Designer Brands Inc (DBI) 2013 Q4 法說會逐字稿

Good morning, and welcome to the DSW fourth-quarter 2013 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead.

Thank you.

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

Earlier today, we issued a press release detailing the results of operations for the 13-week period ended February 1, 2014.

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 in today's press release, and our public filings with the SEC.

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

Doug will start with a short discussion in our fourth-quarter results and then highlight details of our adjusted results for the fourth quarter and the full year.

Mike will then elaborate on our progress towards our strategic initiatives, and discuss our outlook for the full year.

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

With that, I'll turn the call over to Doug.

Thanks, Christina, and good morning, everyone.

Our reported net income for the 13-week fourth quarter was $28.1 million or $0.30 per share, which included a $700,000 after-tax charge from our luxury test.

This compares against last year's reported net income for the 1- week fourth quarter of $27.1 million or $0.30 per share, which included an after-tax loss of $4.2 million for legacy items related to the merger with RVI.

Excluding these items, adjusted net income for the quarter was $28.7 million or $0.31 per share, compared to last year's adjusted net income of $31.4 million or $0.34 a share, a decline of 9%.

Excluding the estimated impact of $0.045 per share from the extra week in 2012, adjusted EPS increased by 5%.

Excluding luxury, sales for the 13-week fourth quarter of FY13 decreased by 4% to $571 million, compared to the 14-week fourth quarter of FY12.

Again, excluding the extra week in FY12, fourth-quarter sales increased by 4%.

Comparable sales were flat, on top of the 3.6% comp growth last year.

For our DSW segment, which includes DSW.com, comps were flat on top of the 3.9% increase last year.

The comp results were due mainly to an increase in store conversion, which offset a decrease in store traffic.

Notably, total transaction for the DSW segment, which accounts for how the consumer is shopping both online and in store, were flat.

We opened one new DSW store in the fourth quarter, for a total of 30 new stores in 2013, and their performance met our expectations.

We estimate that sales cannibalization from these new stores reduced comp sales by approximately 1%.

We plan to open approximately 35 new stores in 2014.

In our Affiliated Business Group, fourth-quarter comps increased by 1.8%, and total revenues grew by 2.2%.

ABG ended the quarter with a total of 365 departments, including nine Loehmann's locations, which are now closed, following the chain's going out of business sale.

Despite the lack of comp growth, our merchandise margin increased by 40 basis points to 41.7%.

This was driven by various systems enhancements and good inventory management.

Our occupancy rate for the quarter was 100 basis points higher than last year, largely due to the 53rd week in the prior year, and flat comps in the current year.

Despite one less week of sales, our SG&A rate in the fourth quarter improved 10 basis points to last year, due to lower marketing, new store opening, and IT expenses.

The net result was a fourth-quarter operating profit of 8.0%, compared to 8.7% last year.

For the year, sales increased by 4% to $2.4 billion.

Excluding the extra week in FY12, sales increased by 6%.

Comparable sales were 0.2%, compared to last year's 5.5% comp growth.

Comparable sales for the DSW segment, which includes DSW.com, were flat, and our affiliated business group comps grew by 1.8%.

Our merchandise margin rate increased by 50 basis points to 45.1%, 10 basis points shy of the record rate we achieved or accomplished in 2011, despite a flat comp in a challenging environment.

This was driven by a higher penetration of private label merchandise, higher regular price mix, and benefits from our systems.

Our occupancy rate increased by 40 basis points to 11%, due mainly to the extra week of sales in FY12, and the flat comps in 2013.

The net result was a 10 basis point improvement in gross profit to 32.2%.

Our SG&A expenses improved by 80 basis points to 20.4%, while remaining flat in total dollars, due to the leveraging of store expenses and lower pre-opening costs, overhead, IT, and incentive expense.

As a result, we achieved our highest annual operating margin rate at 11.7%, an 80 basis point increase over last year.

Our strong operating income performance, combined with higher interest income and more favorable tax rates, enabled our adjusted EPS to grow by 12% to $1.88 per share.

This excluded one-time charges of $0.13 per share from our luxury test, and $0.10 per share for the termination of the pension plan assumed in conjunction with the RVI merger.

To put things in perspective, we tried three new things in 2013.

Those were the luxury test, the Loehmann's relationship, and the jewelry test.

The luxury test was not successful, and the Loehmann's relationship ended prematurely, but we learned from both these new initiatives, and we demonstrated our organizational ability to implement new programs outside of our base business.

And as for the jewelry test, it was successful, and we are rolling it out to all stores right now.

Turning to the balance sheet, on a cost per square foot basis, DSW segment inventories, excluding luxury last year, increased by 1.2%.

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

Capital expenditures for the fourth quarter were $19 million, with $12 million for new store construction and store remodels, and $7 million for system projects.

For the full year, capital expenditures were $84 million, compared to $100 million last year, due to fewer store openings and lower supply chain spending.

We plan to increase our capital expenditures to $130 million in 2014.

Finally, we increased our quarterly dividend by 50% to $0.1875 per share for an approximate 1.9% yield, based on yesterday's closing price.

Since initiating our dividends in 2011, we have distributed $262 million to our shareholders.

With that, let me turn the call over to Mike.

Thanks, Doug.

Before I begin, let me say a few words about Doug.

As you know, earlier this year Doug announced his intention to retire from DSW.

He's been at DSW for the past nine years, a period over which the Company has grown both financially and operationally.

On behalf of the entire leadership team at DSW, I want to publicly thank Doug for his contributions as both our Chief Financial Officer, and as a key leader in our business.

Doug will continue to be our CFO through the end of the first quarter of FY14.

Now, turning to business results.

DSW's fourth-quarter performance was a microcosm of our full-year results.

The following statements are true for both Q4 and the 2013 fiscal year.

Comparable sales results were flat.

Strong sales increases in men's footwear and accessories were offset by sales declines in women's footwear.

The South and West regions of the country produced comparable sales increases, while the Northeast, Mid-Atlantic and Midwest experienced small comparable sales decreases.

The DSW team managed through this very uneven selling environment quite well.

We produced a best-ever operating margin of 11.7%, on the strength of both merchandise margin expansion, and operating expense leverage.

These performance improvements, coupled with our overall sales growth of 4.1%, allowed DSW to increase adjusted EPS by 12%.

Again, given the environment we were quite satisfied with our financial performance.

Let me talk about the women's footwear business for a moment.

In Q4, we posted a 3% comparable sales decline in women's footwear.

The weakness in women's was not common to all categories.

The seasonal categories of boots and sandals performed well, both in the quarter and for the year.

In fact, after a late start to the Fall selling season, we chased the strong boot demand, and ended the fourth quarter with a high single digit increase in women's boots.

Our decision to distort the category drove strong results within all areas of our boot business, not just in the cold weather category.

As I said last quarter, we've put our women's shoe business under the microscope.

We believe there are lifestyle shifts underway, and we are making specific product decisions to react to these changes.

We also strengthened our merchant organization in the women's footwear area earlier this year, and we believe those changes will pay dividends down the road.

We are also working with our suppliers to add freshness in the casual category, and increasing opportunistic buys, while simultaneously testing new resources.

All-in-all, we are cautiously optimistic about our women's business.

As noted before, we produced strong merchandise margin results, in spite of our soft comparable sales results.

As always, we controlled our merchandise receipts and inventories by category and by location.

We also continued to benefit from our size optimization system that balances sizes in total, and by location.

I should also note that the good margin results came in spite of margin pressures from shipping charges related to the new charge-send system.

We ended the year with very clean inventories.

In fact, our clearance units per store were down 8% to the prior year as of year-end.

Let me say a few words about charge-send.

This system allows us to fulfill dot-com orders out of store inventories, when the product is out of stock in our fulfillment center.

This system also allows us to fulfill a customer's in-store shoe request from another store.

The customer reaction to this new capability has been quite strong.

We're still assessing how many of the sales from this system capability are incremental; however, we know that we are making many more customers happy, and this has driven strong conversion across the chain since the launch.

charge-send was the second step in our omnichannel journey.

The first step came in 2010 when we implemented our shoephoria!

system that allows in store customers to get their wanted shoe from our dot-com fulfillment center, when that shoe isn't in stock in their size at the store where they're shopping.

Together, these two programs are producing sales at an annualized rate of approximately $75 million.

We started marketing these capabilities during the fourth quarter, and have seen an acceleration in the number of shoephoria!

searches.

We think this volume can grow further, as customer awareness of this new capability increases.

In the past, you've heard me refer to the shoephoria!

and charge-send systems as reactive omnichannel capabilities.

I call them reactive, because a customer sees a shoe in one place, and we get it to her from inventory located elsewhere.

I believe that ultimately, an even bigger opportunity will come from creating proactive omnichannel capability.

This will happen when we electronically expose our entire assortment of 25,000 or so customer choices to customers, regardless of whether they're shopping in a store, on dot-com, or on a mobile device.

To create full proactive omnichannel capability, we will need to change some of our systems infrastructure, and create some new processes that don't currently exist.

We also need to move from operating separate store and dot-com channels to a single omnichannel mentality.

We intend to pursue the omnichannel opportunity in an aggressive manner.

A few weeks ago, we made some organizational changes in support of our omnichannel strategy.

First, we established an eight-person team to manage the implementation of our omni strategy.

This team consists of talented individuals from all parts of the organization.

The team will be lead by Roger Rawlins, who had managed our dot-com business for the last three years, but has now been promoted to the newly-created position of Executive Vice President for Omnichannel.

Second, we merged the buying and planning organizations for both the stores and the dot-com channels.

We did this in order to foster adoption of an omnichannel mindset, even before we changed the supporting systems infrastructure.

We expect the omnichannel implementation will take place over the next three years.

It will require an investment of both money and manpower.

We estimate it will increase our operating expenses by $10 million in FY14.

We expect the benefits from omni to exceed the omni costs in 2015 and thereafter.

We are approaching the omni project as both a business necessity, and an opportunity to create competitive advantage.

It's a business necessity because the customer expects to be able to shop seamlessly across channels.

The rapid customer adoption of charge-send demonstrates that point very clearly.

But our omnichannel capability can also create distance between DSW and single-channel competitors, as well as multi-channel competitors who either don't operate in an omnichannel way, or who don't define omnichannel as broadly as DSW intends to define it.

Let me give you a small example of the power of omnichannel.

In this past Q4, we opened two small format stores in smaller than normal communities.

The stores are doing fine so far, but we think they could do even better if we were able to electronically make our full assortment available to the customers who frequent those stores.

Turning to our full-year guidance, we expect 2014 revenue growth of 6% to 7%, with comparable sales growth in the low single digit range, and the opening of 35 new stores, including five to six smaller format stores.

We estimate square footage to increase by 8%.

Full year earnings per share is expected to range between $1.80 and $1.95 per share, including omnichannel-related expenses of $10 million, or approximately $0.07 per share.

Excluding these expenses, earnings per share is expected to range between $1.87 and $2.02 per share.

This EPS range assumes shares outstanding of 93 million, which includes the impact of stock option dilution, and a tax rate of slightly less than 39%.

We are still operating in an uncertain environment, and we believe that value remains paramount to the consumer.

Our women's team is introducing freshness in new brands, while sourcing sharper deals.

We are enhancing our assortment with compelling bargains in both regular price and clearance.

We are driving better customer engagement in the stores.

Our systems initiatives will continue to raise in-stock rates and conversion.

We've also started marketing our shoephoria!

capability in the stores.

Our omnichannel work is underway, and we've begun testing small format stores.

For all of these reasons, we look to the future with a great deal of optimism.

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

(Operator Instructions)

Our first question comes from Amy Noblin of William Blair.

Congratulations on a great performance in 2013, in a very difficult environment.

My first question relates to the guidance for 2014, specifically the difference between the comp guidance and the total revenue guidance.

It looks to imply new store productivity somewhere in the vicinity of 50%, which is comparable to what you saw in 2013, but given that you are not going up against some of those larger volume stores and your small market stores seem to be on par with what you did in 2013, I was hoping you could provide a little bit of additional color on that front, please?

Thanks.

Yes, thanks, Amy.

There's a couple different variables in those estimates you referred to and one being the volume per store for those new store openings in 2014, and the timing of those stores.

There are more small market stores in that 35 store openings that we estimate, and outside of that, I can't tell you that there's any significant differences to the 2013 openings.

So again, maybe there's some things we could talk about in your model, but we are pleased with the 2013 results, and we think it's a decent estimate for the expectations of the 2014 openings as well.

Okay, thanks.

Our next question will come from Seth Sigman of Credit Suisse.

Please go ahead.

First just a question on trends throughout the quarter.

Any more color on how the business trended, and then any early commentary on the first quarter, so far?

Thanks.

Yes, we don't give guidance on sales within the quarter that we're in, so I won't be able to answer the second part of your question.

As to the first part of the question, the business was stronger in November and December, and it got weaker in January, when some of the weather difficulties hit.

Okay, and then if you just go back to the 2014 guidance, any other commentary on some of the gross margin assumptions that are implied in the guidance?

It seems like when you back into the numbers, it doesn't really imply a whole lot of upside to gross margin.

Any commentary on that front?

Thanks.

Yes, basically at the low single digit comps, and given our performance in merchandise margin in 2013, which wasn't too bad, you'd expect some flat merchandise margins, you'd expect some flat to maybe deleveraged, depending on where it goes within that range for low single digit comps on our occupancy charges.

And SG&A, as we already mentioned in the call, they will be deleveraging there, because of the omnichannel expenses.

So all total, we would expect some contraction in the operating profit rate, but again that's coming off an 11.7% in 2013.

Maybe just to follow-up on the occupancy, though.

Given the low single digit comps, and given that you'll have smaller stores, maybe less expensive locations as well, why wouldn't there be more leverage baked in there?

Well at low single digits, let's say 2 to 3, if that's where it came out to, there would be a little bit of leverage in that occupancy rate, but not much, so that's plain and simple.

We've always said that we get leverage at that level, but you get below a 2% you don't leverage occupancy in our business, with incremental charges coming through occupancy.

And as to the smaller stores, I think even though we pay less per square foot, often times the sales per square foot of the unit in those smaller stores is lower, so on a percent to sales basis, it's really not that much different.

Our next question will come from David Mann of Johnson Rice.

Please go ahead.

Congratulations, Doug on your tenure and contributions.

Thanks, David.

First question, on the ladies business.

Can you provide a little more detail there on some of the changes that you're making, perhaps by category and how quickly you expect some of those changes to have an impact through 2014.

Sure, David, this is Debbie.

First of all, we're really happy to have been able to have promoted some internal candidates into these key jobs, that really will help us define not only the turnaround in women's, but what the future looks like for the women's business.

These are strong impact players that have been with the Company for many years, 10-plus years, and we're very, very confident that they will be able to make the contributions that we need to deliver in the women's business.

As far as the women's business is concerned, there's a couple things that I will mention, as it relates to Q4.

We continued to have very, very strong boot business, and the contribution of boots to our total women's business continue to accelerate, so the penetration to women's increased by 500 basis points in boots.

And to the total DSW business, it increased to 200 basis points, so we're continuing to see the shift from really shoes into boots in Q4, and actually that continued, David, that has continued into Q1.

As far as some of the meaningful shifts that we're making in the women's business going forward, the dress category has stabilized.

We think we've identified some of the key trends and looks that are really driving the business right now, and I'm hopeful we'll be able to maximize those, or work in with our partners in the market right now to do that.

Some early spring trends have started to resonate very strongly in our business.

I'll just make a couple of those call outs.

Anything that's opened up, could be an opened-up sandal, an opened-up flat, and even in spite of the weather being -- not working really in our favor for the first six weeks of the season, we've started to see some nice business in the opened-up category.

And then the other category that everyone is talking about, which is vulcanized, and that's really taking hold across the entire business.

In addition to that, the men's business continues to remain very strong, and we continue to see growth there.

That's very helpful.

Just for quick follow-up, on the jewelry expansion, can you talk a little bit about any of the metrics that you're seeing there, in terms of attachment rate, average unit retail on jewelry, and how impactful you expect that roll-out to be to annual comps?

Well first of all, we just rolled it out to the chain within the last couple of weeks, so we're still in the beginning stages of that, both from a content and average unit retail, and a sell-through perspective.

All of those KPIs, they're hitting exactly where we need them to hit right now.

So the original guidance we gave you around jewelry, we're keeping that in play, and I'm hoping there's an upside to that.

Thank you.

Our next question will come from Chris Svezia of Susquehanna Financial Group.

Please go ahead.

Congratulations, Doug, to you, and in honor of your retirement, actually I've got three questions.

First, just going back on the women's product, Debbie for you, when you dig a little deeper in women's casual and definitely seasonal product, as it pertains to sandals and open-toe looks spot-on in terms of what you're doing in store, but maybe if you can talk about opportunities on a casual side, if you have the ability in terms of opportunistic buys, what you can really think can begin to move the needle on that front, in terms of product assortment?

That's my first question.

Sure, so let me take that one first.

The casual business has really two parts.

There's a fashion component, and there is more of a classic investment component.

The classic piece, which we had been able to rely on for many quarters, I think I read last night in the Q3 earnings call, we said we had 10 consecutive quarters of comp increases in the classic casual area.

That hit a wall fourth quarter, and I think that's totally due to lack of freshness in the market.

So what we've done is we've really dissected that business, and we've gone in and said, where do we have the pain, what are the brands, what are the styles, and we worked with those manufacturers to either pull them back, where they don't show the capability of delivering freshness, and/or working with them on development, so that they would make a product for us, develop a product that was specific to DSW, that would help fuel our business.

So there's part of the business that I think is just due from lack of freshness.

The other part of the business, the fashion piece, actually we're pretty happy with, and there's a young component of that, the vulcanized is what I talked about, there's the opened-up component, which we are really starting to sell opened-up footwear quite nicely now, and that's across the entire business, so I think it's a blend.

Working with manufacturers, that we need to maybe push a little bit to take a little bit more risk and get out there and not just refresh their product, but actually revolutionize their product.

And then some of the actual trends that we identified six months ago that we felt we were going to hit, in fact are hitting, and we will maximize those.

Opportunistic buying is a discipline we will follow across our entire business.

Doesn't really just pertain to flats.

So we're going to be increasing that percentage, as we called out the last earnings call.

Those decisions have already been made.

Orders have been written, and we're already starting to see the beginnings of some of those results in opportunistic buys, and that will continue into the future of DSW.

Okay, thank you, Debbie, appreciate that.

The other two, one, just Doug for you.

Timing of the investments, and I guess they're all in SG&A but just the cadence as we think about the year.

And the last question I just had is on buyback, how you're thinking about that even with the higher dividend, somewhat higher CapEx, you're still throwing off a substantial amount of free cash flow.

So just curious how you think as an organization about buybacks, as we move forward into the shareholder value.

Okay, well first thing the cadence of omni.

To be quite honest, we're still developing some those plans, and it will likely ramp up as we go through the year.

We've been looking at a lot of those.

The team that just got put together, we're looking at a lot those spending plans.

The most important part of the decision on that spending is the sequencing and capability of the business to adopt the changes, and those things, so we'll be very deliberate as to the timing.

I'm not trying to be evasive at all.

It's just that those plans are still developing, but we do believe over the course of the year, that $10 million number is a fair number to assume at this point.

Do you want to take the buyback?

Yes, Chris, we did actually buyback a relatively small number of shares in Q4, in a private transaction.

I don't want you to get too excited about it.

It was small, but it does prove that we will do share buybacks.

And the way we're thinking about it is that it's one of the tools we have to enhance shareholder value, but we need to do that when two things are in place.

One, when the share price is attractive, and two, when we have an open window.

So we need both of those things to be present, not just one.

Okay, fair enough.

Thanks and all the best to you.

The next question will come from Mark Montagna of Avondale Partners.

Please go ahead.

Two questions.

First, Debbie third quarter, I'm wondering if we would be looking out to the third quarter before we see women's, where you really want it to be, and then when you -- second question, really, is just looking at the small market stores.

Is there any income demographic change versus larger markets, and are you going to have to alter, say, the product mix to perhaps be targeting a little bit lower income?

Thank you.

Good morning, Mark.

First of all, I just want to make an overall statement that the women's business, we have made changes in the women's business, we continue to make changes in the product assortment to right size that assortment, for what customers want.

The women's business is not strong right now, though.

It is still weak coming out of Q4.

We're starting to see some nice signs of positive results, but we still have a lot of work to do, so I just wanted to kind of level set that.

Going into third quarter, I think that we're looking to make sure that the back half, that we deliver on the back half.

I believe that the second quarter there is an opportunity to deliver on our results, but we've got some timing issues on getting some of the products that we want, as we shifted part of our strategy, so we have some timing issues there on getting in the product that we need, and that we're hoping that through some reorders and through some opportunistic buys we'll be able to protect as much of the women's business in second quarter as we possibly can.

But third quarter, to your point, and going forward, we feel very strongly about that, and so I hope that answered your question on that Mark.

I'm not quite sure.

Yes, that was fantastic.

Okay, as far as small format stores, the way we really look at assortment architecture in small format stores is there's a core product assortment that we put in all stores for DSW, and we really start with that, and then we try to right-size those stores based on what we really know about that particular market.

There are no major shifts that we actually need to take right now, that we can see, in the changing of the core assortment, and even the extended assortment, that's really different in those small stores than we have from the bigger stores.

The only difference is really the number of customer choices, but what we do is one year prior to opening a store, we go into that market and we study it, we identify it, and we follow that store for one year after we open the store.

So we hope that going in we've made the appropriate assortment selections, and that we make those adjustments the 12 months after, as we study and see what that customer demand looks like.

Okay, that's fantastic, thank you.

The next question will come from Sam Poser of Sterne, Agee.

I've got two.

Number one, well Doug, congratulations, first of all.

Thanks, Sam.

And first question is, could you just go through what the comps were by category?

You mentioned women's.

Could you go through men's, athletic, and accessories for the quarter?

Yes, Sam, the men's business was up double digits, low double digits.

The athletic business was down mid-single digits, and that was really -- the athletic business was down mid single, and men's really was weaker than the women's.

The accessory business, up strong single digits.

So the two places that continue to show opportunity, big upside opportunity, is the men's business, and the accessory business.

Athletic, I think, is just a function of timing, because when you look under the covers, we're actually pretty pleased with what we see between the technical piece of athletic and the fashion piece.

And the fashion piece of athletic is coming along very, very nicely, so I think you're going to see more of a balance in athletic, more toward the fashion piece, and a little bit out of the technical and running.

But I think the running weakness right now is mostly predicated on just this weather so we feel very, very good about the assortment going forward there.

Debbie is there, just to follow-up on that, is there enough, given how late this season is getting started, is this sort of just the clock is ticking a little faster than it was a year ago, given the way the weather is later Easter and so on, it's very hard to make up business.

Am I thinking about that correctly, even though there are signs of some good activity, I would assume, where the weather is a little bit better?

Yes, Sam, I think obviously when you lose anything in the beginning of a quarter, you always ask yourself, are you able to make that up?

My personal feeling is that we started to see signs, positive signs of some of the opened up product and the vulcanized, that we thought were going to be good.

We've already started to see that open up for us, so that part of the business is actually pretty good.

But I think there's pent-up demand we're going to start to see, because once the weather does turn, and believe me, I do not attribute all of my merchandising challenges to weather, but it certainly is a piece of it.

But I think there's partly a pent-up demand that we're going to see, especially in the sandal business, once things break loose, because the one thing I do know is that the product that we have on hand and on order is the right product.

Thanks and then lastly, Doug, the $10 million, is that really a this-year story or do you think that the investments in omnichannel are going to continue?

Are we going to have another $7 million next year just as an ongoing investment, or -- you mentioned you expect to see outperformance relative to the investment in 2015.

But will that be a zero investment there or will it just be a lesser investment, an ongoing thing.

This is just the big nut at the beginning?

Yes, it's the incremental expenses in the beginning, because there's really no benefits associated with it until 2015 starts to come.

So there will continue to be investments, but in 2015 we expect that the results and the impact of those investments will start to come, so the benefits will outweigh the expenses.

But there will certainly be incremental cost going into 2015, but again it will offset by the incremental benefits.

So more spending, but benefits to come in 2015 and beyond.

The next question will come from Camilo Lyon of Canaccord Genuity.

Please go ahead.

Doug, all the best to you in your next life.

I know there's not much life after DSW, but I'm sure you'll enjoy yourself.

Thank you.

I have two questions.

My first one is on the competitive landscape.

Dreadful fourth quarter for many retailers.

I wanted to get your sense as to what do you see on the competitive front, and if there's a change in the value proposition that you're offering the consumer, or that you need to offer your consumer, to continue to drive that traffic into your stores, given what some of your competitors did in the quarter?

So we stay very, very close to what's happening in the competitive landscape, and yes, no question, there was a tremendous amount of promotional activity out there in fourth quarter.

What did we do as an everyday value proposition business, to be able to stay competitive in the customer's mind.

The first thing we're doing is we did go out and we bought some opportunistic buys.

We really ramped that up from where we had been before, and we saw some very, very good results there.

So we will continue to add that to the merchandising mix, in addition to being able to offer very sharp price points in the merchandise that we negotiate on the floor every single day.

The next thing we did from a marketing perspective, is we really wanted to try to deliver sharper and crisper messaging around those big deals, those big values that we have in our business, and we did that, and we saw very positive results.

Specific examples were around the Thanksgiving time where we took a real strong position on certain boots, key item boots that we had, and we communicated that to the customer through e-mail and other ways.

So we have been looking at the competitive landscape.

We think that we are going to be able to compete very effectively with some of the changes that we've made and we're in an every day value business proposition, and that's where we are, so we have to get sharper and sharper on the floor every day, with the kind of value we pass to our customers.

Thanks for that, Debbie.

Just following up on that, do you think you need to bring in more full-price brands to offset and balance that opportunistic component?

I'm not sure I understand that question.

Meaning, do you think that you need to have other brands in the store that you currently don't carry, that might not want to be sold at any discount?

Oh.

But might still be relevant to the consumer?

Sure.

So I will tell you, I have a very open mind to that.

Our business model is everyday value, but today, you'll even see selected items on the floor that we really have at full price.

It's a handful, but it's places that we didn't think that we needed to offer a pricing discount.

So I will tell you it's not part of a strategy where I'm looking to acquire brands that are missing, just to bring them in at regular price.

We will look at any brand that we think the DSW customer wants to buy in the store, and we'll make those decisions, whether it is an everyday value, what is the value we pass in pricing on everyday or if we want it to be a full price brand.

So we're very open, those discussions are very open as we look forward, but there are only a couple brands that I don't have in the store right now that I would bring in at regular price, if the opportunity was afforded me.

Just my second question is, you talked about the second quarter, and potentially having some timing issues, and getting product on the floor.

Is that to say that right now you've cut some of your receipts and you're planning to chase once spring weather breaks across all your markets?

Is that how we should interpret that language?

No.

The first thing is, on all of our core items, we have back-ups that are planned back-ups that we planned with our business partners.

So if business is up or if it's down, we right-size those back-ups to make sure that we support the big key items.

What I was talking about mostly is, is that the supply chain in footwear works against how the customer is really thinking.

The customer wants every retailer to be very responsive, instant gratification, and they want what they want, right now, and they're very impatient.

When you look at the time lines that it takes to reorder certain shoes, if the manufacturer doesn't have a stock position on it, that is usually, that could be 90 to 120 days.

So if there is an item that emerges that we've not identified as a big item, and I say if, and we want to get back into that, we have to work closely with the manufacturer, to see if they can honor the delivery date that we need.

There's still a lot of time for spring.

I think the game has just begun.

We've got six, seven weeks behind us, but I actually think customers in their mind, spring and summer is just starting right now, so I think we do have time to give the kind of product we need on the floor.

If there's something that hits, that we haven't predicted is going to be good.

Our next question will come from Kelly Chen of Telsey Advisory.

Please go ahead.

Nice job managing through a tough environment, and Doug, congratulations from me as well.

You will be missed.

Thanks, Kelly.

Just going back to 2014 guidance for a minute, I understand the omnichannel spend that's going to be in place for 2014, but excluding that, you have always talked about the ability to leverage SG&A on a low single digit comp.

Just wanted to clarify, is that still the case or is there anything else to know on SG&A in 2014 on marketing or incentive compensation, or anything like that?

I'll take that one, Kelly.

I think there is some reinvestment in several corporate expense areas, where we saved some money in 2013, and we did that to manage the business in a difficult environment, but we don't want to do that long term.

We want to manage the business for the long term, so that's a pressure point.

Another pressure point is slightly higher pre-opening expenses, and so all of those things work against us, in terms of leveraging expenses in a low sales increase environment.

Got you and one other thing I wanted talk about was, in the press release you guys mentioned that you increased the store build-out potential just 500 to 550.

Just wanted to clarify, does that not include the small format stores, so could there be more upside on top of that?

What was the thinking behind what were you seeing that was giving you confidence to take that store target up higher?

And if you could give us also some, you talked a little bit about the smaller format stores, but how are the unit economics on that comparing to the full-price stores?

Okay well first of all the 500 to 550 number does not include small format, so just to be clear on that.

In terms of the economics of the small format stores, we subjected to the same rate of return requirements as any other new store investment.

And what was the third part of your question?

That was it.

Actually one more on private label.

You mentioned that it increased this quarter.

Could you remind us what percentage of sales is that now, and how much higher are the margins there?

Private brand is about, just slightly less than 12% right now.

I think when we started talking about this as a strategy, it was probably 7%, so that was four or five years ago.

And I think we've said publicly that we think we could get it to 15%, but we're not going to, we manage that on a category by category basis, because we don't want to have too much of a selection in a given category to represent private brands.

So whatever it settles out to, utilizing that guideline is how we're going to think about it.

Our next question will come from Taposh Bari of Goldman Sachs.

Just trying to get a level of confidence in your ability to achieve that low single digit comp growth for the year.

You just did a flat in the fourth quarter, so you're kind of guiding for an acceleration, and if I look back at your past guidance practice over the past several years, you've typically guided to a comp deceleration from what you have done in the fourth quarter.

So just trying to get more context around the different scenarios there.

Well, I think if you look at our business, Q4 and for the year, men's was very healthy, accessories was quite healthy, athletic was solid for the full year, it was softened a little bit in Q4, but it was solid on a full-year basis.

And even within the women's category, the seasonal categories of sandals and boots, we were not displeased with.

In fact, I think Debbie commented on how we really capitalized on boots in Q4.

So what we really have is a women's shoe issue, and that's what we're working on.

That's why we're trying to bring in fresh looks in existing resources, that's why we're testing new resources, that's why we're increasing our penetration of special buys, and that's why we made two very important organizational changes that we believe will strengthen our ability to get that business going again.

To be brutally honest, we need to turnaround the women's business in order to achieve those guidance, those sales comp guidance numbers.

And it is different but that's really the issue with our business, is turning around women's shoes.

So that's what we're focused on, and we're committed to doing it.

That's helpful and just to follow-up on that question, the men's and athletic and even accessories growth, help us understand what's been driving that over the past couple of years?

Is it share, is it just kind of underlying category growth, is it ASP?

Just trying to get a better idea of how sustainable those growth rates are throughout the next 12 months?

In the men's business, at one point in time, many, many years ago we were at a 20% penetration in men's.

We distorted our efforts toward women, got the women's business moving, so took our eye off of men's.

So part of the men's growth, and I think it's two reasons, is part of it is what is really owed to DSW.

We have a very strong customer base.

I didn't think we had the right assortment in men's, and we have taken our eye off the ball a little bit there.

So if you remember, the DMM that was running that area really flipped that business on its head, put new fashion merchandise in, which is consistent which is what you're reading in all of the articles today, where men are dressing back up and really taking a lot of care in terms of changing how they dress, going from more jeans to just dressing up in a nicer way.

And so what we did is, we made our assortment more consistent with what the men's apparel business was really saying was happening in the men's industry.

So that business has been strong for us.

We've increased penetration to total DSW.

We've had strong comp growth, we've had strong gross margin growth, and there is still quite a bit more growth there to be had, and so I don't really see that stopping.

To help that, you've got a whole men's accessory business that has been actually doing very nicely for us so, if you really look at those two components, men's footwear and men's accessories, I think we have an opportunity to have a real domination in that category for men.

Total handbag and accessory business has also been on a pretty dramatic ramp up, and part of that is, the assortment was incorrect.

If you'll remember, two years ago what we did is we really changed the assortment there, to better reflect what our women's footwear customers were buying.

So we changed the mix, the assortment, architecture, the brand architecture, and have really seen positive results there.

That business, I think, still has a tremendous upside.

We penetrated fourth quarter a little less than 10% in the handbag and accessory area, and I think that I'll just let that business float as high as it wants to go, because there's no signs in sell-through that the customer is resisting anything that we're doing in that category.

So both of those areas I think are solid, and I think they will continue to grow.

The next question will come from Jeff Van Sinderen of B. Riley.

Please go ahead.

I guess I just had a follow-up on the ladies dress shoe business.

Just wondering how important you feel that is to turning around that business, how big that could be, or if that's more of a minor component of the overall turnaround in the women's business.

So I look at the entire women's business, and the few things I think it's the casualization of what women are wearing.

So dress shoes are not dress shoes the way you think about them in the old traditional way, dress shoes can be different heel heights, they can be changing in materials, and I think that dress is the smaller piece of the business in women's.

I think it is much more important to have category domination in boots, in sandals, and in flats, but dress is an important piece.

So we have to figure out that dress piece, but it in no way indicates that if the particular dress category isn't turned around, that we cannot have good results in the women's area.

Okay, and but are you starting to see improvement I think you said stabilization in women's dress?

Yes, we have seen stabilization there, and that's really come from our contemporary fashion area that was really weak.

We made some changes there as well, not only in content, but in how we -- the brands that we bought for the business and the kind of fashion we put on the floor.

So we've made some changes there.

Early results have been we've seen a couple of different trends that are really spring forward facing, that started selling for us actually back in December, and those are selling pretty strongly for us.

So I'm seeing hints, I'm seeing indications that the business is turning around.

I say stabilized, because I haven't seen it on a high single digit, double digit growth trajectory.

That's where I want it to be, but it has stabilized.

I think it's seen its bottom.

And then in the running category, I know you touched on that a little bit, and I'm just wondering, it sounds like you feel that is largely weather-related and I'm not sure how you're looking at the product cycle and introduction of newness and so forth, just wondering how you can sort of rule out at this point that it might be a broader slowdown in the running category?

So in the running category, we actually have I think some, we have some overall upside opportunity in athletic.

We really were underpenetrated, based on where I thought that business should be in our business, and I think we're really in a pre-peak life cycle on the curve, to be able to grow the athletic business.

I think running is mostly weather predicated right now, but what we did, I think we may have taken a little bit out of the opening price point in running, and put maybe a little too much into the technical, which was the over $85 product.

So we're trying to right size that mix right now.

So I think running definitely is a function of customers being able to get out and use that product for what it was intended for, so that part is weather-related, but I think we're just trying to balance our mix a little bit more into some more opening price points, along with the over $85 product.

We're delivering freshness every single month.

That's really not the issue, it's us just being able to right-size the mix a little bit more than we have right now.

We have time for one more question that will come from Edward Yruma, of KeyBanc.

Best of luck, Doug.

As it relates to the e-comm initiative, I know that you said it won't be accretive per se until 2015, but should we expect any kind of functional improvements to e-comm capabilities in 2014?

And is there a piece of the investment other than the $10 million SG&A impact that will be capitalized this year?

It's Mike.

I don't want to get too much into the details of the omni strategy specifically, but we will deliver some increased capability on our website yet this year, that we believe will begin to generate additional sales this year.

So yes.

And to your point about is there capital, absolutely there's capital.

All we did was identify the expense portion.

But I think that goes to Doug's comment before, of this is not a one-year investment, it's a multi-year investment.

And I think we said beginning at least one maybe two quarters ago, as we developed this plan, we're trying to do it and sequence it in a way that minimizes the financial pain in any year, and that's what hopefully we've done for 2014.

Great, thanks so much.

Ladies and gentlemen that will conclude our question and answer session.

I would like to turn the conference back over to Michael MacDonald for any closing remarks.

Thanks.

As always, I want to thank you all for your interest in DSW and your support for DSW.

We're keenly aware of our obligation to maximize shareholder value, while managing the business with a long-term perspective, and you can count on the DSW team to continue to do that in 2014, and in the years to come.

Thank you very much for your participation in today's call.

Have a great day.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.