Designer Brands Inc (DBI) 2015 Q1 法說會逐字稿

Good morning and welcome to DSW's first-quarter 2015 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, Andrew.

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 2, 2015.

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 in 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 first-quarter results and discuss our outlook for the full year.

Mike will share additional color on the quarter and provide an update on our strategic initiatives.

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

With that, I turn the call over to Mary.

Thank you, Christina, and good morning, everyone.

Our first-quarter results were a good start to our 2015 spring season.

Sales for the quarter increased 9.4% to $655 million, driven by a 5% comparable sales increase for the DSW segment.

We are pleased to report that all categories contributed to comp growth despite port delays.

Transactions for the DSW segment increased in the low single-digit range.

We chose not to repeat an unprofitable online promotion from last year resulting in lower conversion online.

However, in-store conversion rates increased.

Average unit retail increased in the low single digits, while units per transaction were flat, resulting in a low single-digit increase in average dollar sales.

With the opening of 18 new stores DSW's store base increased by 10% and total square footage increased by 7.4% over last year.

In our Affiliated Business Group first-quarter comps increased 5%, as well.

Total sales for the quarter grew 8%.

We were pleased with our ABG performance which benefited from strong merchandise assortment.

ABG opened three stores and ended the quarter with a total of 374 departments in operation.

Total Company gross profit for the quarter increased 110 basis points.

Merchandise margin increased 85 basis points.

Our spring assortment demonstrated better sell through rates which improved markdowns by roughly 155 basis points.

This was partly offset by lower initial markup, costs related to our rewards program and higher shipping expenses.

Combined, these factors negatively impacted merch margins by 70 basis points.

Occupancy, distribution and fulfillment center rates for the total Company leveraged by 25 basis points compared to last year.

Operating expense rates delevered by 10 basis points in the first quarter, with stock and incentive compensation deleverage, partially offset by the leverage of store and home-office expenses.

Town Shoes of Canada contributed a loss of $0.01 per share.

Town Shoes' profits are seasonally skewed towards the second through fourth quarters.

We expect full-year Town Shoes profitability to exceed last year.

Our net income increased by 22.6% to $47.4 million.

Shares outstanding were 89.6 million compared to 92.1 million last year.

As a result, earnings per share for the first quarter increased 26.2% to $0.53 per share, generally consistent with our expectations.

Turning to the balance sheet, we ended the quarter with cash, short- and long-term investments of $456 million.

During the quarter we liquidated $79 million of investments to purchase CAD100 million in anticipation of funding the future purchase of the remaining interest in Town Shoes of Canada.

Although the definitive date of this transaction is not currently set we decided to take advantage of the favorable US dollar to Canadian dollar exchange rate, which has been trading near record highs.

We are in the process of investing in the Canadian currency.

Once invested, future foreign currency gains or losses will flow through other comprehensive income on the balance sheet.

We recognized $3.3 million of foreign currency gains in Q1 nonoperating income related to the Canadian dollar holding.

Inventories at the end of the quarter were up 13.8% on a cost per square foot basis.

Excluding pre-buys, inventories were up 8.5% on a cost per square foot.

The increase in pre-buy inventory was due to the purchase primarily of fall 2015 pre-buys and a multi-season buy of hard to access brands.

We estimate that close to half of the 8.5% increase relates to the timing of deliveries.

Capital expenditures for the first quarter were $27.3 million, of which $15 million was spent on new stores and store remodels, and the balance was spent on technology, distribution center and facility projects.

We continue to guide full year EPS of $1.80 to $1.90.

We expect full-year comparable sales growth in the low to mid single digits and full-year total sales to increase in the 7% to 8% range.

We plan to open 35 to 40 new stores this year including 9 small-format stores.

We continue to expect full-year merchandise margin to improve modestly, with lower markdowns partly offset by category mix, shipping expenses and expenses related to enhancing our rewards program.

For the full year we expect to see occupancy leverage above 2% to 3% comp growth.

We expect distribution and fulfillment rates to remain flat.

We continue to project operating expenses to increase in the low double-digit range for the full-year, driven by higher stock and incentive compensation expense, as we discussed last quarter.

We assume a full-year tax rate of 39% and shares outstanding of 90 million shares.

We project a contribution from Town Shoes of Canada in the range of $0.03 to $0.04 per share which will be recorded below the line as income from equity investment.

With that I will turn the call over to Mike.

Thanks, Mary, and good morning.

As Mary described, we were pleased with the start of our spring season which comped up 5% despite challenges created by West Coast port delays.

The women's category increased comps by 4% with reg price comps stronger than clearance comps.

I was pleased that all sub categories in women's posted positive comp sales including the casual and dress businesses which were impacted most significantly from the port delays.

Comps for the seasons business increased in the high single-digit range helped by the early release of pre-buys that bolstered our sandal inventory position.

Athletic comps increased in the low double digits during the quarter with fashion athletics driving outsized growth.

We allocated more open-to-buy dollars from the casual category into athletics and provided effective marketing support to help drive our athletic momentum.

The men's business increased comps in the low single-digit range.

Growth in men's seasonal and fashion areas partly offset softness in the traditional dress areas.

Men's boots drove a healthy sales increase for the quarter.

Our accessories business posted a low single-digit comp led by fashion accessories, hosiery and jewelry.

The Midwest, South and West regions all posted mid single-digit comp growth.

The Northeast and the Mid-Atlantic regions posted low single-digit comp growth, experiencing more severe weather compared to last year.

We opened 18 new stores this quarter and are pleased to report that our new stores are meeting our sales expectations.

We now have a total of 13 small-format stores in operation.

We found that these small format stores in aggregate generate a higher level of in-store demanded omni-channel sales than our average stores.

And we think that indicates that our omni-channel capabilities have and will benefit the performance of our small-format stores going forward.

As we discussed last quarter, we provided full points for clearance purchases to rewards members beginning this fiscal year.

We believe full points on clearance is another way to enhance our value proposition.

This enhancement also simplifies our ability to communicate the benefits of our rewards program to customers.

We obviously need more time and we will update you as we have more history with this revised program.

This March we introduced DSW's spring marketing campaign which features real people in real life settings.

The campaign has resonated among many of our customers and friends.

Coupled with our compelling assortment, our marketing helped drive solid gains in multi-channel traffic.

Total traffic for the quarter including stores online and mobile was up 7% to last year.

Our focus this year is to expand the customer's access to our full assortment.

The customer typically finds 2,500 choices in a single store out of the more than 15,000 choices that we carry across DSW.

Since we started our ship-from-store program customers can now access DSW's entire assortment no matter where they shop and have their orders shipped for free.

This capability has transformed our 450 stores into a network of mini distribution centers.

Customers and associates have embraced this feature rapidly, allowing us to increase our omni-channel sales last year to almost $100 million.

A test of new endless aisle technology is now live in 10 of our stores.

This test includes digital displays in 5 of the stores and an associate-facing mobile app in all 10 locations.

The digital displays provide extended colors, sizes, product reviews and related styles through strategically located touchscreens.

In addition, with our mobile app, associates can better service customer needs in the aisle by providing a wider range of product choices, access to saved wish lists, and reward certificates, and the ability to complete their transaction from anywhere in the store.

The customer can complete both an in-store and a ship-to-home purchase in a single transaction.

I look forward to updating you on the results of this test as the year progresses.

In order to optimize the adoption of these tools we're implementing an updated store service model.

This updated model emphasizes a handful of behaviors that facilitate more meaningful engagement with the customer.

We have also put in place a new labor scheduling tool that matches associate scheduling with peak traffic hours based on historical hourly traffic patterns.

At the same time, the system also provides our associates improved visibility and flexibility over their schedules.

We believe these changes will improve the customer experience, store conversion and associate satisfaction.

We've recently completed a significant upgrade of the DSW.com platform.

This upgrade provides us with features and functionality that will be the basis for future digital demand growth.

Customers shopping for products online will now find a dramatic improvement in search results.

This is particularly important as we expand the breadth of SKUs and increase the number of drop ship vendors on DSW.com.

This upgrade improves our site visibility for product-related queries conducted on search engines.

This upgrade was implemented seamlessly, and it opens the door for powerful capabilities like buy online/pick up in store, and personalization.

We continue our phased implementation of the assortment planning system which we are using to localize store assortments based on customer preferences.

We are now fully functional on the pre-season planning phase of the system and we've begun the implementation of the in-season forecasting phase.

We expect that we will start to see benefits from this investment in 2016.

Later this year we will roll out buy online/pick up in store and buy online/ship to store.

Buy online/pick up in store and ship to store are critical for many customers who do not have the capability to receive packages securely at their homes.

These capabilities provide additional convenience to customers who prefer to pre-shop online before picking up the item in store.

We will also implement order routing optimization which uses a new algorithm that selects our slowest moving inventory to fulfill digital orders.

Finally, so far this year Town Shoes of Canada has opened four DSW Canada stores averaging 20,000 square feet in the cities of Whitby, Calgary and Edmonton.

Similar to our first two stores in the greater Toronto area, these new DSW Canada stores have received strong support from their local communities.

The first 6 stores have met our initial expectations and we plan to open another 6 in the fall for a total of 12 DSW Canada stores by the end of the year.

In summary, we were very encouraged with our first-quarter performance.

We're pleased with customer response to our merchandise strategy this spring.

We're expanding the customers' access to DSW's entire assortment while bringing our full breadth of choices into every store.

With our investments we'll deliver a unique endless-aisle experience that differentiates DSW and positions us as the customer's first choice for footwear.

And with that, I'll hopefully turn it over to the operator for questions.

(Operator Instructions)

Patrick McKeever, MKM Partners.

Great, thank you very much.

Just wondering if you could talk, Mike, about the percent of the business now that is off-price buys or opportunistic buys.

And I'm wondering if you've seen any -- clearly you've seen some incremental opportunities from the port situation, but wondering if there's any change in the strategy there in terms of increasing the penetration of off-price buys.

I think previously you had said somewhere in the low double digits was the ultimate goal.

Yes, this is Debbie Ferree.

Good morning.

Opportunity buys, close out buys, there are a lot of deals in the market right now.

And currently our penetration of those opportunities is in the low double-digit range.

I think we called out before in a previous call that we would be happy to have that range go from 10% to 15% in terms of opportunity buys, and that's where we are landing right now.

There are a lot of great deals in the market out there.

There's plenty of goods in the market.

We have the ability to be a lot more disciplined and strategic about the goods we take and we have found a lot of good opportunities.

So, between 10% and 15% is our goal.

If that were to float a little bit higher and it was the right product at the right price, that wouldn't disappoint me.

And then just as a follow-up, on the cost side of the business, did you incur some incremental costs because of the port disruptions in terms of added shipping costs, rerouting costs, those kinds of things?

Was that a material factor in terms of earnings?

Not material.

Okay.

Great.

Thank you.

David Mann of Johnson Rice.

Yes, thank you, good morning.

Nice quarter.

Following up on that question about opportunistic buys, just curious about what implications that has for margins.

I know you didn't change your merchandise margin guidance but it would seem like you might have an opportunity to have bought things a little, might have some positive implications there.

Yes, David, there were a lot of characteristics around those buys.

In some cases we can get significantly better cost and we can do one of two things with that.

We can pass more value on to the consumer.

We can also use it to leverage where our IMU and our margins are right now.

So I would tell you it was a combination of all the above factors.

I really don't like to just talk about port delays.

I will just tell you overall there are plenty of goods in the market.

We don't have full knowledge on did it come from the port delay, was it a cancellation from a brand, was it an in-stock position that a wholesaler took.

All I know is there are some really good deals out there right now and we're being very strategic and disciplined about what we take and when we take them and what we are paying.

And then to follow up, can you talk a little bit about the performance of sandals and open toe shoes, and generally how might you be trending out of the quarter into the second quarter?

Sure.

Sandals had a nice comp, as Mike mentioned.

We were very pleased with our sandal business in Q1.

That came from a couple of different places -- our regular on order, but some of the pre-buys that we actually were able to access last year and put in a pack and hold, we actually were able to accelerate some of those pre-buys to offset some of the potential receipt risk in the port delays.

So, we were pleased with our comps, we were pleased with our inventory position.

Going forward, as we typically do, we're going to plan it conservatively and we're going to chase into what the customer tells us they want to buy.

From a liquidity position we are in good shape.

Goods available for sale and sandals Q2, we're pleased with that, both with content and the value we're passing to the consumer.

There is liquidity in the event that there are some really good opportunities out there additional that we want to take advantage of.

So, I'm overall pleased with that category where we performed and what it looks like for the balance of the season.

Thank you.

Chris Svezia of Susquehanna.

Good morning, everyone, nice job.

Mike, you have been generous in the past in terms of providing some color either, A, about the comp trajectory in the most recent quarter and how you are trending so far quarter to date.

Any color that you can share with us if the business obviously accelerated and whether or not that acceleration is continuing into the second quarter?

Chris, I'm not sure you're accurate that I've been generous in the past.

I'm trying to be nice here, Mike.

I'm trying to get whatever I can out of you so I'm sweet talking you.

Come on.

In all honesty, even if I were inclined to give that kind of insight I think it would be hard to do it accurately just because of the shift of Easter that advantaged the earlier weeks in the quarter and disadvantaged the later weeks in the quarter.

We always look at the combination of March and April and that was strong and solid.

Okay.

And anything about second quarter or no, not going to go there?

No, sir

Okay, I had to try.

I'm curious, just switching gears for a sec, on the merchandise margin, the 70 basis points from shipping and the rewards program, is that something we should expect for the balance of the year?

And when do you anniversary that pressure?

When does that abate?

Is that in the fourth quarter?

The different components of it have different timing for the balance of the year.

We had really started more of our pricing actions in Q2 of last year so the IMU component of that in Q1 should start to abate in the balance of the year and have a more modest impact, as should the shipping component.

We really began our full-year free shipping in the second quarter last year on a more full basis.

So, while we will continue to sees shipping costs increase in total because more of our sales are being done direct to consumer, we should see some abatement from that.

I will tell you that in total my expectation is that we will still see some modest deleverage from those three sources for the balance of the year.

Okay.

Helpful.

And then, Debbie, one for you.

I think you mentioned the casual business had turned comp positive.

The first time we've heard that in a while, if I have that correct.

And maybe talk through what's driving it.

And I'm sure it's a much smaller piece of the business that it had been historically.

Just maybe talk about that a little bit.

Sure.

If you remember, Chris, in Q4 casuals comped down 8%, and we saw that comp 1% positive for Q1 of this year, just to give you a frame of reference.

As we talked about last season there's a lot of excitement happening in casuals.

There are some new brands that are coming into the fold and there's some strengthening of existing brands as we all look to the whole lifestyle shift of the casualization of lifestyle.

We see new silhouettes, new brands, all entering the fold and adding some nice comp.

So, you are seeing a mix shift under the covers from certain brands.

Some are getting weaker, some are getting stronger.

And that is what directionally helped us with the comp for Q1.

Okay.

Thank you very much.

All the best.

Thank you.

Kelly Chen of Telsey Advisory Group.

Hey, guys, congrats on a nice quarter.

I just wanted to piggyback a little bit more Chris's question.

If we talk about the merch margins here a little bit, Mary, it seems like you guys got 85 basis points in the first quarter.

It seems like there's even more opportunity in the second quarter.

Can you just talk about your expectations for the full year?

I understand there's still a drag from the shipping and whatnot but why still only the modest improvement for the year?

Kelly, could you repeat the last part of the question?

Sure.

Just trying to get more color around your expectation for a modest improvement in the merch margin for the year.

It seems like you guys got off to such a good start in the first quarter and that there's even more opportunity in the second, so trying to understand that full-year guidance for the merch margin.

Just a little more color on that.

I would tell you probably the single most significant area within the merch margin that's going to have an impact on us is in the rewards program with the full points on clearance.

We did see in Q1 impact there as well as, if you recall, we had some good news last year from shortening up the timeframe for certificate redemption from six months to three months.

So, by not repeating that good news from last year, combined with offering full points on clearance, that will provide us some additional impact on the overall merch margins for the full year.

I think that where we're looking at, we do expect overall IMU to be down very modestly, year over year, maintaining some of that pricing sharpness that we had begun last year.

We also are looking at some modest deleverage in shipping.

And then we do see an improvement in markdowns that we expect to see in Q2 and then more modestly flatten out for the balance of the year.

That's the overall view of where the merch margins should be.

Great, that's really helpful.

And then, Debbie, you talked a little bit about the women's casual but could you just talk a little bit about how you feel about the fashion content now that you are seeing?

It seems like there is more newness in the space.

Do you think that is the case?

And could you also just talk specifically about athletic?

It sounds like you guys are doing really well there and that you're seeing a bit of a shift towards sports style.

Do you think you're better positioned to capitalize on the athleisure trend this year?

Thank you for that question.

I'm going to really break it down into three different parts because I think there were three different questions in there.

In the dress shoe area, from a silhouette point of view, you talked about fashion, there aren't a whole lot of new styles coming out in dress.

And we stabilized that category.

But the way we've infused freshness and excitement there is through how we detail the shoes.

So, I still see some excitement in material interest, colors and how we detail, but once again I want to emphasize I think we have stabilized the dress business.

I really don't look for a significant increase in penetration of that business.

I think we're out of the trough and we're in a good stable place right now.

In the casual area I look at that in two ways.

Number one, just the women's black and brown casual, which I think is being infused by a lot of excitement in this whole modern comfort, modern athleisure trend.

And I'm not going to call out any brand names but there are some new brands that have come into the fold in the industry that are doing exceptionally well, and some of the traditional classic brands have a little bit of weakness associated with them.

But we're really excited about what some of these new brands are in terms of what they are bringing in terms of comps and margin.

As far as athletic is concerned, the fashion piece of the athletic business is very different from last year.

Fashion actually contributes about 46% of the business versus 40% last year.

There's a lot of new fashion coming there and it tends to be mostly in the young attitude junior area.

Those comps were in the high double digits.

We continue to see strength in the fashion athletic piece of the business.

So, the combination of the traditional casual, the fashionable shoes there with the new brands, and the athletic fashion, I think have laid a new solid foundation for us.

And I think we have a pretty good growth trajectory ahead of us on that.

Thank you.

That's very helpful.

Camilo Lyon of Canaccord Genuity.

Thanks and good morning, everyone.

Nice job on the quarter.

Mike or Mary, I was hoping you could just give a little bit more detail on the excess inventory that you're seeing -- or maybe this is a better question for Debbie.

I think what companies have been saying is that the port situation has, for the most part, now been resolved from an inventory flow perspective.

I'm curious to know how much opportunity you still have left, whether it's something termed in a timing perspective, or however you want to quantify.

It sounds like as of the quarter end you had about $25 million worth of pre-buy inventory.

I'm curious to understand what the total opportunity you see being in terms of the pre-buys that you have in front of you.

Let me just tell you about what we see coming at us from our content point of view.

The list, the opportunities, have been consistent in the market.

As I said before, it's really hard to tell where that is coming from, but I really don't care where it is coming from, I just know there's plenty of goods out there, a lot of good opportunities, and we're able to be very selective.

We saw those lists, those opportunities, slow down a little bit at the very end of Q1, beginning of Q2, but now they've picked back up again.

I think that having a new close-out buyer in place that lives in New York and is on the ground every single day and is able to continue to elevate all sorts of opportunities for us has helped us, number one.

And, number two, there is just a general good flow of off-price opportunities out there.

Would you be able to say what the current pre-buys represent of your expected total pre-buys in this period?

So, does $25 million equated to half of what you think you might be able to get or a quarter of what you think you might be able to get?

Is there any way to put some quantification around it?

Let me try that one, Camilo.

I think Debbie has been clear she wants her opportunistic buy penetration to be in the 10% to 15% area.

And not all of that goes through pre-buy but a lot of it does.

And at the end of Q1 we had about 5% of our inventory invested in pre-buys.

So those are the ditches you can fit the question between.

Great, that's helpful.

And then, Debbie, how long do you think you will be able to use the product that you are buying now?

Is this product meant for Q2-Q3 or does it have a longer use of life to it?

All of the above.

The opportunities that we've been getting through Q1, and even now, part of that can be used as flow-through.

In other words, receipt it now and flow it directly to the stores, depending on what our need, what the demand is by category based on sales projections.

Some of it that we will get now we will hold for a spring 2016 packaway.

That will be opportunity buys that are good product, in my opinion, it doesn't age, and they are great values for the consumer.

So, we will put that away for pre-buys for the future.

And part of our pre-buy on hand right now is opportunities that we bought last fall that will start to flow in fall 2015.

We're very surgical about what we buy -- is it flow-through, is it pre-buy -- and we make sure that we are putting it in the appropriate bucket so that when the customer sees that it is the right item at the right price.

Great.

And then, Mike, a lot of the questions I get surround competition.

You've done a lot over the past year or so to improve your value messaging.

How would you characterize your competitive position right now in the market, especially when speaking about your online competition?

And how do you view your assortment relative to some of the online competitors?

I think we put a stake in the ground about a year ago when we said we are not going to let our value proposition and our reputation be diminished in any way.

And that's when Debbie and her merchants identified some key items, recognizable, knowable price points, that she took action on and has been taking action on ever since.

And I think once those price points took effect you saw the inflection point in our sales trend.

We are monitoring our values on identical and similar items from brick-and-mortar retailers, from online retailers and from multi-channel retailers.

It's an ongoing process and it's something we pay a lot of attention to.

And I can assure you we are investing in tools that will enhance our ability to monitor that pricing environment.

Value is critical, one of our brand cornerstones that we see as essential to our success, so we're paying a lot of attention to it.

Okay.

And then just my final questions on the assortment planning.

You've talked a lot about the implementation of it and when we should expect to see some of the benefits really starting in 2016.

But is there a possibility for some of that improvement to manifest earlier this year as you are implementing that on the pre-season buys for the fall assortment and starting to do the in-season buys?

Is there an opportunity to have an improved full price comp, either in Q3, Q4, as that program rolls out?

It's possible but the people in our organization who are closest to it advise us not to count on it.

And that's why we have consistently said count on it beginning in 2016.

And I think the reason for that is that there are fundamental changes in who does what within our merchandise planning and allocation and buying areas.

And there's a lot of change management that we are having to manage through.

So, just understanding how the system operates and who does what is a lot for us to absorb.

That's why we think that the first season's receipts that were planned using assortment planning probably won't have a lot of benefit, but should beginning next year.

And I'm not internally counting on any benefit from AP this year.

Scott Krasik of Buckingham Research.

Hi, everyone, thanks.

A couple questions.

First, maybe if you could just help us understand, building on Camilo's question, not just the competitive environment but how do you view how the season is going to go from a promotional standpoint, and just balance the fact that maybe some traditional retailers canceled orders which created excess buys for you.

Do you get the sense that your competitions' inventories are pretty clean so that the season will be fairly less promotional year over year?

I can't comment on our competitors' inventories.

I see basically the same thing that everyone else sees.

You have the brick-and-mortar point of view and you have the dot-com point of view.

But I really don't know that their inventory positions or, better than that, the quality of the content of their inventory.

All I know is that we are a value retailer.

We pass good value on to our customers.

And we've been more disciplined than ever over the last year to really make sure that every single week we are evaluating our level of inventory sell throughs by item as we review outdates and sell throughs.

So the discipline and rigor around how we are evaluating content is higher than it's ever been before.

I believe we have the right content.

The goods available for sale Q2, I like what we have, I like how we priced it.

I don't know what may or may not happen differently than last year in the promotional environment but I believe that our content is strong enough to weather whatever we know right now.

And if I could, Scott, just add on to what Debbie said, the way we manage our business is, every item that we bring in has a date by which we anticipate we are going to move it into clearance.

And we have an assumption as to how much of that item we will have sold through it at the right price.

And what that allows us to do is, on an item by item basis, monitor sell through rates throughout the season.

And if our sell through rates are faster than we anticipated, maybe we will chase that business and get more in or move it into clearance later.

And if the sell throughs are slower than what we anticipated, then maybe we will move those goods into clearance faster than we would have thought.

But we're monitoring that on a weekly basis.

Now the one thing that I am a little excited about is something I put into the script, and that the new algorithm we're going to used to figure out where we fulfill digital demand from.

And that will give us just another arrow in our quiver as to how we manage inventory lumps that pop up on a store by store basis.

But the most important thing I wanted to emphasize is that we're focused on units and sell through rates and when we need to move it out of right place into clearance, and we're pretty vigilant, as Debbie said, about managing to that process.

Thank you, Mike.

And if I could squeeze in two more, one on SG&A.

It seemed like this was the quarter maybe you would have the toughest comparison and it would grow the most.

It was only up 10% so maybe comment on why you still think it's going to grow double digits for the year.

And then your stock is down still almost 10% since the beginning of the year.

How does this not qualify as an opportunistic time to be buying your own stock?

Even though you have the Canadian obligation it still seems like there's a lot of excess cash there.

Thanks

Scott, the SG&A side, the impact in Q1 was pretty much in line with our expectations.

We do expect that continued higher SG&A in the balance of the year.

And I think you will see that tilt slightly towards Q2 in terms of the higher impact.

And as it relates to the value of the shares we certainly appreciate your impact.

We've always taken a very opportunistic approach to share repurchase.

And as we've said in the past we require an open window and then we have a subcommittee of the Board that makes a determination in terms of value, and both of those things have to be in place for us to act.

And, in fact, we took no action in Q1.

Thank you.

Kelly Bari of Goldman Sachs.

Good morning, it's Taposh Bari.

I've got a multi-part question on merchandise margin, so I'll just read them off.

First, can you tell us what merchandise margins were or what the year-over-year change was for the DSW segment?

Two, how did that figure compare to your internal plan for the quarter?

Three, the ABG gross margins were down pretty meaningfully.

If you can explain why that happened and if it was transient.

And then, finally, a lot of questions on opportunistic buys.

Can you help quantify how impactful that was or how much it benefited your first-quarter merch margins?

Let me start.

I think you will see the DSW margin performance in the press release.

Secondly, we really don't comment against plan on a line item basis.

But I think in Mary's script she said that our performance in the quarter was generally in line with our expectations.

The EBG margin contraction was really the result of an asset impairment we took in the quarter.

And can you be a little more specific on your question about opportunistic buys?

Yes, I was just under the impression that the opportunity to buy for more off price was allowing you to lower your cost basis for some goods in season and help subsidize some of that IMU pressure we have been seeming.

I was hoping you can quantify the impact.

I think Debbie said it well when she said there's been a lot out there.

We've been able to be strategic and selective about that.

And the fact that we've got a closeout buyer in place advantages us versus others who don't have that kind of singular point of contact with the supplier community.

But Debbie also was pretty clear in saying that we always have a choice as to whether we want to try and convert those cost advantages to margin advancement or we want to convert it to stronger values to the customer.

I don't think we have a score keeping system that tells us exactly how much of the time we've done the former and how much of the time we've done the latter.

There was some markup on goods sold contraction in the quarter versus prior year.

That's a continuation of some of the work we did last year to sharpen our price points, and we did that on an item-by-item, style-by-style basis.

And we are continuing that and coming around the horn on that initiative we started, as Mary said, in the second quarter of last year.

It's really impossible for me to identify just how much of the time we took it to margin and how much of the time we converted it into value for the customer.

I just don't have a mechanism to do that

Got it, that's helpful.

And then just a quick follow up on small stores.

It sounds like that strategy is working out to your plan.

Can you just remind us what your plans are ultimately with the small-store format, where you are opening them, and what the next phase of growth could be for that format if things continue to go according to your plans?

Here's what I would say.

We are encouraged by the performance.

We started opening those small-format stores at the tail end of 2013.

And then we opened some more in 2014 and we've open some in 2015.

The 2015 stores are doing better than the 2014 stores, and the 2014 stores are doing other than the 2013 stores.

I'm not trying to characterize that we have gotten smart; I'm just telling you that the trend has gotten better.

We continue to fine-tune that model, and we fine-tune it from a cost to build out perspective and from a rent negotiation perspective and from a volume expectation perspective.

And, importantly, we're using those small-format stores, a couple of them, to test out some of our new endless-aisle technology, which is going to be important to all of our stores but I think it's especially important to the small-format stores that have a choice count that's roughly half what a full-size DSW store would have.

The endless-aisle technology and service model set that I mentioned in my part of the script are even more important to the small-format stores.

We have actually not declared what the build out potential is for the small-format stores, and I'm not going to do that here today because we haven't made that determination.

Suffice to say we think it's significant and we will be declarative about that as soon as we are able to, but not yet.

Great, thank you.

And best of luck for the rest of the year.

Jeff Van Sinderen of B. Riley.

Good morning.

I wonder if you can just follow up a little bit more on athletic, concentration of athletic.

Is that morphing a little bit in the women's business and casual athletic?

Maybe you could talk about where you see that and how you are thinking about that.

And then if you could also follow up on the kids' business and where you stand at that on this point.

Thanks

Yes, good morning.

We were really pleased with the athletic performance that we had for the quarter.

That was up in a healthy mid double-digit increase range.

I believe we quoted 14%.

The good thing about that is there are many new things happening in that business that I see continuing into second and even third quarter to support early back-to-school and into fall.

The fashion piece of the business, as I mentioned before, is increasing relative to performance although both fashion and performance are getting nice comp increases.

So I am pleased with what we see there.

I am pleased with the brands that we have obviously are resonating well with our customer.

And the values that we've got on those brands are resonating well.

We actually don't start lapping big headwinds or big increases until Q4 of this year.

So, I think we have a nice tailwind in athletic ahead of us for the next couple of quarters.

Kids right now, let me just refresh your memory -- that it is online and we do have it in 20 stores.

And kids continues to do exceptionally well.

It is one of the growth businesses that we have declared for the future and we're looking to expand that in DSW.

I'm not sure that we have proclaimed exactly how many doors and when that's going to happen but we are working on that right now.

We are pretty excited about that because what we have found is that the consumer, when offered children's shoes when they have kids in the house, actually have an opportunity to give us more adult footwear wallet share.

So, we're excited about that business, that's what's happening now, and we're going to be looking to expand that.

Okay, great.

Good to hear and good luck for the rest of the quarter.

Sam Poser of Sterne Agee.

Good morning and thank you for taking my question.

Debbie, I have a question about the initial markup in the gross margin.

It sounds to me like you're offering better value to your customers, so the less markdowns are really helping drive the improved merchandise margin.

Am I thinking about that correctly?

Yes.

And, Mary, why would that change over time?

That's something that's proving out that you are doing that very well.

Why would that moderate throughout the year?

The primary reason is we actually had very good performance in markdowns in Q3 and Q4 of last year.

And we were up against much worse markdown performance in the spring season of last year.

As we basically lap spring of last year our markdowns improvements will be significantly better this year in spring than in fall.

So we would expect, I would think, Q2 merch margins, then, to be high again, and then possibly merch margins being down in the back half?

Is that the correct way to think about it?

And I have one more thing for Debbie.

I think the better way to think about it, Sam, is that you're going to see consistent improvement in margins through the spring season similar to what you saw in Q1, and then just modest improvement in the back half.

Got you.

And then, Debbie, at the CEO summit you talked about the new way that you are addressing your customers and thinking about DSW as a brand.

Some of that was hinted at on the call.

Can you just give us an update on how the DSW brand is evolving?

Yes.

What we really talked about at the conference, Sam, was about 14 to 16 months ago we really took a pause and said we really do want to step back and understand our customer more deeply.

So, we narrowed the lens.

We're more specific around the target customer, which allows you to be a lot more precise about your assortment architecture and how you market to those consumers.

That was the big story that I think I talked about.

And then we also talked about how you speak to the customers -- so, being more engaging with the customer, how do we do that, and then also the impact of digital for the future and how we are really using digital to be where the customer is and how we speak to them.

Those were the three big takeaways, I think, from the conference was, narrowing our lens and being much more precise about who we are focusing on, and leveraging all of the intelligence that we have to be more personal and engaging with the customer.

And then how do we actually see our marketing spend in terms of traditional versus digital.

And where are you in that continuum right now of getting to where you want to be?

We are in the early stages.

The research was done, like I said, 14 to 16 months ago.

We have put our plans together and we are in the early part of our journey, which I think I mentioned when I was down there.

So, there's good things to come but we are in the early part of the journey there.

Thank you very much and good luck.

This concludes our question-and-answer session.

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

Thanks very much.

And thanks to all of you on the call for your interest, your participation, and today for your patience with our technological difficulties, which we will try to remedy before the next call.

Thanks again.

Have a great day.

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