Designer Brands Inc (DBI) 2016 Q3 法說會逐字稿

Good morning, everyone, and welcome to the DSW third-quarter earnings conference call.

(Operator Instructions)

Please also note that this event is being recorded.

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

Please go ahead.

Thank you, Denise.

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

Earlier today, we issued a press release detailing the results of operations for the 13-week period ended October 29, 2016.

Please note that the various remarks made about the future expectations, plans and prospects of the Company constitute forward-looking statements.

Actual results may differ materially from those indicated by these forward-looking statements due to various factors, including those listed in today's press release and our public filings with the SEC.

Joining us today are Roger Rawlins, Chief Executive Officer; Deborah Ferree, Vice Chairman and Chief Merchandising Officer; and Jared Poff, Chief Financial Officer.

Let me now turn the call over to Roger.

Thank you, Christina.

Our third-quarter results demonstrate the progress we've made in stabilizing our business with improvements in gross margin and expense management, resulting in year-over-year earnings increase after four consecutive quarters of decline.

Actions we took to strengthen the content, freshness and consistency of our assortment resulted in better regular price selling in women's dress and casual and a continued acceleration in our athletic business.

These improvements were offset by a late start in boots, which we partially anticipated.

In contrast to last year, we were able to manage inventories through cancellations and reorders, allowing us to enhance our merchandise margin.

While there is still plenty of opportunity for improvement, including returning to positive comps, this quarter's results demonstrate the kind of success we can achieve when we focus on executing our model.

Now, let me congratulate Jared are being named CFO and let him provide some color on our Q3 performance and Q4 outlook.

Thanks, Roger, and good morning, everyone.

Solid execution during the third quarter resulted in much-improved financial performance.

On a GAAP basis, earnings per share increased by 7% to $0.47 per share including acquisition related and restructuring expenses of $0.03 per share.

Adjusted earnings per share increased by 16% to $0.51 per share.

The balance of my comments refer to our adjusted results.

The Company revenues increased by 5% with the DSW segment and Ebuys each contributing to our sales growth this quarter.

Comparable sales at the DSW segment decreased 2% with regular price comps down 1% while clearance comps decreased 6%.

We opened 18 new stores this quarter, including our first location in our 43rd state, New Mexico.

Year-to-date, we have opened 30 net new stores compared to 34 last year.

Our marketing activities drove a low single-digit increase in transactions, with an improvement in new customer acquisition.

Traffic improved modestly in both channels with store traffic turning positive during the back-to-school selling period.

Average dollar sales remain below last year due to shifts in category mix.

Digital demand increased in the low teens including strong growth from our drop ship business.

Stores will fill close to 28% of digital demand this quarter led by the significant adoption of our buy online pick up and ship to stores program.

Revenues at the ABG division remained flat driven by 5% comp decline and the opening of net 11 new locations for a total of 396 departments this quarter.

We continue to work closely with our partners to manage the appropriate level of inventory.

Ebuys contribute $21 million to DSW Inc revenues and grew at a healthy pace.

As we have more fully integrated Ebuys into our infrastructure and shored up our talent needs with experienced merchants and planners, we felt it was important to set some reserves and take markdowns to clear aged inventory.

These additional markdowns led to a lower gross profit, but enabled us to enter the peak selling season with an appropriate assortment.

Turning to gross profit, tighter buys and higher sell-throughs resulted in better margin favorability in clearance.

In addition, we initiated a number of new actions to optimize clearance levels and reduce markdowns, which generated approximately 50 basis points of markdown favorability this quarter.

Lower markups and shipping expense growth partly offset the benefit from last year's inventory valuation reserve.

As a result, organic gross profit, which excludes the impact of Ebuys, increased by 150 basis points this quarter.

Occupancy costs improved by 20 basis points and distribution and fulfillment costs deleveraged by 50 basis points due to higher fulfillment costs at Ebuys.

Total company gross profit increased by 60 basis points with gross profit dollars up by 7% on 5% sales growth, the first increase in gross profit dollars and gross margin rates since the second quarter of 2015.

On operating expenses, operating expenses increased 7% and deleveraged by 40 basis points this quarter due to the reversal of incentive compensation last year.

Excluding incentive compensation, our SG&A rate leveraged by 110 basis points as a result of actions taken to create a more efficient organizational structure, strategically source key items and supplies, reduce discretionary spend, and the impact of some favorable timing of marketing spend.

Although this resulted in our adjusted operating income of $67 million, an increase of 6% over last year and a 15 basis point increase in operating margin rate to 9.7%, significant improvement over the 300 basis point decline during the first half of the year.

Our investment in Town Shoes of Canada contributed $1.1 million in investment income this year compared to $700,000 last year.

Town opened six DSW Canada locations this quarter for a total of 23 stores open today.

Adjusted net income increased by 6% to $42 million, due to a lower share count resulting from $159 million in repurchase activity in the last four quarters.

Adjusted earnings per share increased by 16% to $0.51 per share.

On the balance sheet, we ended the quarter with cash and investments of $216 million compared to last year's $397 million.

The lower cash balance reflects our investment in Ebuys this year and ongoing share repurchases.

We repurchased 2 million shares for $43 million this quarter.

Subsequent to the end of the quarter, we repurchase an additional 351,000 shares for $7 million and now have 33 million remaining in our current authorization.

Excluding Ebuys, we ended the quarter with inventories lower by 3.5% per square foot.

Ebuys accounted for $35 million out of the $41 million increase in total inventory this quarter.

We are positioned to take advantage of great quality branded merchandise opportunities in the marketplace that will further benefit the balance of the year should they materialize.

Capital expenditures for the third quarter totaled $21 million.

We spent $16 million on new stores and remodels and $5 million on fulfillment center and technology projects.

Turning to guidance, we raised our full-year outlook to $1.35 to $1.45 per share.

We have positioned our inventory such that we expect lower markdowns than the fourth quarter last year.

Importantly, we estimate that last year's elevated promotional activity accounted for 350 basis points of comp headwind this year.

We have bought into an exciting holiday campaign, but given the uncertainties in the current environment, we believe that it is more prudent to position our sales plan with sufficient flexibility while protecting our bottom line.

As such, our updated outlook assumes a low to mid single-digit comp decline for the fall season, with tax rate of approximate 39%, and a slightly lower share count of 82 million shares for the full year.

In conclusion, we are encouraged with the progress we have made in the third quarter as we focused on strengthening our operational foundation and set our sights towards driving sustained earnings growth and improving total shareholder returns.

We are pursuing initiatives to improve our gross margin long-term, to drive our top line through focused execution, to become more efficient and control expenses, and to generate solid free cash flow.

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

Thanks, Jared, and good morning, everyone.

I am pleased with how we are executing in athletics, given the long-term opportunities in this category, and we're beginning to see signs of a greater appetite for non-athletic fashion footwear.

We're putting in place stronger brands and compelling values with really sharp buys, attractive close-outs and an exciting private brand offering.

Our inventory positioning has given us more room to read and react and chase reorders in some areas while canceling orders in other places, like boots.

Our combined women's comps were in line with the chain average with healthy increases across a number of fashion offerings.

Our team anticipated the customer shift toward new retro styling, and we deployed strategic buys in this area.

Coupled with the growth in vulcanized fashion athletic and performance, we have accelerated the momentum in this category with even stronger double-digit comps leading to an expansion of 400 basis points in category penetration in Q3.

We continue to drive growth in our vulcanized category on top of double digit comps last year.

I am proud of how we've stayed ahead of the pack in athletic, and with our merchandising initiatives, I'm confident DSW will capture even greater market share in the athletic category.

Outside of athletic, a new fashion movement is gaining steam.

Athletic has dominated customers' wardrobes for the last couple of years and our research indicates a readiness to embrace fresh, feminine silhouettes in fashion apparel and denim.

These non-athletic trends are in the early innings today, but we're already chasing into a number of exciting styles.

We anticipate the demand for these new emerging trends will build during late fall and continue into next spring.

Turning to boots, we planned boots down significantly with later deliveries in boot receipts as part of our transition strategy.

Boots came in softer than expected as the warm weather fueled the customers demand for athletic, opened up shoes and other casual styles.

We continue to actively manage inventories and receipts in the category, while balancing opportunities to extend the season into early spring.

Additionally, we took advantage of excess channel inventory last year and this provided us greater flexibility to read, to react to a change in seasonal conditions this year.

There is a level of freshness in silhouettes and material interest within boots that is resonating today.

We have reacted to this favorable response with reorders that will maintain this momentum into the fourth quarter.

Like the women's business, the men's category performed in line with the chain and athletic continued to exert a strong influence in this category.

We updated our brand mix to better reflect value in men's dress and casual, greater athletic inspired styling, and introduced a number of new emerging brands to the customer.

Now let me walk you through some of the initiatives we have been working on.

We have improve the consistency of our assortment by increasing the depth of key items by threefold this past fall season.

With this change, customers will find DSW's must-have items and core styles in any store, big or small, across our network and with greater inventory in stock, we expect to maximize regular price selling and improve our sourcing cost.

In addition, we've also identified areas where we can strengthen our merchandise flow and presentation so that we can communicate powerful stories to the customer.

We continue to differentiate our assortment by increasing exclusive, private brand and sourcing unique products from our branded merchandise vendors.

Turning to kids, we were pleased with the launch of our 224 kids stores this quarter, which contributed to the positive results during the back-to-school timeframe.

I am proud to say that after first testing DSW Kids years ago, we believe we found a model that produces incremental results.

DSW Kids stores saw a meaningful increase in store traffic and transactions with a healthy percentage of transactions that included adult footwear, additional adult footwear.

Stores that did not have any physical constraints experienced a meaningful lift across all of our selling metrics, which validates our strategic rationale for DSW Kids.

We're getting new customers and bringing existing reward members back to our brand, many of them young families and a healthy percentage of these customers are picking up an extra item, which is contributing to an increase in average dollar sales.

During the first phase of our kids expansion, we gained new insights on customer needs, seasonality and store operations that we are implementing as we expand the category to the rest of the chain.

We plan to add 70 to 80 kids stores during the first quarter of 2017.

We will evaluate the appropriate time for rolling out kids into the balance of the chain, which requires us to tackle some of the most challenging layouts and space constraints in the fleet.

We will keep you posted on our progress with kids.

Let me say a few words about our marketing.

We have stepped up our efforts to market DSW's everyday value proposition.

We put a spotlight on some of the most fashionable trends, exciting brands, limited-time events, and exclusives we secured for the season.

Particularly noteworthy is the impact of this year's special event [ness] in driving athletic comps this quarter on top of double-digit gains last year.

We launched a new digital marketing campaign to engage and activate new customers with personalized fashion content and collaborated with fashion influencers that should drive awareness for the DSW brand among millennials.

Lastly, improvements in our CRM campaigns have successfully increased online conversion among reward members.

As a result of these actions, we drove an improvement in new customer transactions this quarter.

This holiday season, we've lined up a number of compelling buys and fun, unique experiences as part of DSW's 30 Days of Wow campaign.

Customers will find incredible deals, special buys and in-store surprises every time they visit DSW this holiday.

We plan to be competitive during this time in driving traffic and engagement, but we will do so more profitably than last year.

Our inventories are well positioned as such, and we plan on continuing to protect our profitability going forward.

Now let me turn the floor over to Roger.

Thanks, Debbie.

Increasing challenges in the US retail industry have led to an ongoing consolidation, with a significant number of players accelerating store closures, if not exiting the business altogether.

Footwear brands have experienced difficulties growing their US wholesale distribution and in maintaining profitability within their Company-owned retail network.

We're also seeing online players continue to invest in their distribution networks, in a race to offer same-day delivery, an increasing number of e-commerce sites test, build and expand their physical presence in order to get even closer to the customer.

Our customers are demanding more convenient shopping models.

They want to walk into a store and find any item identified on their mobile devices and if not available that day, they expect it to be available somewhere within our network for next-day delivery.

They want the entire process to be frictionless and flexible.

Research says that consumers who conduct a mobile search are much more likely to visit the store to make a purchase within two days.

In addition, these online shoppers are increasingly choosing to pick up their purchase in-store, whether to ascertain sizing and comfort or to secure one's purchase the same day.

This evolving environment will create significant opportunities for survivors.

Based on our renewed focus on the DSW customer, the investments we have made and will continue to make to support our customer, and our history of innovation, we will be one of the few left standing.

That's why am confident about that statement and our future.

This quarter, we demonstrated that when we focus our efforts on inventory management discipline, we can expand our merchandise margins and grow our bottom line.

I am happy we are able to demonstrate these defensive skills.

But it's time we start playing offense by delivering differentiated and unique assortments across every touch point.

Our vendor relationships provide us the ability to offer in-line, special makeup, closed out and private branded goods.

This is a unique position, and starting the spring, you will see a noticeable difference in our assortment.

We're finding that our omni-channel capabilities are influencing traffic.

Our store traffic trends continue to outperform the industry and digital demand continues to grow at a double-digit rate.

Our brick-and-mortar warehouses are fulfilling as much as 28% of our digital demand.

The recent joint venture we entered into with Infor to build a world-class retail technology platform that empowers our store associates with tools and capabilities to easily meet our customers demand will change the game.

For once, our associates will not be at a disadvantage when they engage with the customer.

They will have at least the same information, if not more, about our products and the customer's purchase history.

Digital is now the door to our brand and our team is working hard to bring this experience to life.

We will relaunch DSW.com after this holiday season to provide a digital experience that will simplify the shopping process for our customer and support the omni-channel model we have built over the past few years.

In third quarter, the DSW brand opened its 500th store in the United States and we now manage five different retail banners in the US, plus three additional retail concepts in Canada with our partner Town Shoes.

Combined, we have close to 1,100 points of distribution in North America and 40 online marketplaces spanning three continents.

As our competitors retrench, we will continue to capture share through a combination of digital and store growth, increasing sales productivity by unlocking the operating synergies of managing all of our retail banners within a single network.

As an example, we have been working closely with key vendors to demonstrate the strong and unique benefit DSW Inc can bring through our multi-channel end-to-end retail platform.

As a result, several vendors have signed up to work with DSW as a strategic partner across their entire resale lifecycle.

From traditional in-line products sold at a DSW to end-of-life hash goods that can be liquidated globally through our digital marketplaces.

In addition to meeting our customers' evolving demand through all of our existing businesses, we are also staying attuned to what is new and disruptive.

We recently created a pop-up store, called Feetz at DSW to offer customers in New York and San Francisco an opportunity to create a shoe using Feetz's 3D-printing technology.

Feetz proprietary scanner will capture your size on at least 22 different dimensions and create customized, recyclable footwear.

The pop-up shops generated immense social media activity and drew new customers to DSW.

In summary, I'm pleased with the progress we are making to focus on the assortment within the DSW brand to operate at a tempo that will allow us to take full advantage of opportunities in each of our brands and to identify and assess new disruptive capabilities like Feetz.

As I mentioned earlier, our third-quarter results marked the first step towards returning DSW on the path of long-term sustainable growth.

With that, I will turn the call back to our operator and take your questions.

(Operator Instructions)

Scott Krasik, Buckingham Research Group.

Hello, guys.

This is Matt Gulmi on for Scott.

Congrats on your quarter and if I could just start off here.

So if you guys flex the category presentation, what evidence is there the Company can drive positive comps next year?

If you can address that.

From athletic and kids and then highlight any other areas, that would be great.

Good morning, Matt.

So the athletic trend, I will address the two categories you just asked me about.

The athletic trend continues very strong momentum.

And we have really not, we have seen a continued strength in the performance and the fashion, but then we also have this new category in non-athletic women's fashion that's also gaining traction.

So this category continues to have momentum.

You didn't see, in third quarter, the typical downtrend at the end of the Q3 and beginning of Q4 that you normally see.

As a matter of fact, it is sustaining everything that we expected from it.

And there is a lot of new products and concepts and ideas for next year.

So I just, I see this as a lifestyle shift and a trend that's not going away anytime soon.

As far as kids is concerned, as we just said, we were very pleased with our early opening of our first 224 stores.

The next tranche of stores, between 70, 80, stores will come in for March.

We have learned a lot from this first phase launch that we did, and we've gotten some very positive encouraging results, and we feel that this will just continue to translate into the next phase of stores we open.

Okay.

And then, I guess as Zappos has moved back to the high-low strategy for the most part and you guys outperformed department stores, can you maybe give us an update on the competitive environment from a high level?

And then, after the reset this quarter, where do you guys expect to see Ebuys' gross margin going forward in 4Q into next year?

Matt, this is Roger.

I will tell you from a competitive standpoint, right now our efforts are really, really focused internally.

And as Debbie mentioned, the opportunities we have within our assortment, that's where we're spending our time and efforts.

Obviously, we watch what others are doing, but we're trying to keep our organization very, very focused on delivering what we see the opportunities are within our own brand.

That's why we tell you how we're approaching it.

Jared, do you want to talk about (multiple speakers)?

Sure.

From a gross margin standpoint, for fall, we are forecasting roughly flattish to maybe down just slightly to up just slightly.

A big driver all of our gross profit percentage will be driven by Ebuys, which is obviously erosive to our historic legacy gross margin.

From a markdown standpoint, we continue to believe there is a significant opportunity and a markdown performance just like in the third quarter for the balance of the year as we have planned inventory such that we won't have to be as promotional as we were last year regarding slower moving inventory.

Great.

Thanks, guys.

Paul Trussell, Deutsche Bank.

Hello, good morning.

Wanted just to continue the conversation around comps, just wanted to dig a little bit into your expectations for the fourth quarter.

Is the view that the clearance comps will be down meaningfully once again and be a drag?

If you can just kind of clarify expectations around that versus full price as well as any specific traffic and ticket headwinds that you are facing for 4Q.

Sure, Paul.

This is Jared.

What I would say, and then, and as you know, we don't give quarterly guidance.

But obviously, we're into the last quarter of the year so you models can back into sort of what we are saying, but we are guiding to a mid single-digit comp decline for the fall.

I think the two-year stacks for the balance of the year will be similar to what we experienced so far this fall.

And that's something that we are planning for.

That's something, as we've talked with you guys about for much of the season, we position the inventory such that we should not have to take the drastic measures that we took last year and our gross profit is rewarded by doing that.

So the pressure on the top line, I think, is more than outweighed on that gross profit performance there.

Paul, this is Roger.

I think one of the things we've been talking a lot about is focus within our organization back on managing inventories and we have some new folks we've brought into our organization in our planning world that are helping us with that, but we're really happy with how we are crossing into the fourth-quarter inventories down 3.5% per square foot.

That set this up so that we do not have to run the same type of promotions we ran last year or the kind of direct mail campaigns we ran last year which were to deal with excess inventory.

So this is the way we historically had operated the business.

We're not happy that we're going to have negative comps in fourth quarter, but long term, we know we can get back to positive comps, but there's just not a need to run those promotions over the fourth quarter.

Understood.

Thank you for that color.

And then just in terms of a follow-up, Roger, you're having success from a digital standpoint across multiple platforms.

I know you're not giving guidance on 2017 yet, but just broadly speaking, can you help us understand what's DSW square footage outlook and opportunity as you think about smaller stores versus regular size stores, Canada opportunity, et cetera.

Thank you.

No, it's a great question.

I think, we just opened our 500th store here in the United States and when we look at outlook for future periods, there's still some store growth opportunities we have.

What I'm really excited about is, as we've put more product in front of the consumer in our stores, whether that was the kids' product, whether it's the test of some athletic stores where we have really ramped up athletic in those stores, what we can see when we put more product in those locations, we can do more sales.

What we're trying to figure out is what's the right way to display those goods?

How do we bring this whole warehouse experience to life in a bigger way go-forward?

And we think that can open up new opportunities whether it be smaller markets, smaller doors.

And I really love the fact that up in Canada we operate an in-line business with Town.

We operate a smaller, more family kind of footwear business within our Shoe Co Shoe Warehouse brand and we operate our DSW stores.

So because our team now has access and visibility to how all of those can play together, that creates some good opportunities longer term for us.

So we do believe there is significant growth opportunities for the DSW Inc.

Enterprise and leveraging all of the learnings we're getting from those things combined with Ebuys, we think creates opportunities for the long haul.

Thanks.

Good luck.

Thank you.

Jeff Van Sinderen, B. Riley.

Good morning and I wonder if we could just follow up a little bit on the comp.

I don't know to what extent you want to break it out, but wondering if there's anything you could add in terms of the brick-and-mortar comp versus e-com.

It sounds like e-com is doing extremely well for you.

Just wondering, anything you can breakout in that.

And then also, can you just remind us, is kids included in the consolidated comp?

That would be my first question.

Yes, kids is included in the consolidated comp.

And Jeff, I will tell you, we do not like using the word stores or dot com because, as Jared had mentioned, and I mentioned in the script, that there was a significant amount of our digital demand that's being fulfilled by a store.

And so we really don't look at it stores or dot com.

It is about engaging with that customer and providing them what they want and where they want those goods, whether it be in a store or available digitally.

The only other thing, Jeff, that I would mention about kids, as Roger said, it is baked into our comp.

We still are very conservative at this point in our lifecycle of kids, not even having it up a full year, let alone a full season.

This is something that we are still learning.

So this is not something that we're majorly baking into the comp in any way shape or form.

Okay, that's helpful.

And then, just as a follow-up, if I might.

On some of the smaller markets you've opened in some of the newer stores there, just wondering if there's anything you can share in terms of performance metrics on those, what you're seeing there, and kind of what the outlook is I guess in going into those smaller markets.

What we have seen is whenever we open doors into these smaller markets or even the smaller doors that we've open, we like the performance.

We are achieving our ROI targets.

And I think the reason why we look to expand the number of doors is because one, it creates an incredible, a platform for us to grow our digital presence as well.

So it's not just about the brick-and-mortar, it's how does that create an opportunity to sell digitally?

We love the fact that it allows our customer to have the ability to touch and feel the product in that local market that they might not have access to today.

So there's multiple reasons why we like our small format, small market strategy that we've been pursuing.

Okay.

That's helpful.

Thanks very much and good luck for holiday.

Thank you.

Chris Svezia, Wedbush.

Good morning and thank you for taking my question.

I guess first, Debbie, for you, could you maybe talk about where you are seeing the improvement in non-athletic categories?

More specifically where that is?

And secondarily, maybe just talk about breakout, how certain categories performed, athletic specifically, and maybe if you could talk about boots.

You said it was a little bit below your plan, how that performed and how you were thinking about that and then I just had a follow-up.

Sure.

Good morning, Chris.

So let me start with boots.

We planned boots down for Q3 to reflect the later start in the season that we thought would happen.

And that, in fact, did happen.

That's what we saw.

We read the results very early and started making necessary adjustments at the style level in boots.

So overall, we saw a continued shift out of when the customer was ready to buy that category.

We believe that if you really believe the buy-now-wear-now theory, which I do, that boots will continue into first quarter further than what we saw last year, further than what we planned last year.

So I would say the learning on the boots is that when you look at the weather patterns, it's just facts that you have to recognize that category starts later and it extends later.

And that's how we planned it.

I am happy with what we're seeing right now.

And that's the way we will address it for next year and maybe even a little bit more dramatically pushing that boot business to start even a little bit later in third quarter.

As far as non-athletic categories are concerned, what I'm really excited about is, I see a new emerging fashion cycle in apparel.

It's really stimulating demand for lots of new women's products that are not athletic.

So if you think about, in the apparel, the feminine styling, the denim and the need for different shoes, the thing I think I'm the most excited about going forward is the ability to really sell a wardrobe of shoes and not really get stuck going from a sandal-to-boot, sandal-to-boot kind of season, which is what we've seen over the past three to four years.

So we're starting to see new emerging items and trends happen really across the board in every single category.

When you think about athletic in general, like I said, the true athletic, Chris, that continues, but there are some non-athletic, what I call sport shoes and it could be vulcanized or it could be other kinds of sport shoes that are happening in the women's business, and they are happening now, and it looks like this is starting a new trend and a path that not only extends into fourth quarter, but extends into next spring.

And that's what I'm the most excited about.

I think I answered all your questions.

You'll tell me if I missed something.

Just real quickly, did boots, what was the comp in boots and what was the comp in total athletic in the quarter?

So we're not sharing specific numbers, but the athletic business continues in very, very healthy double digits, and the boots were down, like I said, in third quarter because of the late start.

So I'd rather talk about that after we close fourth quarter.

I think that's probably going to be more reasonable.

Okay, fair enough.

Roger, just one quick follow-up for you just on Town Shoes.

I know you guys have, or at least the investment group, has a put option, I think in the spring, to put to you the balance of the business.

I'm just curious, how has it been performing?

I think you broke out $1 million are there I think after tax and after your share of, but it seems like maybe it's somewhat below with the overall DSW operating margin structure is.

Can you just talk about what's going on at that business and maybe some opportunities to improve the operating performance there?

Chris, unfortunately, we can't get into that kind of detail.

I would tell you, I am happy with the work that our team is doing to help Town grow, both top line and bottom line.

We have a lot of work our home office team has been doing up there around IT and HR and some of the other disciplines, and so we're really getting ourselves prepared for, at some point in the future, when we have the opportunity to own the entire Town Enterprise, that we want to make certain that's very successful, but I don't want to get into any details beyond just that.

Okay.

Appreciate it.

Thank you all.

Best around the holiday.

Thank you.

Randy Konik, Jefferies.

Great.

Thanks a lot.

I guess my first question is, can we get a little bit more clarity on, with the kids addition, you gave color on visits up, UPTs, or at lease transaction value up.

I guess what I want to get a little more specific on the comp metric of the 200-plus stores with the kids versus without to try to get some kind of perspective on how much lift it's giving to the stores, that would be very helpful.

And then, you talked about, I think, you said in your commentary regarding, something regarding new-customer transactions.

Is there any kind of, a little bit more detail you can share there, where it sounds like you are broadening out the customer base, which is very positive?

And I guess, lastly, you have done a very good job of inventory control and just curious about what kind of process changes you have implemented to the inventory planning process so that we can get very good comfort that this will be a nice solid controlled trend as we go throughout not just the fourth quarter, but into 2017 and beyond.

Thanks.

From a kids perspective, this is Jared, and then I will turn the call over or turn the question over.

From a kids perspective, what I would say is, as we had shared before, we were launching this in a waved approach for several reasons.

One, it was prudent to do so, and two, we really had never taken an entirely new category of something that didn't exist and drop it into an existing store.

So what we wanted to do was take all of the learning that we got from Phase I and make sure we have that behind us and fully digested as we work to figure out the right rollout strategy.

What we saw and what we mentioned in the script was when the kids were rolled out and we saw them executed in the way that they needed to be, we had absolute validation of our hypothesis.

So all of the metrics that we thought would happen, the incrementality, happened in the way that we thought that it would and we're very excited about that.

What we are going to do now is take those learnings.

We've got another 70 to 80 stores lined up in spring that we know can take kids and fit them into the existing store and they are going to perform, I assume, just like the ones that did in the fall.

But then on Phase III, or the final rollout, we're going to take our time and make sure we understand how to fit those into the stores.

They are some of our most challenging layouts and not have to lose any existing footwear.

So for this to be incremental, we don't want to take anything out.

What we have seen is whenever we can put more product in front of the customer in our stores, they buy more shoes.

And so, this is an entirely incremental category, and it's something that we are very excited about.

We just want to do it in the right way.

Randy, I will take your second question about the customer base.

This third quarter, we took a different approach to our marketing than we had ever taken.

We invested heavily in digital rather than TV.

And we were excited to see the kind of response that we did receive and that we were able to grow our new non-customer base.

We were able to attract people that historically might not have shopped a DSW location or our website.

I think that something that we will continue to penetrate more heavily toward go-forward.

In fourth quarter, we are doing some TV so that we can balance the heavy digital campaign in third against how we deal with some TV in select markets in fourth quarter.

So we are learning as we go through this process, I think as every retailer is, how do you distort those marketing dollars?

So I feel really good about what our Marketing Team has delivered in third quarter.

I mentioned this in the script, we were really pleased with the kind of traffic that we were able to generate and a large chunk of that came from our real strategy to go digital with a lot of our marketing spend.

As it relates to inventory process changes, I will let Debbie take that question.

Thank you, Roger.

So I will tell you, I think it's really three big things that we did around the inventory and process change.

We really took a look at how we plan.

As I mentioned earlier, we have a new leader in the planning and allocation function.

Comes with a great amount of experience and discipline from his previous life and he came in immediately and really assessed current state of where we were in process and we took a look at how we plan down at the category level.

We took a look at how we manage with rigor and discipline the inventories to match demand.

And the biggest thing, I think, that was quite a shift from last year was we really took an early look at the early results that we saw happening at the beginning of Q3 on how the customers were [voting] on certain products and we reacted very quickly to that, both reordering the big items and also canceling things that customer showed that they really weren't interested in.

So I would just say that we took a look at the entire process and we're really getting back to basics and focusing on inventory management and the disciplines around how we plan, how we allocate and how we maximize the business.

It's really, it's a pretty simple strategy.

I think, Randy, what's important is, and I mentioned this also in my comments, that I think we did a good job in third quarter of being conservative in our approach in managing our inventories.

That is a discipline that we will continue as we head into the spring season.

But we also are going to get more aggressive of identifying those key trends that Debbie mentioned and we got to go after them because if we want to get positive comps, you don't get there by managing it through inventory reductions.

So we're going to go place some bets as we head into the spring season, but they will be educated bets that we are placing rather than across the entire assortment.

Thank you.

You're welcome.

Christian Buss, Credit Suisse.

Steve Marotta, C.L. King & Associates.

Good morning, everybody.

Good morning.

Can you talk about the penetration of athletic in the mix during the third quarter and what it was versus last year?

And my follow-up with you is, besides the vulcanized, which would be benefiting from the denim trend, can you narrow a little bit and more specifically talk about what other styles you would expect to benefit from the denim trend?

So I'm not going to quote, good morning, Steve, I'm not going to quote numbers in athletic, but I will tell you that the penetration, as we said in the earnings call, went up by, I believe, 400 basis points.

So we did see an increase there.

As far as the other trends that are really happening, they are happening in the -- so there is continued strength in athletic and non-athletic sport.

So without calling out brand names, there are shoes that may have a vulcanized, kind of a bottom, but they've got more of a fashion upper that actually live in the women's business.

But as far as other trends that are concerned, when you look at the shift in apparel, it requires heavier shoes, heavier bottom, man tailored shoes that haven't been in the industry for as many years as I can remember.

So I think the key take away here, the big story is that there are styles and products that the customer is demanding based on the apparel trends and shifts that haven't been in the market.

They are not in her closet.

And we're starting to see traction there that I believe will continue through fourth quarter into the spring season.

So it really allows our customers to buy a wardrobe of shoes now.

It doesn't limit them to two categories, just sandals and boots, like we've seen over the past few years.

That's helpful.

Thank you.

And, Roger, can you go into a little bit of detail regarding the relaunch of the website in, I think you said, spring of 2017?

What are going to be the new capabilities?

What would be the benefit to the consumer for the new look?

Thanks.

I've mentioned how mobile is really the front door to our brand.

I think what you're going to see with our new responsive design that we'll rollout after holiday.

We didn't want to launch it right before Cyber Monday, but it's going to be much, much more mobile friendly.

And that is where the vast majority of our traffic is coming from and right now, frankly, our experience is not great in that space.

And so I'm excited with how it's going to show in the mobile space.

That it is what I would tell you is the biggest thing, Steve, because that is again where the vast majority of our traffic is coming from.

Great.

Thank you very much.

You're welcome.

Kelly Chen, Telsey Advisory Group.

Hello, guys.

Thanks for taking my question.

I know that one of the areas you guys have been working on is opportunistic buys and I noticed that in the release you guys talked about I think lower opportunistic buys when you talked about the inventory.

But could you talk about where you are trending now with opportunistic buys as a percentage of sales?

What you're expecting over the next couple of quarters?

And just in general, how you are feeling about the inventory content that you're seeing there given that across the channel within retail everybody seems to be much more disciplined with inventory heading into holiday?

Sure.

Good morning, Kelly.

So, the way I look at opportunistic buys is they are a lot of goods in the market right now, but are there enough of the right goods?

Our opportunistic buy percentage, I'm not going to quote that, but I will tell you it's flat to slightly down from last year, but that is totally indicative of us being able to identify the right items that we see in the market and be able to translate them into values for the customer.

So we get lifts every single week.

The lift, we're seeing a lot of lifts right now, and we are taking advantage of those things that we think are right for the business to be able to pass value to consumer.

Great, thanks.

And then just as a follow-up, Debbie, I was wondering if you could talk, I know we've talked about athletic quite a bit, but if you look at the assortment now, how do you feel about the brands that you have?

Do you feel like you have all of the brands that you want?

How do you feel you are positioned price-wise in terms of, when we go into the stores, it feels like the percentage off on athletic is a little bit less than the rest of the store.

I don't know if that's true or not, but how do you feel like you are messaging the value proposition there and then also what are you doing in the test stores that are over assorted to athletic?

More color on that, please.

Thank you.

Sure.

We could spend an entire day talking about athletics because there's so much excitement there.

And I will just call out, in the past few weeks, when I would've expected it to decelerate a bit, if you just look at historical numbers, it's not what happened at all.

So this lifestyle shift is here to stay.

How do I like the brand assortment architecture that I have in athletics?

I love it.

The brands that we have in the true athletic space are great, great partners to us.

We continue to get not only their important, hot items, but we also working with them now on exclusives and things that will bring differentiation to DSW.

I like our value proposition there.

It's not as deep as what you would see across the rest of the Enterprise, but when you have a category based on supply and demand where the customer is really coming aggressively at you for more of this big shift, this lifestyle shift, I am not so concerned about lowering the prices and how cheap can you go because the customer is telling us they want the brand, they want the item that we have, and that is being demonstrated in the comps that we are delivering there.

As far as what does the future look like for athletic?

I see one of the biggest increase opportunities is in the non-athletic women's piece of the sport business.

And make no mistake, you've been in our stores, you can see some of the real fun fashion brand that are really knocking it out of the park in terms of styling.

But the other thing I am looking for is new brands that don't exist that are massly distributed across retail in the United States and I do that by attending lots of different trade shows and looking for new exciting things that will continue to fuel the excitement and style desire of the customer in those categories.

So I'm excited about it, I continue to be excited about it, and I think it's a big part of DSW's business going forward.

And, Kelly, I want to share with you a year ago, I had the opportunity to move into this role and the three words that I use to describe the way we were going to operate as a leadership team was focus, tempo and disruption.

And I think this athletic space is one where he have demonstrated that.

Debbie and team have done a good job of, with the brands we have, and other brands that she is attracting to our business, we've been very focused to make that happen.

But we've operated with a different tempo.

And an example was, on one evening, or one afternoon, we were having a conversation about wouldn't it be cool if we could really figure out how big we could make athletic?

And within a week, we were able to have a store up and running with a significant increase in athletic presence.

And what we have seen is, that can be very disruptive in a healthy way to our competitors and where we can play.

What we've got to figure out now is how can we take what we learned through the three stores we tested and do it without removing other footwear from the floor?

Because that's when we are going to roll it in a bigger way.

So I'm really excited about some of things that we've been doing as an organization that led us to develop some new fixturing that you will see in our Power 35 stores that, we call it SKU over SKU.

But it allows us to get more choices on the floor and we also have some new displays we're working on that will allow us to bring a category like athletic or kids or booties, things we really want to stand for the consumer, how we can bring those to life in both the brick-and-mortar and digital space.

So I think the athletic area has really allowed us to go play and think differently as an organization.

Great.

Thank you, guys.

Jessica Schmidt, KeyBanc Capital Markets.

Hello.

Thanks for taking my question.

Can you talk about the initiatives you've taken with some of your private-label business?

I guess, how are these private brands performing with some of the changes and emphasis you placed on them?

And do you think that they are driving traffic?

Good morning, Jessica.

So as far as private brand is concerned, I would say that prior to our new partnership with our new partner that is helping us evolve private labels into private brands, we probably were not as tight and important in those private brands as we will be in the future because they really were labels more than brands.

Our new partnership has allowed us to put focus on a specific number of our private brands to develop, further develop, the DNAs in the brands, the marketing strategy, the assortment strategy.

So I like very much the new partnership that we have just forged to be able to take these from labels to brands.

They are performing very well.

The margins are healthier and they should be for private brand.

I don't want to over emphasize private brand to make the domestic brands seem like a dilutive conversation though, because private brand is important to us, it brings differentiation.

It brings value to the floor.

When you look at some of the searches that we get in DSW, the customers are really in love with two or three of the private brands that we have now, and really think of them as very big, almost a mature domestic brand.

So very happy with the performance there, but the real focus, the bigger part of our assortment is on the domestic brands, and we're spending just as much time, if not more, there developing those brands and those products and those exclusives with those brands as we are with private brand.

Great.

Thanks.

And just a quick follow-up.

I'm just wondering do you have any update on the handbag category?

Are you seeing any kind of improvement there?

Not a lot of improvement, Jessica.

Handbags continues to be a challenge as I will just reinforce that we did right-size and down-size the handbag area, and we focus on fashion and we focus on affordable price points there, but that business, as in the industry, has been really, really tough.

So what we're trying to do is we're trying to be very focused and specific on the key looks, the items, the brands that are really doing well and I will tell you, we're making progress in the gross margin piece of that.

And as we have managed the assortment and the inventory more rigorously than we have before.

So I'm pleased with the progress we're making in the profitability, but I am not real happy with the handbag business in general.

Or actually, in many of the things I'm seeing in the industry, to be able to drive new comps right now.

So I am hoping that the market is going to be able to start showing us some things that will get us excited.

Thanks.

I will pass it along.

Camilo Lyon, Canaccord Genuity.

Thanks.

Good morning, everyone.

Good morning.

I wanted to just step back a little bit and just talk about what you've done in the quarter, specifically with respect to when you had promotions running and when you didn't have promotions running, and what commensurate traffic was during those on-and-off periods.

And what insights does that give you with respect to how you can actually drive traffic into your stores while also driving gross margin expansion?

I can take that question.

I think we have the luxury of having access to 24 million rewards members, and so where we spend our effort is really trying to figure out how do we attract two kinds of customer bases?

One, our existing rewards member, and what we are really working on is how can we do that without having to offer a promo?

And that's the work that Debbie and team are doing on a differentiated assortment, killer price points, the close-out opportunities that come our way.

And then the second group of customers, obviously, are those people that don't know us.

And that's where we've gone after the digital space to really try and attract that customer.

I will tell you we don't see a significant gap in traffic when we are communicating between our promotional kind of communications to our rewards members versus non-promotional.

So there isn't anything I would tell you in particular that we see that drives inactivity.

I mean, obviously, if you give dollars off, you're going to get them, but that's not where we want to go.

We want it to be about the product, about the differentiation in our product and that's what is attracting them to our store.

One thing I will add to that is our continued out-performance to the index.

We measure our traffic our store traffic versus a basket of other retailers, as most people do, and we have continuously out-performed that index.

It goes up or down, our over-performance does sometimes based on some of our promotional activities, but pretty much, through and through, we are consistently out-performing the index on store traffic.

I guess to that point, the implied comp for the fourth quarter seems to be about negative 6%-ish, in that range.

What is the composition that you expect that to be from traffic as you are lapping a lot of these promos from last year?

I think the vast majority of that decline is going to come from, I would say, more conversion than anything just simply because of the fact that we are not going to run those promotions this year that we ran last year.

Okay.

As we mentioned, we had 350 basis points of decline in comp that we built in that was specific to these promotional activities last year.

Okay and then just longer term, you kind of worked through the anniversarying of the promos from last.

Can you level-set the store and bringing more merchandise and more on-trend product.

What do you think this business can really comp at consistently?

I think the low-single digit, that is what we are looking for as we grow the DSW brand.

And we think that's where we should be.

Debbie or Jared, anything else?

No, I agree.

I think it's obviously a journey.

As you are seeing from our performance now and the performance at our gross profit as well, it's not an overnight turnaround, but absolutely, I think a low single-digit comp performance is where we ought to be in a healthy trajectory.

And, Camilo, I would echo that.

Everything starts with product, and if I were to based on what I've seen in the market and the opportunities around having different kinds of products to be able to drive customer demand, customer sales, I'm encouraged by what I'm seeing right now and as we look forward into spring of next year.

Thank you for that and, Debbie, do you have just the category comps that you've provided in the past, men's, women's?

We are not providing specifics, Camilo.

So we are not doing that.

Okay.

Thanks very much.

Good luck in holiday.

Thank you.

Tom Nikic, Wells Fargo.

Good morning, everyone.

Thanks for taking my question.

Good morning.

I just wanted to ask around the operating expenses.

I know there's kind of a lot of lumpiness with the bonus accrual last year and the cost-saving initiative that you're implementing and the, I think you mentioned, a shift of marketing expenses which I assume is a shift into Q4.

So I'm basically just wondering how we should think about operating expenses.

Not only for Q4, but kind of as we get into 2017.

Thanks.

Sure.

This is Jared.

What I will say is we talked last quarter about an expense-savings initiative where we had identified roughly $25 million of opportunity that we feel very good about and should see a full annualized amount of that full $25 million in 2017, but for 2016, we thought that there was about $7 million of that $25 million available immediately.

And so, that leaves an incremental $18 million for 2017.

As we have been laying the groundwork to start recognizing that incremental $18 million next year, obviously, some things can be seen this year.

And so with that, we have found a little bit of additional save on top of that $7 million yet for 2016 which we're very excited about.

So I think it's looking more like probably about $10 million in 2016 and $15 million in 2017 versus the $7 million and $18 million that we had talked about last quarter.

Overall, when you look at our performance from an SG&A standpoint, for fall, I think where we had been guiding to a mid single-digit increase in SG&A dollars, I think it's now going to be just modest growth, flattish to modest growth for the fall as we continue to see the benefits of the expense initiatives that we have going on.

Very helpful.

Just a quick clarification, so some of those cost savings, $10 million (inaudible) split (inaudible).

I'm sorry, Tom.

You're breaking up.

I can't --

Oh.

Sorry about that.

I was just saying, so just a clarification.

So you did get some savings from the cost-savings initiative in Q3 and then a little bit more in Q4 as well, right?

That's correct.

Yes.

All right, great.

Thanks very much.

Ladies and gentlemen, that concludes the question-and-answer session.

I would like to hand the conference back over to Roger Rawlins for his closing remarks.

Thanks, everyone, for taking the time.

I hope everybody has a great holiday season and, most importantly, go Bucks.

Bye-bye.

Thank you.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.