Designer Brands Inc (DBI) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

(Operator Instructions) As a reminder, today's conference is being recorded.

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

Please go ahead.

Thank you.

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

Earlier today, we issued a press release detailing the results of operations for the 13 weeks ended April 29, 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 now turn the call over to Roger.

Thanks, Christina and good morning.

I'd like to begin today by discussing a few highlights from our first quarter and progress we've made against our 2017 priorities.

I will then turn the call over to Jared, who will provide a financial update.

At the DSW brand, we saw continued strength in our distortion to athleisure.

However, women's dress, men's dress and accessories were soft.

From an inventory perspective, we pulled back casual sandals and invested in athletic and women's dress.

This played out well in athletic but not as well in women's dress and, as a result, we are rightsizing our dress inventory, while chasing casual sandals.

As we address the challenged areas of our core business, we are also focused on assembling an experienced merchandising leadership team.

We promoted Jim Weinberg to DSW's GMM of Women's Footwear after 2 successful years leading our affiliated business group as General Manager.

Jim has vast merchandising experience across multiple retailers, and I'm thrilled to have Jim leading our largest category.

We've experienced several years of negative comps in women's.

It's time to change that trend, and I'm confident in Jim's ability to make that happen.

In addition, we recruited Nancy Pastor, a seasoned executive and merchant from the department store and off-price channels, as DSW's new GMM of Accessories.

These proven leaders bring significant expertise that will drive women's and accessories back to the positions of strength that we know they can be.

I'm also very excited to welcome Michele Love to our executive team as EVP and Chief Operating Officer.

Michele had a strong and distinguished career at Nordstrom, most recently, spearheading the expansion of Nordstrom Rack.

Michele will oversee all engagement with our DSW customer, including our digital experience.

We recently launched our redesigned website and mobile app, which drove a significant improvement in online conversion and user engagement.

As digital exerts an increasingly larger influence over retail sales, we expect these platforms to expand DSW's online presence and accelerate digital demand growth.

Michele will also oversee marketing and the operation of our nationwide fleet of warehouses.

By combining oversight of these critical areas under one leader, we will provide messaging, engagement and storytelling, united across all touch points.

Our power store initiative delivered encouraging Q1 results.

We have now closed the gap between our power stores and the balance of the chain.

And we expect performance to improve with ongoing focus and actions as the year progresses.

Finally, during the first quarter, we also undertook the transition of Gordmans and continued our integration of Ebuys.

Following the bankruptcy filing of Gordmans, we've been working through residual inventories through GOB sales as well as transitioning several locations over to Stage Stores.

Additionally, we are liquidating some of our excess inventory through Ebuys.

This is just one example of how we've begun to leverage Ebuys across our brand portfolio by making key infrastructure investments to unlock more synergies in the near future.

Now let me turn the call over to Jared.

Thanks, Roger, and good morning, everyone.

We remain focused on managing the business in a challenging retail environment.

Sales increased 1.4% to $691 million, driven by a 48% growth at Ebuys and stable revenues from our organic segments.

Reported earnings were $0.28 per share, which included the following: $1.5 million pretax expense from foreign exchange transaction loss on Canadian dollar investments related to the future funding of our upcoming Town Shoes acquisition; $537,000 pretax from our cost restructuring initiative; and $2.1 million pretax from the amortization of intangible assets and change in contingent consideration liability related to Ebuys' acquisition.

When we exclude these items, adjusted earnings per share were $0.32.

The rest of our comments will refer to adjusted results.

While first quarter comps declined 3%, I was happy to see performance improve coming out of the quarter, with April comps turning positive, even after adjusting for the Easter timing shift.

Digital demand percentage growth was in the high teens, and our store fulfillment of digital orders increased by 52% and was just shy of 45% of all digital orders this quarter.

The enhanced digital experience from our relaunched website is lifting demand conversion and reducing cart abandonment, leading to dramatically improved checkout rates in our desktop and mobile sites.

Transactions at the DSW segment increased in the low single digits, led by an increase in traffic which outperformed the industry benchmark by 400 basis points.

AUR and UPT contributed to lower average dollar sale.

Turning to our ABG group, comps declined by 1.7% this quarter.

Given the noncomparable activity occurring within the Gordmans stores due to the GOB sales and the transition to Stage, we have removed the chain from the comp base.

We closed 19 Gordmans locations at the end of the first quarter and plan to exit another 30 to 37 locations at the beginning of the second quarter.

We will transition the footwear departments at the 50 to 57 stores acquired by Stage Stores during the remainder of the year.

Additionally, we are clearing excess inventory at select DSW locations and Ebuys in order to maximize recovery value.

Including a net 3 new Stein Mart locations, the ABG division ended the quarter with 379 locations.

At Ebuys, we continued to make progress establishing new direct relationships with branded vendors, which will improve the flow of inventory to Ebuys while further enhancing DSW's end-to-end relationship with the vendor community.

I am pleased with the new partnerships we have forged with vendors who have agreed to work with us across all of our banners, which improves our sourcing leverage significantly.

We expect this number to grow as DSW Inc.

continues to increase market share in this consolidating footwear market.

We started the process of transitioning Ebuys' existing fulfillment centers into one larger, new facility in Nashville, Tennessee.

We are taking measures to ensure as little disruption as possible and expect to complete this process during the third quarter.

These new supply chain capabilities will allow Ebuys to accelerate growth during the important holiday season and beyond.

Turning to gross profit.

Total company gross profit declined by 180 basis points, with 140 basis points from merchandise margin and 40 basis points from fulfillment and distribution costs.

We optimized the timing of clearance activities this year, reverting back to our legacy cadence of 6 rotations per year: 3 in the spring and 3 in the fall.

As planned, we added a rotation to the first quarter, which accounted for the majority of our merchandise margin decline.

Incremental markdowns taken to manage inventories and category mix were offset by better markdown management and initial mark-ups.

We also took inventory reserves to account for aged goods as we align our inventory process during Ebuys' integration.

Total company occupancy expenses as a percentage of sales remained flat, primarily due to favorable real estate taxes.

We continue to manage expenses through organizational efficiencies at our home office and store labor, and as a result, operating expense as a percentage of sales improved 25 basis points during the quarter.

With tighter discipline on discretionary spending, we will continue to identify cost savings while investing in key priorities in the medium term.

We recorded a net loss from equity investment in Town Shoes of $1.3 million this quarter.

The unseasonal conditions in Canada and the challenging environment resulted in softer sales and higher markdowns this quarter.

Similar to DSW, we invested in new talent that strengthens the merchandising leadership at Town Shoes.

As we prepare for the ownership transition next year, Town will open only 2 new DSW Canada locations in 2017.

Adjusted net income was $26 million, resulting in an adjusted EPS of $0.32 per share.

Turning to the balance sheet.

Excluding inventories from Ebuys and Gordmans, inventories on a per-square-foot basis declined by 2.6%.

We ended the quarter with $254 million in cash and cash equivalents, including $75 million earmarked for the eventual acquisition of Town Shoes.

We allocated $19 million in CapEx spending for the quarter, and project $66 million for the full year, our lowest level of capital spending in the last 6 years.

With our focus on integrating our information, data and digital capabilities for tomorrow's retail experience, technology will account for the largest share of our CapEx budget this year.

Given the customers' rapid adoption of our digital infrastructure today, transforming our associate selling platform in partnership with industry leader Infor is one of DSW's strategic priorities.

And as such, we plan for higher technology spending and technology-related depreciation over the next few years.

As we open fewer new locations and undertake less remodel and relocation projects, store-related CapEx is expected to decline by 1/3 from last year's level.

Lastly, I'd like to provide some color on our full year outlook.

As we shared with you last quarter, FY '17 is expected to calendarize differently than the past few years, with earnings weighted more closely to a 40-60 split between the front half and the back half of the year.

The front half is challenged by the website redesign, extra expense and minor sales disruptions caused by Ebuys' fulfillment center transition, the additional clearance rotation and Gordmans liquidation.

On the other hand, the back half will benefit from the 53rd-week, progressive results from our power store and key item initiatives and a more impactful contribution from our kids rollout during the back-to-school season.

We are maintaining our guidance for adjusted earnings per share of $1.45 to $1.55.

This assumes comps at the low end of our prior range.

Due to category mix and inventory management actions, gross margin is expected to be lower than last year as we focus on driving sales and gross margin dollars.

On the expense front, we continue to relentlessly review our SG&A spend with a greater discipline on discretionary and variable expenses while leveraging our scale across all of our businesses.

We now project a low single-digit expense growth for the year.

With that, let me turn the call over to Debbie for an update on merchandising.

Thanks, Jared, and good morning, everyone.

We're working hard to manage the business in a tough environment.

We made several category distortions this spring, some of which performed well and some that required a necessary course correction during the season.

Starting with athletic.

We drove continued strength in our athleisure business.

With the addition of casual sports styles, our athletic-inspired footwear is now close to 1/3 of our business.

We capitalized on a wider range of athletic-inspired choices that drove strong comp growth on top of last year's challenging comparisons.

Although we've been able to contain the impact of category mix on merchandise margin this quarter, we expect the growth of this category to produce a modest margin headwind for the balance of the year.

In our seasonal category, we planned women's sandals for a double-digit decline at the start of the season and performance has been stronger than planned.

In hindsight, we positioned this category too conservatively, and we've now moved into chase mode.

With the bulk of the sandal season still ahead of us, we're bringing in additional receipts as we head into the peak selling season.

Other category distortions had mixed results.

We received encouraging results in opened-up styles but found that closed-up dress styles are not resonating with the customer.

We are evaluating ways to tactically drive growth in this category by focusing on top dress locations, where demand is more constant.

On the other hand, we are encouraged with the customer response to our fashion casual assortment, particularly with new silhouettes not found in her existing wardrobe today.

The results from our women's category illustrate the need to continue to take calculated risk and operate at a greater agility than ever before.

With the industry providing more freshness, Jim and his team will position DSW to take full advantage of these opportunities to bring sustainable growth into our women's business.

We must achieve positive comps in women's to drive the business, and this is our top priority.

Similar to the women's category, men's dress was soft due to the continued shift toward the casual and athletic styles and late receipts from a key vendor.

We are adjusting receipts and significantly editing our assortment to support the most productive items within men's.

In accessories, the trend was unchanged from the fourth quarter.

Given the customer's selective purchasing behavior in accessories, we're rationalizing choice count to focus on fewer, must-have items.

I look forward to the fresh perspectives that Nancy and her team will bring to the accessory business.

We successfully installed DSW kids at 75 locations this quarter, which now brings kids to close to 60% of our locations.

After applying our learnings from last year, these warehouses have produced greater incremental sales than the first phase.

We are optimistic our customers will find a compelling kids offering during the important back-to-school selling period.

In addition to Jim and Nancy, we've also made a number of key hires within planning and allocation this quarter, and I'm excited with the diversity and expertise and experience we now have across the entire buying, planning and allocating organization.

As we elevate talent and build one of the strongest teams in the industry, we will raise our game.

We will continue to develop great product and great customer experiences that will establish Designer Shoe Warehouse as a premier destination for footwear.

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

Thanks, Debbie.

Big ticket items, personal technology and rising costs of health care have created headwinds on discretionary spending and made the customer more demanding of value.

To compete in this environment, we must remain focused on building great product and great customer experiences that differentiate Designer Shoe Warehouse.

Recent recognitions from The Harris Poll and Conde Nast's 2017 Love List illustrates the strong brand equity that Designer Shoe Warehouse has built, particularly among millennials.

We must continue working hard to earn the right to remain top of mind and grow our share of wallet.

When we have the right product in the right place, we earn our customers' dollar.

The assortment initiatives we started last fall have begun to improve assortment consistency on the floor, with key item penetration now doubled from last year's levels and tracking toward our targets.

We've also made a number of merchandising, process, management and talent changes across our power stores that have started to produce better customer service, more relevant content and stronger merchandising stories.

For example, we debuted a Made in Italy collection in a number of our fashion doors, and customers have been quite excited by these findings.

Additionally, store-level marketing plans will begin later in the year, aiming to reengage customers in these markets and drum up excitement for the changes we've made.

We expect to sustain and grow these improvements into the balance of the year.

Our efforts to differentiate our merchandise have produced a number of exciting new brands and exclusive opportunities.

We have secured the exclusive right to sell differentiated content from Adidas ahead of other retailers across the country.

We will start to offer our first collection of Under Armour adult and kids footwear during the back-to-school season.

And finally, we debuted a new exclusive collection this quarter with a broad digital marketing campaign and we have been pleased with higher search, conversion and sell-through rates post-launch.

We're also making progress towards our efforts to redefine DSW's warehouse experience.

We're testing a new layout that creates significant additional capacity to allow us to hold more customer choices in every location.

We are also strengthening our visual merchandising, in a way that presents product stories as powerfully in every warehouse as we do online.

This new layout enables us to reclaim 30% of our existing cubic capacity for future market share opportunities.

The increased capacity also gives us more flexibility to optimize DSW's existing locations and footprint.

In conclusion, despite a challenging environment, DSW will be one of the few survivors of this retail consolidation.

In a sea of sameness, we are singularly focused on creating great product and innovating new experiences that will nurture deeper, more meaningful relationships with our customer and inspire her to express herself through fashion.

I look forward to reporting our progress next quarter.

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

(Operator Instructions) The first question comes from Jeff Van Sinderen of B. Riley.

I wonder if you can -- I know you talked about athleisure being strong, but I wonder if you can give us any sense there of directional changes you're seeing in athletic outside of athleisure, maybe how you're planning that business for second half in terms of inventory.

And also, if you could update us on how the kids' business will evolve for back-to-school this year versus last year.

Yes, it's Debbie.

Thanks for your questions.

So I would tell you in athletic, the results indicate a continued strong demand and continued growth in athleisure.

And when I say athleisure, I mean, both performance athletic and fashion athletic on the women's and the men's side that are not performance brands.

So the momentum continues.

And we continue to fuel that business based on customer demand.

Some of the things that are helping us here are the strength of the key items that we have from our core brands, some new exclusive and differentiated product and some new launches, which we shared with you on the call.

So we see this demand continuing through second quarter and even beyond.

I haven't seen a slowdown at all.

And when you think about it, it's really in our wheelhouse, the whole athletic, athleisure sport piece of the business that's in the nonathletic brand.

So we feel very comfortable that we're growing both the athletic piece of the business and also the women's piece of the business.

Okay.

Good to hear.

And then as a quick follow-up, can you update us on your latest thinking on real estate, maybe if that's shifting at all in your mind?

Yes, I guess, which markets and store sizes are you leaning toward going forward, and kind of what is your latest thinking on what the right number of DSW stores is?

And then maybe just give us a sense, reminder, I guess, of how many leases you guys have coming up for renewal over the next couple of years, if you decided you wanted to flex.

Yes, I think -- Jeff, this is Roger.

The -- as we said on the call, the work we're doing with our one store, I would call it the prototype of what we think the future store looks like, frankly, is going to have a significant impact on what our future real estate strategy looks like.

So I think, as we're working through that and understanding how we can increase capacity, getting more units in front of the customer and perhaps with a smaller box, those are things we are -- we're trying to solve.

What I would tell you though that we are very passionate about is having our warehouses as close to the customer as we possibly can.

And today, we've said this before, but we're within 20 minutes of 70% of the U.S. population, and I think we would want to stay in that kind of ballpark.

So the number, long-term, could change.

The size of them could change.

That's all stuff we're working on to try and solve right now.

And we have an average of about 5-year terms when we renew our terms.

So on average, roughly, we've got about 20% that's coming up for renewal every year.

Yes.

The next question comes from Tom Nikic of Wells Fargo.

I wanted to just ask about the comp.

I think you said traffic was up low single -- or transactions and traffic were up low singles and that the comp decline was driven by ticket size.

Was that just a function of the extra clearance rotation in the quarter?

Or was there something else going on there?

This is Jared.

What we said was that transactions were up, so -- in the low single digits across the segment, which includes dot-com demand as well as store-generated demand.

Transactions were up and ADS was down, both from AUR as well as UPT.

So we saw the impact of the rotation by all means, but overall, I would say mix continues to be a part of what we see and it really was just a function of the selling.

Got it.

And just for the full year, I think you said low end of your prior range, which would suggest down low singles.

Should we kind of assume basically it doesn't get back to positive in the -- in Q3 or Q4?

What I would say is right now we are looking at the comps progressively getting better as the year goes on.

So without giving quarterly guidance, what we feel comfortable with is for the full year saying that we're going to be at the lower end of that original guidance, the low -- down low single digits, but again, we do expect progressively better performance throughout the year.

Especially, given, Tom, that if you look at our performance last year and the back half was significantly worse than the front half.

So that's what I would say.

The next question comes from David Mann of Johnson Rice.

In terms of the website redesign, it sounds like you had some success on the conversion side, but you're also calling out some, I guess, impact in the first half.

So can you just talk a little bit about the performance on the site sales-wise?

Was there any negative impact?

And how you expect that to proceed throughout the year?

Thanks for the question, David.

This is Roger.

I think -- I would tell you we are very excited about the results we've seen around conversion.

And that was the reason we went through the site redesign, was that we made it mobile first.

And unfortunately, we really had not done anything, I would say, to the front end of the site in the last 9 years in a meaningful way.

And so a lot of the SEO connections that existed for 9 years, you lose those when we went through this process.

So traffic was softer.

But that was simply -- that was something we knew was going to happen, but I think, overall, very, very excited about the results we've gotten through conversion, really has been the big change.

And we keep talking about this, but we love the fact that there is a significant number of our customers who visit our website, and now the majority of them are visiting on a mobile device.

And for them to have a consistent experience from what they see on that device to what they see when they walk in the store, we think this site redesign gives us that kind of capability, and that's the direction we're headed.

And then, Jared, in terms of guidance, your gross margin guidance, I think, is a tad weaker than you talked about on the last call.

Can you just talk about the puts and takes as we should look at them over the rest of the year?

Sure.

So from a margin standpoint, we've got markdown favorability that we are anticipating, again, sequential improvements throughout the balance of the year.

That's driven by our key item, continued key item traction on the Power 35 traction, which Roger talked to and we're very excited about.

And athleisure, in general, tends to be a little bit of a markdown performer that's better than the balance of the chain.

We do still though see headwinds coming from shipping as that continues to be, direct-to-consumer, a piece of fulfillment that grows, although the headwind, we do expect to become less of a headwind, but a headwind nonetheless as the year progresses.

And Ebuys, as we talked about before, they've got a transition to their new distribution center, taking from -- it already started a little bit in the first quarter, but going through the third quarter, and we expect that to also provide some headwinds on the margin side.

And then, on Ebuys, I think you've talked in the past about the long-term opportunity maybe to clear goods through there rather than the way you have in the past.

This effort that you did this past quarter to liquidate merchandise, did that give you any sense or a snapshot on how much better margin could be through liquidation through Ebuys versus through the stores as you've done that?

Sure.

What I will tell you is we've run some very manual tests, where we have actually taken some of our deepest discounted products from the stores that are around the distribution centers at Ebuys and sent them to Ebuys to list and sell.

We were very, very pleased with the results that we saw with them selling on their marketplaces versus having that visible only to people that were walking through those specific DSW stores, and we think there's a very big unlock there.

This new distribution center helped set the stage for that.

With the additional investments we are making in technology that we talked about down the road, that's going to further enable us to be able to do that seamlessly so we're not having to actually shuttle the merchandise from the stores over to Ebuys.

Dave.

I'm sorry.

This is Roger.

I think the big thing for us in Q1 was the work that our team did to transition from what is really 4 different fulfillment centers that were dispersed throughout the United States supporting Ebuys into one location in Nashville.

So we haven't really turned on a lot of the capabilities that we think we can bring to life with Ebuys, because we had disconnects on facilities.

So I think we are now positioned to where, primarily in the back half, we think there would be some opportunity to go in a different direction with the assortment.

I think the other challenge that we have -- I shouldn't say challenge, the thing we have to look at is, as we start to make those goods available, we also have to make certain we're not feeding too much because that business was not built around having access to the number of units that are available within a DSW.

So we've got to make certain we have the right infrastructure that can handle that volume too.

So those are all things -- that's why we're moving at a pace to make certain that it's successful long term and doesn't damage our relationships in the marketplaces.

Very helpful.

One last housekeeping question.

Jared, in the guidance you gave last quarter you talked about how the Gordmans liquidation might impact you.

Given that Stage is taking 50 plus stores and looks like they're going to operate them throughout the rest of the year, can you give a sense and an update of what's in your guidance for the Gordmans impact?

Sure.

What I would say is we were very happy with the progress that we've made through the liquidation, and then obviously, finding a transition agreement with Stage.

And that transition agreement is one that bleeds down over time, so they have their own footwear business that will ramp up as the course of the year progresses and ours will ramp down.

But it is something that will continue for a little bit yet this year.

So overall, I think we managed our exposure to the Gordmans GOB very, very well.

All that being said, obviously, still was something that was a drag to last year -- versus last year, and we have taken a fair amount of activity and moved product from Gordmans stores to nearby DSWs on occasion.

We've taken it from the Gordmans fulfillment center and moved it to Ebuys.

We kind of maneuvered it all throughout the organization and actually have been very -- makes it very challenged to pinpoint what a specific overall impact is just related to that.

So net-net, we are very comfortable with our full year guidance of $1.45 to $1.55, but I'm not really able to break out the exact impact of every piece of the Gordmans liquidation.

The next question comes from Chris Svezia of Wedbush.

First question, I guess, just on the comp going to the lower end of your range for the [gear].

I was just wondering, is it a function of -- because you commented in April you turned positive.

I know you're not going to give any indication of where you are right now, but is it a function of the fact you don't have enough sandal inventory, you're chasing that product, and maybe some errors in the women's dress business that are causing maybe a more conservative comp view in the near-to-medium term?

Or is it just the fact that Q1 fell below -- down 3%, was probably below where you expected, so therefore, you're resetting that?

Just kind of curious about how you think about those observations.

Chris, it's Debbie.

Thanks for your question.

So just as I addressed sandals, sandals was planned at a double-digit comp drop for the season.

But the reason that was is because of the strength -- continuing strength of the athletic and nonathletic sport business.

So it's really more of a balancing act to come out to your total comp.

But the sandal inventory that we have right now, that's selling through much faster than we expected, we're pulling up receipts, we're buying more receipts.

And we expect to have a solid performance in the sandal category for both Q2 and actually into Q3.

If you remember last year, we ran out of that product and we did not fund our hot stores or warm doors the way that we should have.

As far as dress shoes are concerned, we are rightsizing that inventory, and that was where some of the biggest comp pressure happened, but there are pieces within that category that are actually doing very well.

All the opened-up product is doing very well, closed-up category is not.

And so we're actually taking the markdowns to make sure we transition in a clean way into third quarter there.

So does that answer your question?

So basically, just in a nutshell, the first quarter comp decline of 3% might have been a little bit lower than what you expected, and therefore, you're slightly adjusting the year to be a little bit lower versus we don't have enough sandal inventory to kind of chase the business, drive the comp, and dress sort of is underperforming as we sit here today.

Yes.

And I think what you will see is based on the adjustments that we made, both in the dress inventory and the acceleration of sandal receipts, you're going to see sequential improvement throughout second and third quarter relative to what you saw Q1.

Okay.

Roger, just a question for you.

When I think about Town and Town Shoes, and that integration process -- I don't know if you can add just (inaudible) color about this, but it seems like according -- it generates roughly $260 million in revenues, you lost some money in the first quarter.

When you fully integrate this business and it flows through the P&L, kind of walk us through what you're going to do to improve the profitability of this segment so that it doesn't -- so it's not dilutive to the total company for DSW once it's integrated next year.

Chris, thanks and also thanks for the question on Town, because we're excited about what the potential looks like there.

What I would tell you is we're going to get back to everyone later this year with a clear game plan of what we're doing.

So I really don't want to get into the specifics as we sit here today.

But what I will tell you is that we have franchised our DSW brand up in Canada, and we're excited to really start to manage that brand on our own.

And we think there are, obviously, significant synergies as we manage the DSW brand along with Town and the other businesses.

I do think the Town brand itself provides some differentiation for DSW Inc., because that gives Debbie access to brands and goods that perhaps might not be available today at a DSW.

So we're thinking through how can we use all of those brands to impact our relationships with our vendor partners, and ultimately, grow both top and bottom line.

The next question comes from Steve Marotta of CL King & Associates.

Jared, can you please comment on the composition of the current inventory and clearance activity that's expected in the second quarter?

I guess -- I mean, from a markdown perspective, again, without giving a quarterly-specific guidance, we are expecting to see our markdown performance improve versus last year -- or get sequentially better as the year goes on.

So again, we saw some markdown unfavorability this year, primarily related to our clearance rotations.

We see that headwind -- still probably some headwind into the second quarter, but not nearly to the same extent, and progressively getting better as the year goes on.

Okay.

Deborah, did you say that athletic is 1/3 of the total women's selection?

Yes, so it would be the performance athletic, which are the true athletic brands, plus the fashion women's and men's brands that don't fit in the athletic space.

So we call that athleisure, because the customer demand in sneakers that could reside either in the performance piece or could reside in the fashion sport piece.

So that is the sum total of both athletic and fashion nonathletic.

Great, and if the women's and men's comp was given, I apologize, I missed it.

Could you offer that, please, for the quarter?

We're not giving specific comp numbers at the department level anymore.

The next question comes from Camilo Lyon of Canaccord Genuity.

Roger, I was hoping you could maybe help disaggregate the difference between the stores that are seeing positive store traffic and the ones that are seeing negative traffic, and what you're doing in those stores that are giving that positive traffic, specifically.

And what I'm really getting at here is, how much self-help opportunity do you have in front of you to really turn the chain's traffic positive?

One thing I will tell you is in all of retail, getting positive traffic into a brick-and-mortar location, I think, is -- there are very few people, I think, that are accomplishing that.

I think where we are having success is leveraging the 25 million rewards members that we know and engaging them in a unique and different way.

And to me, that is the opportunity that we have, and I'm proud of our marketing team.

Our traffic, I think, significantly beats what we get from a competitive landscape standpoint.

And again, using that rewards information to really drive our business is an important part.

I also think our field organization and Michele being here now is going to help this.

We've got to do a better job of capturing data on those rewards members.

It's great that we have 25 million rewards members, but we need to have 25 million addresses as well as e-mail addresses.

And that's work that we're doing.

And we've talked about our technology we're rolling out here in the next 12 months with the support of Infor.

That's why we're going down that path, so that we can have technology that's in the store so our associate, instead of having 9 devices would have 1 device, instead of having 30 logins will have 1 login to be able to engage a consumer in a way that, frankly, we could not do today.

So our path to getting, I would say, traffic improvements will come through the hard work of our field organization, the support of our marketing team, but then ultimately, I think, be driven by the technology we're rolling out that will make it easy for our associates to engage the customer and for the customer to provide us that information.

If I could switch topics here for a quick second, Jared, on Ebuys, could you help me understand -- help us understand how much of the contribution in the first quarter came from the liquidation?

I'm trying to parse out the true organic growth of Ebuys versus what seems to be more ephemeral in nature?

The liquidation, I guess, I'm not following what liquidation you're referring to?

The Gordmans liquidation that you ran through Ebuys.

Yes, again, it's very challenging to break that out when you look at -- there were store-specific movements made and various things within distribution centers and their fulfillment center going to parts of -- to Ebuys and going to some of the DSWs.

So when we look at the overall, it just gets very muddy and to give you a number with specificity, I think, would just be a guess.

Overall, like I said, we were very happy with the results, given the bad situation.

And I think our team managed the overall exposure as best they could.

Okay.

So -- but is it safe to say that 48% growth is not the right number to be thinking about for that channel?

For the Ebuys?

Yes.

Yes.

I mean, on a go-forward basis, I think that would be a pretty aggressive growth target overall from a sustainable -- from a sustainability standpoint, yes.

Okay.

My last question, Debbie, for you, is you've had a fair amount of turnover in your GMMs, and women's has, like you said, has been under pressure for quite some time.

As you step back and you think about the business, you think about your place in it, you think about the demands that are now being placed on vendors to be quicker to market and quicker to you with inventory, as you also try to manage your inventory more tightly, what do you think you need more of or what do you think really gets the women's business to turn positive for you?

Wow, that's a great question.

And I wish I had a couple hours to sit and talk to you about this, but I'll try to keep it brief.

Number one, speed to market is critical, and we're trying to work with all of our vendors to try to make sure that they increase their speed not only in terms of new product to market, but in the timing that they get it into the market and into the customer's hands.

And I think our industry needs to improve in that substantially.

I think that when you think about talent and the kinds of talent that we need, we're always looking for great talent.

And the kind of talent that you need today to really run a business that has been -- where the customer is really changing their expectations, what they want, how quickly they want it.

I think when you took a look at our talent in the organization, we found that there was opportunity to elevate some talent that was in the organization, to bring the strategy to life in a quicker way and to work with the vendor partners even a little bit more closely than we have and to also hold our teams in DSW accountable, which, I think, we can do a much, much better job of that.

So the talent change -- changes that we've made, we've promoted some internal talent, Jim was an internal promote.

And we've gotten some talent from the outside, Nancy was from the outside.

And I think this blend of diversification of talent to bring us to a more elite team is going to demonstrate results that we're going to be very pleased with going forward in the future.

Can your vendors accommodate speed to market?

It seems like there's only one vendor in the market, Steve Madden, that can do that well?

Yes.

He is pretty good at it.

Actually, he's fantastic at it.

But there are many brands that we are working with much, much more closely and trying to understand their supply chain process and how we can work with them, either on materials or doing more testing, earlier testing, faster testing, speed-to-market testing, moving test items to bigger items, and there are actually a handful of them that are doing very nicely for us.

It's no question that Madden is actually the best at it, but he's kind of provided the gold standard by which we're holding many of the other vendors accountable.

So I think you're going to see some significant changes that will result in some positive results going forward.

The next question comes from Scott Krasik of Buckingham Research.

Two, first one on guidance, and then sort of a bigger-picture question.

Jared, just wondering, it seemed like investors after 1Q didn't sort of understand the puts and takes of the quarters.

I'm just wondering how close we should model this 40/60 split in terms of the first half and second half EPS guidance, to your comment.

Again, we don't give quarterly guidance, but with a 40/60 split, you can probably back into Q2 pretty well.

I think we feel pretty good about that split, so that's one that supports the $1.45 to $1.55.

And given the puts and takes that I walked through, we feel pretty good about the 40/60 split.

Okay.

And then Debbie, as you look -- thanks.

And then Debbie, as you look at the back half of the year, we've heard that there's already a lot of casual booties out in the marketplace, that maybe department stores were packing away product last year.

And it's obviously a potentially high margin, big category for you in the back half of the year.

So I'm just wondering how you sort of expect to drive better comp performance in the back half of the year, if boots appear to be challenging.

Sure.

So obviously, athletic continues, and like I said, I'm very comfortable with the kind of demand, customer demand we are seeing that I just believe continues.

Kids' growth continues.

As you know, we just added another tranche of stores in March, and so we have that going for us as well.

The other category that we're starting to see some really nice results in is specifically in the women's casual category.

And there's many things that are working there right now that I think just continue, flat, sport, work.

And then, in sandals, last year, I remember us talking to you about third quarter really running out of casual sandals because it's still very, very hot and not really having protected our Zone 1, which is our warmest zone in the country, the way that we should have.

So I think there's an opportunity there.

Boots, we are going to be planning very conservatively.

The same categories that worked last year are not working this year, but -- will not be working with this year because I think that they have kind of seen their end of life.

But there is some excitement that is happening in the boot category, and the categories within boots that we plan to drive should actually get us some higher [AUTs] than we got last year.

So it's going to be a balancing act, but I think that there's enough positive going on with some new trends and continuing trends that it makes me confident in our back half.

Scott, the other piece of the back half that we think will have a significant impact are our power stores, and the assortment changes that we have made in those stores where we've increased the penetration significantly of better and best brands.

And I think that those stores are a material portion of our top and bottom line.

And the changes we've made there, those stores had been gapped anywhere from 500 basis points to 600 basis points below balance of chain, and as we've closed that gap and we look for the balance of year to actually have that gap to go the other way.

So we believe in the power doors to be able to drive the comp as well.

The next question comes from Patrick McKeever of MKM Partners.

Question on the enhancements that you made to the website, the redesign, and then the relaunch.

What were some of the specific things that you did that are driving the big increase in conversion?

And then, I was just wondering if you could run through some of the numbers again that you mentioned earlier.

I think you said digital demand was up in the high teens, but not sure.

And then, my second question is just on all the store closures across the department store space and also in the footwear space.

The liquidation sales, likely in the second and third quarters, and then probably a lot of closed stores going into the fourth, and then into next year.

My question is, how are you thinking about the industry rationalization?

And how does it play into the guidance for this year, for both sales and also gross margin?

Patrick, it's Roger, I'll take the first.

I will tell you the biggest change that we made was going to responsive design, and the vast majority of the conversion improvement we are seeing is through the mobile device and it's material.

And when you think about it, again, our site was designed 9 years ago when the phone I had was a flip phone.

It wasn't really set up to allow me to do commerce on a device.

And I think that kind of change, that's where we're seeing the vast majority of our improvement is in -- on the mobile device.

Jared, you want to talk about the other?

Sure.

So what we had mentioned is that the digital demand as a portion of our overall segment demand had increased in the high teens.

And our -- the amount of sales that were digitally demanded but fulfilled from a store was in -- just shy of 50%.

So I think it was closer to 45%.

So again, from an omni -- a multichannel standpoint, as Roger has talked about for quite a while now, we are looking to focus on driving digital demand and fulfilling it from the place that makes the most sense anywhere in the chain, and we've built the infrastructure to do that and it's playing out that way.

And again, when you connect that with what we talked about on the call, the experience we're creating in a store, where there's 30%, roughly, more choices available to a consumer and you're within 20 minutes of that consumer, it will create a -- what we believe is a competitive advantage to be able to get those goods quicker to a consumer than our competition and offer them a broader assortment in a local market than they can see anywhere else.

And then just a quick follow-up to that then.

On just digital demand up in the high teens, what's the comparable figure for that?

Did you say back in the fourth quarter that -- did you say at mid-teens at that point in time?

So will that be the acceleration from mid- to high-teens?

I think that's about -- yes.

Yes, that's right.

And that was impacted negatively in Q1 and also will continue throughout the spring season because of the loss of some of the SEO traffic that you would naturally have received.

So again, we're very excited about the changes we've made and the customer's response to it.

And not just that, but also on our mobile app.

And I'm probably not supposed to say this, but we're launching a droid app this week as well.

So Ashley, our IT person, is probably going to shoot me for saying that.

But we've got to be much more aggressive in our customer-facing applications and things we're doing.

And I think the changes we've made on the site are the right changes, and it's where we're headed.

And then, on the rationalization?

On just department stores?

Is that...

Yes, exactly, just how that plays into guidance.

Jared?

What I would tell you is we think that the closure of doors in the department store space and the Gordmans space and the Payless space and you name it, the footwear space is consolidating.

We are looking at capturing market share in this consolidating environment through whatever channels make the most sense.

We have reached out in a targeted campaign towards Macy's customers and other stores that are closing.

And what we have found is a lot of them already were reward members and so it's making sure that we let them know that we'd love to continue to service whatever footwear needs they were having met by these department stores.

We are not necessarily building into guidance anything specific related to 200 doors closing in this market, but overall, our goal of driving market share gain is something we're absolutely focused on.

And we think as this market consolidates, we are going to be the beneficiary of that.

The next question comes from Jay Sole of Morgan Stanley.

Roger, at the top of your comments you mentioned, obviously, there's a channel shift going on.

But also you slightly highlighted some factors that are pressuring the consumer, I think you mentioned rising health care costs and big-ticket items.

Can you kind of talk about what factor is more important right now?

And maybe what's the bigger driver of the changes that are happening in footwear overall?

Jay, I think, as we've been looking at things, the data point that I would refer you to is there is -- I think -- I forget who it was, whether it was Wells.

Someone had issued a report that said our sector, meaning footwear apparel, that over the past 20 years, our area had been hit harder than anyone, meaning we had lost the largest share of wallet of the consumer.

And what we're seeing, and I think it was consistent with what was in that report, was that it's about health care, it's about education, and it's about services.

So as we're thinking how can we address opportunities that provide services related to footwear, for us, those are things that we believe we can add and that we have the right to add to our consumer base.

That's something they would value from us.

And connecting that through our rewards program and engaging, again, in an experience that is unique when they visit one of our warehouses, those are things we think we can bring to life that will counter some of the declines that have taken place in our entire retail sector.

The next question comes from Sam Poser of Susquehanna.

I just wonder if you could give us an idea of sort of, without giving specifics, what percent of your business is touched by digital?

It doesn't mean you're buying it online, but I mean, how many people are accessing and coming to stores or buying online?

I mean, just how much is just touched by digital right now versus, let's say, a couple years ago?

Sam, it's a great question.

I think, let's just say it's between 70% and 80% of all of our customers as they engage with our brand, that engagement starts in a digital way first.

And when you think about the impact that the stuff we're doing can ultimately have on the experience with the customer, that is a significant impact.

And what we are working toward is when they're on that device and they're looking at the device and they see, like right now, the top 5 trends in the spring season, and then they walk into a DSW warehouse and they do not see those trends stand out when they walk in, you've suddenly created a disconnect with your consumers.

So we've got to figure out ways through -- of how we market, how we present, how we talk to the consumer to make that experience consistent between the mobile device, between their desktop and between them walking into the warehouse.

And that's work we're doing, and again, we have a lab store that we're working through that we're really excited about how we can change that experience, because we think if you don't do that, then you are not a digital business.

And it's great we are using our warehouses to fulfill demands, but that's price of entry.

We've got to figure out how we develop and build experiences that are unique and differentiated and start with that, I would say, digital mindset or put the customer first.

And if we do that, we're going to -- we're going to win.

And then, I guess, the question is you've talked over the years about your rewards folks being 90% of your business.

Your comps have not been -- haven't been great over the last few years.

I mean, what can you do -- at 90%, what can you do to bring that up?

Because it's -- you're getting new people but are they all coming to the party as much as you would like, I guess, is the question?

And how do you get more productivity out of them to start driving improved same-store sales?

Sam, I would say, I think the first things starts with getting our women's product right.

And as Debbie had mentioned, and I've told you this before when we've met, we've made visits to our warehouses with -- as a team, and we were not satisfied with what we were presenting to the consumers.

So it starts and frankly ends right there.

We've got to get the right product in the right place on the women's side.

And when that happens, then I'm very comfortable that the traffic we're getting, they are coming to us.

Unfortunately, they're not liking what they were seeing at as great a rate as they had the year before.

And that is about product, and that's the talent that Debbie has addressed.

So I would say that's the big driver for us.

One last thing, is that product or is it the experience?

Or is it that combination?

Because you mentioned you started off with all the discussion on experience.

Is that -- where's the line, I guess?

It starts with product first, and then experience second, that's what I would tell you.

And I think what we've seen in our power doors where we have addressed the product, we're very excited with the results we have seen.

And we have not addressed anything, I would say, around experience yet in those stores, and that would be next.

But it's very clear, based on the results we've seen in those doors where Debbie and team have done exactly what we need to do to balance the company, that when we have the right product she will buy it.

This concludes the question-and-answer session.

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

First of all, just like to say thanks for everybody to -- for calling in.

And again, to our associates on the call, keep up the great work, and we're making incredible progress.

So thanks, everybody.

The conference is now concluded.

Thank you for attending today's presentation.

You may disconnect your lines.

Have a great day.