Designer Brands Inc (DBI) 2014 Q1 法說會逐字稿

Good morning and welcome to the DSW's first-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

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

Please go ahead.

Thanks, Emily.

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

Earlier today we issued a press release detailing the results of operations for the 13-week period ended May 3, 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 our Mike MacDonald, President and CEO; Debbie Ferree, Vice Chairman and Chief Merchandising Officer; and Mary Meixelsperger, our new Chief Financial Officer.

Mary will start with a short discussion of our first-quarter reported results, then highlight the details of our adjusted results for the first quarter.

She will discuss our outlook for the full year.

Mike will then elaborate our results and describe our progress on our strategic initiatives.

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

With that, I turn the call over to Mary.

Thanks, Christina, and good morning, everyone.

I've been here at DSW now for just over a month and I've spent my time listening, learning and getting to know the team.

DSW has a history of growing market share and profitability and I'm thrilled to have the opportunity to be part of such a great retailer.

I have personally been a fan and a longtime customer of DSW and it is exciting for me to become part of the team.

I'm also looking forward to working with all of you in the near future.

Our net income for the first quarter of 2014 was $38.6 million, or $0.42 per share.

This compares against the last years' reported net income of $34.5 million, or $0.38 per share which included a net charge of $11.4 million, or $0.12 per share from our luxury test.

Excluding this charge, our net income declined by 16% from the prior year.

All of my comments this morning regarding year-over-year comparisons will relate to adjusted results which exclude the impact of the luxury test in the prior year.

Sales for the quarter increased slightly from $596 million in 2013 to $599 million in the current year.

Comparable sales declined by 3.7%.

In the DSW segment, which includes DSW stores and www.dsw.com, comparable sales declined 4%.

Traffic to our website increased but that increase was offset by declines in store traffic, such that total traffic was flat for the quarter.

Conversion rates in both the stores and dot com increased but the change in the mix of customer traffic caused our total DSW segment conversion rate to decline by 2%.

Transactions for the DSW segment declined 1%.

As the Company has noted before, with the changes in customer behavior, we believe total transactions for the DSW segment better reflect the underlying dynamics of our business.

Within the quarter, there were sequential improvements in our comparable sales performance.

But we've posted negative comp performance in each of the three months in the quarter.

We opened 14 new stores in the first quarter, bringing us to a total of 408 stores in operation as of the end of the quarter.

So far, results in these new stories have lagged our projections, but we attribute this performance to the week overall climate.

We expect these stores to demonstrate performance improvement as we move throughout the year.

We plan to open approximately 35 new stores in 2014.

In our Affiliated Business Group, first-quarter comps increased by 0.9% and total sales grew by 4.3%.

ABG ended the quarter with a total of 358 departments in operation.

Gross profit for the quarter declined by 210 basis points.

Merchandising margin contracted by 150 basis points and occupancy cost deleveraged by 60 basis points.

The merchandise margin contraction was due to the acceleration of slow selling styles in the clearance and incremental promotional event and higher shipping costs from charge-send offset by favorability in our rewards reserve.

SG&A expenses were 10 basis lower than the prior year.

Modest deleverage in store expenses was more than offset by lower incentive compensation expense.

We spent approximately $1 million on our omni-channel initiative in the quarter.

Turning to the balance sheet.

We ended the quarter with cash, short and long-term investments of $548 million.

This cash position does not reflect the $69 million payment for our investment in Town Shoes of Canada.

That transaction was completed early in the second quarter.

Inventories at the end of the quarter for the DSW segment were up 1.4% on a cost per square foot basis.

Clearance footwear units per average store were flat to the prior year as of the end of the quarter.

Capital expenditures for the first quarter were $25 million, $16 million was spent on new stores and store remodels and $6 million was spent on technology projects.

Full-year CapEx is now projected at $120 million, which is somewhat lower than our previous projection of $130 million.

As we look forward, we expect full-year comparable sales to decline in this low single digits and full year total sales to increase in the low single-digit range.

We expect full-year merchandise margin will be 100 to 150 basis points lower than last year with most of the deterioration happening in the second quarter.

We intend to exit the spring season with inventories lower than last year.

We are now projecting earnings per share to range from $1.45 to $1.60 based on a tax rate slightly higher than 39% and 92.5 million shares outstanding.

Our guidance includes incremental spending of $10 million, or $0.07 per share on our omni-channel initiative.

It excludes any impact from Town Shoes of Canada.

We still expect Town to be modestly accretive but we are waiting on asset valuations to ascertain the exact impact.

The guidance also does not reflect the impact of any potential share buyback.

You should not interpret this lack of a specific buyback assumption to reflect our buyback intentions one way or another.

With that, I will turn the call over to Mike.

Thanks, Mary, and good morning, everyone.

We were disappointed with our sales results this quarter.

We had expected to post a sales increase given the cold start to spring that we experienced in the prior year.

Unfortunately, weather was even less favorable this year.

These conditions created a very competitive pricing environment in the quarter which is reflected in our margin results.

In terms of sales performance, women's footwear was the weakest part of our business, posting a 7% comp sales decline.

Women's shoes, which excludes boots and sandals, comped down 9%.

Shoes that provided the greatest foot coverage performed better than more opened up footwear.

Women's sandals posted a 12% comp decline with the regions of the country with seasonal temperatures posting better results than the balance of the country.

We actually extended the boot season well into the first quarter and that proved to be a good move given the cooler temperatures.

The boot category posted a comp sales growth of 26% on a relatively small base.

As you know, we have a new leadership in our merchant staff for women's footwear.

They're working hard to improve the assortment and to strengthen our value proposition.

We expect those initiatives to gain traction in the second half of the year.

We've already seen improved comps from our fashion oriented, better and contemporary areas of the business.

Our men's and our accessories businesses posted positive comps in Q1.

Athletic footwear sales were down slightly and we believe that was primarily due to weather.

Geographically our south and west regions performed better than the rest of the country also reflecting weather differences.

As Mary mentioned, our merchandise margin contracted by 150 basis points in Q1.

This performance reflects the pricing actions we took in response to a very competitive environment.

We are working with our vendor partners to ensure we're offering the most competitive prices so that our customer recognizes DSW as the destination for best value.

We are taking aggressive pricing action on slower moving product and sourcing more opportunistic buys.

Value is one of our three brand cornerstones and we will continue to uphold our value leadership in the industry.

We intend to support our value thrust with more direct marketing messages and we plan to engage a new ad agency to assist us in this effort.

We're also fine-tuning our media mix to ensure we're reaching all of our customer segments in the way that are most relevant to them.

While our current business results are difficult, we are continuing to support our strategic initiatives that will further differentiate DSW over the longer term.

Omni-channel is one of our most important initiatives.

Last fall we implemented our charge-send capability that allows our 400 stores to act as mini fulfillment centers.

Earlier this year, we put in place our omni-channel team and that team is making excellent progress.

We've begun to expose products on our website that were previously only available in store.

Later this year, we will upgrade our website which will provide improved search capabilities, customer personalization and additional payment options.

Also this fall we intend to test new technology that will give our in-store customers access to the full breadth of the DSW assortment which is far greater than the assortment we represent in any single store location.

We think this capability will help all stores but it will be especially meaningful to our small format stores of which we now have four in test.

I am also pleased to report that we've begun to pilot our new assortment planning system in one area of the business.

This system will help us be more precise in the way we develop our assortment mix on a store-by-store basis.

The system will provide bottoms up recommendations for store assortments based on customer preferences in the areas of brands, fashion, price point and end use.

We also continue to benefit from our size optimization program which we implemented more than a year ago.

Size optimization has contributed to better in stock rates and incremental sales from increased size availability.

Size optimization remains a positive margin driver for the longer term.

As Mary mentioned, earlier this month we closed on the transaction to purchase a 49% stake in Town Shoes of Canada.

A put to call mechanism in the purchase agreement allows us to acquire the remaining 51% in either three or four years.

Town operates 182 stores in Canada, some of which are very similar to DSW, only smaller.

We've been looking at Canada for some time now and considering a variety of entry mechanisms.

We ultimately concluded the best option was to acquire an existing business whose management already understands the nuances of associated with operating in Canada.

We intend to use the Town base of operations to open DSW branded stores in Canada.

In that sense, Town will function much like a franchisee for DSW.

Let me turn to our Affiliated Business Group.

ABG had a solid quarter and posted a 4% total sales increase in a tough environment.

Similar to DSW, sandals also had a late start in the season, even for locations in the warmer regions of the country.

This segment helped drive traffic at our retail partners through effective marketing, promotion and product assortments.

Next month our Affiliated Business Group will open the first Yellow Box store.

Yellow Box is one of the top five national brands in the sandal category and is an important vendor to DSW.

Currently Yellow Box only engages in wholesale operations.

Given the strength of their brand at wholesale, we partnered to co-develop branded concept stores this year.

ABG has agreed to open and operate several test Yellow Box stores on their behalf.

If the test is successful, it could lead to a significant Yellow Box store base.

In April, we began offering the co-branded Visa card to DSW rewards customers.

The idea is to give our customers the opportunity to earn points towards reward certificates when they make purchases both inside DSW and at other establishments.

Faster point accumulation will lead to earning rewards certificates more frequently which should increase shopping frequency.

So from the foregoing, I think you can see that DSW is investing both in its base business and in growth vehicles as well.

In summary, we've had a difficult first quarter.

The consumer environment was challenging for a variety of reasons and that led to an intensification of competitive pricing.

DSW has and will continue to improve our content, sharpen our values and clarify our messaging to the customer.

Simultaneously, we're investing in those initiatives that will lead to sustainable competitive advantage and growth.

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

(Operator Instructions)

Camilo Lyon, Canaccord Genuity.

I was hoping you could give a little bit more color with respect to how you saw -- really, the last time we heard from you, I think it was 1.5 or 2 months ago, what really changed there with respect to how we're looking at the guidance now -- the new guidance that was issued -- and marrying that with the commentary around how comps have improved sequentially?

I'm just trying to bridge the gap there between what looks to be dramatic gross margin contraction in Q2, and what really changed that was so sharp from what we heard from you last?

Okay, this is Mike.

I'm not sure a lot changed.

I think what our guidance and our margin performance reflects is the fact that the Business didn't recover as rapidly as we had anticipated.

As Mary mentioned, there was sequential improvement in comps throughout the quarter, but we were still negative comps for all three months.

I think the other thing that we have seen is pretty intense pricing competition, which we've obviously reacted to, in order to give the same great relative value to the customer but also to control our inventory.

So, I don't think there's -- aside from the pricing thing, I don't think there's been a lot that's changed.

Really, what the guidance reflects is that we haven't recovered the Business as rapidly as we might have anticipated.

And then, are we to assume that, just by the commentary around it being relegated to Q2, that the pick-up in the back half will look like more of a normalized selling pattern?

Your inventories will be more in line, or is there more inventory workdown that you expect to see in the third quarter?

Well, first of all, our basic assumption that we communicated in the last quarter is that the new merchandise team that we put in place at the start of the year is going to take a period of time to implement the changes necessary to re-stimulate growth, particularly in the women's business, and we continue to believe that.

In terms of margin and inventory, we expect to enter the Fall season with clean inventories, and that's reflected in our margin projections for Q2, which, I think Mary mentioned, is going to be the most challenging margin performance quarter of the year.

In terms of what the pricing environment will be in the Fall season, that's a little harder for me to say, and it's a little harder for me to assess right now how much of the pricing intensification that we've seen so far this year is the result of others having inventory imbalances that they're really trying to react to.

So, if perhaps there's been some underlying change in the competitive environment not related to inventory imbalances, there's the chance that that could continue into Fall.

Right now, we're thinking it's mostly inventory related.

Great.

Thanks for the color.

And then just lastly, Debbie, if you could just talk about some of the trends that you're starting to see; I know that sandy is coming up next week.

What are you and your buying team, in particular on the women's side, most excited about that can help turn around the women's category?

Yes, good morning.

So, I'll say that Q2 really is behind us at this point in time.

And we are anxiously awaiting the sandal category to turn on for us because, as we said prior, Q1 -- the sandal business still didn't turn on for us.

We're continuing to comp strongly in boots.

So, we think we're well positioned in the right items for sandals for Q2, but that remains to be seen how the customer votes on that.

So, let's talk about the back half, which is where we're really trying to spend most of our energy.

We are excited about the boot category again.

Boots is a major category domination and distortion for us.

We will distort it more heavily this year than we did last year.

We're going to put what I call a boot campaign behind the boot category with a more deliberate focus on some very strong marketing messages, going back and beefing up some key items, and making sure that the assortment really does look different from what we had last year.

So goes boots, so goes the season, because in the women's area, it's almost half of the business in the back half.

So, we're pretty excited about that, and we've gone back and made some adjustments.

We've bought some great deals for the eight weeks prior to Christmas, so we can really go out into the marketplace and offer our customers some really good value.

Scott Krasik, Buckingham.

Digging back into women's, Debbie, maybe talk a little bit more about casual and dress also.

And then, last year you made the decision to extend sandals more of a buy now, wear now; can you clarify, because you're talking so much about boots for the back half, you intend to do the same this year?

So, yes, good morning, Scott.

So, let's take sandals.

What it appears to be doing in the market right now is: It looks like the sandals business is actually starting three months later than what you would normally position the sandal inventory.

So, for example, you typically think that sandals start in February.

As they did last year and as they're doing this year, they're taking a later start by three to four months.

How the customers will respond to the sandals we have on the floor -- we've got some good items.

We've got some tough items.

It's really too early in the game right now to see.

Just last week, I started to see that sandal business shift slightly, but I haven't really seen it turn on yet the way that we thought that it might.

We could say it's partly due to weather; maybe it's content.

We don't know, so I'm waiting another couple weeks to see that.

Having said that, we'll pick the best key items for sandals, and we will extend them into third quarter, a little bit -- in a little bit bigger way than we did last year.

So, I'm watching that very, very carefully with the merchants, and will make sure that we'll respond according to what the customer votes on.

As far as casual and dress are concerned, let's just level set: Everything saw lower levels in first quarter.

So, coming out of first quarter, we do start to see -- and we talked about this on the earnings call last time -- we do start to see dress pick up a little bit.

And remember that dress is still a small portion of our Business, but we did start to see that business turn a little bit.

And into last week, for the first week in a long time, it actually comped positive, so I'm encouraged by that.

Not overly excited, but I am encouraged by it; we're going to watch that carefully to see what the customer actually buys.

Casuals overall have not bounced back at all.

If you remember Spring 2013, we had a very, very strong casual business.

Casual business started to decline the back half of Fall last year.

We attributed that to a couple of things, mostly flats were over-penetrated because they had been out for a long time in the industry, and classic casuals were not fresh.

So, the market really lacked freshness in what they brought to us.

We didn't really see that change very much for first quarter.

We have gone out; we've tested some new resources.

They happen to be contemporary comfort resources.

We're seeing nice response to that.

We have repositioned our inventory in casual to reflect the contemporary and the comfort businesses that we see kicking in for us right now.

So, we'll continue that through third and fourth quarter.

And I'm optimistic there because of some of the selling results I've seen in some of the new product and new brands that we brought in.

Okay.

No, that's great.

And then, Mike, can you talk about -- you alluded to new store productivity missing your pro forma.

Maybe just elaborate on that, and how you think about that in terms of your ultimate store potential in the future?

I think what I said, Scott, is that -- or what Mary said was that we were missing our pro forma sales in Q1 in the new stores -- in the 14 new stores that we opened.

And what we really think is it's really following the pattern of the rest of the Business, which is weaker than what we'd thought.

And we really don't believe it's indicative of the long-term sales potential for those stores.

In terms of productivity, I just want to remind you that the stores that we are opening this year have a smaller footprint than the stores we opened last year; and the stores we opened last year had a smaller footprint than the stores we opened in the prior year.

I'm not speaking to sales per square foot.

I'm speaking to the sales production that you can expect out of those stores.

And just because more of our stores are closer to 15,000 than they are to 25,000, that's bringing the average square footage down, which is going to mean, as you do your modeling, the sales per store is going to be lower than what it had been last year and what it had been before that.

Sam Poser, Sterne, Agee.

A couple of things.

Number one, when you talk about the promotional environment, what type of retailers or where is that competition coming from?

Could you talk a little bit about that?

Yes, sure, Sam.

Good morning, I'll take that question.

So, I think the promotional activity, I would describe it as disruptive, chaotic, and really is across the entire industry.

And I think what you're seeing is business has been tough, and I think that most retailers to address that are just price reducing in a degree that I've never ever seen before.

So, we all know that we can't chase price down and drive a growth business.

And so, what we talked about in the earnings call is that we're going to be very proactive, as we are right now.

We always have been, but it'll be even more so, sitting with our vendor partners to make sure that we're competitive with everything going on in the industry, so that we continue to drive value to the customer.

But it's happening across the industry in every segment.

Thank you.

I want to give you a couple more things.

Number one, could you give us the detail of same-store sales by category?

Number two, can we assume basically that you're going to cap your top line for the second quarter to make -- assuming that things even got better, you're not going to be chasing goods, your job right now is to get clean and set yourself up for the back half of the year?

And lastly, could we assume also that based on what you gave us at average selling price at the DSW stores in Q1 were down about 3%; is that correct?

Sorry, I loaded them all up together.

Yes, Sam, you're going to have to repeat some of those.

So, I think we said women's footwear was down 7%.

Right.

Men's was up 2%.

Accessories was up 5%.

And athletic was down fractionally, less than 1 point.

Next question.

Average selling prices for the quarter, just based on what you gave us, it sounded like they were probably down around 3%; is that about right?

It is.

Okay.

Then lastly, can we assume that you're capping your top line for the second quarter by just making sure you're going to get clean?

Take the aggressive actions to get clean, and then move on from there rather than canceling orders and so on?

And are you having to re-look at the way you deal with vendors?

I mean, most often you guys negotiate all your prices upfront and you're done with it.

Is this become a dire enough situation where you're going to have to go back to the vendors and say: Time to give us some markdown money and stuff like that?

Well, let me handle the first part, and give Debbie the second part.

I don't think we're capping anything.

I think we're committed to exiting Q2 clean, okay?

But we've always shown an ability to react to the Business quickly, and in those spots where the customer has shown the most receptivity.

So, I wouldn't want you to think we are capping the Business.

We're staying very vigilant on the Business and ready to pounce on opportunities as they become apparent to us.

So, I don't like that term cap.

I'll turn it over to Debbie for dealing with the vendors.

So, Sam, what I will tell you is: We offer everyday value from the minute that product hits the floor, until the minute it's exited out of the back of our clearance area.

We work those prices with the vendors upfront.

That will not change.

What will change is how we're looking at how we continue to drive growth and profitability for both DSW and that vendor, so that we are mutually successful together.

For DSW to be successful, the vendor may have to look at the kind of value and costs that they're giving on some certain products.

But we will not go back and be reactive and ask the market to cough up -- markdown money at the end of the season.

I would much rather go in at the front of the season, make sure that our product is fairly priced, is competitively priced, so that from the minute it gets on the floor, it offers a value to the customer which will drive sales and the kind of sell through we need to drive top line.

Chris Svezia, Susquehanna.

Mike, a question for you.

Going back a little over a year ago, you guys were comping down 5% when you went into the first quarter last year, when you had your fourth-quarter call, and I think the visibility to give guidance at that point in time was very difficult.

Assuming that the comp progression improves throughout this first quarter -- I don't know maybe where you might have been comping at that point in time when you gave your guidance, but what changed this time that you felt that you can guide to a low single-digit positive comp?

What were you seeing in the Business or hoping for the Business to really turn, in April, to give you that confidence?

And then I got a couple follow-ups.

Yes, Chris, it's really just confidence in the new team we've got in place in women's.

We've said previously that we can't be successful in total if we're not comping positive in the women's business.

Obviously, the women's business continues to be a drag on overall business, but we do believe that the actions the new team is putting in place right now are going to change the course -- the trend of our Business in the back half.

So, that's really -- it's not more than that.

Okay, I'll move on.

So, Debbie, a question for you.

I'm curious here: When you talk about the overall -- I just want to talk about merchandise for a second.

I assume the sandals were bought under the old team.

And I think when you think about casual and the challenges there, is some of that bleed or has bled into how you think about the sandal business as well?

And I'm curious -- some of the changes you're making -- maybe you can talk a little more specific about your confidence as you think about the back half, and the ability to maybe turn that category around and maybe have it comp positive?

Is that what you need as you think about your thought process in the back half of the year to get to that negative low single-digit comp for the year overall?

Okay, Chris, you had several questions in there, so let me try to answer those, and if I miss something, you'll come back at me.

So, the sandal business, the casual sandal business, the seasonal sandal business is being bought by the same team that's always bought it.

That is a seasoned team.

They have a proven track record over many, many quarters in delivering a very strong sandal business.

We believed that this past quarter, because it had a very slow start because of the weather, we actually believe that we had bought the right things.

We bought core items.

We bought trend items.

The trend items, the early trend items that we placed our bet on that seemed to be the big deals in the industry didn't play out for us.

Example of that would be gladiators; they just didn't play out.

So, we took some bets and we lost those bets.

The place that we took bets on our core items, fashionable, not fashion directional, those are actually doing very well.

So, I think this is typical of any quarter where some of the fashion you place your money on, it doesn't work.

The weather worked against us.

But we do have some bright spots in sandals, but we still haven't started to see it comp positive yet.

But I have a tremendous amount of confidence in that team.

The divisional that leads that team has actually been at DSW more years than I have been; she has a proven track record.

She has terrific merchants under her, and I have the confidence that they continue to manage their inventory and buy back into the things that the customer is voting well on.

So, that addresses seasonal.

As far as the new team that actually sits over better and contemporary, that is the brand new team.

We have a new DMM in there that actually ran this business before she ran the athletic and men's, and you know her, Crystal Kirkbride.

Proven track record as a merchant.

She needs time to get in there and make the appropriate adjustments that she needs.

She's made some changes underneath her, in terms of the buyers.

She's retraining them.

She's looking at things, reviewing things with them that she feels that are important, in terms of how we curate our assortment, how we price our goods, and how we present goods on the floor.

So, she's got a lot of work ahead of her.

But she has a proven track record in this building, and she will demonstrate that in the women's business similarly to what she was able to do in the men's and the athletic area.

And you know her very well, Chris; I've introduced you to her before.

There are a few categories under the covers in that area, the better and the contemporary area, that still need to be, I'll say, quote-unquote, fixed.

The dress area has been weak for quite some time.

As I just stated, we've just started to see that start to turn the corner a little bit.

I'm encouraged.

I'm not overzealous about it, but I'm encouraged, and we need to make sure that we continue to read what the customer is voting on and continue to buy that kind of product back in.

And the casual area, the other piece that she manages under contemporary and better, that still hasn't turned on yet, as I just said when I addressed Scott's question earlier on in the earnings call.

So, we're looking for things that are going to rejuvenate that and re-energize that area.

We've made some bets there with some new brands, new products that are proving very strong for us; now we just need to wait to see that play out.

Okay.

All right, thank you.

And just last quickly here, on the men's business, only up 2%, is that just a function of soft traffic overall at DSW dragging down, or is anything structurally changing there?

It's still decent, but probably at the lower end of what we've seen in the past.

I think the total business has been suppressed, and I think the men's is just a function of that.

Men's -- we're actually very, very pleased with, and even though we've had several good quarters of very, very strong positive comps, we still think there's additional opportunity there and we'll be taking advantage of that in the back half.

David Mann, Johnson Rice.

With the growth in merchandise margin over the years, and your comment about needing to improve your value proposition, can you give us a sense on how much change in pricing you think you need to do to get better in line with what the customer expects?

So, good morning, David.

Let me address this by talking about the mix underneath the covers of the product.

So, I think what we've said is we're going to be increasing -- to be able to pass additional value to the consumer, there's three different buckets there.

Number one, we're going to be increasing the amount of opportunity buys that we do, and that is close-outs.

We have already started that.

We're right in the heat of it, and we're aggressively out in the marketplace to procure additional opportunity buys.

We will be pricing those very sharply.

And I want to stress, very sharply.

The second piece of that is our big core and key items.

We want to make sure that we really do pass incredible value onto the customer.

So, we're going back and we're looking at those to make sure that those are priced very, very sharply, so the customer sees that as one of the best values in the industry when she looks at buying that trend item for the season.

Number three, we have to make sure on an everyday basis on everything else we do, on the make-up product on the end line, that we are priced competitively with what our customers can find at other retailers.

And that's what we're doing.

And it's a model that we're -- that we think is needed right now, and I think that's it.

In terms of the inventory plan for the second half, how conservative will that look in terms of relative to last year?

We're going to go in slightly below last year in terms of our ownership position, David, and then, obviously, the sales trends will dictate where we go from there.

But that's our intention is to go in pretty clean and pretty lean.

David, if I could just add one thing to that.

And I'm going to let a bit of humility step in here as I talk to you.

We believed, in the sandal business, that the weather -- we had bought the right trend items.

We bought the right core items, and we felt that our inventories were positioned appropriately.

We believed that the weather was not going to be -- was not going to live with us as long as it did, and it did.

I believe that we need to manage our inventories even more tightly than we demonstrated in first quarter.

When I say let humility step in, when I look back, I say maybe we shouldn't have let the sandal inventories live as long as they did, because the weather didn't turn for us.

So, the one thing that we do know is when we are in a chase mode, and we operate lean and mean, we deliver results and we don't take excess markdown.

We will be running our inventory levels very wisely and tightly in the back half, so we make sure that we demonstrate that.

We're in a good chase mode.

We have open-to-buy liquidity, and we don't wait for: maybe the weather never turns.

Seth Sigman, Credit Suisse.

First, a question on capital allocation, and specifically the buyback.

How you were thinking about this quarter -- that this quarter, given the stock's pull-back.

And then, related to that, were there any block-out periods at any point because of the acquisition?

And then a quick follow-up.

Yes, we effectively -- as you know, the buyback program that we've authorized, $100-million buyback program, is an opportunistic buyback program.

So, it requires two things.

One, it requires a price that subcommittee deems attractive.

And two, it requires an open trading window because we're subject to the same trading restrictions as any other insider.

And we really didn't have an open window in Q1.

And it was because of the impending Town transaction that that window never opened.

We do anticipate that there'll be an open window in Q2.

And so, it'll be -- we'll have an opportunity to buy back if that's what the subcommittee determines they want to do.

Okay.

And on the SG&A front, to clarify, I think you said $1 million of the $11 million omni-channel spend hit this quarter.

Is that right?

Yes, $1 million out of $10 million.

$1 million out of $10 million, right.

And so, has the spending plan been firmed up for the remainder of the year, and maybe you can just elaborate on where that's going and the timing for the next couple quarters or so?

And then bigger picture on SG&A, given the sales outlook, are there other levers that you can pull at this point to maybe help navigate the next couple quarters?

Sure.

I don't think I want to give you by-quarter color on our omni spend.

Our omni spend is still projected to be $10 million.

The way it's going to happen is: There's some payroll, we've got an eight-person team dedicated to omni, as we described in the last call.

And then we've got a variety of software purchases and consulting purchases that will either be directly expensed to the P&L or be expensed through depreciation, depending on the accounting treatment.

So, that's primarily how we're spending our money.

The other thing that the guidance assumes is that we will beef up our marketing spend in the back half.

So, that's the other key assumption.

Aside from that, I think you know that we'll be prudent in filling positions, and we're going to be tight but we're committed to pursuing our key strategic initiatives like omni-channel, like assortment planning, because, frankly, the Business is changing as rapidly as any of us have ever seen, and those strategic initiatives become even more important and we can't lose any momentum on that.

We've got a lot of projects ahead of us.

We're going to re-platform our website this Fall.

It's going to help us with search engine optimization.

It's going to help us with internal search within the website.

It's going to provide personalization to some of our customers, and it's going to give us new payment options.

So, we're excited about all that stuff because we think it can drive more traffic to the website.

It can drive more conversion.

So, I don't plan on slowing down on that stuff.

So, again, we're going to save where we can without compromising our strategic initiatives.

Kelly Chen, Telsey Advisory Group.

I wanted to dig back into the sales trends this quarter a little bit more.

I know you guys said that it improved, but it was still negative throughout the quarter.

Could you give us a little bit more color on the differences by region, and I know you said the south and the west were better, but also the magnitude of the acceleration?

Ultimately, trying to get a sense of how much was really impacted by weather, if you've done any analysis on the number of selling days that were impacted, for example; so, just more color there.

Yes, I'm not going to get quite that granular.

The comps by region went from very low single-digit negative to a mid to high single-digit negative.

And the degree of acceleration or improvement as we went from the front of the quarter to the back of the quarter was, I would say, modest.

It was an upward improvement, so there was some incline, but it wasn't a dramatic improvement from February to March and March to April.

Got it, okay.

And then, on the Town Shoes, wanted to confirm: The potential accretion from that is not in the guidance, correct?

It is not.

Okay.

And then, could you give us a little bit more color on your early thoughts to how you want to approach that market?

How you think about the market in terms of how similar the consumer is, and how they shop, the type of merchandise that they buy?

And more color on the potential that you see in terms of synergies that might be coming down the road.

Well, the reason why we picked a partner like Town is because we don't think we, internal to DSW, have a deep understanding of the Canadian market and the Canadian consumer.

Town Shoes has been in business for over 60 years, and they've been operating successfully over that entire time period.

And so, they will give us the base of operations to use to grow the DSW brand.

We are in the process of working with them, rather intensively right now, on ways that they could emulate the DSW operation in Canada.

That, as it relates to product, as it relates to pricing, as it relates to communication with the customer, and most importantly, as it relates to the customer experience in the stores themselves.

And so, that's how we're operating.

And we think that they will operate much like a franchisee does.

They'll happen to be an owned franchisee, but they're going to operate like a franchisee.

So, they're going to operate the DSW brands in Canada according to our direction, but it will be the Town Shoes organization that is managing those operations.

And with respect to potential synergies, I do think there are some best practices synergies that will come out of the process.

In fact, we've already identified a few.

I think there may be some joint sourcing opportunities down the road, particularly for private brand product.

But in terms of some kind of a wholesale integration of the two operations, we don't have that in our plans, either now or in the future.

We're going to let them operate as a separate organization.

In terms of what's different about Canada, I think the biggest thing is that there's less time to sell warm-weather product and more time to focus on cold-weather product.

And based on our numerous trips to Toronto, that had become very obvious to us.

So, the timing of receipt flow will be much different.

But again, this is the kind of thing that Town and their merchant staff, and planning and allocation staff, understand very well, and we have confidence based on their long track record of success that they'll be able to execute that on our behalf.

Hope that helps.

Mark Montagna, Avondale Partners.

Questions about second half: You had expressed optimism towards the second half, and I'm wondering if the guidance reduction is solely centered on the first half, or are you adjusting your own expectations a little bit downward for the second half?

Without getting specific, we reduced our expected results both from the second quarter and the second half.

Okay.

And then, on the past call, you had mentioned trying to get the athletic pricing a little bit below -- basically below the $85 level where technical athletic is priced.

Wondering where you stand on that, in terms of how far into the transition, when can we expect that transition to be completed?

So, good morning, Mark.

So, what we've said is that we were increasing the fashion piece of the athletic business that was under $85.

And that technical would come down just slightly, and the more commercial fashion piece would increase.

That is well underway, and we're executing that against the planned.

And I'm pleased with the results so far, and that's proving out to be strong for us.

Taposh Bari, Goldman Sachs.

A quick one on capital allocation.

Beyond the Town Shoe acquisition, are there other deals that you're looking to -- or that you're hoping to making, or was that the key deal as you think about capital allocation?

Yes, we don't comment on that kind of thing.

Okay.

I guess maybe if I can reword the question, where do acquisitions fall into your cash use criteria?

Well, we think we've got a lot of growth initiatives.

We've got significant growth opportunity in our base business, as we build out our 550 stores that are full size.

We've got, as you know, a small format initiative underway.

We already have four of those stores underway and in operation.

That's being supplemented in a major way by our omni-channel initiative, which helps the in-store customer in that 1,000-choice store have access to 25,000 choices that are somewhere in our system.

Acquisitions of regional players in the footwear industry is also a potential down the road.

We think that that is either a corollary strategy to our small format store expansion, or else it's a replacement.

Because, frankly, we want to be the best there is catering to small markets and omni-channel helps us do that.

So, if we're successful there, I think we weaken the operating effectiveness of some of those regional players, and that might make them more vulnerable or amenable to some kind of a consolidation.

So, that's what I'd say about that.

Obviously, we think that the DSW brand is exportable, and our foray into Canada is obviously a reflection of that belief, and we're going to learn a lot from Canada.

I mentioned that Town is going to operate much like a franchisee because I think that that is the most likely format that we would use to expand internationally is through a franchise operation.

But we're going to use the Canada experience to learn, and evolve that international strategy from there.

So, hopefully that gives you some sense for all of the things that we're working on and where acquisitions fit within that.

I appreciate that, and one quick follow-up.

You mentioned -- part of the [bull] case on DSW is that the whole idea is consolidation in a fragmented industry.

And I was hoping you can comment more on what you're seeing in terms of these smaller, regional players out there, if you can comment on -- do you think that there's still a lot of opportunity out there, as the category moves into an omni-channel distribution model?

And obviously those players, I would suspect, are much less advantaged when it comes to that kind of strategy.

Yes.

I've got some statistical evidence and some anecdotal evidence.

Statistically, we know that over the last couple of years the top 10 retailers in footwear have grown their market share by several hundred basis points.

So, what that means is -- I mean, in total they've grown their market share, the top 10 retailers, footwear retailers.

So, that means that all the other retailers have had market share losses.

And I think that what that reflects is the difficulty that smaller, less well-capitalized, less technologically proficient regional footwear players are -- they're going to have a very difficult time being competitive in the new way of doing retail.

And that way is that the customer wants to shop seamlessly from store to the dot-com site to the mobile site, and she wants access to all the product regardless of where it is.

And she wants help making that decision on what she should buy.

And once she decides what she's going to buy, she wants it delivered to her wherever she wants it and whenever.

And that is a major trend in the industry that we see.

It's reflected in the traffic trends out of stores into mobile and into dot-com.

And so, I do think that those smaller players are going to have a difficult time catching up and being competitive with the ones who are making strides in the omni-channel strategy.

And fortunately, DSW has a successful website, and we have an outstanding omni-channel transformation plan that we are pursuing pretty relentlessly right now.

Patrick McKeever, MKM Partners.

On the sandals, you said they comped down, I think, was it 12%?

I think we said -- 12%, 13%.

Yes.

12%, 13% -- so, what percent of total sales were sandals in the quarter?

I think you've said in the past it's about 25% -- that category is about 25% of total?

Yes, it was.

It was almost exactly 25% when you count both the seasonal sandals and the very casual young attitude sandals.

Got it, okay.

And then a question on the new fashion jewelry initiative.

Wondering if you could -- assuming that had -- there was some impact on that as well from just the weather and the weather impact on store traffic in general, but wondering if you could give us a little color on what you saw there as you rolled that new merchandise into the stores early on in the quarter?

Yes, so, we've actually been pleased with being able to achieve our $15-million jewelry plan this year.

We are making some adjustments.

We had originally gone with one player in jewelry, and what we found is that we needed a little bit different assortment and more enhanced assortment I would say.

And so, we've gone out, we've selectively chosen some partners that we're going to start receiving some new receipts from them, more along the fashion line, a little bit higher priced than our average retail right now.

And that starts actually for July/August delivery.

So, I'm pleased with the traction we've made.

We had a successful rollout.

We will be enhancing the assortment architecture and we're on track to achieve our plan.

Can I add one thing?

On the last question, I thought the question was percentage of sandals to total women's, which is about 25%.

If the question was percentage of sandals to total business, then it's more like 15%.

So, if I answered the question incorrectly, I apologize, but those are both numbers that you need.

Okay.

And then on the buyback, I know you've had a couple questions there already, but when you say an opportunistic buyback program -- wondering if you could elaborate on that a little bit?

I mean, I think I get it, but I think we're -- many of us wondering why not be more aggressive there?

Understanding that the window was closed in the first quarter, for much of it anyway, but for all of last year, I think you bought back $1.6 million worth.

Yes, and I think that buyback price was something with a 4. It started with a 4. So, that gives you some sense for what we thought about in terms of value at the time.

We didn't have a window in the first quarter, and, unlike a 10b5-1 plan, an opportunistic buyback plan requires an open window and the right price.

So, as I mentioned, I think the window will open, and I think we've got a three-person subcommittee of the Board that will be meeting as soon as that window opens to evaluate our opportunities.

Jeff Van Sinderen, B. Riley.

A follow-up on inventory -- trying to understand better where the inventory overhang is, going into Q2?

Obviously, I would imagine partially sandals, but is it also more widespread into the other parts of women's footwear?

Maybe you can comment on that.

Yes.

So, Jeff, I'll tell you: We've taken some pretty aggressive markdowns that you see reflected in our performance this quarter.

We believe that we are well positioned right now in the right inventory and the right quantities to do second-quarter business.

The only thing that is the big question mark is if sandals don't kick in the way that we think that they will in second quarter, there may be some additional sandal markdowns to take there.

But as far as the dress inventory, the casual inventory, and the sandal inventory, we have done repricing.

We've put more things in the unit letter, and we have addressed everything that we know up until right now that we think that we need for second quarter.

We'll leave a little bit of a slush fund just to protect us if sandals don't kick in, but we believe that our inventory is positioned in the right way, and that we're clean going into second quarter.

And as Mary mentioned earlier, we will come out of second quarter lighter than we did last year.

Okay.

And then, in the categories where you -- the mainstay of your businesses, as you look toward second half in the women's business, do you think that there's enough newness in terms of trend, product trends to drive that business to be positive for you?

And again, speaking towards second half, and maybe for example you can touch a little bit more on boots, what you see being the driver in boots versus the relatively strong prior seasons?

Yes.

So, in the boot area, I think that there is enough newness, and we really did force that newness.

We struggled a little bit with some of the product that the market showed us.

We went out; we re-detailed things in a different way to try to add freshness to the product.

So, we saw a little bit of newness in the industry, not as much as I would like to have seen, but like I said, we kind of forced that because we have a strong SMU make-up program here where we actually influence material and color differently than what the market shows us.

So, I'm actually encouraged by the last line review that we just did in boots.

I'm more encouraged by the very strong marketing campaign that we're going to have behind boots that we really feel will position DSW as the dominant go-to player for the boot business.

Dress, like I said, we just started to see that turnaround.

It's too early in the game to call that.

We're not seeing a lot of freshness in the industry.

What freshness we will put on the floor will be through material and color changes, not so much silhouette.

There's not a whole lot of new silhouettes in the industry.

Casual, I'm concerned about.

And I'm concerned because some of the new brands that we brought in are doing exceptionally well, but will that be enough to offset some of the big players that lacked freshness that actually started last Fall by not performing for us?

So, I'm cautiously optimistic.

And 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.

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

We're obviously pretty keenly aware of our obligation to maximize shareholder value, but at the same time, managing the Business with a long-term perspective.

And as you've seen in recent years, you can count on the DSW team to do exactly that going forward.

So, thanks again; have a productive day.

The conference has now concluded.

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