Designer Brands Inc (DBI) 2014 Q2 法說會逐字稿

Good morning, and welcome to the DSW second-quarter 2014 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 second-quarter conference call.

Earlier today we issued a press release detailing the results of operations for the 13-week period ended August 2, 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 listed 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 Mary Meixelsperger, our Chief Financial Officer.

Mary will start with a short discussion of our second-quarter results and then highlight the details of our adjusted results for the second quarter and discuss our outlook for the full year.

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

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

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

Thanks, Christina, and good morning, everyone.

Our reported net income for the second quarter of 2014 was $34.3 million or $0.38 per share, which includes a benefit of $0.01 per share related to non-recurring income from RVI.

This compares against last year's reported net income of $33.7 million or $0.37 per share, which included a net charge of $0.02 per share from our luxury test and a charge of $0.10 per share from the termination of RVI's pension plan.

Excluding these items, adjusted net income was $33.6 million or $0.37 per share on 91 million shares outstanding, compared to last year's adjusted net income of $44.6 million or $0.49 per share on 92 million shares outstanding.

Our equity investment in Town Shoes contributed $0.01 in earnings per share for the quarter.

All of my comments this morning regarding year-over-year comparisons will relate to adjusted results which exclude one-time items from RVI in both years in our luxury test last year.

Sales for the quarter increased 5.2% from $558 million to $587 million in the current year.

Comparable sales increased by 0.8% on top of an increase of 4.4% last year.

Transactions for the DSW segment increased 5%.

As the Company noted before, we believe total transactions for the DSW segment better reflect the underlying dynamics of our business.

Store traffic declined in the low single-digit range but improved substantially from Q1.

Traffic to our website and mobile site increased by a healthy rate as more customers engaged with DSW online.

Store conversion rate increased in the high single-digit range.

Charge-send fulfillment is also driving healthy conversion increases.

AUR declined in the low single-digits, while units per transaction increased in the low single-digits for the segment.

We opened two new stores in the second quarter, bringing us to a total of 410 stores in operation as of the end of the quarter.

Although our new stores fell short of sales expectations in Q2, their performance improved materially from Q1 to Q2.

We plan to open approximately 35 new stores in 2014.

In our affiliated business group, second-quarter comps increased by 2.5% on top of a 4.3% increase last year.

Total sales grew by 6.9%.

ABG ended the quarter with a total of 363 departments in operation, including our new Yellow Box retail store in Miami.

Gross profit for the quarter contracted 390 basis points with merchandise margin declining by 320 basis points.

210 basis points of the margin contraction was due to our aggressive clearance activity this year and abnormally low mark-downs in the prior year because of unusually low clearance levels.

Mix and pricing accounted for 40 basis points of the decline.

Increased shipping expenses, primarily from higher charge-send sales accounted for the remaining 70 basis points contraction.

Occupancy and FCDC rates increased by 70 basis points primarily due to one-time items.

SG&A expenses were 15 basis points lower than last year with SG&A dollars increasing by 4.4%.

Lower incentive compensation offset increases in omni-channel and IT expenses.

Turning to the balance sheet.

We ended the quarter with cash, short- and long-term investments of $465 million compared to $500 million last year.

We invested $72 million in Town Shoes of Canada, consisting of an equity investment of $24.8 million and a note receivable of $47.8 million.

Inventories for the DSW segment ended below last year by 3.3% on a cost per square foot basis.

Clearance footwear units per average store were flat to the prior year.

We are pleased with our inventory position going into the fall season and we are managing our inventories conservatively.

Capital expenditures for the second quarter were $22.7 million with $13.1 million spent on new stores and store remodels, and $9.6 million spent on technology projects and improvement in our distribution and fulfillment centers.

I'd like to take a few minutes to discuss our capital allocation priorities.

Growth, both organic and non-organic is our number-one priority.

We are investing $120 million in CapEx this year.

About half of this CapEx goes to new stores and remodels and the balance to IT and business projects.

Our stores provide very attractive four-wall profit rates.

Dividends and buybacks are DSW's other two priorities.

We have paid $34 million in dividends year-to-date for a dividend yield of 2.7% based on yesterday's closing price.

We would like to maintain an attractive pay out over time.

We also repurchased approximately 2 million shares for $55 million under our current stock buyback program during the quarter, with $43.2 million remaining in our current authorization.

We appreciate that dividends and stock buybacks create additional shareholder value.

Turning to guidance.

We expect full-year comparable sales to be flattish and full-year total sales to increase in the mid single-digit range.

Due to mark-down actions and heavy clearance this spring, we expect full-year merchandise margins will be 100 to 150 basis points lower than last year, as we previously stated last quarter.

As we start to see better sell-throughs of our fall product we expect mark-downs to normalize.

But sharper pricing and higher shipping costs are projected to cause merchandise margin to contract modestly in the back half.

We expect SG&A expenses in dollars to increase in the mid-teens range in the fall, as we invest in omni-channel integration, marketing and IT.

Mike will address the progress on these efforts more fully in his comments.

We are now projecting earnings per share to range from $1.50 to $1.65 based on a tax rate of 39%.

Our guidance includes $0.02 per share from our equity investment in Town Shoes of Canada and assumes 91 million shares outstanding for the full year, which has been reduced to reflect the impact of shares repurchased so far this year.

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

Thanks, Mary and good morning, everyone.

We saw continuous improvement in our selling metrics throughout the quarter, with comps turning positive for all regions and all categories in the month of July.

For the quarter, our stores in the South and the West outperformed while the Northeast and Mid Atlantic regions comped flat.

Our Midwest region comped down in the low single-digits.

As Mary noted our new stores fell short of their collective sales plan in Q2, but they achieved improved sales performance in Q2 compared to Q1.

We think sales at these new stores will continue to ramp up steadily.

Moreover, we still expect these stores to exceed our targeted internal rate of return for new store investments.

As you'll recall, we took several merchandising actions in Q2.

We moved slow sellers into clearance faster.

We reduced prices for select items.

And we increased our opportunistic buys.

With respect to clearance, our selling of clearance out-paced regular priced selling for the quarter as a whole.

But we saw sequential improvement in reg-price selling through the quarter, as our team brought in new receipts and injected freshness into the assortment.

In terms of the repricing actions we took, we saw accelerated sell-throughs on these key items.

We were successful in securing additional opportunistic buys during the quarter that allowed us to increase our value offering, particularly in women's footwear.

In short, each of these merchandising actions worked.

In terms of category performance, accessories was the strongest category with comps in the low teens range, driven by growth in our seasonal and core areas and the expansion of jewelry to all doors.

Our men's and athletic businesses both comped up 2% during the quarter with the latter driven by our fashion athletic category.

While the women's business comped down 1.6% for the quarter, we saw sequential improvement in the quarter on an overall basis and within reg price.

Our women's dress business generated strong positive comps, while women's casual continued to show negative comps against double-digit increases in the prior year.

We are expanding brands that are doing well within casual while bringing in new silhouettes and testing new resources.

Our casual sandal business had a low single-digit decline.

Seasonal sandals actually had an increase, but this was offset by weakness in Young Attitude.

We believe this reflects some demand shifting into other young categories.

So to summarize our performance in women's footwear, we're encouraged by the progress we've seen, but we still have much more to do before we declare mission accomplished.

We've been carrying kids footwear online for the past three years.

Our research last year identified this as an opportunity area.

As a result, we're testing an assortment of kids product at 20 stores during the fall season.

These locations are stores that have extra capacity to carry kids products without taking anything else off the floor.

We are supporting this initiative with an exciting marketing campaign that appeals to the entire family.

We will update you on the results of this test next quarter.

Now I'd like to talk about some important actions we're taking that give us optimism for improved performance in the back half of the year.

First, after rolling out charge-send, chain wide last November, this new capability is receiving increased customer acceptance and utilization.

The charge-send program is helping our overall customer conversion rates.

Second, we are upgrading our website this fall which will improve site search, generate stronger SEO results and provide a platform for future personalization.

Third, we've made it easier for customers to enjoy free shipping in a number of ways and they are responding well to these changes.

Fourth, in partnership with a new creative agency, we've developed a new advertising campaign that puts the spotlight on our breathtaking assortment in footwear at compelling price points.

We've also replaced our media agency to help us optimize our media spend by type.

We are also increasing our marketing spend in the back half.

Fifth, we're working to improve our customer data capture to allow us to communicate with our rewards members even more effectively.

Sixth, we'll be launching our first mobile app later this fall.

Seventh, we're piloting our new assortment planning tool in a handful of categories right now.

Assortment planning will allow us to localize our store assortments to better cater to market preferences.

We expect to roll out assortment planning to all of our footwear categories later this year with benefits to begin in the fall of next year.

Eighth, we're also testing a number of mechanisms to increase customer engagement in our stores.

And as we look to 2015, we have several new capabilities on deck including buy online pick up in store and buy online ship to store.

Many of these new capabilities are the direct result of our omni initiative.

I've often described omni as a project to conform our business processes to the way the customer now wants to shop.

While that's an accurate statement, it's also a bit incomplete.

Our omni-channel endeavor is really much more than just a project or an initiative.

It's a fundamental change in how DSW conducts business.

It's causing us to view everything we do through the lens of the customer.

And that is causing us to expand our traditional definitions of our brand corner stones of assortment and value and convenience.

I tell you this because it's becoming increasingly difficult to isolate the costs and the benefits of omni from our base business.

At the outset of this year we estimated the cost of omni in 2014 would be $10 million, and we projected that it will be earnings accretive after 2014.

We still believe that.

However, because of the pervasive impact of omni, we've concluded there is no longer utility in isolating the impact of omni.

So going forward, we are just going to incorporate the impact of omni within our overall earnings guidance.

Let me now update you briefly on our Affiliated Business Group.

As Mary already noted, ABG had a solid quarter in terms of comp and total sales performance.

In addition, we successfully opened our first Yellow Box store in Miami in July and our second new store in Southern California earlier this month.

Yellow Box is a top-five national brand with a strong following and customer response has been positive.

We're excited about our retail partnership with Yellow Box because it demonstrates new ABG capabilities which can pave the way for future growth.

We intend to open up a total of four Yellow Box concept stores this year.

And finally I want to say a few words about Town Shoes of Canada.

On August 7, Town Shoes opened the first two DSW stores in the Greater Toronto area.

Town built an assortment that offers compelling competitive prices and exciting brands, leveraging their local expertise.

Customer response has been very positive.

These are the only two DSW Canada stores Town will open this year.

In conclusion, in the second quarter, we accomplished our goals of aligning inventories with our sales expectations and improving our underlying sales trends.

We are encouraged to see healthier sell-through rates from new products that we've delivered in the second quarter.

We are on track with our omni-channel initiative, which is starting to drive greater demand and transaction activity within our DSW segment.

In short, we made good progress in the second quarter.

I want to thank all of my fellow DSW associates for their hard work.

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

Thank you.

(Operator Instructions)

Our first question is from Mark Montagna of Avondale Partners.

Hi, thank you.

Mike, you've got -- with the new leadership underneath Debbie for the women's division, what makes you comfortable that -- you just had that change in January.

What makes you comfortable that by this fall with such a quick turnaround that that merchandise is accurate and really on par with what the customer is looking for, because it's very quick.

Well, I'll let Debbie comment on that, Mark.

But I think what we tried to describe is that our women's footwear business is a work in progress, not a complete product.

I think we'll continue to make progress, and it will take time.

As you know, the lead times in footwear are long, and to make big changes in a short period of time just doesn't happen.

But we are pleased with what we see so far.

And we were particularly pleased with the reg price positive comp that we showed in July in women's footwear.

Debbie, anything else you want to add?

Yes, good morning, Mark.

What I would tell you is: With the change in the Organization, number one, I think we have the best talent in the Organization in this women's area.

So, we've put the best people on the most critical part of our Business.

Number two, we have a renewed focus in really driving the things that are important in that area, and that is to make sure that we have the right assortments at good value.

And going back to some of the basics that we talked about before -- making sure that our close-out mix, our opportunistic buy mix was appropriate.

And that we're always leading with a differentiated assortment of great value for the consumer.

Okay.

It certainly looks like it's working.

And then, just as a quick follow-up, regarding opportunistic buys -- do you see this as a permanently higher level of opportunistic buys?

How do we understand what the impact is, in terms of maybe percentage of purchases?

Are you needing to staff up in that department for opportunistic buys?

Yes, so, I would tell you, over the last couple of years, Mark, the opportunistic buys actually dropped below the levels that we felt we really needed for our Company.

So, as I said, we have a renewed focus on getting back to the basic fundamentals of our Business, and that is having a certain percentage of our buy in opportunistic buys.

So, renewed focus and working very closely with the brands to be able to make sure that we have a consistent flow of that product into our assortments.

Our next question is from Taposh Bari of Goldman Sachs.

Hi, good morning.

Debbie, a question for you -- how you're thinking about fashion heading into fall?

Any early signs of how you're feeling about the boot season?

So, it's very early to call anything on boots right now.

We have though started delivering boots, and I would tell you that, with what we've delivered on the floor so far, we're pleased.

But it's really -- it's way, way too early to be able to call that.

Okay.

And what about some of the other categories, like dress and casual?

So, just got back from two major shoe shows, as you know.

There was an overwhelming amount of new fresh casual in the marketplace that we believe fits clearly in the core of our core customer.

I was very excited about that, and see some great opportunity there.

As far as the dress business is concerned, as Mike reported, we've turned the corner on that.

I want to be cautiously optimistic there, but I am encouraged by the customers' response to the fresh new products we've put on the floor.

I saw enough in the market, and in addition to what we do in development on our own, to be able to continue the momentum that we've seen in dress.

Great.

And then, just a quick follow-up on gross margins.

Mary, you mentioned a couple of one-time items.

Can you repeat them -- what their impact was, and what the nature was on the gross margin line?

In the second quarter, there was about 70 basis points of one-time items in the other margin category.

Those were comprised of some one-time impairment charges of about $1.3 million pre-tax.

Then, the balance was related to some one-time repair and maintenance charges within our overall occupancy structure.

And those were included in that $0.37 adjusted number?

Yes.

And they won't repeat going forward?

That's correct.

Well, I'd say -- they won't repeat.

We are always reviewing our store fleets for impairment, but I don't expect to see any additional impairment charges this year.

Okay, thanks, I'll pass it on.

Good luck.

Thank you.

Our next question is from Scott Krasik of Buckingham Research Group.

Yes, hi, thanks very much.

I know you don't like to talk a lot about -- or give a comp, quarter to date.

But at least in terms of your reg pricing, is there anything that gives you less confidence than what you saw in July?

We really can't comment on that, Scott.

Okay.

In terms of your decision to raise your comp guidance to roughly flat for the year, are you assuming positive comps in each of the next two quarters?

Yes, I think the math would say you've got to get a positive comp in the fall to offset what's a 1% to 2% negative comp year to date.

But not necessarily in both quarters?

Not necessarily.

We're just giving you annual guidance.

Okay.

And then, maybe just talk about the new store productivity.

Obviously, we like to see it better sequentially, but it is still below plan.

So, maybe talk about how you're thinking about opening stores in the future, and some of the pressures on the new stores.

Sure.

Well, I think, first of all, what we see a lot of times is that new store performance mirrors the performance of our base business.

When the base business is strong, new stores are really terrific; and when base business is weak, we struggle a little bit with new stores.

I think that's what's going on.

Obviously, the sequential improvement in the new store performance from Q1 to Q2 really supports that, because our base business got a little stronger in Q2.

I think the important thing that I tried to emphasize is that we might sign up for an IRR of 40% or 50% based on our sales projections, because we want the best sales projections in those IRRs because that's what we're going to buy to.

If we end up achieving a 25% IRR, it will still have been the right thing to do, open those stores, even if we fall short, if we ultimately fall short of our IRR projection.

I'm not suggesting we will.

We don't have enough experience to know that.

But I am suggesting that we oftentimes sign up for a much higher rate of return than what our minimum hurdle requirement is.

We got a long ways to go on those stores.

Our typical pattern is that the ones that start out slow ramp up, and the ones that start out strong typically tend to stay strong.

I suspect that pattern will play out again.

In terms of new store going forward, we've got lots of opportunity to complete our buildout of full-size DSW stores.

So long as we can see success, we're going to continue to open up those stores.

We've got the additional opportunity in our small-format store expansion program, which we haven't declared a roll out for yet.

But I think we ultimately will.

One thing I will say is that we've come to look at our new store performance a little differently through an omni lens.

What I mean by that is that it's not just the sales that are recorded there.

It's the sales that are recorded there, plus the sales that are demanded there by the customer, but perhaps fulfilled in another location or in our fulfillment center.

I think what we're learning is we really have to take a holistic view and definition of the sales that are being generated by those new stores.

Because what we see -- and that doesn't even include the impact that a new store in a new market can have on dot com business that is generated from those geographies.

What we find is it's a pretty good billboard for the DSW brand, and it increases awareness.

And it typically creates a lift in our dot com business from customers who live in that vicinity.

Our next question is from Patrick McKeever of MKM Partners.

Thanks, good morning, everyone.

A question on the urban market store performance -- wondering how those stores are performing, particularly the ones in New York and Chicago, San Francisco.

How do urban markets factor into your growth plans as we look into next year?

I don't know that we've ever commented on individual store performance, and I'm not really interested in starting that now.

As I think about the stores that you've mentioned, I can think of a store that's knocking the cover off the ball.

I can think of a store that's generating slightly better performance than the total Company.

And I can think of a store that's lagging the total Company.

Really, that's kind of how we manage the Business, is on a location-by-location basis.

We essentially manage our open to buys on a location basis.

I don't think about urban stores as a group requiring separate strategies or considerations.

They're individual stores and that's how we treat them.

Okay, fair enough.

And then on the decision to test children's shoes, in, I think, you said 20 stores -- what was behind that?

Was it driven by success online -- a little color there.

And how big might that be as we look forward here?

How many stores might eventually have kids shoes if the test is successful?

Well, we've had kids online for two or three years now.

Our customers like the convenience of that.

They like the ability to buy it online; and if they have to, return it in the store.

And we like that as well.

We've gotten a lot of our customers who want kids shoes in our brick-and-mortar locations, and they've told us that.

They like the convenience of being able to buy both for themselves and for their family.

The way we're currently set up, that isn't always possible.

So, that's why we thought -- and we have some further research that I don't want to go into that indicates it would be an opportunity for us, if we could make it work.

In terms of how big it could be, we probably have half of our stores that we could put kids into without changing anything.

It's got the capacity.

It's got the space, and we wouldn't have to do much work at all to fit kids in.

I think most of the other 200 stores we could figure out a way, through creating higher-capacity fixturing or rearranging the fixturing, to allow us to put kids in.

Such that probably in 90% or 95% of our stores, we could have a kids' assortment if the test proves to be successful.

Our next question is from Seth Sigman of Credit Suisse.

Okay, thanks, and good morning.

Couple questions on the gross margin -- and you talked a little bit about some efforts to sharpen the pricing.

Over the last few years, you've obviously enjoyed pretty strong margins.

Obviously, in the short term there's a little bit of a give back here as you manage the inventory.

But as you take these steps to sharpen the pricing, does that limit your ability to get back and recover the margins -- get back to some of the prior levels?

I'm just wondering: What are some of the steps you're taking?

How you're working with vendors to ensure margins may be stable long term?

Or any other offsets that you can speak to.

I'll take the first part, and let Debbie cover how we're working with the vendors.

I think Mary's comments indicated that we expect sharper pricing in the back half to create some margin pressure.

And so, you're right, we are selectively taking prices down to maintain our pricing advantage versus the competition.

As to what that means longer term, I think we have to just wait and see.

It's entirely possible that, on the items that we reprice and we take a sharper approach to, that we could have better sell-throughs at reg price.

Fewer of those styles end up in the clearance racks, and we end up margin-neutral.

That would probably be the best that it could be, is that we'd be margin-neutral.

On the other hand, it may well be that we get the same sell-throughs.

And as a consequence, whatever we give up on the initial pricing falls through to the margin line.

We just don't know yet because we don't have enough experience, and we're going to find that out as we move through the fall.

I think it was hard to determine, in the spring, what pricing actions -- what those pricing actions had -- what impact they had on our margin results, just because there wasn't that much of it.

There was so much other noise going on in terms of our clearance acceleration and that kind of thing.

I think it's a story that's yet to be written, and we'll find that out as time goes by.

Debbie, do you want to talk about how we deal with our vendor partners?

Sure, Mike.

I would say, overall, the partnerships that we have with our brands -- you should really think of it as us developing a win-win relationship with our vendor partners.

We have an in-season business management approach and process to deliver sales and profitability.

I think there are many different levers that we have to deliver margin, outside of just talking about the question you had.

We have things such as assortment planning, which will localize assortments, and should deliver improved sales and reduce markdowns.

We have private brand, which delivers an increased gross margin rate above our average.

We have accessories growth, which, actually, margins out considerably higher than our average.

Getting women's back on track, which is one of our highest-margin businesses -- that is also another lever.

And lastly, with the inventory management discipline that we have, I think it allows us to really chase into the business.

And as you know, those last sales that actually you add to the top line, are actually the most profitable and the highest margin rate.

I would say those are the levers that we're looking at.

Seth, I would just add a couple things.

We also, as we've mentioned in terms of our assortment planning initiatives, expect, with the localization efforts that we're making with the roll out of assortment planning, we do expect that long term that will also be helping us in terms of our overall margin rate.

And then within our omni initiatives, we're doing some work on optimizing our charge-send algorithms in terms of optimizing the location from which we identify where we should ship the inventory from, in order to minimize our markdowns.

So, there are some other initiatives that will be helping us on the margin line in terms of offsetting some of that pricing pressure as well.

Okay, that's helpful.

And I assume -- it's been difficult to see some of that, just given the sales environment.

But assuming sales improve, as you've guided to, we should maybe see some of those margin drivers start to come into play -- some of those system initiatives that you mentioned.

If I could just follow up on the -- (multiple speakers)

Just to be clear on that: I think the comments that Debbie made on private brand and on accessories -- you'll see those sooner.

AP, assortment planning, we don't expect to see benefit from that until beginning fall season.

We tried to be specific about that in the script.

And the charge-send optimization that Mary mentioned, that's a next-year item also.

Hopefully first half of next year, but it's a next-year item.

Just so you can be clear in terms of timing of expectations.

Perfect, thank you.

If I can just follow-up on the SG&A, I think you discussed mid-teens growth in the fall.

Can you just elaborate on what's going on there -- remind us what happened a year ago that may be driving some of that?

I think Mary talked about three things.

She talked about omni spend and IT, which I put in the same bucket.

And then she talked about an increased spending in marketing for additional media.

Those are really the three big drivers that we have going on in the fall season.

We spend a little bit less in omni in the first half of the year.

We still expect to spend the $10 million, so you're going to have a little bit more of that in the back half.

So much of omni is related to systems that it requires intensified investment in IT.

Obviously, assortment planning is part of that.

And then, in terms of marketing, we think we need to beef up our marketing budgets.

We need to shout a little louder to the customer.

That's what we intend to do in the back half.

Thank you.

The next question is from David Mann of Johnson Rice.

Yes, thank you.

Nice rebound after that first quarter.

I had a quick question, or couple questions -- big-picture oriented.

When you look at what happened in the first half -- when you think about your commitment to private label and in the assortments, any concerns that you've become too reliant on that, and that some of your assortments have -- that they've become too much duplication within the assortments?

Well, statistically, David, we've been gradually increasing our private brand penetration.

But it's all the way up to 12% right now.

What we've said is that it will likely never get to be more than 15%.

And we actually police it on a category-by-category basis, such that we never let the penetration in any category exceed 20%.

We're pretty rigorous about that.

Debbie, anything else you want to say?

No, I think that describes it perfectly, Mike.

And then in terms of the commitment to parts of the ladies' categories, clearly there's been a lot of weakness that you're seeing on the casual side.

When you think bigger picture about space allocation, have you ever thought about shrinking some of these parts of the businesses that are perhaps a lot weaker, rather than continuing to commit inventories to those areas?

Sure, David.

I would tell you that on a monthly basis there's a very rigorous discipline around looking at sales and inventory, and making sure that inventory matches demand.

That is a discipline that we've always had in place.

We will continue to demonstrate that.

We do make sure that we flex inventories based on what the customer demand is calling for.

Okay.

And if I can slide one more in about -- just curious on the follow-up on the marketing.

How soon should we start to see the marketing hit?

What medium or media would you be using for that?

And then lastly, will there be a strong call to action within that marketing?

Yes, you'll see the marketing beginning later this week.

It's going to be a healthy dose of TV and digital marketing.

In terms of call to action, I don't know what you mean by that.

If the call to action means we've got to kill our assortment, particularly in boots, and we're the place, yes, it's a call to action.

If you're talking about a pricing call to action, no.

We're going to reemphasize that we have compelling values every single day, not sale price.

Our next question is from Chris Svezia of Susquehanna Financial Group.

Good morning, everyone, and thanks for taking my questions.

First, Debbie, for you, on the casual end of the Business -- women's casual -- can you talk about some of the things that the new team and yourself are doing to turn that business around?

I know it's going to take time, but I'm curious what you're seeing in the marketplace, what you're testing in the stores more specifically, comfort, casual, et cetera -- just give us some visibility in and around that category.

And then I have a follow-up question.

Sure.

Chris, I would tell you that, as we talked about on the last earnings call, there were many brands that actually sat in that classic casual area that we've really relied on for many, many years.

I think the assortments became a bit stale, and maybe some of the product development from the particular brands didn't move forward as fast as what the customer said they wanted to see it move toward.

So, we have adjusted our plans to reflect sales expectations in those brands that we believe deliver product to our target customer.

We pulled back sales in some brands.

We've added new brands.

We've tested new brands.

We've taken the results from those tests, and we've really blown out and expanded many of the brands that actually you and I saw in market last week, that are really demonstrating some strong growth in that area.

We believe we've taken all the right actions to be able to readjust the assortment and brand architecture to reflect what the customer wants and to drive sales in that business.

I was excited about what I saw in market last week.

Okay.

But you're not anticipating the casual category in women's to comp positively in the fall?

It's really predicated on boots.

It's a different category, but boots primarily.

Casual is more of a 2015 opportunity; is that fair to say?

I wouldn't really say that.

We have placed strong expectations on boots.

I think that's the right thing to do.

Some of the results of some of these new casual brands that we've tested and rolled out are delivering some nice results.

I don't want to promise you a positive comp in either quarter in casual, but I will tell you, directionally, we're seeing some nice results.

If that continues, I would expect that you'd see that trend reverse.

Okay.

Last question -- just on the inventory.

I'm curious how we should think about that and your ability obviously to test and react.

Is inventory still going to be something you're going to keep very, very tight and to the vest, and chase relevant product?

I'm curious how we should think about that.

I think we've demonstrated in past quarters that when we're in a chase mode, we actually do very well.

So, we're going to plan our inventories conservatively, and we're going to play the chase game.

That's when we deliver sales at stronger margins.

Okay, thanks very much.

All the best.

The next question is from Kelly Chen of Telsey Advisory Group.

Hi, guys.

Congrats on a nice quarter.

I just wanted to drill into the new store productivity a little bit more.

I know that in the past you guys have tested and done some small market and also small format stores.

First, could you update us on how many stores in the chain are small format versus small market?

How those stores are fairing -- what you're learning?

The four-wall contribution versus the rest of the chain?

And how it plays into your future plans for growth?

Sure.

I think it was a couple of years ago we talked about small-market stores.

And we really don't talk about them anymore because they're big stores in smaller markets.

I think we identified 250,000 to 400,000, and they're just more stores.

The ones that we're focusing on are the ones that are smaller format -- smaller footprint stores that are typically 10,000, which is about half -- less than half the size of our full-line stores.

So, those are the ones we're working on.

Those are the ones that we're testing -- trying to get the formula right before we declare a full-scale roll out.

We opened up two of those small-format stores last fall.

We've opened up another three this spring.

We have two more we plan to open up in the fall.

So, by the end of this year, we'll have seven small-format stores in operation.

What I'd say about how they're doing is they're doing fine.

They are coming up a little bit short of our sales projection, in terms of recorded sales.

But when you factor in the other demanded sales from those small-format locations, they are doing well against their pro forma, and they're beating their IRR projection that we set for them.

So, they're doing fine.

We think there's an opportunity to do more than fine going forward.

We're going to be testing new ways of engaging the customer in some of those stores yet this fall season, as a way of fine tuning the store operation.

They have, by definition, smaller choice counts within those four walls, just because they're half the size of our full-line store.

So, it requires a little different service model that's more reliant upon drawing on inventory that might be located elsewhere.

That's what we're going to be testing this fall.

I think we'll ultimately get the small-format stores cooking well.

And we'll declare it a full-scale roll-out strategy, but we're not quite there yet.

Got you.

And then a follow-up on the SG&A: Could you quantify how much you spent on omni-channel this quarter?

And then also, I think you guys mentioned that incentive played a factor.

Was that a big part of the reason for the SG&A leverage?

Or are there just main buckets where you see some more leeway and flexibility with spending?

The omni-channel spend this quarter was around $2 million.

In terms of looking at the total year, we're really 30% in the front half and about 70% in the back half.

In terms of overall omni spend, that's the way it's laying out.

Could you repeat the second half of your question, Kelly?

I thought you mentioned that incentive comp also played a factor in terms of some of the leverage that you saw.

Was that a big part of the leverage?

Could you quantify the incentive comp?

Yes, it was a significant part of the leverage.

It provided a favorable impact in the first half of -- I'm not sure on a basis point what it was, but I think in total it was about $6 million.

Great, thank you.

Our next question is from Camilo Lyon of Canaccord Genuity.

Thanks, good morning, everyone.

I wanted to get your thoughts on the competitive outlook -- how you're seeing the price/value relationship in your stores now that you've adjusted some of the pricing.

Looks like you're increasing the opportunistic buys.

I'd like to get your thoughts on how you're viewing the back half relative to what you expect the competitive environment to be.

Yes, so, good morning.

As I said, we really have an in-season business management process to deliver our sales and margin.

I don't want to really get into a pricing discussion, but I will tell you that it is our objective.

We will deliver strong value on a differentiated assortment to the consumer.

That's really how I look at it.

And part of that is to deliver some better values to the floor by increasing the opportunistic buy bucket.

But we believe that we can deliver the sales and the margin expectations for the back half.

Are those opportunistic buys expected to be margin-neutral or margin-accretive?

Never really looked at it like that.

I look at that as that the opportunistic buys are part of the value proposition that we offer our customer.

On some things, you take a little bit shorter mark; on other things, you may take a little bit longer mark.

But overall, I will say we will deliver our margin expectations.

Okay.

And then, as it relates to some of the positivity on the dress category, which was great to see, Debbie, can you disaggregate what portion of that category that turned positive was more reg price versus promotionally driven?

I'm trying to understand the sustainability of the positivity in dress, if we strip out some of the promotional activity that ensued in the category.

Sure.

The first thing I will tell you is that we believe, as we talked about in first quarter, that dress has started to turn the corner.

Will dress, as a percent of penetration to the total, ever see the levels that it did years ago?

No, it won't.

And the reason it won't is because there is a much more casual lifestyle today.

So, we are going to let dress elevate itself to whatever degree the customer says that they will buy it.

We're seeing -- as far as excitement in the industry, the styles are still pretty simple.

We rely on our merchants' development capabilities to bring freshness to that category through new materials and development, and also in colors.

That's what I would really tell you about dress.

Our next question is from Jeff Van Sinderen of B. Riley.

Good morning.

I wonder if you could update us a little bit on athletic, and athletic derivative -- what you're seeing there?

I think you mentioned it's strong.

Then also, would it make sense for you to change penetration in that segment on a regional or store basis?

And then, if you could also touch on the men's business?

And I have a follow-up.

Okay, let me see if I can get everything you asked.

If I miss anything, you'll come back and ask that again.

As far as the casual business is concerned, we're excited about what we've seen in the market.

We feel that it really does address the needs of our core customer.

That's everything from vulcanized to flats to anything that really lies in that casual space.

It could be casual boots, shoes or sandals.

So, I'm excited about what I saw.

I like the approach the market is taking with really addressing comfort.

I really call it modern comfort.

I like the direction; I think it fits the needs for our customer.

I'm highly encouraged by the direction the market is taking, and we will take advantage of that.

As far as the men's business is concerned, as we stated, we comped up 2% there.

I'm still encouraged by the men's business.

We still have upside opportunity in casual.

We had a nice increase -- mid-single-digit comp in dress for Q2.

We had a comp increase in casual, but when I look to what the opportunities are in casual for DSW overall, men's and women's fall into that category.

I think there's enough freshness out in the market to where we will really be able to maximize that for our customer.

Okay, great, and then I know it started out as a test, but maybe you could just touch on the kids business a little bit more.

I think initially you were a little bit reluctant to put kids in some of your stores.

I'm wondering how you think about keeping the environment right for adults when you do add kids?

Yes, it's a good question.

You're right -- we have expressed concern about that.

That's part of the learning we'll get from this fall's 20-store test.

We're going to listen very closely at what our customer says, but more importantly what they do.

So, if they take advantage of the kids shoe selection that we've put in those 20 stores, that will probably weigh more heavily on our minds than the anecdotal feedback we get from the customers.

But we do intend to find out how they think about it, and whether they feel like there's been an ambience change that's to the negative side.

So, it's a good point you raise.

Our next question is from Steve Marotta of C.L. King & Associates.

Good morning, everybody.

Mary, was there any delay in SG&A costs from the second quarter into the third quarter?

I know that the third quarter is expected to be up.

You mentioned the omni-channel, as well as marketing, but were any of those expenses delayed or previously budgeted for the second quarter?

A very small amount of the omni expenses were pushed out, but it was less than $1 million.

That was just pure timing in terms of things that just crossed over from one month to another.

Yes, we didn't push it.

It's just the way the work fell.

Okay.

And the second question is that I heard that you are testing an outdoor category -- a separation -- either a table or at least a portion of the store to outdoor and rugged outdoor.

Can you talk about if that's accurate, first of all?

And secondly, how many stores that's in?

And what you anticipate that doing through fall and into spring next year?

That isn't an accurate statement.

We're not testing any outdoor product.

Two years ago we started testing some outdoor brands in some of the markets that required that they needed to deliver a little bit more of that product.

But it's not a call-out and strategy.

If there's something outdoor-related that we feel is appropriate for a particular store, we'll buy it as part of the assortment.

But there's not a test going on, on that category.

Great, thank you very much.

You're welcome.

Our next question is from Sam Poser of Sterne, Agee.

Good morning.

Thank you for taking my question.

In the casual business, can you talk about what role comfort footwear is playing in that, Debbie?

Yes, good morning, Sam.

So, as we saw at the last two shoe shows, I think comfort has infiltrated every single category.

The vendors, smartfully so, are putting it into dress, sandals, casual shoes.

It is pervasive across the industry.

And frankly, that's what gets me really excited because customers have been asking for it for a long time.

I think they're doing it in a smart way.

There are a couple brands that actually, I think, are doing it in an exceptional way.

I think that's what really is going to continue to drive this casual business and reinvigorate that category.

This concludes our question-and-answer session.

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

Sure, thanks very much.

Listen, we want to thank you all for your continuing interest in DSW and your support.

We're focused on improving near-term results, while continuing to manage the Business with a long-term mind set.

I know if you have follow-up questions, Mary and Christina are going to be available during the day, so feel free to contact them.

Thanks again.

The conference has now concluded.

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