So we don't so much inventory pressure at this stage to move excess product right now.

Okay, thanks.

Jeff Van Sinderen, B Riley.

Good morning.

Just a couple of follow-ups.

I was wondering on athletic -- I know it's a relatively small part of your Business -- but anything you can call out there in terms of what's working, what isn't, that would be helpful?

Sure, we're relatively pleased with our athletic business.

It was about flat.

Merchandise margins up slightly from last year.

Just some of the minor shift that we're seeing is the technical piece of the Business has softened up just a little bit.

If you'll remember how we define technical, it's really the higher price points.

But we are seeing continued strength and actually growth in cross training, lightweight running, basic running, and so we really don't really see any major shifts in that athletic business and it's just business as usual there.

Debbie, one other thing I might add, and correct me if I'm wrong, but the women's business was -- had nice growth and the men's business had a decline, which offset the women's growth, and some of that was transference of purchases out of athletic into men's casual.

Yes, that's a good point, Mike and so maybe we can just jump in just a couple bullet points on men's.

Overall, men's is continuing to do very nicely and all categories are really comping so, as Mike mentioned, some of that men's business could be transferring over to the men's black and brown business.

I will tell you that the casual piece of our men's business is actually the strongest piece that we have.

So they might be bouncing back and forth in terms of what their purchase needs are but the men's business overall is very healthy and we don't really see that changing.

Okay, good to hear.

And on the casual women's piece, not to focus too much on that, but it sounds like you think it is not a merchandise content issue at this point, that it's more of a timing issue.

Is that correct?

It's really a combination.

I will tell you that we count on that business really starting to kick in as more a point of need and maybe a little bit of the weather causing customers to cause them to start to think about purchasing a category, specifically in classic casual.

That didn't happen until about a month, four to five weeks after when it did last year so part of it is weather-related.

The other part is, though, that I do think that this business needs an infusion of newness.

This business, by the nature of what it is -- a lot of the shoes can run for many, many seasons and you just change them up ever so slightly and they just continue to run.

We're seen a couple different shifts in that.

Number one, some of those styles just need to be updated a little bit and we also see that we need to, I would say, contemporarize some of these shoes.

In other words, we want to make them have a little bit more attitude, make them be just a little bit more contemporary, a little bit younger.

Some of them tend to get a little bit stodgy looking after time.

So it's both content and it's weather.

What I can effect is the content and that's the work that we'll do in market in December.

Okay and the type of content you're speaking of that you want to have in the mix is out there or it's just not out there so much because the vendors you're buying from don't really have it right now?

Maybe you can just clarify that?

Yes some of the brands that are the big contributors in this category, we will work with them on maybe doing some special productions, special make-ups on things that are more appropriate for our Business that don't exist in their lines right now.

So we'll help from a development point of view and we'll work with their design teams like we do all the time.

That's just an ongoing thing.

So we're going to look -- work on that -- develop some things that aren't out there.

Then we're also going to try to encourage some of our brands to freshen up some of the styles that they've been running with for a while that we think need a new facelift.

Got it, thanks very much and good luck for holiday.

Thank you.

Kelly Chen, Telsey.

Hello, guys.

Nice job managing through a tough environment.

You broke out a little bit of the color on the differences by region and it seemed like the less weather-sensitive areas, the west and the south did a little bit better.

Could you just summarize how you think about -- do think the slowdown early in the quarter was more weather or how are you viewing the macro and, in general, how do you feel about the consumer heading into holiday versus, say, three or six months ago?

Yes, I do think it's weather.

We hate using weather as an excuse, but the evidence would seem to indicate that it was weather-driven.

We were getting some very nice check-outs in the west and the south where weather was pretty normal.

When weather shifted -- we do a chart that tracks weather by region versus the prior year and on that same chart we track comps and they are perfectly inversely related.

So, it was a pretty strong correlation.

Having said that, I do think that some of our difficulty in the mid-Atlantic, particularly, could be attributed to some of the uncertainty over the economy and the government and Washington, DC is one of our highest market-share cities, so we saw some softness there, and we saw some bounce-back when the government went back to work, too.

So, it's not strictly weather; there are some other factors and that's why I mentioned it in my remarks, because we didn't see it but.

And then with the northeast, the last week of the quarter was up against the brunt of Sandy last year so we got a little bit of a lift there in the northeast.

But, generally, the midwest and the northeast and the mid-Atlantic were considerably weaker than the west and the south.

Got it.

Then if I could just follow up, you guys have charge-send in all stores and you mentioned some of the benefits from size optimization.

Could you talk a little bit more on some of the color you have seen, some of the initial results with charge-send in terms of how it's made it able to drive conversion or comp?

And now that that's done, you also mentioned drop ship.

What are some of the bigger initiatives on the system side that you have coming up?

Well the biggest initiative we have coming up on the system side is omni-channel and charge-send is the first step on that long journey.

And I mentioned that in the comments.

But we really need to operate the way the customer shops, which is a seamless look at the Business from assortment, from service, and from the customer's shopping experience.

So that will translate into a pretty extensive systems initiative list in order to break down those systemic and organizational barriers.

That's going to be our priority going forward.

Having said that, we still have a very important assortment planning project in flight that's a multi-year project that we're about half-way through and that project will continue and we will morph it to become omni-channel in its perspective.

In terms of size optimization, I mentioned in the call that our in-stock rate on replenishment items did go up a couple of percentage points during the quarter and that's one indicator of the benefit of size optimization.

Another indicator, and I'll try not to get into the weeds to deeply, but five years ago we ordered everything in case packs.

We had what we call musical -- so a series of -- a size run in a case -- and what we're trying to do is, particularly on replenishment items, is to convert more of those case pack orders into solids, where we get a case of sixes, a case of sevens, a case of eights -- because that allows us to allocate by size, by store, with a lot more precision than if you just order fixed case packs.

What we saw in the third quarter is a fairly dramatic ramp-up in the percentage of our URI orders that are being written in solids versus case packs, so that to me is a leading indicator of more precision coming forward, which translates into better sell-throughs, and conceivably, better margins because you're effectively reducing markdowns and turning them into sales.

The last thing you mentioned was charge-send.

What I mentioned in the call is that we piloted charge-send, first in about six stores, that was in September.

Then we ramped it up to about 60 stores in October and it really wasn't until the first week of fiscal November that we rolled it out to all stores.

That was the first time, in November, that we put up the signing in our stores that you may have seen that says, poof, we'll get you your size.

That was the first time we put up the collateral to support the initiative.

It's pretty clear that it was a customer expectation.

They seem to be taking advantage of the charge-send capability very readily and I'm happy to report that the systems are working, the associates in our stores are embracing it, our ability to satisfy dot-com customers is ramping up.

Ultimately, we're going to have to figure how much of this business -- we'll want to figure how much of this business is incremental and I simply don't have that data right now.

What we will look at, in order to measure that, among other things, is conversion rate.

And I expect that we will see an inflection.

So far so good.

We're please operationally; we're really pleased that our associates are doing such a great job of operating the system and introducing our customers to the system.

The order volume would indicate that the customer is embracing it so we're pretty pleased but it's early given that we've just rolled out to all of our stores in Q4.

Thank you so much for that great color.

Camilo Lyon, Canaccord Genuity.

Thanks, good morning, everyone.

I had a question regarding some of the prepared commentary.

Mike, you said that traffic trends improved in the latter part of October.

Did they turn positive?

Yes that was Doug, but yes, they did.

My apologies.

You both sound so youthful (laugh).

I'm sorry, so you said that it did turn positive?

Yes, did.

And then should we think about that momentum continuing at that pace or at an accelerating pace now that weather truly has become more favorable for the season?

That's where we're going to have to stay away from.

We bent a little bit and gave you some intra-quarter looking backwards into third quarter just because it was so obvious that we felt we would share that as long as other retailers were doing the same.

But to Mike's earlier point, to review the first three weeks of November giving all the comparison challenges, we would be prematurely giving that information anyhow if we had that policy.

So we'll find out as we go through but certainly the weather balances itself out as you get deeper into the winter season.

Great, okay and then, Debbie, have a question for you.

In the third quarter, was there -- sandals were strong as you said -- was there a negative ASP impact because of having carried that category longer through the season than you typically normally do?

No, there was not.

Okay and then the follow-up about what do you expect the mix to be in boots in the first quarter relative to last year now that you're going to carry that category longer into the season?

Should there be a material change that should be viewed as a positive ASP mix to you?

We have the boot category planned up higher than the average.

I will tell you that.

So we are expecting to see more business there.

In terms of the content mix, you will see more boots, in other words the tall-shafted boots than you did last year, but we will support the key bootie item.

So you're going to see a bit of a mix shift, which means the AUR should be a little bit higher Q1 than what we saw last year and the volume opportunity is greater than the average.

Okay, great and just finally, with that as a backdrop, is there a potential for the women's category to turn positive as the dress category also starts to be more aligned with current trends and the uptick in a category starts to unfold?

I wish I had a crystal ball and I could go ahead and promise you that, so I can't really comment on that.

I can just tell you that, like on the last earnings call, someone asked about -- I can't remember who it was, I apologize -- asked about dress, I'm starting to see some positive signs in the business, of it turning.

I look at the ready-to-wear that the manufacturers are showing and a lot of it's very dressy.

So, I'm hopeful and we're starting to see some items start to change the direction of that business but we're just going to have to watch that play out.

All right, great, thanks, and good luck with the holiday.

Take care.

Thank you.

Scott Krasik, BB&T Capital.

Hello, everyone.

Thanks, I have a few questions.

First, Doug, how do you balance your inventories which are in great shape versus potentially the need to promote as department stores increase the intensity of promotions as we get closer to holiday and how that would impact margins?

Well, Debbie, addressed it nicely and she may want to add a few more comments on that.

We're everyday value pricing and we have to stick with that.

From the standpoint of inventories in good shape, we are not pressured into moving product out because we have excess inventories going into this promotional period.

So we're nicely set up and Debbie has a little bit more opportunity to get some more product at some value prices and [chase] -- but Debbie, want to add some more color?

Yes, as we keep reiterating, we are an everyday value and it's up to us to make sure that we put really good, good solid values on the floor for the customer.

With our liquidity and our open-to-buy right now, and the inventory levels being where they're at, as we continue to get some of these opportunistic buy lists from the market, we have the ability to pick and choose what is the best for our assortment.

We're driving some really nice deals on those lists.

So you're going to see more of those pleasant surprises on the floor.

The floor is going to be peppered with some really interesting things and it's going to be mostly around the boot category but there are going to be some other categories we're going to see some really nice values on the floor.

Once again, having open-to-buy liquidity, it does allow us to chase into the things that the customer is telling us they really like, whether it's regular price or whether it's deeply discounted.

So we're in a really good position right now to capitalize on driving the Business.

Somewhat tied into that, Debbie, you given a lot of a great detail on women's, but if you think about the comps in women's all year they're probably running down low single-digits or in that range.

You've been such a good market share taker from department stores because the everyday low price strategy has resonated.

Looking back over the course of a year, has it been merchandise?

What hasn't allowed you to continue to take that share or maybe you do think you're continuing to take share and the categories is just down even more than that?

I'm not going to avoid the share question but I will just tell you that this year I've seen more major shift in the women's business than I have in my entire career.

There were a lot of things that really weakened in the dress shoe.

Hindsight is 20/20.

If you could've seen it six months prior, would you have been able to minimize some of the downside?

Yes, but some of the major shifts that we've seen, as you recall we had a very, very and still do have a very good strong evening business and that business shifted so quickly on what the customer wanted there and I found myself chasing that business downhill.

It was like chasing a car that was going 100 miles an hour on the evening business.

I think that we found the bottom on the traditional evening business and we've made those adjustments and we've started to see some positive improvements there.

The casualization of dress, which we have been talking about for a while -- it was casualization in materials and also heel heights so we made those shift as we went to the year.

So I would just tell you that I've seen more change and more, I would say, disruptive change in the women's dress business, which is more than a third of my business, this year than I ever have.

So I think we've identified clearly what those issues are.

I think we've caught them.

I think we've made the appropriate adjustments.

And like I said, I am starting to see a little bit of light at the end of the tunnel.

So, I'm optimistic -- like I said before to the previous question, I can't promise I'm going to put positive comps on the board for the dress area but I think we've made all the appropriate decisions we need to, to course correct that deterioration.

Okay.

And then just last, Doug, can you quantify what the impact was of getting that first week of November into the third quarter, the sales shift?

That's a longer answer than we probably have time for because you also have to build into the Sandy, the timing of some of our business changes, charge-send, there's a lot of components in there.

We don't spend a lot of time looking at the particular week of that shift so the answer is no on this call but I can try to give you some more detail to help you build some thoughts around that.

But there's a lot of components so I'd rather not go into it at a broad level.

And you alluded to it being a driver of expense leverages you won't get in the fourth quarter.

Is that fair?

Well, the deleveraging in the fourth quarter is driven primarily by the extra week, not the shift in weeks.

Okay, thanks.

David Mann, Johnson Rice.

Yes, thank you.

Good morning.

In past years, you've had, obviously strong comp growth.

This year it slowed down to this flattish rate.

I'm just curious when you look out the performance of perhaps acquiring new customers versus your existing customers, where do you think that you're having a little more trouble?

And then secondly, can you just talk a little more about the behavior or any insights from the rewards program and do you plan on leaning on your loyalty program more as part of your marketing plan?

David, this is Mike.

Our reward customer base in total is up about 7.5% over a year ago, so pretty consistent with our total sales growth.

That includes all customers who have bought something in the last two years.

If you break that down to the customers who have bought in the last year, it's up 6.5%, so about the same.

We continue to sign up about 90,000 new rewards customers every week.

So we continue to get good benefits out of our rewards database and we try to work that more precisely.

As you know, that's been an ongoing strategy for the last several years.

The way I look at the business is that our -- Q3 was a microcosm of the year and that is we have a part of our Business, a vitally important part of our Business that has been lagging a little bit.

And Debbie has talked extensively about the actions she's taking to inject newness and value and more fashion into the women's category to get that business going again.

It's really hard to generate a positive overall comp when you're running a negative comp in a business that comprises 60% or 65% of your total business and that's our priority and that's what we're focusing on.

I don't think there's a fundamental shift of customers away from the DSW format or business model; we've just got some tactical things to work through.

And then in terms of that women's business, it sounds like when you're talking about adjustments, you're not looking to change the planogram or the layout of the store to shrink footage from that category?

No.

We're actually not.

Where you'll find the adjustments are actually within the women's category in how we're distorting certain classifications and how we're pulling other things back.

Evening, for example, is it a big example of that.

You used to go in and see a full wall of evening on the right hand side of the store.

You'll see probably a half a run of that on the right hand side of the store.

Doesn't mean we don't believe there aren't events to go to.

It's just customer is demanding a different kind of shoe and we're addressing that within the assortment.

But you'll start to see just mix shifts on the floor in terms of distortions in certain categories versus others.

And Debbie, I saw during the quarter you added the Aldo brand.

I'm curious if you can just talk at all about how you feel about the performance there and any other new brands that you think you might introduce in the upcoming quarters?

So, David, as you know, we typically don't talk about particular brands.

I will just tell you, as you've heard from all of us probably over the last couple of quarters, is we are intensely focused on making sure that we grab the appropriate share of wallet from the fashion consumers.

Our AFPS research told us that maybe things were getting a little bit stale on our floor and they wanted to see a little bit more fashion freshness and we just felt that with the addition of some brands, Aldo is one of them, that we could infuse some really great commercial fashion on the floor.

We love our relationship with the Aldo Group.

I have a tremendous amount of respect for them.

They do a great job and hopefully our partnership for the future will look really bright.

Great, thank you very much.

This concludes our question-and-answer session.

I'd like to turn the conference back over to Mike MacDonald for any closing remarks.

Thanks very much and thanks to all of you who have participated on the call.

We very much appreciate your interest in DSW.

On behalf of all of us here at DSW, we wish you all a very happy Thanksgiving.

Have a great holiday.

The conference is now concluded.

Thank you for attending today's presentation.

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