Designer Brands Inc (DBI) 2016 Q4 法說會逐字稿

Good morning and welcome to DSW's fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I'd now like to turn the conference over to Christina Cheng.

Please go ahead.

Thank you, Steve.

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

Earlier today, we issued a press release detailing the results of operations for the 13-week and 52-week periods ended January 28, 2017.

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

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.

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

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

Let me turn the call over to Roger.

Thanks, Christina, and good morning.

I thought I'd start our call today by sharing some of our accomplishments over the past 12 months.

Our total Company revenues hit a new high of $2.7 billion.

We opened our 500th warehouse in the United States and expanded our footprint across North America.

We continue to see growth in digital demand that outpace the industry.

We entered digital marketplaces with our Ebuys acquisition.

We successfully launched DSW Kids in almost half of our warehouses.

We heightened our focus on talent and rebuilt strength across all levels of the organization, working to form a top caliber team who's passionate about the business but even more passionate about winning.

We rightsized our cost structure to make us more efficient while supporting our key investment priorities.

And we continued transforming our brick-and-mortar locations into a powerful digitally enabled warehouse network.

I'm also proud of the dramatic change in our financial performance with adjusted earnings per share improving from a decline of 21% in spring to an increase of 22% this fall.

These results were driven by changes that strengthen our organization, a renewed focus on inventory discipline, and executing with greater focus and tempo.

We'll spend some time this morning reviewing the steps we took to strengthen the foundation in 2016 and discuss how we transition the business to our next stage of growth.

For now, let me turn the floor over to Jared to discuss details of our financial results.

Jared?

Thanks, Roger, and good morning, everyone.

Stronger execution contributed to a significant sequential improvement in our back-half performance.

Fourth-quarter revenue of $674.6 million was a slight increase to last year, with sales from our acquisition and new store openings offsetting lower planned comps at the DSW segment, which we anticipated.

The combined improvement in gross margin rate and lower expenses resulted in adjusted earnings per share increasing by 43%, to $0.20 per share.

Our discussion today will reference adjusted numbers that exclude items related to the acquisition of Ebuys and restructuring costs, which we will discuss later.

Let me provide more color on our organic business.

First, the DSW segment.

As part of our commitment to move away from excessive promotions, we positioned the back half of the year for a mid-single-digit comp decline, factoring in a 350-basis-point headwind in the fourth quarter from last year's events.

Despite the choppiness from weather and external geopolitical factors, we were pleased to achieve our comp guidance for the back half of the year.

Our disciplined execution enabled us to sell a higher mix of regular-priced merchandise in the fourth quarter.

Our brand-focused campaign and amplified value messaging drove product sell-through rates during the holiday period.

In addition, our effective digital marketing strategy drove even stronger traffic online and e-mail conversion this quarter.

This holiday season also demonstrated how recent technology investments are paying off.

These investments significantly improved search conversion, reduced call center support, and ultimately drove a robust growth in online demand that outpaced the market.

In the last three years alone we've doubled the level of digitally impacted sales.

We continue to increase operational efficiencies with our proprietary order-routing algorithm optimizing fulfillment.

As our brick-and-mortar locations fulfill as much as 40% of digital orders, we have started to shift inventory out of our fulfillment centers to better serve the customer while improving inventory turns and increasing profitability.

With our fourth-quarter performance we increased gross margin dollars by 5% on a 3% increase in sales this fall, a notable change from this spring season when gross margin dollars declined 3% despite a 4% sales increase.

Segment gross margin increased by 160 basis points this quarter, with close to 300-basis-point improvement in merchandise margin, partly offset by occupancy deleverage, again which we anticipated.

Although Q4 gross margin performance was comparable to the third quarter, Q4 merchandise margin improvement of 270 basis points was even greater than the third quarter's 170-basis-point increase due to significantly lower clearance levels and favorable sourcing costs.

We continue to identify new opportunities to enhance segment profitability long term.

Turning to the ABG business, fourth-quarter revenues declined 2% with a 6% decline in comps, but with better sourcing and lower markdowns, gross margin at the ABG division improved by 310 basis points.

For the full year, sales were flattish, with a 4% comp decline partially offset by new store openings.

Yesterday Gordmans, one of our affiliate business partners, filed for Chapter 11 protection and announced its plans to liquidate its assets.

As a result of this action, we have begun our efforts to clear inventory at 106 locations that will remain open through the proposed liquidation event.

We have been managing our inventory exposure proactively and we are working hard to mitigate the impact of the transition out of Gordmans.

Let me say a few words about our acquisition.

Ebuys contributed $84 million of sales during its first year.

The fourth quarter was its largest quarter, contributing $28 million to the top line.

We continue to make progress integrating Ebuys operations this quarter, with recent adjustments to better align our inventory disciplines as we head into 2017.

Given the structure of our purchase agreement, which provides us an ongoing opportunity to reassess risk and forward expectations, we recalibrated our long-term outlook against this year's results and, consequently, we reduced the accrual for our future contingent consideration by $25 million.

We continue to believe that Ebuys has a long runway of growth ahead.

Now let me turn to operating expenses.

After three consecutive quarterly increases, operating expenses for the Company declined by 3%, even after including the expenses for Ebuys.

This resulted in our Q4 SG&A rate leveraging by 70 basis points due to lower store expenses and corporate overhead.

Following two consecutive years of high single-digit increases, expense growth slowed to a 5% increase for the year.

Due to the combination of improved gross margin and better expense leverage, fourth quarter's operating income increase of nearly 50% leads us to a 15% growth for the fall, a strong recovery after the 25% decline experienced during the spring season.

On to our Canadian operations.

Town Shoes contributed a loss of $496,000 this quarter, for a full-year total of $741,000 of investment income, which is less than $0.01 to the bottom line.

We look forward to increasing our collaboration with our partner as we move towards Town's eventual full integration.

Finally, our fourth-quarter income tax rate decreased by 70 basis points, to 35.3%.

On a GAAP basis, fourth-quarter earnings increased to $0.38 per share from last year's $0.14 per share.

This includes a net favorable adjustment from the reduction of Ebuys contingent consideration, the amortization of intangibles, inventory step-up costs, and restructuring expenses totaling $0.18 per share.

For the full year, reported earnings were $1.52 per share, including a net favorable adjustment of $0.06 per share related to Ebuys and restructuring expenses.

On the balance sheet, excluding Ebuys inventory of $31 million, we ended the quarter with inventories lower by 8% on a per-square-foot basis despite additional inventory related to the launch of Kids, strategic buys in athletic and key items.

Pre-buy levels were comparable to last year.

Moving on to capital allocation, we ended the quarter with cash and investments of $287 million and generated $125 million in free cash flow this year.

Capital spending of $14 million this quarter brings our full-year CapEx to $79 million, 17% below our original expectation at the start of the year.

We repurchased 351,000 shares this quarter for $7 million, which brings our total share repurchase activity for the year to $50 million for 2.4 million shares, representing close to 3% of our share count at the end of 2015.

Since initiating our first share repurchase program in 2013, we've bought back 12.6 million shares for $316.5 million, representing 14% of our shares outstanding.

For 2017 we are budgeting $66 million in capital expenditures, with lower store-related spending and fewer business, IT, and supply chain projects.

Turning to our outlook, after undertaking significant changes in 2016, we are intent on driving sustainable and profitable growth.

As we target 3% to 5% revenue growth for the total Company, we are prioritizing driving comp growth by accelerating digital demand with comparable sales projected to range between flat to a low single-digit decline for the full year.

We are slowing the pace of new store expansion with net 12 to 15 new locations this year.

I know many of you ask, what gives us the confidence for a continued recovery.

For starters, we intend to drive even stronger momentum out of our fastest growing businesses, Athleisure and Kids.

Additionally, with continued signs of increased customer appetite for women's fashion, we are fueling the growth of this category with a greater inventory distortion this spring.

We are intensifying our focus on our largest and highest contributing stores, which Roger will discuss later in the call.

And we are increasing the depth of key items across all stores, which will help to improve conversion and drive more regular-priced selling.

Finally, in anticipation of ongoing shifts in the current macroenvironment, we will strategically manage inventory with a goal of increasing turns, supply chain agility, and return on investment.

Our outlook assumes flattish gross margin for the full year, with improved sourcing costs and new ways to optimize clearance markdowns, offsetting the costs related to the Gordmans liquidation.

Furthermore, in order to support Ebuys growth, we are transitioning their existing fulfillment centers into a single, larger facility in Nashville, Tennessee, that will double Ebuys' supply chain capabilities.

We have budgeted a temporary increase in distribution and labor costs during this transition.

Operating expenses are expected to grow modestly in the mid-single-digit range, with higher IT, selling expenses, and incentive compensation costs partially offsetting savings from our cost initiatives.

This is the first time in three years we are operating expense growth as more closely aligned with our top-line expectations.

We continue to take new actions to secure previously identified cost savings while we continue to proactively manage our variable expenses.

Adjusted earnings per share are expected to range between $1.45 to $1.55 per share, assuming a tax rate of approximately 39% and 81 million shares outstanding.

Our guidance does not assume full ownership of Town Shoes this year and that we will only receive nominal investment income for a minority stake.

Furthermore, our guidance includes the impact of up to $0.10 per share from the discontinuation of our affiliate business with Gordmans, which includes operating earnings and the cost of liquidating inventory.

We also project that quarterly earnings will be back-half loaded this year.

Like many retailers we expect the extra week this year to benefit sales and earnings growth during the fourth quarter.

On the other hand, we expect the impact of delayed tax refunds and the timing of several initiatives, such as our site redesign and Ebuys FC transition, to create headwinds that will weigh on earnings during the front half of the year.

As such, we anticipate the back half to account for a greater portion of earnings than it has historically.

With that let me turn the call over to Debbie.

Thanks, Jared.

And good morning, everyone.

As I assess our 2016 performance, we are pleased with the discipline and agility we demonstrated this fall season.

Nowhere was this more evident than in our results within boots which at 30% of the mix is the largest category during the quarter.

At the start of the fall season we positioned the category for lower comps and accounted for shifts between tall and short boots.

This conservative position protected our business during a choppy environment.

The warm weather at the beginning of the quarter stimulated sales of fashion boots, athletic and casual footwear.

With the onset of cold weather in December, our merchandising and marketing strategies created a stronger-than-expected demand in boots which allowed our team to deploy some pre-buys we had allocated for next year.

With the strong results from our cold-weather business, coupled with our decision to chase a number of fashion styles early in the third quarter, we beat our boot forecast for the season.

This spring we have positioned inventories appropriately with transitional merchandise and a sandal assortment that we will carry in our warm doors all year round.

I was encouraged to see greater interest in women's fashion, particularly when the weather warmed up last quarter.

Our plan to proactively rightsize the assortment in other parts of the business resulted in lower but more profitable sales this quarter.

We continue to take steps to strengthen the depth and breadth of our women's assortment, with a significantly higher level of exclusive emerging fashion in both new and expanded vendor partnerships as we drive sequential improvements in this important category.

Turning to athletic, we are proud of the results of our Athleisure business, which has reached new highs for the third year in a row.

Strong full-priced selling and better sourcing decisions improved the profitability of the business.

With our growing partnerships we put together an exciting assortment in retro and fashion athletic merchandise to fuel the athletic momentum.

I am particularly excited to announce our brand partnership with Under Armour this year.

The influence of athletic also carried to our men's business but overall results have been below plan.

We are aggressively managing our assortment of core items while increasing the freshness within men's dress and casual, with relevant sport-influenced fashion.

After a successful launch last year, we now support our digital kids business with DSW Kids shops at nearly 60% of the total chain.

We continue to apply our learnings to enhance the assortment at our Phase I stores, while adding new fixtures and layout adjustments to better accommodate the new Kids shops.

DSW is on track to capture meaningful market share in the kids category.

This year, we will bring several compelling offerings from a number of exciting brands within the women's and men's designer contemporary space.

We supplemented our buys with our fast-growing drop-ship program, which surpassed our expectations during its first year.

Furthermore, we are complementing this branded assortment with the relaunch of our private brands under new partnership and a marketing campaign that highlights some of the incredible values we have to offer in this space.

As we transform our private brand business, we will make the program even more important to the bottom line.

To further support our product initiatives we're focusing on the depth of key items, which will provide the critical must-have styles to customers across the fleet, generate more regular-priced sales and reduce markdowns over the product lifecycle.

In addition, we are deliberately increasing our all-store buys, which will give us a platform to market our key merchandise ideas in a more powerful way.

Lastly, we've kicked off a new power store initiative this year, with exciting brand and merchandise changes that will appeal to the diverse needs in these locations.

In conclusion, we are encouraged with the work we've done in merchandising and we look forward to continued progress as we focus on delivering top-line growth for the business.

With that, let me turn the call over to Roger to discuss our 2017 priorities.

Thanks, Debbie.

After making fundamental changes to strengthen our core business last year, we are now laser focused on driving profitable top-line growth.

In addition to the merchandising initiatives Debbie discussed, we are intensifying our focus on some of our largest markets.

Because these warehouses turn much faster than average, we are closely managing choice count, brand mix, pricing tiers, and depth of key items.

We've created a localized marketing plan specifically targeted at driving traffic in these markets.

And we have put in place the best, most talented teams who can meet the challenge of driving higher levels of conversion, efficiency, and profitability in our top locations.

Under this important initiative, we expect our power warehouses to generate a more meaningful sales and profit contribution this year as they return to their legacy position within our brand.

We were also excited about the record level of digital growth we have achieved this year.

We will dramatically elevate our digital experience with the much-anticipated site redesign of DSW.com in the next couple of weeks.

Customers will find a modernized digital experience that seamlessly integrates their rewards information and preferences into this new mobile-oriented and responsive site.

As we continue to evolve our customer experience, we're bringing our immersive digital environment to life in our customer-facing warehouses.

We've partnered with Infor to develop a proprietary technology that will give our associates all of the data they need at their fingertips to run our stores and serve our customers.

We look forward to introducing this new platform soon.

A few weeks ago, our Company hosted our first all-hands meeting in Columbus, with associates across all of our retail brands, including representatives from Town Shoes, our ABG partners, and Ebuys.

It was exciting to see the multiple pieces of DSW Inc.

start to take shape, each fitting together to fill a distinct role in helping DSW Inc.

grow market share, from brands like the Shoe Company and Shoe Warehouse serving customers within a traditional family footwear small store format; to Town Shoes, affordable luxury and full-service experience; to ABG, providing footwear expertise and scale to department store customers; and Ebuys, reaching customers across the globe through digital marketplaces.

Our retail portfolio now provides us with several brands to serve different customers.

We will also extend the investments we've made in the DSW brand to support shared needs in finance, real estate, IT, and supply chain expertise.

In summary, we continue to make progress in strengthening our core business as evidenced by the turnaround in our financial performance this past fall season.

We will continue to elevate execution and intensify our focus and tempo as we drive greater returns to shareholders going forward.

With that, let me turn the call over to the operator for Q&A.

(Operator Instructions)

The first question comes from Scott Krasik with Buckingham Research.

Hi, everyone, good morning.

Just the first question on how you're planning inventory.

Obviously, with inventory ending the year down high single digits, it sounds like maybe you're planning for similar comps as you saw in the fourth quarter.

But just wondering what level of inventory you need to achieve flat to down low single-digit for the year.

Thanks.

I would say at the end of fourth quarter we managed our inventory.

As we told you before, Scott, we wanted to make sure that we managed inventory that would really match the sales comps.

But going into the spring season, we are going to manage inventory to a flattish comp.

We plan conservatively, as you know.

So, I would not use the down 8% comp as an indicator of what future inventory looks like for spring.

Scott, this is Roger.

One of the things that consistently drives me nuts is when we have these conversations about points in time on inventory.

Our goods available for sale for the spring season, we're planning in the low single-digit range decline, it just so happens, depending on timing of when Chinese New Year and other things.

I don't think you can look at the minus 8% and say -- holy cow, that's how they're going to plan their inventory.

No, that is just a point in time.

That's helpful, Roger.

Thanks.

And then, Debbie, maybe can you characterize how big of a launch Under Armour is going to be for you?

Is this similar product to what Kohl's is getting?

Are they carving out different product for you than the athletic specialty or sporting goods channel?

What else are you doing in athletic in 2017 that's worth calling out?

Thanks.

Sure.

Let me just start, Scott, with saying that we're very pleased with the athletic performance.

And the kind of performance that we've been showing consistently through this year in both the comp and the margin area I don't think is going to stop.

There's every indication, because of the strength of the brands that are strong right now in athletics, that those brands will continue.

There's brands that weren't so strong last year that have emerged with new exciting product that are going to be even stronger for this year.

I look at consistency in the athletic performance and then also coupled with adding in athleisure which, as you know, is the non-athletic piece of men's and women's in the sport and fashion piece.

So, you have strong momentum in athletic.

You have very strong momentum in the athleisure piece.

I don't see this stopping any time soon.

And the casualization of America, with everything going so casual, just continues to support this momentum.

We're very pleased to announce our new partnership with Under Armour.

It's a collaboration where we are developing unique product, and it will be unique product for DSW with their design team.

And that will be a launch toward the back half, around back-to-school.

So, that's what I can tell you about that.

We're very happy with that partnership.

Okay.

If I could just sneak one last one in on share buybacks -- you weren't that active.

Is that just in preparation for something to do on Town Shoes and expect share buybacks to be minimal until that's done?

Thanks.

Scott, it's Jared.

We run an opportunistic program and obviously we've been active throughout the year and throughout the last couple of years.

But we do look at everything opportunistically.

I think you call out a couple good points.

We've got some large expenditures on the horizon, as well as having completed our Ebuys acquisition last year and making sure that we have everything right-sized from a working capital standpoint for that.

We've got the integration of Town coming up some time over the next year or two.

So, I won't say that we won't jump back into the market when we feel opportunistically or that we will, but we just treat it opportunistically.

Okay.

Thanks and good luck.

The next question comes from Jeff VanSinderen with B. Riley.

Good morning.

I wonder if you could speak a little bit more about how we should think about SG&A going forward.

And then maybe you can talk about areas where you can tighten or just reduce more.

And if you could touch on real estate, as well, given that you're still opening stores.

Just wondering how you think about the fleet overall at this point, what you think the right number of stores is given the growth of digital and the migration there.

And then, finally, if you could also just touch on the men's business and what you think needs to happen to turn that around.

Thank you.

Sure.

This probably one for all three of us but I'll start with the SG&A piece of it.

This is Jared.

As we mentioned, we anticipate that SG&A will align more closely with our sales expectations this year, the first time in the last three years that's been the case.

We have obviously several dollars that we continue to find from our expense savings initiative get activated and we're excited about that.

On the flip side, we are also seeing an increase in some IT spend as we ready the business with some investments in that space, as well as an increased depreciation on the IT front as we have launched some of the investments we've made over the last couple of years across the business.

And then new stores obviously bring on new expense growth, as well.

But overall that expense growth will be much more tied to our sales growth than it has been in the past.

From a real estate standpoint?

I can take the real estate question.

Jeff, one of the things we continually talk about is we are looking at our business as a digital business.

And with a digital business, you have to place warehouses close to your consumer.

With our 500 warehouses we have today we're within 20 minutes of 70% of the US population.

So, when we are looking to build out a new warehouse we are trying to figure out how can we get closer to that customer, so that some day we can meet that demand of the customer of delivery within whatever short period of time we want to deliver upon.

I will tell you, that's the lens we are using in making these decisions.

We also are testing a lot of new fixturing that we think dramatically changes the interior of our warehouses and the customer experience we can create, but also how many units we could place in a warehouse that is closer to the consumer.

I think there's some really cool things and opportunities we have in our warehouse network, that I wouldn't give you a full number because frankly it might be more that are smaller boxes, and those are things we're working through.

But we are approaching it with a digital lens first, is how I would describe it.

And I'll speak to the men's turnaround.

What I would tell you is the shift out of dress into casual, that distortion, we planned for that but it's happening even faster than we anticipated.

So, we're actively moving dollars into the casual area to continue to capitalize on the piece of the business that is comping nicely.

How are we going to support that with product?

We've been actively engaged in the market to seek out new brands and new product that will give a fresh new face to the men's business.

In addition to that, we are supporting key core items in [all door] shoes that will actually increase sales, increase margin, reduce markdowns, and actually ensure that in a men's business that part of it tends to be very basic that we are in stock on the key items.

So, I will tell you that the combination of these efforts right now is offering sequential improvement, and I see that every day.

And I believe we're well on our way to turning this business around.

Okay, good to hear.

Thanks for taking my questions and best of luck.

The next question comes from Alex Pham with Mizuho Securities.

Hi, thank you for taking my question.

I was wondering if you could provide a little update on the rollout of the kids business.

What have been the biggest opportunities or challenges so far?

And any early reads you can share with us in terms of potential stores' sales lift or what you guys think in terms of the long term opportunity there?

Thanks.

Sure.

Good morning.

We're very early in the game here in the kids area.

We're in roughly half of our stores, a little bit over half of our stores.

Last fall we launched phase one of kids.

We were very pleased with the results.

March week three, so in the month of March right now we're launching phase two.

For obvious reasons we're not going to quote a lot of the metrics that we're experiencing in kids right now other than to tell you we've been very pleased with our performance.

We are achieving our goals.

And as we look forward to phase three, some of the learnings that came out of phase one and two we're looking at so that phase three launch is even better than the first and the second phase.

As we talked about a little bit earlier, as you get into phase three you start to have a little bit more challenge with space in the stores because, remember, the first phase we put it in the stores that it was the easiest to do.

They have the space and it was a natural thing for us to do.

So, there are a few more challenges we're facing for phase three that we're working through now, and we're very confident that after this phase we'll take significant market share in the kids space.

Alex, I think the big thing we're trying to accomplish with kids, and we've talked about this before, is we have to create unique experiences that create and inspire an emotional loyalty with our customer.

Kids product is one way in which we can do that.

The kind of environments we can create, the tools we're building -- I mentioned the Infor capability that we're working on -- how do we bring all those things to life to create a unique customer experience.

And we think kids plays an important part of that relationship with our customer throughout their entire lifetime.

Got it.

Thank you very much.

And, Jared, in terms of 2017, when we are talking about the SG&A, I think you mentioned in line with sales growth, does that include the cost savings program that you guys announced last year?

I think $15 million or so was supposed to fall into 2017.

It does, yes.

It does.

Okay, great.

Thank you very much.

The next question comes from Chris Svezia with Wedbush.

Good morning.

Thanks for taking my questions.

Just first, Debbie, for you on product.

I'm just curious, you called out athletic, I would assume the fashion athletic business.

Is that something along the lines, do you consider canvas part of that fashion athletic business?

And does that also include something along the lines of fashion athletic in terms of something that Steve Madden is putting into the market?

And what else are you seeing going on outside of athletic that gives you confidence to this flattish comp as the year unfolds?

Sure.

Good morning, Chris.

Nice to hear your voice.

I will tell you, within the athletic space, fashion continues to be the fastest comp growth that we have.

There are all sorts of, as I said earlier, new things coming from some of the performance or the athletic vendors that are continuing to fuel this growth.

So, fashion is the biggest piece.

It's comping about 4 times higher than performance is, but both are comping very nicely.

When I speak about athleisure, I really look at the blend of athletic and the non-athletic brands.

We typically don't call out our brands but you mentioned Steve Madden and he's really the leader in this space.

So, all of the sport bottoms, the sport shoes, sneakers and things like that that are coming out of the women's contemporary space, Madden being the leader, of course, are comping significantly higher than the casual category.

This gives me confidence.

And there is newness coming every single day.

I think if you look at our floors, you can see new styles and new products, not only key items that we've identified that can be big items for us but also new versions of sneakers.

That's got a long runway.

I think we have a long way to go on that.

So, the product itself gives me great confidence.

The way we're comping right now gives me great confidence.

And the brands that are existing and also some new brands that we're introducing that will bring exclusive products to our customer gives me great confidence.

I hope that answered your question.

And outside of athletic and fashion athletics, the dress category, anything going on?

You mentioned something about sandals year around in warmer markets.

Just anything else you can talk to there?

Sure.

Overall in dress, the same way you're seeing a shift out of dress to casual in men's, you continue to see that in women's.

And we're right-sizing those inventories every day to adjust for that shift and those distortions.

There are some interesting positive things that are happening in the dress category.

That started early in Q3, extended into Q4, and are now extending into the spring season.

And that's anything that's opened up, embellished, novelty, mules, all of these new styles that you see that didn't exist before.

That's giving a bit of a shot in the arm to some excitement in the dress category.

But I think what we really have to understand is that casual has really got the real traction.

The things that are happening in casual, which is sport or mocs or some of these re-energized, retooled casual flats that are offering some excitement in the assortment, that's what's really fueling the casual comps.

So, dress is important.

We're going to right-size it.

We're going to make sure that we continue to fuel the trends that we saw early on in Q3.

We'll continue to bring freshness to the floor.

That focus has really got to be in casual.

Okay, thank you.

And just, Jared, for you on the gross margin, you're looking at flattish here.

Could you just walk me through some of the puts and takes in terms of how you think about product margin, how much occupancy cost deleverage, and mix, maybe more athletic plays into that product margin dynamic.

I just want to talk about the puts and takes, how we think about that.

Sure.

We do have some mix going in there.

As Debbie mentioned, athleisure and kids continues to be some of our fastest growing business.

That tends to be a little margin dilutive and that's because kids is oriented towards athletic and athletic, as we have talked about many times, tends to be a little margin dilutive.

However, we are expecting to see some offsets to that through markdown optimization and our continuation of looking at how we utilize clearance and great price turn.

If you look throughout the year, you'll see in the quarters where we typically have our highest clearance penetration, we are seeing some of our best margin improvements during those years coming from improvements in the markdown rates.

Occupancy is expected to generally, as far as the deleverage, stay relatively flattish, not really be a big drain, maybe plus or minus a few basis points.

Okay, thank you.

And just, finally, real quick here, on the Ebuys profitability and Town Shoes profitability, just maybe talk to what you're doing to either improve the trend line there or just your thoughts or what you're factoring into this year in and around those businesses that seem to be, call it, dilutive to the overall core.

Just trying to figure out what's going on there.

Chris, this is Roger.

I think, for us, both of these are longer-term plays.

This was our first year with Ebuys.

I think we've learned a lot in the process.

What I'm excited about is the future of how we can leverage this.

I talked about all of the brands that we now have at our disposal.

But think of the number of clearance units that we liquidate annually between all of Shoe Company, Shoe Warehouse, Town Shoes, DSW, Steinmart, Gordmans and Frugal Fannie's.

Making those goods available digitally to be liquidated through an Ebuys, that's the kind of opportunity we see long term.

So, from a profitability standpoint, yes, we want to drive profitability in the business in the short term, but it's long term how do we integrate that into our business.

That's where we are focused there.

On the Town front, I think we're making really good progress there and I'm excited about the role we have taken there.

Obviously we still are a minority shareholder but we've taken, I'd say, a more active role in the day-to-day management as we prep for the transition to bring that onboard.

And what we are excited about is that creates additional opportunities for us to grow footwear both in Canada as well as domestically.

The Shoe Co, Shoe Warehouse concept, you guys have asked us a lot of times -- what's the small door strategy -- there's some pretty compelling business cases that we are working on based on the success that they've had in Canada with those brands, how could we bring those to life somewhere else.

Again, it's the longer term play but how we can fit all of these brands together for DSW Inc.

is really what we're driving towards.

So, on the short-term basis obviously we're managing profitability, expenses, markdowns, all those things the way we do, but we're really in these for the longer-term play.

Okay.

Thank you and all the best.

The next question comes from Pallavi Bakshi with Credit Suisse.

Yes, this is Christian Buss.

I have a question.

I'm trying to reconcile the revenue growth guidance with the comparable store guidance down low single digits to flat and square footage growth of 2% to 3%.

Can you help me understand how much Gordmans' liquidation is going to negatively impact revenues on a go-forward basis?

And what gets you that bridge to 3% to 5% revenue growth when comps are expected to be down and square footage growth is about 3%?

This is Jared.

We won't go into details specifically around Gordmans other than to say if you look at the number of stores that they had, vis-a-vis everyone else in the ABG segment, they represented about 25% of the stores in the ABG segment.

And we disclose what the ABG segment does in total in our 10-K, so I would look to that for directional guidance.

From a comp and net store growth standpoint, one of the factors you also have to take into consideration there is a planned increase in Ebuys, which also is not in our comp base, and won't be until next year.

So, that's where we see some additional growth outside of the comp that we're talking about and the new store openings.

Thank you.

That's very helpful.

And could you tell us a little bit more about the commentary around increasing appetites for women's fashion?

Did you see that business start to trend positively in the fourth quarter?

Is that something you started to see since the end of the quarter?

Where I really started to see the shift was probably at the end of third quarter, beginning of fourth.

As I said before, that whole opened up category -- anything that was opened up, it was almost like weather resistant -- anything that was opened up sold well -- open toes, open uppers, anything that was opened up.

The other thing that got a new renewed life to it was in the evening category, which really speaks to the customers' appetite for embellishment, embroidery and excitement.

Those trends started to show themselves, I would say, probably at the end of Q3, continued strong into Q4, and actually are resonating as we've crossed the season.

So, I'm very pleased with what I saw there.

The biggest excitement, as I said before, is really in the casual space, and it really speaks to customers continuing to go to a very casual lifestyle.

And it doesn't just have to be sneakers and athletic.

It's actually showing up in other ways with new products -- mules, backless mules and new mocs, and new coloration.

So, there's a lot of excitement in the whole casual category.

The sport sneakers, as we talked a little bit about before, is an extension of athletic but done in a more contemporary and fun way.

We're seeing a lot of traction there.

So, I'm encouraged by what I saw coming out of Q4, starting to see that resonate, continue to resonate in Q1.

I think there's some things that our customers don't have in their closet which will cause purchase.

That's really helpful.

Can I ask a final question?

Boots speak to plan, athletic has continued strong, fashion is good, but comps are down 7%.

What's not working?

What's the drag that's leading to deteriorating comp store sales results if the three big categories are doing well?

Sure.

If you'll remember, our strategy for fourth quarter was to make sure that we plan conservative comps.

We were up against some pretty extreme promotional activity from the year before.

I'll speak to boots for a minute.

Boots -- we were pleased with our performance.

We hit expectations.

That did comp down because we planned it to comp down.

Once again that was deliberate, to plan the comp down but to be more profitable.

And that's, actually, in fact, what has happened across these categories.

I'll tell you the things that aren't working.

Dress -- there are some things that are exciting that are going on in the dress and casual space but dress continues to decelerate as the customer continues to vote for casual.

In the casual space, there are parts of the business that aren't comping well and giving way to things that are doing well.

So, I don't want you to mistake my sharing with you -- the question was -- what are you seeing, what new trends are you seeing?

We're seeing some nice new trends but some of those are being offset by other categories that aren't doing well.

But the plan for fourth quarter was to plan conservatively, to plan down because of the headwind with promotional activity the year prior, but to be more profitable, and we accomplished that.

Great.

Thank you so much and best of luck.

The next question comes from Steve Marotta with C.L. King & Associates.

Good morning, everybody.

Roger, you touched on this earlier.

I'm just hoping you can expand on it.

I have several questions that are all related to one another.

How many stores are currently considered small -- format small or footprint stores?

Can you comment on their performance?

And are any of the 12 to 15 new stores planned this year in that format?

Steve, it's a dozen-ish kind of number that is in what we would define as a small format.

And there aren't any significant ones that I would say in the ones that we have planned for 2017.

And can you just comment a little bit on how -- well, I guess if they're not in the plan there's still tweaks to be worked out?

That's right.

Okay.

If you said this, forgive me.

How many stores are expected to close?

You said net 12 to 15 new but what's the gross to net number there, please?

Gross is somewhere between 15 and 17 openings and somewhere between 2 and 4 closings.

Thank you.

That's all I had.

Thank you.

The next question comes from Patrick McKeever with MKM Partners.

Thanks.

Good morning, everyone.

I was multi-tasking so I apologize if this came up already, but did you give any color on transactions versus average transaction value during the quarter?

I know you started to blend everything together with online and the stores.

That's my first question.

Second question is on all of the store closings that are either under way or set to take place across the department store space, I'm just wondering if you have any negative impact planned into your same-store sales guidance for the year from the liquidation sales.

Would you expect that to hurt your business in the first half of the year?

Patrick, it's Jared.

I'll take the first question.

Transactions were down in the mid single digits.

Again, not overly surprised by that given what we had planned for the fourth quarter and the lower promotional activities there.

Our average transaction, our ADS, also was down -- again, not overly a surprise given the fact, although we were less promotional, we also had planned boots, as Debbie said, down considerably, and that tends to be a high ticket category.

So, both of those pretty much came out as we had planned.

And, Patrick, I'll take the question on the impact of the liquidations.

We've looked at where things overlay with our existing boxes of where we are at.

There isn't a significant amount of overlay, so we haven't built anything in from a negative perspective for any kind of closing.

If anything, long term that should create opportunity for us as people walk away from those markets and we can go after it digitally if we do not have a physical presence in that marketplace.

Got it.

And then just a quick one on the later tax refund call out.

A little surprised to hear that.

I wouldn't think it would have much impact on your business just given your customer demographic being a little better off and probably not as sensitive to the timing and flow of tax refunds this time of the year.

But what are you seeing that suggests that is having an impact on the business?

Obviously, Patrick, we're not going to give any color around current business but we did mention that's something that we factored into our guidance.

When we look at our stratification of our customer base, there is a decent-sized segment in there that is more moderate to average income.

So, I think you are correct in general.

On average our demographic skews a little on the higher income side.

But we do have a core that is exposed to that.

And, certainly, when you are looking at discretionary spend, shoes is something they could probably do without until they have those dollars back in their wallet.

Okay, got it.

Makes sense.

Thank you very much.

The next question comes from David Mann with Johnson Rice.

Yes, thank you.

Good morning.

I was cut off so sorry if this question had been asked.

On the large market stores that you've talked about where you're going to focus, can you give us a sense on what percentage of sales they represent and what you think the opportunity is there in terms of potential increase?

Yes, David, this is Roger.

I don't want to get into that kind of detail but what I would tell you is these stores or these markets have underperformed to balance the Company by 4 to 5 comp points for the past couple of years, and that's not acceptable.

They are our biggest markets.

They are our most fashion forward markets.

They are markets where we should dominate.

So, our organization -- I'm always talking about focus and tempo -- if we're going to get the DSW core business back on track, you've got to start there.

So, we are violently executing toward that group of stores to get our top line to not just be equal to how balance of Company has performed but to exceed that.

It starts with the assortments and we've taken action.

I know you're in our stores but when you get into the end of first quarter, start of second quarter, you're going to see a different assortment that's going to pop in those doors.

You're going to see, I believe a different level of talent and experience in those stores.

We've got to start there to really drive comps for this enterprise.

If we can make those things happen, we are going to have a great year so that's where we are starting our efforts.

So, it sounds like you believe your issue there is mostly internal execution and assortment driven?

Is that correct?

I believe it is.

This is about us.

This isn't about competition.

This is about us.

We see it.

And in terms of the changes in the assortment, how much should we expect or what percentage of the assortment do you think you'll need to change in the stores?

And will those stores be totally unique versus what you're doing in other stores in the chain?

David, good morning, this is Debbie.

I'll take that question.

First of all, there are unique characteristics that define these Power 35 focus stores.

So, what we did is we studied brand architecture, price point architecture, assortment, and then coupled that with some of the historical facts we know in how those markets and those particular stores behave.

And we did find depth.

For example, they may be predisposed to selling higher price point goods.

It could be different kinds of brands that are more important to them than other stores.

So, we took all of this data, some was fact, some was store manager feedback and what we knew about these markets, and we put an assortment strategy together that will actually define the needs, the demands of what the customers want in those locations.

David, I think what's important is this isn't a dramatic shift in what we are buying.

This is a change in mind set to think about all of the brands, all of the product that we have across our network of warehouses and fulfillment centers.

Across our entire Enterprise there was the right inventory in our buildings.

They might not have been placed in the right locations.

So, if we approach it differently with a digital mind set and say -- okay, we've got to have these brands, these price points, this architecture closer to the consumer in those markets, you would take that product out of a fulfillment center in Columbus Ohio and put it into a store that's closer to that consumer in New York City or LA or wherever it might be.

Again, it's not a dramatic shift in how we're buying or what we're buying.

It's putting it in the right place, is how I would describe it.

Is that fair, Debbie?

Yes.

That's very helpful.

If I could ask one other question on what you're doing with Aldo.

Can you talk a little bit about how you think that performed last year, where your private brand penetration ended in 2016 and where you think it's going in 2017?

Sure.

I will tell you, we're extremely pleased with our relationship with that group.

What we're seeing from that is a real focus on converting our labels into brands and really bringing these brands to life with better-designed product, higher-margin product.

So, we're really pleased with our first year experience with that group.

As far as private brand is concerned, we are seeing an improved margin rate, significant improved margin rate, this year over last year, and the penetration has increased slightly from last year on the year.

So, it looks like our strategy is working there and we'll continue to evolve that as time goes on.

Thank you.

Good luck in 2017.

The next question comes from Camilo Lyon with Canaccord Genuity.

Thank you.

Roger, it was clear that in this quarter a key focal point of yours was to promote more of a full-price selling strategy, and that was borne out in the gross margin, for sure.

I'm curious, as the quarter unfolded there were times when you still ran your promotional email fliers.

I'm curious to know from you, when did you see your traffic fluctuate, either up or down, in response to some of those marketing promotional fliers?

When did you see the most amount of response by your consumer to that?

And then, secondarily, if we can think about a longer-term view of the EBIT margins of this business, there's a lot you're working on, there's a lot of opportunity that you speak to from running this warehouse strategy.

How do you think about the long-term opportunities for EBIT margins to potentially expand and certainly get back up to levels of prior years?

I think on the first one, what I would ask you, it's tough to look at how things are being communicated to get an indication are we being more promotional or not.

I think what we are doing a very good job at is figuring out how we can be more effective communicating what was already the markdowns we were taking.

I'll give you an example.

We do a rotation one to two times within a quarter.

In general, we would just tell people that there's a price move.

If you can package that differently and tell a different story, you're not taking more markdowns.

And, actually, what we have found is we can take less markdowns by perhaps jumping a little earlier than what we might have historically done and packaging that to be an event around boots.

But the reality is, all you're doing is doing it a week in advance of when you would have normally taken something to 30%, 40% or 50% off as part of a unit letter we would take.

So, our team, our marketing team, our merchant team, our planning team, I think, again, very focused on how can we extract more margin, knowing that we were taking significant amounts of markdowns without ever really telling our customer about it.

I think if you're just looking at how we're messaging it, it could come off as misleading.

When we went through the holidays I will tell you -- we have a lot of associates that listen to this call, our Board and others -- the patience this organization showed, knowing that every day we were open at a daily sales seeing the negative comps we were seeing, but knowing we were making more money, I am so proud that we did not respond to what we were seeing in the marketplace.

We had a strategy and we followed our strategy and we delivered the expectations.

I think that's the way we have to manage our business, and I'm real proud of that.

As far as how do we grow the warehouse strategy, expand margins go forward, again, I think the integration of Ebuys into what we're doing, I think leveraging digital to drive a different experience for DSW can create opportunities.

We have a lot of things that we can go after in the next couple of years that we think can grow our bottom line in a meaningful way.

Thank you.

Then just my final question is for Debbie.

You mentioned you were able to use some of your opportunistic buys in boots and pull those forward to chase some demand in season.

How does your inventory and opportunistic buys stand for 2017?

How do you feel about that?

And could you talk about the availability of product as I think more brands are trying to become a little bit more surgical with the inventory that they put into the market so that there's a limited impact on their own pricing architecture.

Thank you.

Good morning.

What I would tell you is that the way we use pre buys really do help us manage inventory needs, whether we need more or whether we need less.

We were very pleased with the pre buys that we had from last year.

We won't name any names but they actually ended up being high-quality brands, high-value products.

We used those to our benefit last fall to actually leverage sales opportunities within the season.

I think that answers the question on opportunity buys.

Could you repeat the second part of your question?

I apologize.

Yes.

Just how does your inventory in that segment look given that you pulled forward some of that inventory for current season sales?

Is the availability of opportunistic buys still as robust as it was a year and two years ago?

I would tell you every day we see less opportunity buys, specifically in the boot category because the boot category is changing so dramatically and really shifting more out of the casual into some, what we saw, traction in dressier product.

I think you have to be really careful about the opportunity buys that are out there.

Some are going to be the right product and some are not going to be the right product.

I think the answer to that is, as these buys come in, we're evaluating them and we're taking advantage of the opportunity of what we think is right for the assortment.

So, does that mean that the mix in total should continue to increase, of opportunistic?

I would say opportunity buys or the pre buy bucket would stay flat to maybe a little bit up for next year.

But there's other ways to pass value other than just opportunity buys and that's having these strong negotiations with our brands and using some cost leverage to continue to pass value.

Also in the SMU, the special makeup piece of the business and in season opportunities.

This concludes our question-and-answer session for today.

I would now like to turn the conference back over to Roger Rawlins for any closing remarks.

On behalf of Jared, Debbie and the rest of our leadership team I just want to say thank you to all of you for your interest and your investments in DSW, and we're looking forward to having a really solid 2017.

Thank you.

This conference is now concluded.

You may now disconnect.