Designer Brands Inc (DBI) 2015 Q3 法說會逐字稿

Good morning and welcome to the DSW Inc.

third-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now to turn the conference over to Christina Cheng.

Ms. Cheng, please go ahead.

Thank you, Keith.

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

Earlier today, we issued a press release detailing the our results of operations for the 13-week period ended October 31, 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 factors including those listed in today's press release, and our public filings with the SEC.

We assume no obligation to update or revise our forward-looking statements.

Joining us today are Mike MacDonald, President and CEO; Roger Rawlins, EVP and Chief Innovation Officer; Debbie Ferree, Vice Chairman and Chief Merchandising officer; and Mary Meixelsperger, Chief Financial Officer.

Mike will provide an overview of our third-quarter performance.

Mary will discuss third-quarter results in our outlook in greater detail.

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

With that, I turn the call over to Mike.

Thanks, Christina.

Before we review our third-quarter results, I would like to say a few words regarding the appointment of Roger Rawlins as DSW's Chief Executive Officer, effective January 1, 2016.

The DSW Board and I have been working on my succession plan since October 2013.

The outcome of that process will facilitate a smooth transition of leadership to an industry veteran, with deep knowledge of all aspects of DSW's business.

Roger joined DSW in 2006 as part of our finance team, and since then, he has been an instrumental part of our senior leadership.

In 2010, I asked Roger to take over a fledgling DSW.com operation that was losing money.

Within two years, he had that business contributing very meaningful sales and profitability.

In 2013, Roger led a group that developed DSW's multi-year omnichannel road map.

And in 2014 we put him in charge of implementing that plan.

Earlier this year, Roger assumed responsibility for innovation, strategic planning, and the affiliated business group.

Time and again, Roger has demonstrated his ability to successfully manage challenging assignments with great success.

We are all thrilled that Roger has agreed to serve as DSW's next CEO.

I've had the distinct privilege of working with an extremely talented team during my tenure, and I know their passion for serving customers and driving shareholder value will only thrive under Roger's leadership.

At this time, I'm going to ask Roger to say a few words.

Roger?

Good morning, everyone.

Thank you, Mike, for your kind words.

It is truly my pleasure to be on the call this morning.

I want to start by thanking Mike and our Board of Directors for this incredible opportunity.

Having worked with the team for the past 10 years, and with Mike for more than six, I've witnessed how DSW has grown from a regional off-price chain into one of the leading footwear retailers in North America.

In the past five years, we have transformed DSW from a traditional brick and mortar operation into a powerful omnichannel retailer.

I believe the investments we have and will continue to make enhance our ability to compete in a fast-changing retail environment, grow market share, and expand into new markets.

I believe in our team, and together, we will focus our immediate attention on creating a stronger, more nimble, and more innovative DSW, better positioned to meet the demands of our evolving customers.

I look forward to working with our team, and meeting many of you in the coming months.

We will we use the next couple of weeks to align our 2016 priorities, which we will discuss during our fourth-quarter earnings call in March.

Before I turn the floor back to Mike, on behalf of our Board, management team and all DSW associates, I want to thank Mike for his contributions to DSW.

Under his leadership, DSW grew its store base by 50%, improved our dot-com platform, and brought DSW to Canada, nearly doubling sales and growing earnings five-fold.

We are truly appreciative of Mike's leadership, and I am personally grateful for his mentorship.

Now let me turn the call back to Mike.

Thanks, Roger.

Let's now turn to the third-quarter results.

As we announced three weeks ago, third-quarter sales for DSW Inc.

decreased slightly to $666 million, with a comparable sales decline of 3.9% for the DSW segment.

Comp sales were flat in August, but materially weakened in September.

In response, we moved quickly to implement incremental promotional measures in October, and the negative sales trends began to improve, but only modestly.

There are three primary reasons for our disappointing sales results in the third quarter: Weather, a weak macro environment, and some areas where we did not execute as well as we could have.

In terms of weather, it is well documented that September was one of the warmest on record in many parts of the country.

This resulted in weak demand for seasonal goods, as evidenced by a double-digit comp decline in women's boots, and a low single-digit comp decline in the seasonal items within accessories.

The comp decline in women's boots alone was responsible for 40% of the total comp sales decline.

Geographically, the Midwest and Northeast, which are our most weather-dependent regions, performed below the chain average.

As the quarter progressed, we obtained a better picture of the full extent of the weakness in the macro environment, as a number of retailers reported similar declines.

The broad decline in consumer spending was also reflected in weaker comp performance in our major tourist cities, and in cities located near the border.

In addition to the difficult macro environment, we also had some DSW-specific factors.

We capitalized on the casual shift in the fashion athletic, but we were unable to adjust inventories fast enough to take advantage of the change in women's casual into newer fashion styles.

Warm weather led to the seasonal sandal business extending well into the third quarter, but inventories were not positioned to take advantage of that.

Additionally, our swift reaction to the negative sales trends in the form of receipt reductions reduced the flow of fresh merchandise to a level that was detrimental to the business.

Turning to the numbers, our comp sales performance was down 8% in women's footwear, flat in men's, and down 5% in accessories.

On a positive note, we continued to see momentum in the athletic category, which comped up 12%.

At our affiliated business group, comps declined 3%.

Another thing we learned in the third quarter is that incremental promotions produced only modest results.

As a consequence, we will be taking more disruptive actions in the fourth quarter.

We expect weather will continue to be warm, relative to historical averages, and competition will be more intense.

In this environment, we are taking meaningful actions to deliver stronger value to our customer, and dramatically increasing our marketing spend to stimulate our customers to visit our stores and our dot-com site.

You may have already seen some of the things we've been doing.

We are excited with the launch of our biggest holiday campaign ever, which promises customers DSW's unbeatable values, special brand events, and the largest assortment of boots and gift-giving ideas.

We are backing this campaign with national advertising, and compelling direct marketing messages.

In addition, with the expansion of our omnichannel capabilities, we will provide customers with additional ways to make holiday shopping incredibly convenient at DSW.

These actions are designed to improve our sales trend, but they will create some near-term margin pressure, and require additional marketing expenditures.

We have partially offset the impact of these actions with expense reductions totaling $27 million.

All of these puts-and-takes are reflected in our revised full-year earnings guidance.

Right now, we are very focused on driving the top line.

In the long term, we remain confident we have the right plan in place, and that we are well-positioned to meet the shifting needs of our customers.

An important part of that plan is our omnichannel strategy, the goal of which is to make our entire assortment available to our customers in a seamless fashion, regardless of how and where they choose to shop.

One exciting new capability we implemented this quarter is buy online, pick-up in store, or BOPUS, and buy online, ship to store, or BOSTS.

We rolled these capabilities out to all stores in the third quarter, and with virtually no proactive marketing, this new program accounted for 1% of total sales in October.

The customer reaction was immediate and significant, which proves how much they want, and frankly expect these additional capabilities.

Omnichannel sales, which I define as sales that are demanded in one place and fulfilled in another, represent 5% of total sales on a year-to-date basis, and they jumped to 6.5% in the month of October.

This acceleration provides clear evidence that our omnichannel strategy is resonating with our customers.

In summary, the third quarter was clearly disappointing, but we've taken decisive actions to protect market share and improve our sales trends.

Now, let me turn the call over to Mary to share more details on our third-quarter results.

Thank you, Mike and good morning, everyone.

Our disappointing comp performance was driven largely by lower average unit retails, in units per transaction, driven by the lower boot penetration and promotional activity.

In-store traffic was down in the low-single digits, and digital tragic traffic was up in the high-single digits.

We opened 17 stores this quarter and closed one for a total of 465 stores at quarter end.

Consistent with the balance of the chain, new store performance was below plan.

Our gross margin contracted by 270 basis points in Q3, with 150 basis points related to an inventory valuation reserve in the balance from promotional markdowns.

We took the reserve on a special inventory purchase that we intend to use to drive traffic to our largest urban stores, as well as online in the fourth quarter.

Initial markup rates improved by 70 basis points, more than offsetting deleverage of occupancy and distribution costs.

Due to significant cost reductions this quarter, operating expenses were down slightly and leveraged by 30 basis points.

In total, third-quarter operating margin declined by 240 basis points to 9.5%.

Town Shoes of Canada contributed less than $0.01 per share this quarter.

Town Shoes opened seven DSW Canada stores for a total of 13 DSW stores in Canada.

The customer reception was positive, and these new DSW stores continue to meet our expectations.

Net income from continuing operations decreased by 20.7% to $39.3 million, and earnings per share decreased 20% to $0.44 per share, which include a $0.07 charge for the inventory valuation reserve.

Turning to the balance sheet, we ended the quarter with cash, short and long-term investments of $397 million.

Inventories ended the quarter at $521 million, an increase of 1.8% on a cost per square foot basis, and down 0.7% excluding opportunistic buys.

Capital expenditures for the third quarter increased 1.4% to $28 million, and remained on track towards the $115 million to $120 million for the full year.

We repurchased 2.1 million shares for $63 million, completing our previous share repurchase authorization of $150 million.

Year to date, we have returned $115 million to shareholders in dividends and share repurchases.

Since initiating a dividend in 2011, we have distributed $530 million in shareholder returns, representing 80% of our cumulative free cash flow.

Our strong balance sheet provides us the flexibility to invest for long-term growth.

Finally, we are holding approximately $80 million in Canadian dollar denominated investments for future needs with respect to Town Shoes of Canada.

We are committed to a disciplined process in capital allocation, and as part of that, we value the role of share repurchases have in enhancing returns for our shareholders.

Accordingly, our Board of Directors recently approved a new $200 million share repurchase authorization, which we plan to use opportunistically.

Turning to our outlook for the remainder of the year, we are very cautious about the current retail environment given the soft start to the fall season.

While we believe weather conditions may become more seasonal, we anticipate the environment to become more promotional during the holiday season.

Our outlook assumes a flat comp for the full year, with total sales growth of approximately 4%.

We are positioned to defend and acquire market share during the holiday season, and anticipate markdowns to be higher than normal.

With the cost reductions we identified during the third quarter, operating expenses for the full year are now expected to increase in the high, single-digit range, compared to the previous guidance for low, double-digit growth.

Full-year tax rate is expected to be approximately 39%.

Assuming a share count of 89 million shares, we anticipate full-year earnings per share in the $1.40 to $1.50 range.

We will now turn the floor over to the operator for questions.

(Operator Instructions)

Jill Nelson, Johnson Rice.

Good morning.

You did mention that your tourist stores did feel a bigger hit in the third quarter.

Is there any way that you could maybe talk about the store volume, how much of that is of your total sales, and that exposure there?

It is a couple of dozen stores, and when you do the math, it looks like those stores accounted for about 0.5 point of comp decline.

The other stores that I mentioned are border stores.

I'm thinking primarily of stores near the Canadian border, and they also comped weak because we did not get as much cross-border traffic from Canada coming into the United States, because of the weakening of the Canadian dollar against the US dollar.

So that also was an incremental impact.

I think about 0.5 point comp due to the performance of those large stores in tourist markets.

Okay, and then you talked about, I know you broke out some expense reductions you have planned for the back half.

If you could talk about maybe what you experienced in the third quarter.

I know you had a bonus adjustment, and what is assumed in expense reductions for fourth quarter?

Thank you.

Sure.

We had a total expense reduction of approximately $27 million, which is being offset by a net increase in marketing of approximately $10 million.

So net, it's about a $17 million expense reduction.

The significant portion of that benefited the third quarter as we made a material adjustment to our incentive comp accruals.

And the smaller portion will be in the fourth quarter.

Thank you.

Scott Krasik, Buckingham Research.

I don't think that you gave it this time, maybe usually you give it.

What was the merchandise margin actually down?

Because the IMU actually offset and I've seen some different stuff.

Sure.

The actual merch margin rate for the quarter was 43.3%.

Okay.

And you obviously talked about major promotional initiatives in a tough environment, so can you talk about order of magnitude of expectations for what your merchandise margin could be down in 4Q?

We have not provided specific guidance around the actual Q4 margin rates, but I think if you do the math implicit in the fourth quarter margin rates, is a total decline in the 400 basis point range.

Right.

We do think we have taken a fairly conservative approach to that.

We think that there may be some upside as we see the success of the events, but we will have more to come on that in our fourth quarter as we see the fourth-quarter results reported in March.

And then how do we read into -- the inventory, I guess, was cleaned up, maybe a quarter or so ahead of what I was thinking.

How do we read the inventory being roughly flat on an average cost per square foot basis?

And as we get into spring, is the expectation that you keep it lean?

I know you had a pretty good spring and there is a lot of interesting fashion out there.

Yes.

I think it is fair to say that we're going to take a reasonably conservative approach to keeping our inventories in line with our comp expectations for spring, and work to be able to chase into those inventories that we are getting early reads on, that are working and resonating with our customers.

And just when we go back to last spring, things like fashion athletic, open-toed dress, I think some new flat casuals, maybe even some sandals up the ankle and things like that, any of those trends not expected to occur?

Anything expected to be much bigger than last year?

This is Debbie.

In the athletic area, I'm looking for continued momentum, as we see now into next year.

I don't see any reason why that should drop at all.

The trends, as you've stated, whether they are Ghillies or lace up, some interesting new flats, we've gotten some positive reads on those early in the third quarter.

Those will continue in the fourth quarter and I think they become even stronger in spring of 2016.

Awesome.

Thanks and good luck.

Jessica Schmidt, KeyBanc.

A little bit more on that inventory.

I know that you had mentioned that because you did pull back on some of the inventory receipts, that you maybe weren't able to have a lot of newness on the floor.

I guess, how should we think about your inventory positioning into 4Q, and when do you think you will be able to take advantage of some of the newer fashion trends in the market?

And if you could just elaborate on that a little bit.

Sure.

Let me just restate that when we started to see the slowdown, we addressed the inventory levels quickly.

So we lowered the sales plan.

I would say we remixed the assortment.

We canceled goods that looked like they were slow early on, so we canceled the next versions, the next iterations of those.

We made adjustments to the content.

We adjusted our retail focus.

I think what we did was the right thing to position the inventories in the appropriate way.

We are pleased with what the inventory looks like right now as we start to get back into some of those things that were very positive for us in early Q3.

So I'm pleased with the assortments for Q4, and we have been able to remix some of the on-order for Q1 and Q2 next year, to where I believe we will see a significant change on the face of the floor in our women's areas, and we have been successful working those deliveries out with the wholesale community.

Okay.

Thank you.

And just a quick follow-up.

Can you talk about some of the trends you're seeing in handbags?

I know you had made some effort in accessories to sort of pull back on your position in handbags, just given some of the weakness you had been seeing.

So I guess any sort of comments that you could provide on accessories, as you sort of change the mix shift there would be helpful.

Yes.

So I think our last call, we talked about pulling the handbag expectation, volume expectations back, until that industry found a place where there was some new exciting items, if you will, come into the mix.

The pullback that we made in sales for Q3, we actually achieved that and beat that just slightly.

So think we've pulled the handbag area back to, I would say what we should expect to see in the future.

As far as new trends in the handbag area, it's still really is coming more out of the moderate fashion area.

I still don't really see a lot of newness and infusion at the very top, which is a lot of where the trend direction comes from.

I am confident though, with the sales that we put in place for Q4 and for spring of next year in the handbag in the moderate area are achievable, and there are some key items that are showing up right now that I'm kind of excited about as well.

So don't expect too much out of the handbag area, because the industry has not really shown me a lot that I'm really excited about, but there is enough to be able to do the business that we expect to do through next year.

Great.

Thank you.

Kelly Chen, Telsey Advisory Group.

Mary, I was wondering if you could first quantify the impact from the incentive comp from this quarter, and if you could just give a little more color behind what are the main budgets of the $27 million in expense reductions that you guys have identified.

And you gave the guidance for SG&A growth for this year, but how should we think about it going forward?

What type of comps do you need to leverage expenses as we look ahead?

Thanks.

Sure, Kelly.

Thank you.

The incentive comp benefit in the full year is approximately $16 million, of which just over $11 million of that benefited the third quarter.

The balance falls into the fourth quarter.

The other areas that we have looked at in terms of expense reductions includes open positions, holding on certain headcounts, looking at areas of variable expenses that we could control, that we can reduce easily and quickly.

We've also looked at flexing our storage expenses appropriately with the sales declines that we are seeing.

Those are the primary areas that comprise the balance of that $27 million.

And as I mentioned before, one of the areas that we are increasing in using some of that savings for is to reinvest in some marketing to ensure our messaging is resonating with our customers.

In terms of future guidance, I'm going to defer on that, as we are in the process preparing our plan, and we will have more information in terms of our outlook at a future date.

Great.

Just a quick follow-up Mike, you had mentioned in the third quarter, the incremental promotions.

It sounded like they had a limited impact, and we might see something more disruptive in the fourth quarter.

Just wondering if you could give us more color on what that might entail.

I know that last year, you went through a period where you sharpened pricing.

Do you think you need to work on that price-value equation again, or just more color on, again, the initiatives there for the fourth quarter?

Thanks.

Sure.

Yes.

I think on the price value issue, Debbie and the merchants have already been working on that continuously in the third quarter, so that is an ongoing activity and we approach it pretty rigorously.

I am not going to tell you about any future promotions.

I will tell you about some things that we have already done in the fourth quarter.

We did a site capacity test, that we do every year to test the volume limitations of our dot-com site.

And we did that on the last day -- the second to the last day of the third quarter.

And we took 25% off the site, and we blew the demand numbers away versus the high watermark, which was on Cyber Monday of last year.

So it was aggressive, and we wanted it to be aggressive to test capacity, but it told us a lot about how the customer is reacting to strong, strong value.

In week two of November, you may have seen, we took 25% off all clearance for about six days.

And that was stores and online, and got a good customer reaction to that.

You have also seen more recently that we have been publicizing a price match guarantee, which is pretty commonplace in retail today, but it was new for us, and we have just started to announce that.

It is similar to what other companies use for price matching purposes.

It is on identical items, which of course limits the number of times that it can really be employed at DSW, because only about half of our total assortment is in-line product that can be directly compared against.

And we are doing that as a test, to see how the customer reacts to it, and to see if it is meaningful.

As we expected, given the sharpness of our prices already, we really haven't seen to date a lot of customers trying to take advantage of it, but we are going to continue to monitor it, and then we will decide if we want to leave it in place or suspend.

I think you will see additional aggressive activity, and there will be different activity for every week of the entire holiday season.

If I could, I want to go back to the question that you asked of the Mary on the bonus.

And I think Mary you answered the question in terms of savings on bonus, versus what we had put in the budget.

And I don't know whether Kelly's question was related to year over year variance or what we had expected variance.

Because the answers to those questions are different.

Kelly, which did you mean?

I meant the year over year.

Okay.

So I think -- I think year over year is $8 million in Q3 and what, $6 million in Q4?

Yes.

All right.

Thank you very much.

That was very helpful.

Mike, you will be missed.

Best of luck.

Steve Marotta, CL King & Associates.

Is the roughly negative 2% to negative 3% implied comp for the fourth quarter, does that assume accelerating or decelerating trends for the balance of the quarter?

If you're asking how is it going so far, we don't comment on intra-quarter performance.

But if I misinterpreted your question, let me know, Steve.

No.

You can't blame a guy from trying, Mike.

Okay.

Thank you.

I have one other question about the performance of the smaller footprint stores.

You mentioned that the newer stores are under-performing, as has been consistent for most of the year.

Can you pinpoint the performance of the smaller footprint stores, in particular?

And also your diagnosis, if they are continuing to underperform, why and how do you think that will be addressed?

Thank you.

Sure.

I don't have a lot new to report on small format stores.

They are underperforming our pro forma expectation, somewhat.

That has been pretty consistent.

They are profitable and generating above standard returns, but we really want them to be more successful and more productive than they are, because we need to get them to a higher level of performance, in order for them to be a really meaningful source of growth for our Company.

And I think what we are going to focus on is, we're going to focus on assortment, which is critical and illuminating, style duplications that may exist on the floor, because every slot is more meaningful in a small format store.

And we're going to focus on a customer engagement because opening up the endless aisle capabilities to our customers in the small format store is all the more critical than it would be in a 20,000 or 25,000 square foot store.

So those are the things that we are working on.

We are planning to also bring in a retail veteran who has been in field operations for their career, and have them visit every one of those stores to give us some objective third-party input, to see if we might be missing something.

So, and then, I guess the last thing that I would say is that we continue to test our endless aisle capabilities in 10 stores or so, and we are beginning to see meaningful lift in endless aisle transactions.

That is where customers are able to purchase a style that perhaps they don't see in front of them at the store.

We are seeing the penetration of those endless aisle transactions create separation versus what it would be in a group of control stores.

We are getting good indications that endless aisle is going to be a meaningful service to our customer, and of course, if it works well in big stores, it's going to be even more important in the small stores.

So hopefully that gives you some sense of our direction on small format stores and our commitment to them.

Just one more follow-up, Mike.

Would you lay any of the issues at real estate selection?

Well, we have learned a lot.

I think I have said before that when a customer is within driving distance of a 25,000 square foot store, but they're closer to a 10,000 square foot store, they end up gravitating to that 25,000 square foot store.

That was very instructive to us as we go forward, in terms of locating these small format stores.

So yes, there's definitely real estate learning.

Great.

Thank you very much.

Camilo Lyon, Canaccord Genuity.

My question relates to the overall picture, and how you view your gross margin potential.

It seems like over the past few years, there's a been continual presence on merchandise margins, and you talked about the consumer responding really well to highly-promoted product.

Now, how do you think about your margin opportunity here?

Given that there is a lot of competition in this space, it seems to be year in and year out, highly promoted product, that drives ultimate traffic.

Is this a business that's basically in a margin decline sort of state?

Well, I think there is countervailing influences.

There is some spin-up, particularly right now, in terms of the competitiveness, and obviously the transparency of pricing, that causes us to need to be sharp and on our toes, and continuously assessing our value proposition compared to the relevant competitors.

We've already -- we have been doing that every quarter, but next year, we will put in place a tool that will allow us to do it dynamically, which is just going to give us much greater information with more frequency, so we can react more quickly.

But I think the things that worked in the other direction, are things like assortment planning.

Things like order routing optimization, and it is those kinds of systemic technologies that are going to help us offset whatever there might be, in terms of competitive pressure.

We don't think that we are in a shrinking margin situation.

We think that right now it is taking more compelling value to get the customer to get up off the couch and either go to her computer or go to the store and we are reacting to that situation that exists.

And hopefully we are reacting strongly and it will have the desired impact.

I don't think the current situation is necessarily indicative of longer-term trends, and we do have some things that will fight whatever that competitive impact is.

Okay.

I guess that leads me to my next question on opportunistic buys.

I think you came into the quarter pretty well-stocked, or pretty well inventoried on product you had bought earlier.

Not anticipating the sales deceleration to the magnitude of what it ended up being.

How do you view your ability to continue to buy opportunistically in the market, given that there is a lot of product available?

And how will that impact your ability to buy spring product?

In other words, are you going to increase the mix of opportunistic buys that you are willing to take on?

I will take that question.

This is Debbie.

In terms of what I call opportunity buys or pre-buys, we have a very disciplined approach on how we engage each one of those buckets.

In terms of pre-buys, we're always looking for compelling offerings that we plan to take advantage of market opportunities that are in the right product, that allow us to acquire sharp deals for our customers.

We are always on the lookout for those.

The lifts on the opportunity buy list that are out there right now, there are many, and there is a lot of product out there.

We sit in a good inventory position right now, to be able to take advantage of whatever that right product and the right deal is for our customer.

We have, when we plan, we plan mix under each department.

Closeouts, private brands, SMUs, in line product, and I would say that I think we are in a good position to take advantage of whatever we need to, to be able to put the right product on the floor, and to drive business.

Okay.

And just my final question.

Mike mentioned in his prepared remarks about some DSW self-inflicted issues during the quarter, missing out on some of the key fashion styles.

But then there was a comment made on the spring 2016 outlook in a sense of taking a cautious stance on inventories, and hoping to chase product.

How do you marry those two comments to the point of -- to the level of comfort that you need to have, to make sure you are in stock for the right products in spring of 2016?

Sure.

Let me get some clarification around what the quote-unquote self inflicted really means.

We had the shift from women's casual into athletic was dramatic, and we really capitalized on that, so I was really pleased with that.

We did, in the women's area, we tested some new products in third quarter, that proved very, very strong for us.

And when we say self-inflicted, I couldn't get back into that product fast enough.

That product is coming in now, and will continue through the spring season.

That was mostly in the casual, the women's casual area.

In the dress area, the dress business moderated downward overall, with the exception of one big category, and that was dress sandals.

As Mike stated in the script, the third quarter seasonal business actually extended, because of the temperatures, far into third quarter than we had planned.

We actually ran out of some of the dress sandals, and that was really where I took my biggest hit.

So I think that self inflicted, you can call it self inflicted, I would say our inability to be able to speed up the supply chain fast enough where we can deliver and get back into those things that were working for us.

I always, when I look at inventory plans, I always take a balanced approach.

I like to make sure that I leave myself some liquidity, and I don't like to plan my inventories higher than what I think the comp sales trend is going to be.

We have several different levers that we can pull to help us not only support up front buying, but in season buying, and that is specifically opportunity buys in the pre-buy bucket.

So we do have some levers that will allow us to capitalize on trends, that will prove to be stronger than we thought.

But I'm pleased with where inventories are positioned for spring, and I really don't want to get ahead of myself.

I want to make sure that my sales and my inventory stay in line until I see how the customer is voting.

Okay.

Thanks very much, and good luck in the holiday season.

Jeff Van Sinderen, B. Riley.

Good morning.

Regarding competitive differentiation, and thinking about that going forward, how are the sell-throughs of some of the more, I guess you would call it off price positioned product versus the rest of your assortment?

And then would it make sense for you to think about shifting more of your business to that deep discount going forward?

Sure.

So when you take a look at, and I am not going to give you specific numbers, but when you take a look at spring, we are trying to balance the right product, the right assortment, with good value.

It's always a balancing act.

I think that you will start to see more opportunity buys, if you will, and I don't want to use the word closeouts, because sometimes that has a negative perception, but I will call it opportunity buys.

And you will start to see that.

And what we will do there is we are going to pass more value on to the consumer.

So you are right in that percent goes up slightly, but I think it's always a balance between mix and price.

Okay.

And just a follow-up on the marketing spend, obviously that is something you are ramping for Q4, and just wondering how we should think about that beyond Q4.

Is it something that you think will strategically change where you will have more investment there into next year, or how should we think about that?

We are taking a look at it right now, and it will be part of our next year planning process.

It is possible, but we may need to tweak that, but we have not made that decision yet.

Okay.

Thanks very much and good luck in the quarter.

Chris Svezia, Susquehanna Financial Group.

First, Debbie, for you.

Just want to clarify, just on inventory.

One, point, do you anticipate some of the promotional cadence that you'll have out there, that you'll have your inventories clean, and where you want them to be?

Other words pulling back on the promotional cadence as you step into first quarter of next year, or do you still feel like there are certain categories you can continue to be promotional on?

And more specifically with regard to product, outside of boots which I think like you might decide it is 40% of the comp decline, what happened in some of the other categories?

You referenced athletic.

Can you just touch on casual?

You touched a little bit on dress.

Just maybe a little more color about some of the puts and takes in some of those categories?

Okay so let me take, I guess you are really asking about what does the competitive landscape look like, in terms of the promotional activity, and how we are really going to address that?

So I would just tell you retail continues to go through periods of significant change.

This is not a whole lot different than what we have been experiencing, all retailers over time.

We are going to continue to focus on putting the right product on the floor at sharp values to the consumer.

The mix of the product, as I just stated in the previous question, Chris, will change slightly, as we continue to try to put great values on the floor for our customers.

In terms of what happened in the balance of the categories over third-quarter, athletic was the shining star.

Not only was there a strong comp increase, there was a strong penetration shift into the athletic space.

We are very pleased with what happened there.

Fashion was healthy.

Performance was healthy.

Women's was healthy, men's was healthy.

It was across the board.

And like I said, I really don't see a reason why that would moderate.

In terms of the dress and casual area, that is where we have the toughest business.

In the dress area specifically, it was around that third quarter, extending dress sandals into third quarter, where we actually do have a zone strategy that addressed that, but with the warmer weather, it just wasn't a big enough.

We didn't have enough receipts there.

In casual, the way I look at casual, Chris, now, is I combine women's casuals with women's athletic fashion casual, and what we saw was a shift a significant shift going to the athletic fashion casual business.

And we comped up pretty significantly, high, high double-digit numbers there.

So, but the blend of the two was still down in the mid-single digit.

I think there is a lot of excitement happening in women's casual right now.

We started to test those goods in the third quarter.

We are getting the reorders back in now, and I am looking forward to what spring is going to deliver there.

So I think there is enough newness to offset some of the weakness that we have seen in those other two categories, and I'm looking forward to spring getting here, so we can get that started.

Debbie, can I just tack on something?

When you think, Chris, about fourth quarter, we have said we're going to get more aggressive, and that is true, compared to last year.

But a different perspective on what we are going to do in fourth quarter is that we are going to use our promotion and marketing plan to take advantage of an opportunity that we've always had in the fourth quarter, and let me tell you what I mean.

Just like other retailers, as we move from October to November, and November to December, customer traffic increases.

However, unlike other retailers, our capture rate, our conversion rate tends to decline.

And if you actually look at our weekly sales, our October weekly sales are greater than November, and November is greater than December.

So it's an anomalous situation, that we should take advantage of.

That's why, when you go into our stores right now, you will see a much stronger set of collateral to support gift giving.

Not just accessories, but shoes, as well.

And so we're going to take advantage of that additional traffic that naturally comes into our stores, and we are going to convert more of those customers by virtue of our offers and by virtue of our holiday gift giving stance.

And so yes, we're ramping it up versus prior year, but I think what we are doing is taking advantage of an opportunity we have really had, and haven't taken full advantage of.

Hopefully that helps.

That's helpful.

So I mean to some degree, it seems like part of it is just, you need to move inventory and product, and part of it is the strategic change to take advantage of traffic trends that are going on in the store to improve conversion.

Does that latter portion continue to be a philosophy as you go into the first quarter or no, to a degree, because traffic then dissipates in Q1 relative to the holiday?

Yes.

It certainly does.

I think the advantage, or the opportunity that we have in Q4 is somewhat unique.

But, we are going to take the learnings that we get from this Q4 and apply to those other parts of the year where it makes sense to.

And so hopefully that helps you understand where we are in our thinking.

Okay.

And last, just for Roger.

I have a question for you.

Okay thanks, Chris.

Sure.

So I guess just thoughts on the business, things maybe you think could be done to a degree differently?

Areas you think maybe could be improved upon?

You're coming from the omni side of the business for the most part, that's been an area focus and investment.

Whether or not people think it's really ultimately generating more consistent results or not is, I guess, time will tell.

But I'm just curious about just your thoughts on the business.

We're you really think things could be done differently that maybe you have been missing?

Chris what I would tell you is for the past two years I've been working with our leadership team to build our strategy.

So, frankly, very much aligned with what we have been communicating.

And our goal would be, when we have our Q4 earnings call, to give you some updates on some tweaks that we would likely make to our strategy but I don't see it as any material change from the work that we have already been doing.

Oh, okay.

All right, well all the best, and Mike all the best to you as well, in the future.

Thanks, Chris.

Sam Poser, Sterne Agee.

A lot of questions have been asked.

On the flip side of the self-inflicted issues regarding the casual business, and I guess the athletic casual business, do you feel like you were fast enough in addressing the slow sellers early in the quarter?

Yes, Sam, as a matter of fact, I will tell you, probably too fast.

When things started to moderate a bit at the end of August, beginning of September, we reacted very quickly and we went through an entire assortment review by item on what was delivering the expectations and what wasn't At that point in time, we started to make the adjustments quickly.

We remixed assortment, we did some pricing adjustments.

We did a lot of reorders early that have proved to be very beneficial to us.

A couple of the areas that I said we just could not catch, we couldn't catch.

And so I am pleased with how the merchant team responded, and we are going to see the benefits of those adjustments, as we move forward.

A couple of follow-ups.

One, are the current, the op buys that you are talking about that you are getting, are those current goods?

You took the valuation reserve on special inventory purchase, I assume that those were some kind of opportunity buys at the time you bought them.

I'd like to just get some clarification there.

And then also you said that -- that there was a shift to the casual athletic fashion business, where I believe that's where you couldn't chase it down.

I assume that it's from the key vendors, Nike, Skechers, and so on and so forth.

I'm just trying to understand those things.

Sure, Sam.

Let me address the pre-buy situation.

First of all, like I said, we have a very disciplined approach to what we buy and what we put into that bucket.

This was a particular buy that didn't achieved our expected sell-throughs and we made a decision very quickly to use those as a traffic driver, and to attract new customers.

We are overall pleased with how we approached what we put into pre-buy.

Those dollars are precious, as they usually due have to sit there for a small period of time before they can be allocated out into the right season for the consumer.

So I am pleased with what is in there right now, because we have a pretty rigorous review of what goes in, and a lot of conversation about it.

I am comfortable what is sitting in there now.

The lists that are coming out now are a combination of industry cancellations, market cancellations, wholesale cancellations.

It could be for a variety of reasons.

We look at every single buy, and make sure that we love it as much in the future as we love it today.

So it has to be bought at the right price.

It has to be the right product.

So when we talk about closeouts and pre-buys, we are not just buying price to allocate value in the future.

The mix has to be correct, along with the price.

Okay.

And then the part about the athletic, the casual athletic business that you talked about?

Sure.

What I was referring to there, Sam, is when you look at women's athletic fashion, very, very healthy.

When you look at the women's casual in the black and brown side, that part was weaker, so that comped negative and the fashion, casual fashion athletic comp was highly positive.

I think that customers were shifting as they are moving from a -- into more of a casual lifestyle.

We did see a shift of business that moved, I think out of the women's area into the women's athletic area.

What was left behind in the women's casual areas were those buys that I said we tested early, and they were pretty strong.

So those were things like flats.

A little bit of sport, so we expect to capitalize on that go forward.

We took advantage of every opportunity in the athletic area, both in make-ups and in closeouts that delivered the kind of results that we saw that plus 12.

I was pleased with how we reacted there.

We didn't have any inventory issues there, we got what we needed.

I was pleased with that.

Like I said before, I don't think that business stopped.

There is a strong momentum there that we will capitalize for spring 2016.

Thank you.

Good luck.

Happy Thanksgiving.

Taposh Bari, Goldman Sachs.

I was hoping, Debbie, you could disaggregate the comment around boots, if you could specifically talk about fashion boots, booties, cold weather boots, how those performed specifically.

And just as a high-level question, it seems like athletics working across the board, across retail and it's a smaller piece of your business.

So I'm trying to better understand at a high level how much flexibility you have, as you think about, call it the next 12 to 18 months, to be able to mix your assortment away from the slow-moving goods into where the market really is straining towards?

Sure.

Let me take the boot question first.

So boots comped down about 10%.

9.5%.

The stores comped down a little bit more than dot-com.

Dot-com was actually relatively flattish.

We did plan a shift in mix between boots and booties.

We saw that shift occur, but the down trend of the tall boots actually happened in a much larger way that we originally anticipated.

So the booty comp, very, very strong.

Continues to be strong.

We reordered very early on in third quarter on best-selling booties.

The combined total between boots and booties was not enough to comp positive for the quarter, though.

Cold weather comped in the low single digits for third quarter, as well.

So what we saw was a penetration shift between boots and booties.

We have some really strong selling items right now.

Some of the slow selling items, we have already taken action on.

I think it was really more of a mix issue.

There was some weather issue in there, but I am anxious to see what next year, what the wholesalers will actually come up with.

What our brands will come up with, in terms of delivering fresh new fashion into boots.

And to me that's the big question right now.

As it relates to athletics.

Athletics for Q3 last year was about a 12% penetration of my business.

This year, it was 14%.

It is healthy across the board.

I have reflected an even higher penetration for next year, 2016 than 2015.

I'm planning, I don't want to say aggressive comps, but I'm planning healthy comps and am going to support that business, because there is less ability to chase back into that business.

I'm going to support it with the appropriate inventory to support the comps that I have planned.

Can I just ask a quick follow-up on the boot piece?

Sure.

If weather is the issue, why is cold weather comping up low single digits?

And boots being down?

I don't understand that.

Sure.

So the cold weather category includes not just functional cold weather, but fashion cold weather.

If you look at our mix this year versus last year, and you go to one of our stores or even look online, you are going to see the brand selection significantly better than it was last year.

We have all of the big brands, the important brands and we skewed that more towards fashion than we did function, even though those boots are functional.

So I think the customers right now are buying that more as a fashion play, and I think that as we move further into Q4, that they will be buying it both as a functional play.

And Mary, can you just quickly comment on the re-class between short-term investments and long-term investments, what the nature of that was?

And the $80 million related to Town, where is that being recorded on the balance sheet?

Thanks.

Sure.

The CAD80 million investment is in long-term investment.

And the short-term investment shift to long-term during the quarter reflects a shift of our investment management to an external third-party, and the intention at the end of the quarter for those investments that were moved to a third-party to be held long-term.

Thanks.

Best of luck.

Christian Buss, Credit Suisse.

I was wondering if you could provide some perspective of how you are thinking about using special buys for next year, in light of what is going to be an excess inventory situation across some of the retail channels and wholesale channels?

So special buys, I will call them opportunity buys and pre-buys, offer the opportunity to pass some significant value on to our customers.

I am increasing that slightly to next year.

But the real important thing to think about is the product, the content has to be right.

So as I mentioned before, we won't buy opportunity buys and pre-buys just to buy price.

The mix between the right product and the right value has to be correct.

So as the opportunities avail themselves in the marketplace, we will take a look at those lists, we'll take a look at the opportunities, and we will make the right decisions that are right for our customer.

Thank you very much, and best of luck.

This concludes our question-and-answer session.

At this time, I would like to turn the call back over to Mike MacDonald for any closing remarks.

Thanks very much, and thanks to all of you on the call for your interest and your attention today.

And I hope that you and your families all have a very happy Thanksgiving holiday, and I hope we all have a successful Black Friday weekend.

Thanks again.

Thank you.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.