Designer Brands Inc (DBI) 2016 Q1 法說會逐字稿

Good morning, and welcome to the DSW Incorporated first-quarter 2016 earnings conference call.

(Operator instructions)

Please also note, today's event is being recorded.

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

Please go ahead, Ma'am.

Thank you.

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 April 30, 2016.

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

Joining us today are Roger Rawlins, Chief Executive Officer; Debbie Ferree, Vice Chairman and Chief Merchandising Officer; and Mary Meixelspeger, Chief Financial Officer.

Let me now turn the call over to Roger.

Thank you, Christina, and good morning, everyone.

You may remember from our last call, how I mentioned the importance of this business operating with a different focus and tempo than we have demonstrated in the past couple of years.

The first quarter results combined with my visits to stores in every region of the country over the past couple of months, validate my initial assessment.

While we've made progress in implementing tools and capabilities, we must continue to improve our focus and tempo on the day to day execution of how we plan, buy and manage our business to deliver a compelling assortment in a manner that differentiates DSW in the eyes of our customer.

We have reduced our sales and earnings guidance for the year to reflect the current trend of our business.

We believe this is the prudent thing to do as we work to improve how and what we buy, where we allocate goods and how we execute in the field.

This decision will help us manage inventories, expenses and capital investments as we continue to make progress through the back half of the year.

Let me turn the floor over to Mary for a recap of our Q1 performance.

Thank you, Roger.

Q1 was a challenging quarter for DSW.

After a strong early start, sales weakened measurably in late March through the balance of the quarter.

Total sales increased 3.9% to $681 million, with a 1.6% comparable sales decline compared to last year's 5.1% comp increase.

Comps of the DSW segment decreased 1.4%.

We opened 10 new DSW stores this quarter, compared to 18 new locations last year and we are encouraged that these stores met our expectations.

Reported net income for the quarter totaled $30 million, or $0.36 per share.

This includes the $4.5 million pretax expense or $0.04 per share, related to transaction costs, purchase accounting impacts and the fair market value accounting for the contingent consideration of Ebuys.

Excluding these amounts, adjusted net income declined 31% to $32.8 million this year, or $0.40 per share on 83 million shares outstanding.

The rest of our comments this morning refer to adjusted results, which exclude these transaction costs and non-cash purchase accounting charges related to the acquisition of Ebuys.

Transactions for the total DSW segment increased 1% in the quarter, offset by a 2% decline in average dollar sale.

Regionally, our cold weather regions outperformed the chain while warm weather regions underperformed the chain.

First quarter comparable sales at the Affiliated Business Group declined 3.4%, compared to last year's 5% increase.

ABG opened seven new locations and closed one location for a total of 385 departments in operation at the end of the quarter.

Ebuys' double-digit revenue growth contributed $15 million to our top line and $2.3 million to gross profit.

Tom Shoes narrowed their operating loss while opening four new DSW Canada stores this quarter.

Canadian customers continued to respond to our new DSW stores with enthusiasm.

Total Company gross profit for the quarter decreased 250 basis points due primarily to higher markdowns, lower IMU from category mix and sharper pricing.

We focused on reactivating rewards members with compelling promotions that ran throughout the quarter.

These events drove incremental sales and modestly incremental gross margin dollars but came at a cost of higher markdowns.

Occupancy, distribution and fulfillment costs deleveraged by 30 basis points due to higher fulfillment costs associated with Ebuys and a higher mix of digital sales.

Operating expense as a percentage of sales increased by 90 basis points due to increased marketing spend, technology investments and higher corporate expenses.

As a result, operating profit margin declined by 340 basis points.

We generated lower interest income this year due to lower investment balances.

Last year's pretax income benefited from $3.3 million, or $0.02 per share, from a foreign currency related gain, which we did not repeat this year.

The income tax rate was 80 basis points higher this quarter primarily from a favorable discrete item last year.

Turning to the balance sheet, we ended the quarter with cash, short-term and long-term investments of $238 million, compared to $456 million last year.

The lower balance reflects our share repurchases last year and the initial payment of $60 million for the acquisition of Ebuys.

We did not make any share repurchases this quarter and currently have $83 million available in our current authorization.

Total inventories increased 4.7% and less than 1% on a cost per square foot basis excluding inventories from Ebuys.

Capital expenditures for the first quarter totaled $18 million, with $11 million spent on stores and the balance spent on technology and other business projects.

Turning to guidance, we are reducing our sales plan for the balance of the year based on current trends in the business.

This will allow us to manage inventories to appropriate levels.

We now expect comparable sales for the full-year to decline in the 1% to 2% range, and full-year sales to increase by approximately 6% driven by a net 32 new stores and incremental sales from Ebuys.

Our guidance assumes gross margin will be lower than last year by 100 basis points to 150 basis points as we adjust inventories to reflect the lower sales trend.

At the same time, we are pursuing cost savings initiatives to reduce expenses going forward.

Full-year operating expense is now expected to grow in the 7% to 8% range down from our original expectation for low teens growth, which better aligns with top line expectations.

Assuming a full-year tax rate of 39% and 83 million shares outstanding, we expect full-year adjusted EPS in the range of $1.32 to $1.42 per share.

Our guidance does not include transaction costs, non-cash purchase accounting and changes in fair market value accounting related to Ebuys totaling $0.11 to $0.13 per share.

We continue to expect lower earnings compared to last year in the spring season.

However, we anticipate earnings to improve versus last year by the fall season.

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

Thank you, Mary, and good morning, everyone.

Within the DSW segment, athletic significantly outperformed the chain with a mid-teens comp increase, while comps for the women's, men's and accessories categories declined in the mid-single digits.

On a unit basis, comps were flat to during the quarter, but higher markdowns to activate customers lowered the AUR.

Regular price comps were flat and clearance comps were down 8%, partially due to lower clearance units on hand.

The first quarter was disappointing with challenges in casual sandals, closed up dress, women's evening and men's casual, more than offsetting the positive signs we're seeing in the balance of the business.

Our product offering and marketing activities drove positive comps and traffic during the first two months of the quarter.

While we experienced the broad industry slowdown that started in late March, our traffic continued to outperform the industry benchmark.

Importantly, DSW gained share in adult footwear as our women's non-athletic business continues to outperform the industry.

The favorable results in our women's fashion and athletic categories indicate that we're on the right path and we're working hard to amplify these results through greater product differentiation, expanded assortments and tactical planning and allocation.

On the product side.

The athletic category continues to show remarkable momentum.

Our athletic penetration is running 200 basis points higher than last year, led by new offerings in fashion and performance athletic.

We're extending the active trend into women's non-athletic with an exciting new assortment of athletic inspired casual offerings.

We have no doubt this business is on track to achieve record levels this year.

Working with our branded partners, we're capitalizing our already strong fashion athletic assortment to transform DSW as an important destination for the ath-leisure customer.

I'm encouraged to say that fresh fashion is beginning to drive the women's business.

The solid results in our women's fashion categories indicate the customer's readiness to embrace new trends.

Women's dress and casual sandals comped up in the low single-digit range with the strength in the category primarily during pre-Easter.

With unusual conditions suppressing the demand for casual sandals post-Easter, we are repositioning our inventories appropriately and expect this will create margin pressure in the second quarter.

Comps in the traditional women's categories declined as we navigate what could be a long-term shift toward the active comfort casual space.

We will measure our progress in women's using the combined results of our athletic and non-athletic businesses.

We still have much to do to ensure greater consistency and flow in our women's assortment.

I've been working closely with our new SVP of Merchandise Planning and Allocation to improve processes and leverage our new localization capabilities.

At the same time, we're adjusting the breadth and depth of buys to maintain target in stock levels while strategically reducing clearance.

We expect both of these actions will maximize sales and profit margin long-term.

Turning to men's.

We were not satisfied with the men's results.

The mid single-digit comp decline accounted for close to 100 basis points of our Q1 comp decline.

While we were pleased with the consistent positive results in dress, the casual trend was softer than expected and we continue to see the shift into athletic fashion.

We will continue to look for new brands and products that will infuse freshness and growth into the men's casual category.

The accessory category delivered a mid single-digit comp decline but an increase in gross margin dollars.

Although comping down, we've made significant progress in rebuilding our handbag business toward more fashion and saw increases in other categories outside handbags.

With new must-have trends and a stronger gifting strategy we expect our accessory comp trend to improve going into the fall season.

Let me take a few minutes to update you on the actions we're taking to differentiate DSW's assortment going forward.

First of all, we are laser focused on offering the brands and products that are most important to our customers.

We're pleased with the progress we're making in bringing exciting merchandise that offer fresh, unique fashion at incredible value.

Our women's assortment will showcase an increased number of brands within the contemporary, better and athletic space.

We continue to allocate more open to buy to closeouts, which will allow us to bring more compelling deals to fuel the thrill of the treasure hunt.

Our closeout penetration has increased by 60 basis points this quarter to 12%, and we're encouraged with these sales results.

With the market continuing to provide attractive opportunities for closeouts, we expect to strategically grow this business.

Second, our merchants continue secure a large number of exclusives for DSW.

More importantly, we are increasing our access to the best performing products in the market.

We're pleased with how customers are responding to our recent product and brand introductions.

Lastly, a word about private brands.

Although it's early, we are excited with the successful relaunch of one of our most important private brands.

Starting this year, we have identified a new partner with strong design and sourcing capabilities that will bring our private brand business to its fullest potential.

With that, I'd like to turn the call back to Roger.

Thanks, Debbie.

We were disappointed in our first quarter performance.

While these results might not indicate we are making progress, I'm going to share a few examples of why I believe we are taking the right steps to improve both our short and long-term results.

In our recent fall line review, we were excited by the progress our merchants have made in differentiating our assortment.

We are increasing our percentage of vendor provided exclusives and we'll highlight this assortment to our 24 million rewards members.

Our customers will understand what unique assortment we offer and the need to respond quickly while supplies last.

We will also increase our closeout penetration and strengthen our already strong value offering.

These killer deals will be another call to action for our customer and highlight our access to some of the best brands in the world with price points that can only be found at DSW.

This fall, you will see a higher penetration of private brands including the launch of a new men's brand.

To expand our private brands without the expense of an internal design team, our intent is to enter into an exclusive agreement with a key vendor partner to improve the consistency, quality and margins of our private brands.

When visiting stores, it was apparent that we were missing important parts of our assortment across the chain.

Our new leader of Planning and Allocation is putting process in place to ensure we are executing our target assortment consistently across all doors regardless of square footage, productivity or location.

These disciplines within our buying, planning and allocation process will enhance sales and margin.

We are intensifying our efforts to create unique brand experiences within DSW.

For example, in Q1, we connected with customers through our shared love for music and fashion at Coachella.

We also hosted a successful athletic event with local artists that drew crowds into a number of stores.

Our customer will see similar events in the future.

We have been pleased with the results we have seen in test stores and as a result, we are ready to launch kids in half of our chain.

We believe this new category will drive share of wallet with existing customers while attracting new customers to the DSW brand.

Our digital demand grew 23% in Q1 with healthy gains in traffic and conversion.

After replatforming DSW.com last year, we will unveil a completely redesigned MobileFirst platform later this year.

The website will be easier to navigate and will provide a much richer shopper experience.

It's no secret that customers are increasingly pre-shopping online and we expect this enhanced digital experience to drive visitor frequency and improve conversion.

This new infrastructure will also lower our cost structure across the business in the long-term.

We are also challenging our team to fully leverage our omnichannel capabilities.

I have been amazed how quickly our customers have adopted capabilities like buy online pickup and buy online ship to stores.

These capabilities create an incredible opportunity for our stores to engage with what has historically been an online only shopper.

This is our omnichannel experience working at its best.

And we're very pleased with the deployment of a proprietary order fulfillment algorithm, which if you recall, helps reduce markdowns by rerouting digital orders to less productive stores.

During the last nine months, this program has improved the DSW brands margins by 10 basis points.

We have additional opportunities to capitalize on this technology to improve profitability.

I would like to share one additional action we believe is important.

Over the past several years, we have invested heavily in technology, new stores, marketing and support services.

While we have seen top line growth from these investments, our expense growth has out paced sales and we have not grown our bottom line.

Since I've transitioned into this role, we've initiated a process to streamline our organizational structure, increase transparency and establish direct accountability across the business resulting in a number of necessary organizational changes.

We will continue our journey in the second quarter as we conduct a comprehensive assessment of our organizational needs and processes in order to leverage our teams, do more with less and focus on fewer priorities.

We expect these changes to improve earnings and more importantly, reinforce DSW's competitive position in a rapidly changing environment.

Finally, I would like to share some of my thoughts on our investment in Ebuys.

We're pleased to report that this quarter, the team at Ebuys increased revenues in the double-digit range.

We are in the process of identifying efficiencies and shared services and leveraging the combined power of DSW and Ebuys off price sourcing expertise.

Vendors have indirectly used Ebuys to liquidate excess inventories at the end of the clearance season.

With our ownership of Ebuys, we can now offer our vendors unique one-stop capabilities for liquidating off-price goods within a multi-channel environment.

In summary, we are taking steps to improve our business and we will focus on maximizing ways to achieve sustainable, profitable growth while making the right investments to fuel our long-term success.

We're going to measure ourselves by the outcomes we deliver such as market share growth and most importantly, earnings growth.

We look forward to reporting our progress next quarter.

With that, Ill open the floor for questions.

(Operator Instructions)

Corinna Freedman, BB&T.

Good morning, guys.

Just a quick question on the cost savings that you're targeting: Do you have an annualized amount that we should be thinking about, and the timing of that?

And a follow-up question on -- any comments on second-quarter to-date comp?

Thank you.

Good morning, Corinna.

On the cost savings side, we're undergoing that work right now, and I expect that we will have more information for you by the end of the second quarter.

And your second question was on the quarter-to-date Q2 comp, and we really don't release any kind of quarterly guidance at all, beyond the remarks that we've made this morning.

Great.

Thank you.

David Mann, Johnson Rice.

Thank you, good morning.

My question is about store growth.

In the last few years, you've continued your store growth, despite the customer shift online and what have been weaker comps.

Can you talk about your thoughts about future store growth, and perhaps what kind of cannibalization you're seeing from the new stores you're opening?

David, it's Roger.

Thanks for the question.

We're viewing 2017 to be in the net 15 to 20 doors -- in that range.

We're still working on our thoughts on what it looks like beyond 2017.

As it relates to some of the new stores, we've actually been very happy with the results we're getting.

We are achieving the ROI targets we had set for the doors we opened in 2015, and obviously so far, in 2016.

We still believe in new stores.

I think they create an incredible place for our customer to touch and feel the product.

They make our digital platform more competitive, and ultimately they create brand awareness.

I think we have opportunities to leverage them perhaps differently than we do today to create different and unique experiences, and we're planning on getting back to you guys with what we think that looks like sometime later this year.

And then for a follow-up, can you just talk about capital allocation?

Obviously, we've seen the dividend today, but you did not buy back stock this quarter after a fairly aggressive buyback last year.

So what's your appetite for continued buyback activity?

David, this is Mary.

We continue to look at buyback opportunistically.

We have $83 million in our current authorization remaining.

And as we've done historically, we'll be looking at that from an opportunistic perspective going forward.

We do expect, from a capital allocation as part of the expense initiative that we're undertaking, that we will be looking hard at our capital spend as well, and expect to see some reductions from a capital spend from what we provided you in our initial guidance.

Great.

Thank you.

Good luck.

Thank you.

Steve Marotta, C.L. King & Associates.

Good morning, everybody -- a couple of very quick questions.

First of all, could you explain specifically the SG&A savings -- the differential between what was expected in FY16 up from low teens now to up 7% to 8%?

Where exactly did that come from?

We factored into our guidance a reduction in our overall SG&A for the remainder of the year.

It's a broad-based reduction, and it's our initial assessment based on the project that we've kicked off.

But it's fair to say that there's a significant component of it that's within our corporate home office SG&A.

All right.

Thank you.

This is Roger.

I would tell you I think, as we've taken a view of the Business, we see that there's opportunity across our Business to be more effective and efficient in everything we do.

It's both our stores; it's our home office.

It's the private brand work we're doing.

And it's also in cost of goods and how we are more effective in driving down our costs without impacting the quality of goods of our products.

So we're looking at all buckets is what I would tell you.

Okay.

Reiterating, you expect EPS to increase in the third and fourth quarter of this year?

Is that accurate?

That's correct.

Okay.

And my last question is: You mentioned in the fourth-quarter call that there were some marketing initiatives -- digital, I believe -- that were tested and were successful.

And then you intimated that there was a little bit more, or maybe similar, of that in the first quarter.

Are they completely different?

Are they very similar?

And do you expect to continue to test and roll out additional digital marketing initiatives through the balance of this year?

I would tell you, Steve, I think the work we did, both in fourth quarter and first quarter, to reactivate lapsed DSW customers -- folks that hadn't shopped our Business in a while -- those were things that we wanted to test and see what kind of result.

In general, I will tell you they were very, very effective at driving sales.

They perhaps didn't drive the kind of margin that we would have hoped for.

But what I'm looking to do is to ultimately for us to be able to drive those customers in without having to give them some kind of coupon or discount, and leveraging the incredible, compelling deals that we have planned throughout the balance of the year to say, come see these incredible brands at these killer prices.

And that's why we are focusing on increasing our close-out penetration.

So I think some of the work we've done in marketing I think has been very effective, and we will continue using those tools.

And a lot of that is in the digital space, but it's also about our product, and screaming about the values that we have on our floor today.

Terrific.

Thank you.

Jessica Schmidt, KeyBanc.

Thanks for taking my question.

How do sales trends on close-out purchases and private brands compare to the rest of the Business?

Are you seeing a big gap in performance in these areas that you're looking to invest more in?

And just given some of the broad weakness we've seen across retail, what do you think is driving some of the softness?

Jessica, could you repeat the first part of your question?

I could not hear it very well.

Yes.

I know that you're looking to do more with the private brand and do more with close-out purchases.

How do sales trends in those areas compare to the broader Business?

Sure.

So, I'd tell you, in private brand -- private brand is about 11% of our Business right now.

What we saw this past quarter -- we saw flat gross margin rate to LY.

We saw a 980-basis-point differential between the gross margin rate and private brand against balance of assortment, and we saw positive comps.

So I will tell you, we're going to be very strategic about how we do it, deliberate how we grow it, and very thoughtful how we grow it.

We are a brand that sells brands, but the component of private brand to bring differentiation and great value to our assortments is critical to us.

Customers have already demonstrated that our number one private brand is something that they ask us for, they search for.

That really, I think, with the work we have done in that space has really evolved it from a label into a credible brand.

And we look to do that with the balance of our intellectual property.

As far as closeouts are concerned, we use closeouts for both passing value to the consumer and also to get increased gross margin.

This past quarter, and part of last year, what we did is we really wanted to drive more value to the consumer.

And so, we really did take those great deals that we bought in the past, great value to the consumer.

What we saw is, as in anything, sometimes it works in some items, sometimes it doesn't.

But what we're doing is we're measuring very, very carefully the philosophy of how we price the goods, and when we pass it on and when we keep a little bit back for ourselves.

We do expect that the closeouts will help with differentiation, bringing great deals to the floor, and my objective is that it will see margin upside.

And, Jessica, just to chime in a little bit about both of those topics -- one on the close-out front.

As we pulled our sales plans down for the balance of the year, at the same time we were doing that, we wanted to create open to buy so that Debbie and team had the ability to be in chase mode around these kind of deals.

We're going to get much more aggressive in that space.

We are looking for opportunities to buy quantities and obviously great product at a great price that we can message across the entire chain.

Because, rather than giving somebody a $10 coupon or some other incentive to come in, we believe that, and we have had this experience, when we can stand behind an item or a brand and scream the value proposition, they respond.

So I think that's what we're trying to accomplish with our closeouts.

In the private brand, I think, again, long term, has incredible opportunities to drive both our top line and margin rate.

And when we look at some of the results we had in the brand that we relaunched, they exceeded our expectations.

We've got to do that work with our new partner to really grow the private brands.

As far as general softness in retail and our belief what's happening, I will tell you everything we see says that traffic in general in the industry was down roughly in the 6%, 7% range for the quarter.

Our traffic was down about 2%.

So I feel like we did a lot to drive consumers into our store.

I think, obviously, there is some folks having some success, whether it's the restaurant industry, the services, autos, those kind of folks, which ultimately put pressure on our area, the discretionary spending.

So you have to be more relevant and offer incredible value to the customer.

And that's what we're working on for the back half of the year.

Great.

Thank you.

Scott Krasik, Buckingham Research.

Hi, thanks, good morning.

I have a question on the revision to the gross margin guidance.

I'm assuming you weren't expecting anything heroic in 1Q, even in your flattish guidance, and now down 100 to 150 basis points, the comparisons get easier.

Maybe talk about why such a major revision there, and specifically at 2Q, are you thinking similar to 1Q?

So, Scott, thanks for your question.

Our margin revision, guidance revision, really revolves around the more promotional markdowns we had in the first quarter.

We think that will continue somewhat into the second quarter as we clear through some pockets of inventory challenges that we have that we came out of the quarter with.

And I think, overall, what we're seeing is some more overall pressure on shipping, and then with -- primarily with the lower sales taking down our comp sales guidance, we're seeing some significant deleverage in occupancy -- about 50 basis points of deleverage in occupancy.

That's also a big driver of the margin revision.

Okay.

That's helpful.

Thanks.

And one question we've gotten this morning -- you spent $60 million, potentially $100 million, on Ebuys.

What are we getting here?

A 15% gross margin business, I think, is a lot lower than what people were expecting.

Maybe just remind us what the strategic rationale is there, and what the opportunity is for profitability?

Because right now it looks a lot lower than what maybe the original expectations were.

Thanks.

I'll let Robert speak to the strategic piece, but I want to be clear.

At the operating income line, Ebuys is not dilutive.

We had talked in our first-quarter call about it having some impact on gross margins and some offsetting benefits on the operating expense.

So, overall, for the first quarter, for example, if you looked at the overall gross margin decline of 250 basis points, about 40 basis points of that came from the ShoeMetro business.

So, we're seeing a decline on the gross margin line; but on the operating expense line, we're seeing an offsetting benefit of a similar amount.

So, at the operating income line, it's relatively neutral.

And, Roger, on the strategic?

Scott, just to reinforce, we did this deal because these guys play in 30 countries where DSW does not play today.

They play in 30 channels where DSW does not play today.

And they provide an incredible opportunity for us to walk into our vendor partners and offer them the ability to liquidate their excess inventory in places where they would want it to be liquidated, whether that be through the DSW brand or through other markets where we could make it go away.

So, that is what we're going to use Ebuys for, and that's how we think we can drive the growth.

And, frankly, we did it based on what the bottom-line opportunities look like, not what it looks like between gross margin or SG&A.

It's about the bottom line.

Okay.

Thanks.

Patrick McKeever, MKM Partners.

Thanks, good morning, everyone -- just a couple on some of the strategic initiatives.

The children's footwear -- I've been multi-tasking, but could you just run through the plan there for this year?

And then maybe talk about any disruptions you might see as you roll that out across, I think you said half of the chain?

How long does the buildout take, and anything on the investment piece would be nice, too.

And just on the small stores, the smaller store format, wondering if there was any major differential there in terms of performance in the first quarter?

And what the outlook might be with that format?

Thanks.

Patrick, I can give you some insights on kids.

We will be in 220 stores by back-to-school this year; so, roughly half the chain.

I think the execution on our side -- obviously, when you're putting in a couple, 300 choices in a store, it takes a lot of work.

We are creating that space, and then doing those buildouts.

And that work really starts here in the next couple of weeks, and will take us really through the month of June essentially.

We were really happy with the results we have seen in the 22 stores where we've tested this.

I'm excited to see the kind of response, because I was looking at information on our rewards file the other day, and 57% of our rewards customers have at least one child in their home.

And for us to be able to stand up to those customers and tell them, you're going to be able to earn your rewards points and everything else that you can get from being a rewards member off of your children's footwear, not just yours, we think that's an opportunity.

So, I'm excited to see what kind of results we get.

And as it relates to the small format stores, again, we've been pleased with our small format results.

But I mentioned this last time on the call, what we want to make certain we do before we grow that more aggressively is that we get the right kind of experience that still demonstrates the kind of compelling, broad assortment of designer footwear that DSW offers in a 25,000 square foot box -- that we can make that experience look, feel, smell the same way in an 8,000 to 10,000 square foot box.

What we've seen so far on those small format stores, when we can get the 1,200 to 1,500 choices, while the margin rate might not be as good as the balance of the chain, the bottom-line results are.

And so, we're trying to figure out how can we get more product?

How can we tell a story in a much smaller box?

I don't want to rush to that.

We want to make certain we have a strategy that can get us a lot more doors than just opening 5, 10 or 20.

Great.

Thank you very much.

Jeff Van Sinderen, B. Riley.

Good morning.

Just a follow-up on private label -- maybe you can just give us a little more color on the new vendor relationship there?

And also, I know you mentioned some inventory challenges.

Just wondering maybe if you can give us a little more on what type of merchandise that's in, and then how you see that evolving over the course of Q2?

And also as a follow-up, how high do you plan to take the close-out penetration?

Thank you.

Good morning, Jeff.

This is Debbie.

I'll take those questions for you.

As far as private brand is concerned, talking about the new vendor, we are in the process of forging a stronger relationship with a key vendor.

And we won't report that now because it's not finalized, but we believe that the capabilities of this resource help us in design, in sourcing, and helping move our labels to actual brands.

As you know, when you start to do product development, in order for you to avoid just throwing a lot of individual products under a label and it doesn't mean anything, if you really want it to mean something to the consumer, you really have to invest that time and experience in moving it from a label to a brand.

And this new partner that we're about ready to forge a relationship with has the capability of doing that, and we're very excited to forge this partnership.

We can't talk about that partner now, but I think by the next call we'll have everything all locked up and we'll be able to make that announcement for you.

As far as inventory challenges, the biggest place that I see the inventory challenge right now, and it's not large, but there are some pockets that I'm not happy with.

That would be in casual sandals.

First of all, the first eight weeks of the quarter we had very strong comps in casual sandals, as we talked to you about in the call.

At the beginning of April, that really fell off, and that consumer was buying things in other categories.

The opened-up category in women's, which is opened-up dress, sandalized dress, and casual sandals -- the combined total of those three categories comped up 1%.

But I still find myself with a little bit too much inventory in the casual sandals space.

You probably saw this week, we started a $29.95 sandal event.

That looks like its check early results, or it's checking nicely for us.

So we've already started to address that.

And then we're working with our core vendor partners to help us get us back into an inventory position where we are happy with what August BOP looks like.

That's work in progress.

The other place that have a little bit too much inventory because of the shift I talked about in the call was in men's casual.

And so we are right sizing that inventory, as we saw a little bit of a larger shift than anticipated go into men's athletic fashion.

And so we have a little bit of pressure in the men's casual category that we're addressing right now.

Once again, that's why vendor strategic partnerships are so critical.

They help you manage the uptime and the downtime, so that's what we plan on doing -- a lot of work ahead of us in market.

Jeff, one thing I want to mention on the sandal event that we started last Thursday -- this is an example of how we have to be more effective in execution within our Business.

We had a lot of product -- a lot of product in our assortment at $29.95.

So, what we were able to do, since that was across the chain, was we could actually market that.

That's an example of when we talk about execution and things that we can control, rather than just spreading all of those $29.95 units across the entire floor, let's put that together in a package in a compelling way and then let's screen that at our 24 million rewards members.

So, those are examples of things we are wanting to do more effectively as we move forward, from a marketing perspective.

Jeff, your last question asked about close-out penetration.

I'm not going to quote an exact number, but I will tell you that it's increasing year over year.

It's higher in the women's category than it is anywhere else.

I think the customer -- first of all, I think the product available in the market -- which there is a lot of good brands and good products in the market right now.

I think those deals and the level of those deals will dictate how much larger that gets, but I could imagine that close-out penetration seeing levels of 15% to 20% over time.

Like I said, we're not there now.

We're right around 11%.

But that will increase because of all the things Roger and I just shared with you on how important that is to the Business and to our customer.

That's helpful.

Thanks very much, and best of luck.

You're welcome, Jeff.

Taposh Bari, Goldman Sachs.

Good morning, everyone.

Debbie, a question for you -- I know there's a lot of focus out there on the weather.

It's obviously been pretty wet and cold out here in the Northeast.

I wanted to see if you're seeing the same divergence across the coast that a lot of other retailers are commenting on?

As a follow-up to that weather point, as online penetration across the entire industry grows, is there a change in the traditional consumption along some of these seasons?

In other words, a greater focus on buy now, wear now, i.e.

instant gratification versus pre-buying the season?

Thanks.

There are several different questions in there for me.

First of all, let's talk about the weather.

Certainly I've read it in all the calls and certainly we were impacted to a certain degree by it, but I'm not using that as an excuse.

I'll use the example of casual sandals, where we did have very strong business the first eight weeks of the season, and it fell off.

I don't think that was just weather, to be honest with you.

I think, in full transparency, I think customers were buying some other things.

I did see a cannibalization of that category into some other categories.

So I don't want to use weather as an excuse.

I think the bigger question for me is: How do we make sure that we really manage these seasonal categories to make sure that we don't get -- that we maximize the Business and don't get ourselves into trouble in boots and in sandals.

I will tell you that as I study the Business, I'm starting to see the penetration contribution of the seasonal categories decrease relative to last year.

And I think that that's just an explanation of customers are buying other things.

I don't think that -- I think the way that we can control that is we make sure that we are liquid and we use the pre-buy bucket the way it was intended to be used.

And that we make sure that we read the data and the patterns that are coming through on the shifts between the seasonal categories and all the other categories.

So, this is a process; it's manageable, and that's how we're going to manage that area.

We did not see consistency between cold and warm regions as the weather changed for Q1.

Like I said, I don't use weather as an excuse.

I'd rather just not talk about weather overall.

Thanks for that.

And, Roger, a quick one for you: You're about six months into your tenure now as CEO.

I wanted to ask: Which financial metrics are you most focused on, as you look to improve the Business?

In particular, I wanted to get your view on balancing market share and sales versus operating margins on the P&L?

Thanks.

Great question.

I will tell you, right now we are spending the vast majority of our time talking about gross margin and our SG&A.

And historically we've operated at much higher gross margin rates.

And as we had debate and conversation here internally about what do we do with our sales view for the balance of the year, our decision to pull down sales was really driven by the fact that we want to be much more conservative in our approach, so that we can be positioned to deliver stronger margin rates and ultimately be in a position to chase the business when it does turn and we see it.

I know our team has the ability to respond when that takes place.

But I'd rather us to position the Business so that we are planning a little more conservatively, pulling down our SG&A, driving margin improvements and, ultimately, as the Business turns and we start to accelerate, we will see more and more of those dollars flow to our bottom line.

So, that is the approach that we're taking.

Understood.

Thanks, and best of luck.

Thank you.

Jay Sole, Morgan Stanley.

Good morning, thanks for taking my question.

Roger, you mentioned how people are pre-shopping online these days, and my question is about how the consumer's behavior is changing.

Because they pre-shop online, is there less impulse shopping?

In the old model, people walk into the store, they're surprised and delighted by the assortment, and instead of buying maybe two shoes, they buy three.

As they shop online, and maybe can think about things for a longer period of time, does that change how they buy?

Is that something that's a headwind to your ability to drive same-store sales?

Jay, what I would tell you is I don't see that.

I see that when we are on our game and we have the right product in the right store, we drive incredible performance.

And that's what we're focused on.

That's what we're working on is how we ensure we get the right product in the right stores.

I think the incredible opportunity we have is to leverage all the tools that we have built, leverage the omnichannel experience, and bring that to life in a different way in the brick-and-mortar location.

And we're not prepared to speak to this yet, but we have some really cool capabilities we're building in the back half of this year that will be customer facing in the store that we're going to be rolling out that, as we get closer to it and can define it in greater detail, I want to share those with you.

But I sort of see it the other way around.

By pre-shopping, that gives us an incredible opportunity to leverage a digital experience that we are working on to improve and, ultimately, to drive them into the store.

When you take things like buy online pickup, buy online ship to store, where you can have a 20%, 25% attachment rate when they do come in the store, those are ways to leverage the resources and assets we have called stores to really grow share.

I see it the other way, that it creates an opportunity for us to grab share.

Okay.

Interesting.

Thanks so much.

You're welcome.

Chris Svezia, Susquehanna Group.

Good morning, thanks for taking my question.

Debbie, for you, just touch on the athletic penetration within DSW.

Where that is, your expectations for the balance of the year, and it seems like you're switching that into more casual product; in other words, taking share from casual.

Can you talk to that?

And just any initial thoughts about how you think about boots for fall, and how maybe closeout and private brand plays into that exposure for boots for the second half?

Okay.

Good morning, Chris.

Thanks for your question.

So let's talk about athletic, first of all.

Athletic comped up 16.5%, and it did it in both genders.

It's got a 57% two-year comp, so continuing to see momentum there, and don't really see that slowing down.

As far as penetration is concerned, the penetration has gone up significantly, and it improved over last year by a 240 basis point.

So, lots of traction and momentum there.

Even though it's a tougher IMU and gross margin business, and the gross margin rate was down 40 bps for the quarter, we saw an increase of 19% in gross margin dollar.

So I think the key is that you really need to keep that comp high, and you need to manage your inventory appropriately so that we deliver the dollars, not necessarily the rate.

Fashion continues to drive it.

Performance is still comping, but fashion continues to drive it.

And with all the things you've heard from the market -- vulcanized being strong and some of the key brands being very strong.

The newness though that I'm excited about is the non-athletic piece of the women's business in casual.

So we call it really sport.

That's where there's a lot of new exciting things that are happening.

We started to see it third quarter last year from a few of the big brands.

It looks like a lot of the wholesale brands are really starting to bring some exciting new product to the table, and we're seeing in that sport category with all the new receipts that we've just recently gotten, some very strong comps there.

So I think it will actually be some benefit that we can extend this ath-leisure trend into the women's zone.

When you add women's casual and you add women's athletic fashion, we actually had a mid-single-digit comp there.

I think it's beneficial, and I think it's healthy for the industry and for the Business.

As far as boots are concerned, we are going to play it very, very conservatively.

I'd rather be in a chase mode.

We're going to build those assortments, as a good merchant would, bottoms up, and we are going to make sure that we have our core and we're going to have a nice assortment of fashion.

But we're really going to be very conservative in terms of how we plan it, and we're going to chase into that.

This past quarter, we still saw very good comps in booties, as everyone has.

That continues; as long as you keep them fresh, I think we will be in good shape.

Q1 was particularly difficult in cold weather as we lapped some really strong comps year prior in cold weather product.

But I think the big story in boots is plan it conservatively -- make sure you bring all the fresh fashion that you can to the table.

You don't go back and duplicate things that are warmed over and not exciting.

And keep open-to-buy liquidity, and that's how we're going to approach in boots.

Chris, as far as private brand, really don't have anything more to add in private brand than what I talked about before.

It's an important part of our business.

We will grow it with this new strategic partner.

I think you're going to see a better looking product in terms of design and better quality product on the floor, and more of a deliberate focus on really making sure that we move those labels to brand.

Not much more to say there.

Closeouts will also grow, and give us the benefit that Roger talked about a few minutes ago.

I think that covers it.

And if you have any other questions, I'll be happy to take them.

No.

That's it.

Thank you very much and all the best.

Thanks, Chris.

Kelly Chen, Telsey Advisory Group.

Thanks for taking my question, guys.

My first one is for Mary.

Mary, you gave the drivers of the gross margin decrease, and I was wondering if you could just quantify the impact from some of the bigger drivers like markdowns, impact from the mix, deleverage on occupancy?

And for some of those bigger buckets, what's embedded in the assumption for the down 100 to 150 basis points, if you could help us understand that?

And my second question would be for Roger or Debbie.

You guys talked about a tough retail environment, and I think it was about maybe two years ago when Mike had described the department store channel as disruptive and chaotic.

As you look at the landscape today, do you feel like the situation is similar?

I know you guys gave color on your own inventory, but what do you think about the inventory in the channel?

Are there pockets of excess?

And if the department store channel were to become more promotional, how do you think you're positioned and how do you plan to manage through that?

Thank you.

Hello, Kelly.

On your first question on margins, for the quarter, the margin deleverage of 250 basis points, approximately 40 basis points of that deleverage came from the mix with ShoeMetro.

So if you look at the deleverage without ShoeMetro, the impacts were primarily driven by markdowns, and that's primarily around marketing promotions that Roger mentioned, where we saw a nice sales lift from those, but we did see incremental gross margin dollars, but they were very modest.

And that would be about 90 basis points of the deleverage.

And we had some modest deleverage in IMU, about 50 basis points.

About a third of that came from the athletic mix and the balance was from sharper pricing.

We saw some shipping costs deleverage about 30 basis points.

About 20 bps in occupancy and about 25 bps in our DCFC deleverage, and that kind of explains the full gross margin deleverage for the quarter.

When you're looking at it for the full year, again, the deleverage for the full year, about half of that 100 to 150 basis points is the impact of the ShoeMetro mix on margins.

The remainder of the margins, we're actually expecting our merch margins to be relatively flat for the full year, with some pressure in IMU being offset by improvements in markdowns.

As we turn the back half of the year, we expect to see some improvements in terms of our markdown rates.

And most of the deleverage coming from occupancy, as I mentioned previously, on that negative comp-sales decline guidance we provided this morning.

Kelly, I can take your second question.

I say this to our associates, and I know we have a lot of them that listen in on this call, so I'll reinforce this message to them now.

But, you know, retail is always challenging.

Right now, it's really about us focusing on ourselves, because we control our own destiny.

And I think the experiences I've had in traveling our stores and the experience I have in viewing our website is we have opportunities to improve our game.

And we don't want to look at what others are doing or how they are responding right now.

It's about us.

And it's about us being focused on what we do, because when we are executing the way I know we can, we deliver the results.

We see it in pockets in our inventory.

We see it in pockets in our stores.

That's where we are focused.

I will tell you the decisions we made to pull down inventories and to pull down sales were to create open-to-buy opportunities for us.

And as those pockets pop up, our team will evaluate them and make those decisions.

And to address the Ebuys opportunity, as a DSW Inc.

shareholder, those create opportunities for us to help liquidate goods through Ebuys.

At the end of the day, we've got to focus on what we do, and execute better than we're doing right now.

Great.

Thanks, guys, and good luck.

You're welcome.

Thanks.

Eddie Plank, Jefferies.

Thanks, guys.

Thanks for taking the question.

Just a couple of quick ones -- it sounds like the initiatives like buy online, ship from store, pick up in store, et cetera, are resonating pretty well.

I guess maybe this is for Mary.

How do we think about how you begin to manage those increased shipping costs going forward?

And then as a follow-up, does your guidance still assume the same EPS contribution from Ebuys this year?

Thanks.

So, I'll answer the second question, first.

Yes, the guidance includes the same initial EPS guidance from Ebuys that we provided earlier on our fourth-quarter call of $0.04 to $0.06 per share, excluding the one-time costs associated with the purchase accounting, the transaction costs, and the fair market value of the contingent consideration.

On the first question regarding shipping costs, there's a lot of things that we're doing to better manage shipping costs.

Earlier this year, we did put in place a new provider for our ship-from-store that's driving down our shipping costs from the packages that we ship from the store.

We're going to see some savings there.

But that is mitigating the fact that our overall mix of our direct-to-consumer business continues to increase, and we don't think that's a bad thing.

We just think it's a function of how our customer wants to do business with us today, and is just the reality of the overall Business moving forward.

So I think our overall deleverage in shipping for the full year is estimated to be in the 15 basis points level.

So it's not a significant pressure on margin.

And by the way, that excludes ShoeMetro.

That's just for our core DSW business.

But that increase in direct-to-consumer is causing some increased pressure with shipping costs that are being mitigated by some of the changes that we've made in our providers at the store level.

Great.

That's helpful, Mary.

Roger, one quick one for you, if I can.

You talked on the last call about a focus on disruption.

Maybe can you elaborate on that a little bit?

Maybe some specific initiatives that you guys are taking in that regard?

Thank you.

Yes, I think the ones I think is the best example is obviously our acquisition of Ebuys.

I think it has an incredible opportunity for us to evolve the DSW Inc model.

I will tell you there are several other investments that we have made that we're not in the position yet to disclose how we're going to leverage them, but I think there's some great opportunities for us to create different and unique experiences in our stores and using technology to create those experiences that force you to come to a DSW location or another banner underneath DSW Inc.

But we're not in a position yet, Ed, to be able to present some of those, but we have some pretty cool things we're working on in that space.

Great.

That's helpful.

Best of luck, guys.

Thank you.

This concludes our question-and-answer session.

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

So I want to thank everyone for joining us today, and I really want to reinforce our commitment to driving our top line and improving this profitability of our Business.

We have significant work ahead of us, as I'm certain you could hear from the call.

But I know we are committed to creating a strong foundation that's going to drive long-term, profitable growth.

So, thanks, everyone, and we appreciate your support.

Thank you, sir.

Today's conference has now concluded.

We thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.