Designer Brands Inc (DBI) 2017 Q2 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 second quarter conference call.

Earlier today, we issued a press release detailing the results of operations for the 13-week ended July 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 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 our forward-looking statements.

Joining us today are Roger Rawlins, Chief Executive Officer; and Jared Poff, Chief Financial Officer.

Let me now turn the call over to Roger.

Thanks, Christina, and good morning.

We are pleased to report our first positive quarterly comp since 2015.

Our results show how our strategy of product differentiation and customer centricity is resonating with DSW customers.

Our largest category, women's, turned positive this quarter and marked the first time the women's business achieved its original plan since 2014.

With our focus on execution, we drove a mid-single-digit comp increase in regular-priced product during a typically clearance-dominated quarter.

We reduced clearance markdowns, and we ended the season with 10% less inventory.

We competed effectively during one of the largest promotional events this quarter.

And with the successful expansion into categories like kids and athletic, we've increased our ability to capture market share and new customers.

We saw a sequential improvement across all selling metrics.

And with disciplined expense management, our operating profit improved at a healthy rate.

As you can see, our first half results give us confidence that we are on the right track.

Let me turn the floor over to Jared to discuss our second quarter performance and our outlook.

Thank you, Roger, and good morning.

Total company sales increased by 3% to $680 million, driven by a 1% comparable sales increase at the DSW segment.

Our second quarter performance resulted in a 2% top line growth for the first half of the year.

Second quarter reported earnings of $0.35 per share included the following: $2.5 million or $0.025 per share related to Ebuys' acquisition cost and restructuring expenses, and $700,000 or less than $0.01 a share related to foreign currency loss on Canadian dollar investments.

When we exclude these items, adjusted earnings of $0.38 per share increased by 9% over last year.

Year-to-date, adjusted earnings were $0.70 per share compared to last year's $0.75 per share due to our incremental clearance rotation during the first quarter this year and the ongoing integration of Ebuys.

The rest of our comments will refer to adjusted results.

Let's start with the Designer Shoe Warehouse segment, where sales increased by 4%.

We extended the positive momentum from April into the second quarter, with a sequential improvement across all selling metrics.

Our successful site redesign significantly improved conversion and increased mobile traffic, both of which drove a 27% increase in digital demand.

Having seen the increased penetration of digital demand during the last 2 years, we are confident that our new capabilities will improve DSW's ability to win this holiday selling season.

Our warehouse strategy is playing a significant role in driving digital demand with an increasing degree of synergy between our physical footprint and the digital experience, from online returns and exchanges to cross-channel fulfillment and speed.

Furthermore, we have found a strong and direct correlation between digital demand growth in a geographic market and the existence of a brick-and-mortar warehouse.

Given our physical proximity to the customer, an increasing number of shoppers are choosing to shop online and pick up in store, which shortens lead times from 3 to 5 business days to 2 to 4 hours.

Furthermore, our warehouses serve as local return and exchange centers for online purchases.

We are now able to engage with our customer across any medium that she desires, and when we continue to -- and we will continue to take her lead as she evolves.

The strong customer response to our merchandise initiatives resulted in a positive comp in the women's business and an increased mix of regular-priced sales.

We were pleased to achieve our original plan with a higher degree of freshness.

Our favorable liquidity position enabled us to react to the increased sandal demand this quarter while bringing in new receipts for the transitional period.

The athleisure category continued to outperform, with growth in both performance and fashion/athletic areas.

We are putting exciting, new athletic-inspired fashion into the assortment, with new brands and exclusive offerings to feed the strong demand.

The men's category also posted a sequential improvement during the second quarter.

We welcome our new GMM for men's and athletic, Kirk Persson, who brings a wealth of valuable experience from Foot Locker, DICK's Sporting Goods and Academy Sports.

Under Kirk's leadership, we will continue to reposition our men's business with an increased distortion towards the casual lifestyle.

We continue to be pleased with our new kid's business.

We successfully completed the second phase of our kid's rollout, bringing kid's to 60% of our warehouses but available all the time through our digital experience.

Our data shows we are attracting a new, younger customer.

And as a result, we've identified opportunities to add kid's to an additional 100 locations next spring.

On the Power store initiative, we were able to deliver a more tailored merchandise assortment, which is starting to improve conversion and comp trends.

Our renewed focus on talent and leadership has resulted in an experienced team that understands what it takes to operate these critical, high-volume Power stores.

For the second quarter, our Power stores closed the gap with the balance of the chain, an improvement of 300 basis points of comp from where they performed in FY '16.

We are less than a year into our Power store initiative, and we will continue to report on our progress later this year.

We opened 2 new warehouses for a total of 510 DSW locations.

Our disciplined inventory management, improved sourcing and markdown management more than offset higher shipping costs and marketing promotions.

Segment gross margin dollars outpaced top line growth, with an 8% increase and a 110 basis point improvement in gross margin rate.

Turning to our ABG group.

Comps at the ABG division were flat to last year, an improvement from first quarter's 2% decline.

Revenues declined by 12%, driven by the planned exit at Gordmans, which closed 30 stores at the start of Q2.

We focused on liquidating residual goods within existing locations, which resulted in less gross profit dollars, but gross profit margin improved by 20 basis points over last year.

We will continue to operate the remaining 58 stores acquired by Stage through the end of this year.

Turning to inorganic growth.

We've begun consolidating Ebuys' 4 legacy distribution centers into a new facility in Nashville, Tennessee.

We closed one facility this quarter and expect to complete the transition before year-end.

We will prioritize Ebuys' operational transition this year, which will slow its top line run rate over the next few months but will prepare the business for the important holiday selling season.

Ebuys' revenues increased 6% during the second quarter.

As a result of operational alignments and the DC consolidation, we incurred incremental transition expenses of $3 million during the quarter and $5 million year-to-date, which drove lower gross margin dollars this year.

We recorded $219,000 in income from our equity investment.

We opened 1 new DSW Canada location this quarter for a total of 24 warehouses, in addition to 161 locations that operate under the Town Shoes, Shoe Company and Shoe Warehouse banners.

We've also started implementing a new financial system that will facilitate the eventual consolidation of this business.

Let me share a few more details about our Q2 financial performance for the total company.

We were pleased with the gross margin trends in our core business, which increased 120 basis points due to improved sourcing, less clearance and lower markdowns.

The unfavorable impact from reserve adjustments and inventory management at Ebuys, however, reduced this gain to a 50 basis point increase for the second quarter.

Year-to-date, gross margin was 65 basis points lower than last year, primarily due to the integration of Ebuys and the addition of the extra clearance rotation in Q1.

Expenses increased 5% due to planned higher technology and incremental selling expense.

As a percentage of sales, our SG&A rate deleveraged by 30 basis points.

Marketing spend was flat as a percentage of sales for the quarter but will increase as we invest in marketing during the back half.

I'd like to spend a few minutes on our balance sheet.

We have diligently managed our inventory position to ensure a high level of freshness, provide liquidity to chase and manage markdowns.

We came into Q2 with inventories down 2.6% per square foot.

During the quarter, we generated a regular-price selling comp increase in the mid-single digits, offset by a clearance selling comp decrease in the high teens, which was in line with our clearance inventory position.

We then ended the second quarter with inventory on a per-square-foot basis down 10% to LY, excluding Ebuys and Gordmans.

We have been pleased with the results of this strict inventory management, which contributed to higher gross margin dollars and rate versus LY.

With our inventories clean, we expect the declines to LY to begin to moderate as we look to further fund key items and positive comps through fall.

We ended the quarter with $271 million in cash and investments.

We have received over $470 million in firm commitments from our bank group, supporting our new, $300 million, unsecured revolving credit facility that will replace our existing $100 million secured revolver.

We are putting the final touches on papering the transaction and expect to close this week.

This strong liquidity position gives DSW ample financial flexibility to fund the future needs of our business and execute strategic initiatives in a tighter and more volatile credit environment.

On the investing and capital return front, last week the board authorized an additional $500 million of share repurchases on top of the $33 million remaining in our existing authorization.

As we have done in the past, we will assess the dynamics of the market and the expected sources and uses of cash and execute any share repurchases opportunistically.

As a reminder, we have returned close to $600 million to shareholders in the form of dividends and share repurchases since 2013.

CapEx spending for the quarter was $10 million, and we expect to incur the lowest level of capital spending in the last 6 years as we open fewer stores and shift more dollars towards technology spending.

With additional store maintenance and capitalized IT expenses, we expect full year CapEx of approximately $70 million for the full year.

Let me share our perspective on our 2017 outlook, which we maintained at $1.45 to $1.55 in adjusted earnings per share.

This outlook assumes a flat comp for the full year, the opening of 11 to 13 net new locations for DSW and more modest growth expectations for Ebuys, which brings us to a full year revenue growth in the 3% to 4% range.

In anticipation of retail closures and choppiness in the current environment, we believe it is prudent to plan inventories for a conservative sales expectation.

While this limits markdowns, it preserves open-to-buy liquidity to chase into trending items, as we did during the second quarter.

At the same time, we have chosen to invest in marketing this fall to reinforce DSW's mind share in our trading areas and compete fiercely in the balance of the year.

We will continue to find ways to optimize markdowns and maximize selling opportunities as they arise.

In addition, we will continue to drive operational efficiency, both on the COGS and expense lines, that will be accretive to the bottom line while using some of these gains to fund market share initiatives longer term.

Our guidance assumes lower full year gross margin as we cycle against sourcing benefits last year, invest in market share and plan for higher transition costs from Ebuys in the back half.

SG&A expenses are expected to grow in the low single-digit range this year.

Our board and management team strongly believe that DSW is one of the few retailers with significant runway for growth, and we're positioned to acquire share during this retail consolidation.

We're committed to delivering a strong value proposition, and we believe by elevating the customer experience and strengthening our brand relationship, DSW will stand out and be the retailers you trust for all things footwear.

Let me turn the floor back over to Roger.

Thanks, Jared.

I'd like to spend the next few minutes taking you along our journey towards accomplishing our mission for the DSW brand.

Over the past year, we've been working to answer the question that many of our shareholders have asked: what are you doing to differentiate DSW in this dramatically changing retail landscape?

In an environment where spending on technology, health care and durable goods has squeezed discretionary spending, customers have become more product and experience oriented than ever.

And as a result, operators who compete solely on transactions and price and offer no differentiated experience or customer connection have lost relevance and competitive appeal.

As we already have seen across multiple sectors of retail, office supply, electronics, sporting goods, at the end of the day, only the strongest will survive.

And DSW will be one of the few survivors in this retail consolidation.

As we look at the retail landscape and assess what truly separates the retailers with opportunity from those that are simply melting away, the key differentiator is a relentless obsession with deepening the connection with the customer and creating the experience she can only find through engagement with you.

At DSW, our passion to innovate, coupled with a willingness and ability to invest, has allowed us to grow and strengthen our relationship with our customers and ultimately led us to our simple but powerful mission: to inspire self-expression.

We know that shoes are more than just a necessity.

They're an extension of yourself.

They help you tell the world what you're made of.

People love their shoes because of the way they make them feel.

That's where we come in.

We foster our customers' self-confidence by giving them access to a vast assortment of great products.

Because the amazing thing about shoes is, the right pair of shoes lets your personality shine.

And the right pair of shoes can make you feel like a whole new person.

Let me share with you a brief story about how shoes inspired self-expression in me.

When I was in the seventh grade, yes, seventh grade, I was on the basketball team.

Now I wasn't all that great.

And in fact, I was the 12th man on a 12-man team, if that tells you anything.

But that was the year I got a new pair of Converse leather sneakers.

I remember the first day I strapped those on.

I felt invincible despite never entering the game.

I was Larry Bird.

I know first hand how the right pair of shoes can let a kid from the middle of Ohio feel like an NBA All-Star.

Those shoes certainly inspired me to express myself both on and off the court.

That's the kind of experience and emotional connection we will create with our customers.

This mission feeds our vision to be the obvious first choice for shoes, to stir emotion and inspiration with engaging experiences we like to call music for your feet.

We have a 3-pronged approach to carrying out our mission: first, we're launching a revamped and elevated rewards program that goes beyond transactional-based points and introduces services and experiences; additionally, we're bringing the warehouse to life through an exciting and innovative new store design; and finally, we are codeveloping new technology that empowers our associates to deliver a differentiated and seamless customer experience.

Let me share with you a few more details on each of these.

First, DSW pioneered the loyalty program for footwear.

With our 25 million customers that we engage with in a regular and personalized way, we are putting the finishing touches on a totally new loyalty program that will bring new and differentiated experiences and services to our most loyal customers.

The new rewards program will be structured to allow customers to earn rewards quicker with compelling incentives to buy more to unlock additional value.

And we'll offer exciting services like shoe repair and rental.

The first phase of the new rewards program is expected next spring, and you will hear more details as we get closer to launch.

Next, DSW has always offered our customers a broad yet curated footwear assortment at great values every day.

But with our current fixturing package and layout, we utilize less than 20% of the cubic capacity of our warehouses.

And while we've been very successful bringing our vast assortment to life digitally, we know there are opportunities to help customers find what they need by putting more of our assortment within immediate access.

To that end, we've been testing an entirely new store design at one of our Power stores here in Columbus, and the early results have been stunning.

We've increased the capacity on the floor by over 30%, creating significantly more choices for the customer to experience.

The new layout enables us to tell more compelling product stories and creates room for new and exciting ways to serve previously unmet customer needs.

This initiative is a cornerstone to unlocking the power of the DSW warehouse with a synchronized and efficient infrastructure that virtually connects DSW with our customer at any point and facilitates complete inventory mobility throughout the enterprise.

We're working out all of the operational details and plan to start rolling our new store design to some of our largest warehouses.

Finally, we are empowering our associates with tools that will facilitate customers' product discovery and decision making.

We are codeveloping proprietary technology that frees up more time for customer engagement by increasing operational efficiency.

This technology puts customer-facing data, such as personalized offers, wish lists and past purchase history, all in one place, finally enabling the customer and associate experiences to converge across all mediums.

Behind all of these initiatives are great people.

We are strengthening our lead team and developing a high-performance culture.

I'm proud of the leadership team we've assembled today, and I am confident this team will lead us towards our near- and long-term goals.

We expect our culture of accountability to translate in greater stewardship of the business.

We are going to drive decision making with smart data and exert discipline behind risk taking, expense management and capital investment.

We're also working hand-in-hand with our vendors to improve speed to market and help our partners move as fast as the customer and thrive in a period where changes move at warp speed.

Our foundation is already built, anchored on a disciplined business model with a pristine balance sheet and robust cash flow and a deliberate real estate portfolio, which puts DSW within 20 miles of 70% of the target population.

With this foundation in place, I am confident our passion for relentless innovation and entrepreneurial spirit will drive us to seize this once-in-a-lifetime opportunity to pursue our mission.

And when we do, the result is simple: we will grow market share and profitability.

With that, I'd like to turn the call over to the operator for our Q&A.

(Operator Instructions) The first question will come from Paul Trussell of Deutsche Bank.

Roger, I can't say that I have the same seventh-grade basketball story, but I do appreciate you sharing.

I wanted to start off, and just if you could help us understand your current marketing and promotional strategy, your inventory and clearance strategy as well.

I mean, your results clearly showcase that you struck a nice balance and was able to increase margins.

But there were also times during the period, at least by our observations, in which there seemed like there were some deeper discounts or at least maybe a more aggressive -- you were more aggressive in your approach to try to drive traffic.

Just kind of explain how you did it, how we should think about the gross profit margins in the second half, especially with all the moving pieces of inventory levels down, Gordmans, the mix of Ebuys, et cetera.

Yes.

So Paul, let me first start -- well, I'd say I think it all starts with product.

And we have been talking for the last 18 months about focus, tempo and disruption.

We've used those words in every call and every conversation we have with our associates.

And I think it was probably 6 months ago I had a conversation with Debbie and said, "We really, really need her and the team to focus on the women's part of our business." I think the work that Debbie has done with her team to get them focused, getting the right talent, getting the right product to drive the business, I think the urgency and tempo with which they operated, it sets the standard for our organization and how we have to operate.

And ultimately, what she did was disrupt the marketplace.

So I'm so proud of her.

I'm proud of the team.

But rather than have her spend time on a call like this or to be engaged in writing a script, we've had her very, very focused on the business, and we're going to get after men's and we're going to get after accessories the same way that her and the team have on women's.

So I'd -- what I would tell you is I think that was the first part of what drove our results in second quarter.

The other thing I would say in marketing, it is about data, and we have the luxury of having access to 25 million rewards members.

And being able to use that data to drive our business and drive traffic, that's what our marketing team and -- they've just done a fantastic job.

I mean, we are in a completely different place when it comes to traffic than everything we read out in the marketplace.

So it's about product and it's been about our marketing team leveraging this weapon we have called the rewards program.

And then just on second half gross margins, if you can just detail that a bit more and also just add to it, how you're kind of planning for women's footwear to perform in the second half, especially how we should think about the boot business.

Sure, Paul.

This is Jared.

What I would say is our second half gross margin is expected to still be challenged versus LY, but that should improve versus the first half of the year.

We think that the primary drivers of that decline are kind of evenly split.

Half of it is really some -- our continued transition costs at Ebuys as well as the additional pressure from their bringing on their new distribution center.

The other half of the pressure comes from some elevated markdowns.

As we mentioned on the call, we are looking to heavy-up our marketing a bit versus LY in the back half of the year.

And with that, we've assumed the need to take some additional markdowns.

What I'm optimistic about is, as you saw in the second quarter, if in fact we are -- we see abilities to chase, we see the ability to go after product that is trending and we can see some reg price selling, we are very optimistic to see what that might mean for the back half of the year.

So as we mentioned on the call, we kept that liquidity open, and that allowed us to chase into the trending sandal.

And we're taking that same type of approach towards our fall business.

So I think that's...

The next question comes from Jeff Van Sinderen of B. Riley.

Congratulations on getting back to positive comps.

Maybe you can just touch a little bit more on the athletic part of your business.

I know you made some comments there, and I was just wondering kind of where the penetration is running, how that is shifting in terms of mix.

I think you mentioned more sort of fashion derivative product.

And just, I guess, overall how we should think about athletic and athletic derivative for second half.

Yes, Jeff, I think if you go back and look at the history of DSW, we have always, I would say, been underpenetrated to the total market in athletic, and we've continued to grab share there.

So I think a lot of the volatility that we're reading about in many other places, yes, that's something we're going to monitor and manage our inventory.

But we feel like we still have significant market share that we can gain in that area because we were so underpenetrated to where many of our competitors were.

So that's sort of the approach we're taking.

We're remaining very liquid.

We're still all in on some very important key items as we go through the fall season.

But again, with Debbie and team very focused on managing and maintaining their liquidity, we feel pretty good about where we sit today with our athletic business.

Okay, that's helpful.

And then just as a follow-up, anything you could give us in terms of performance in the smaller-market stores?

Any change there?

And then, I guess, plans to roll out more of those?

Yes, there's really, I would say, been no change.

Again, as an organization, we are very, very focused on our -- what we call our power doors and love the fact that we have seen significant improvement there, and that trend continues to improve.

So our real focus as an organization has been on our power doors.

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

Just piggybacking on the last question, what percent of your total sales is comprised by power stores?

Well, we don't disclose that.

What we would tell you is it is not nearly as material as the percentage of our operating income that they represent, which is why as an organization we've been so focused on those.

And then what I love is we actually are having conversations.

The learnings we have taken from those power stores, we're now able to take to the next group of stores that would fall below that.

So we are really, really focused as an organization.

And I love the fact that we've had an impact on the Power 35.

We're learning from it, and we're going to take it to the next level.

That's helpful.

And also, you mentioned that there's new fixturing to be rolled out, and that could be rolling out to some of the larger warehouses.

Can you talk a little bit about time frame for that and if there's any disruption in the current pace of sales within those stores with the change of fixturing?

Yes.

Unfortunately, we only have one store and so you can't get really get a read.

But what I would tell you is that one store where we have put in our new fixturing package, our new -- it's not just fixturing, it's a new way of operating.

I read in -- or somebody had put out something, I forget who it was but had compared it to a Home Depot meets Nordstrom, and that is exactly what we were trying to accomplish.

I would say we are probably around 20% to 25% of what our vision looks like for that space, but we love the results.

It is our #1 store in the chain right now.

And I think all of us that have been in retail for an extended period of time, you see when you're doing a remodel or relo, you usually don't see that kind of a lift.

So by putting more product in, making it available to our consumer, we're really, really encouraged.

But as you know, that's one store.

That's not a test.

And we're going to get it out as quickly as we can to some additional stores.

But at this time, I'm not ready to discuss time frame.

Okay.

And one last question.

Given the guidance for flat comps for the balance of the year -- excuse me, for the entire year, that implies that the planned comps for the second half are roughly in that very low positive single digits.

Is that accurate?

That's accurate.

Yes.

The next question comes from Chris Svezia of Wedbush.

I guess, first, I just want to talk about second half, more specifically the comment about some key marketing events to drive some additional markdowns.

Is that basically -- have you bought inventory, whether it's private -- whether it's your private label or private brand or that type of thing, to drive those additional markdowns?

In other words, your inventory is clean for the DSW segment.

Did you just buy product that you want to drive in the back half of the year with key marketing events that you bought specifically to be promotional launch?

Just can you maybe clarify that a little bit?

Yes.

Unfortunately, Chris, I'm not going to answer that because we'll be giving away some of our secret sauce for the back half.

But we're looking at ways to be more competitive, and I'm really proud of the team.

As I think everyone knows, in second quarter, one of our largest competitors runs a gigantic event that has changed the way people look at retail.

And we competed in that period, and we grew our digital demand, which, ultimately, 60% to 70% of that demand was fulfilled out of the store, and there was a lot of buy online-and-pick-up and then buy online-and-ship-to activity.

But we competed in that time period in a way we hadn't before.

And so as we look at growing market share, we're not going to stand on the sideline and let others grab share from us.

So that we are working on and we have a game plan for how we're attacking the back half.

Okay.

Just on boots, does -- I know Debbie is not on the call, but does she feel any differently?

I think you're probably planning boots to comp down, I would assume.

Has that plan changed based on any early reads or early thought process?

Or any color about that category would be helpful.

I would say -- I won't talk about an individual category, but what I would tell you is we still feel very confident now -- or we feel very confident now in our women's direction.

And the results we've experienced in second quarter and with the liquidity that we have, we have the ability to chase.

And I remember the time periods back in '09, '10, '11, what were our heydays, I guess, if you look at from a public perspective.

We were chasing the business all day long.

And I love the fact that that's sort of the tempo that Debbie has our team operating at right now.

So if there is opportunity, we're going to be prepared to go after it.

Okay.

Final question.

Just on the Power 35 stores, what's the -- you mentioned, I think, there's a 300 basis point delta relative to where they were [playing], I think, a year ago.

Just any color.

Are they comping negative?

And is the plan for them to comp positive as you go to the fourth quarter?

Just any color about where they really are and where they really stand right now.

Yes.

That metric was versus the delta of the chain, and then that's really how we are looking at it, is when we look at -- when they were performing the best, they were performing at several percentage points above the balance of the chain.

We have closed the gap to where they were, so they're now pretty much riding even with the chain, and we certainly have aspirations to bring them back to a leadership position.

As I mentioned earlier, we're seeing the back half projected right now at a very slight positive comp, so that's pretty much a chain-wide expectation.

The next question will come from Kelly Chen of Telsey Advisory.

Jared, I think you previously had talked about EPS for the full year being a 40-60 split.

And obviously, the kind of seems like a lot has changed.

But could just give us a little bit more color on what your expectation is?

What drove the upside here in the second quarter?

Where there any shifts in timing for expenses?

Or anything we should be aware of on that front?

Yes.

We kind of alluded to some of what overperformed, and that really was given our position to chase and then our successful attempts in doing so, we really did see that reg price selling come in at a nice, healthy rate, and that drove a better overall margin.

So that more than offset some shipping headwinds that we saw.

And then as we mentioned earlier, we also had to take some charges related to Ebuys.

As I mentioned a little bit earlier, in the back half, we're still expecting some headwinds versus LY, but those should get better than what we saw in the first half.

And that's primarily going to be a split between additional Ebuys charges and then some markdowns on the heavy-up with marketing.

If in fact, however, we do execute on that ability to chase and we see some of the same type of traction we saw in the second half -- or, excuse me, in second quarter, we think there's some upside from there.

So we are conservatively positioned.

It is not 40-60 any longer, as you mentioned.

Obviously, when you do the math, we're closer to our more historical average of almost an even split, but that's what we think is the best projection right now.

Great.

And then, Roger, in the release this morning, you talked a little bit about retail consolidation.

I was wondering if you could talk through a little bit more about what happens in the marketplace.

How it impacts DSW in the near term as well as the long term.

Specifically, when doors are closing, do you see increased pressure on pricing and promotions?

You talked, I think, a little bit about the marketing.

So are you doing proactive actions to try to gain share?

And then within that, could you just update us on your total market share in the U.S. and just kind of thoughts on where you think that could go?

Kelly, I think, as I mentioned on the call, the -- we really have 3 things we are going after when we talk about what's happening in the marketplace.

We -- I talked a little bit about the leveraging, the warehouse capabilities that we have and the Lab store we have in Columbus.

I mean, the fact that we have -- we're utilizing less than 20% of that capacity, we've got to get more choices in our stores.

We've got to get more sizes.

We've got to accelerate our speed to customer.

And being within 20 miles of 70% of the population of our customer base, we've got to use that to our advantage.

And I think the new fixturing packages we're working on are going to allow us to accomplish that but also allow us to sell an in-store and in-warehouse experience that aligns with what you see digitally.

And that's really the first thing.

The second is rewards.

And you had mentioned competing on price or price adjustments.

We monitor day in and day out where we sit from a pricing perspective, and we feel very good about where we're positioned.

Our true value proposition is more than just the price you see on a sticker or on the case [talker].

It's also the rewards relationship we have.

It's the birthday cert that you get.

It's the -- all of the different opportunities that you have to engage with our brand.

But it is about creating experiences that differentiate DSW from the rest.

So how do we take these incredible warehouses?

How do we build experiences through our rewards program that you cannot get elsewhere?

And so for us, as we think about growing market share, when you combine those 2 things with a technology platform that is unlike anything else that's out in the marketplace today, that is how we will grow market share.

It's not about price.

It's not about competing on saying every single day you can get the best price here.

For us, it's about creating a unique and differentiated experience that emotionally connects with our customer, that allows him or her to inspire self-expression.

That is how we will grab market share.

As far as what our market share position is, we do not disclose that, but we have been growing market share over the last couple of years.

The vast majority of that has been through expansion of our warehouses, but we think if we're accomplishing our mission, we will grow market share.

The next question comes from Dylan Carden of William Blair.

Just ahead of some of the initiatives you're talking about in loyalty, can you just speak to the trends that you're seeing there sort of currently, whether or not kid's is bringing in a new member?

Any sort of reengagement of fallen-off members?

Well, it's a great question.

So we are really, really excited about our progress with kid's.

It is doing exactly what we thought it would do, which is attract that customer into our business that was walking away from us when they would have a child -- a newborn child or an infant, whatever, in their household.

And that's what we're seeing.

So it's going to create an opportunity for us to keep that existing adult customer but also introduce kids to our mix.

So we're really happy with the results.

It has exceeded our expectations.

And again, we're trying to grow that more aggressively into more warehouses.

And as far as sort of engaging them or the flow-through to the loyalty program, is there any comment you can make there?

Or is it too early?

I would say it's too early, is what I would say, Dylan.

And then reengagement of -- for sort of members that maybe hadn't been spending as much historically, is there any comment there to make?

Or is it...

No.

I mean, we continue to run different programs to go after people who have either walked away from our brand or have not engaged with us in the last 12 to 24 months.

But in general, again, we are very focused on leveraging the data we have in that program to drive you into our warehouse or through one of our digital experiences.

I would add, Dylan, on there that we are seeing a similar usage rate and acquisition rate.

So our new member sign-ons, even with these customers, continue to be the same.

And then our number of sales as a percentage of our reward -- or our -- reward sales as a percentage of our total sales continue to be in that high 90%.

So we continue to capture that data, as Roger mentioned, whether they be a new customer or a lapsed one coming back.

The next question comes from Camilo Lyon of Canaccord Genuity.

This is Pallav Saini on for Camilo.

My first question is how are you progressing on your speed-to-market initiative with your vendors?

How are the vendors responding to it?

And are you happy with the progress that you are seeing there?

We're not going to get into detailed conversations around our work we're doing with our vendor partners.

I would tell you there are a couple that we are working with that we're very happy with, but we're going to continue to push them to operate at a tempo that allows us to be ahead of the market, and that will create disruption, we think, for everybody.

Great.

And the second question is, you commented in the release that you're building the infrastructure to mobilize inventory across all of your brands.

Can you elaborate on that comment?

What exactly do you mean by that?

Sure.

There are multiple pieces do that.

But one of the large ones that Roger mentioned on his part of the call was an initiative we're doing.

We're codeveloping a proprietary software package that will allow us to have full visibility all the way through the channels.

So inventory coming into a store, inventory that is moving from one store to another.

It also will allow the customer experience, what they can see online, to match what's the in-store experience.

When an associate is engaging with them, they can look and see what have they bought, from where did they buy it and what's on their wish list, all the type of stuff.

So that's a big cornerstone to part of that investment as well as the things that we've done already.

I mean, some -- our site -- or our website redesign, the work that we're doing on the Ebuys website to be able to look at the different inventory that's sitting out there at their warehouses.

So there's a lot of work streams going on, and we're very excited about that progress.

I think an important thing that we continue to discuss with our vendor partners, we are a brand of brands.

We are here to lift up our brand -- or our vendor partners.

And being able to offer them options on how obviously they can sell inline goods, they can sell special makeup, but also how we can help them liquidate closeout inventory in a unique and different way through all of the different offerings we have for the vendor community.

Those are things we want to be able to have built out so that we can be a one-stop shop for them.

And let's create a relationship with them where they would have no reason to go to anyone else for their ability to connect with a customer.

The next question comes from Patrick McKeever of MKM Partners.

Just on kid's again.

What -- you've got kid's now in 60% of the stores and planning -- you're planning to roll it out to an additional 100 stores in the spring of next year.

What -- where have you settled in, in terms of the amount of square footage that you're putting -- that you're devoting to kid's footwear?

And what about just the number of SKUs?

Yes, I think what I would tell you is the size of the box or the size of the space we need for them really does vary based on market and the warehouse in which we are placing it.

So there -- I wouldn't say there's a real consistency to that.

I think from a choice count standpoint, we're seeing that digitally -- I love the fact that, I was just looking at this yesterday, our digital penetration in kid's has outpaced our warehouse penetration, meaning by bringing it to the warehouse where they can see it, it's driving people to our website, where we are able to explode the assortment in a meaningful way.

So again, it's the magic of what everyone calls omnichannel.

For us, that's just retail.

And so I feel really good about the growth in choice count and the way in which we are managing it in the store.

It's not something that I think day in and day out will become a larger portion of our physical footprint, but I think it will continue to grow as a percentage of our sales.

And then did kid's have a meaningful impact on the comp in the quarter, a sequential improvement?

Yes, it did.

Jared?

Yes is the answer.

I would agree.

We don't break that out, but it obviously was meaningful.

Yes.

And then just a second question on your stores in some of the bigger tourist markets like New York and Miami and San Francisco.

Anything notable there?

I know that has come up in the past.

I mean, I think Q2, with -- along with some of the department stores, have -- had seen some weakness in those stores.

Any change?

What I would say, and I would echo what Roger said earlier and in a couple of the questions I had answered, those stores tend to be where you find our power stores.

And the work and the focus that we're putting into those power stores certainly paid results.

And I think if there was pressure from the tourist side, we probably experienced that along with everyone else, but our focus has allowed those power stores to overperform and close the gap.

Your next question comes from Scott Krasik of Buckingham Research Group.

So one more short term and one longer term.

I guess just sort of near term, you're changing your outlook for the back half from maybe flat to down, comp trends to flat to up.

I'm just trying to understand exactly what changed for you to make that change.

And then one follow-up.

Sure.

What I would say is the -- our performance in the second quarter and the open-to-buy, the liquidity that we're keeping in the back half, gives us confidence that our execution plan can be -- could be and should be maintained.

But we are cautiously hedging with the additional marketing that I had mentioned before, and that may come with markdowns.

So that's kind of what -- we've put all into the hopper and shook out where our guidance is.

Okay.

And then just when you make all of the changes, you implement some of the new store design fixturing, Roger, maybe can you talk about -- I think you have 2,000 styles, roughly, in the stores today.

By the end of all of these changes, what -- how many styles will you have?

What percentage do you think will be men's, women's and kid's, athletic versus nonathletic?

Yes.

Scott, I'm not going to get into the assortment mix, but what I can share is in the Lab store, we went from roughly around 30,000 units to close to 50,000 units that were available to the consumer.

And what we are excited about is that every metric by which you would evaluate one of your warehouses have seen improvement, and that's a positive thing.

And that is because, again, think about when you go from 30,000 to 50,000.

One, you're adding some choices, but you're also getting depth behind your key items.

The product that would have been sitting in a fulfillment center, that the only way it would have been visible would have been digitally, you're actually getting that in front of the consumer.

So it's -- the experience has driven traffic.

It's driven conversion.

It's driven AUR, UPT, all of those metrics.

So again, it's not often that you see that kind of result.

That -- but that does not mean that's our expectation going forward.

It's one location and we've got to get at some more doors to be able to really test it is what I would say.

Okay.

And if I could just sneak one last one in.

And any changes to either your competitive retailers or the online pure play in terms of free shipping, free returns, what's expected?

No, Scott, nothing that I could point to, but I would tell you we feel pretty good about where we're positioned with all of that.

The next question comes from Christian Buss of Crédit Suisse.

Yes.

And could you talk a little bit about how the Ebuys is being integrated to buying organization?

Can you provide an update on the new buying system, the new platform, how that is up and running and what kind of progress you've made there?

I'm sorry, Chris, and you cut out.

I think the question, from what I caught at the end, was the -- about our buying systems and the things that we implemented it from.

Is that correct?

Yes.

And also how Ebuys is being integrated into your buy.

Oh, okay, okay.

Yes.

So I think we talked about this, gosh, probably a year ago about the distraction, that we felt a lot of the work we had done, which was necessary work around planning and assortment planning tools, had distracted our merchants -- merchant and planning organizations.

And we have really stabilized that.

I love the fact that Debbie went out and recruited, I will tell you, a world-class team in planning and allocation space.

I'm really proud of the team we have there.

And we have stopped touching those systems, meaning we're not tinkering with them anymore and we're actually using them.

So that, I think, has created a real focus for the team and eliminated a lot of distractions for Debbie and her team.

So feel really good about the progress we've made there.

As far as Ebuys, right now what I would tell you is the work we're doing there is us learning the business, understanding how we can use it most effectively to drive business for all of our brands, how we can use it to engage differently with the vendor community.

But there's not a whole lot of work right now we're doing, I would say, to get them onto our buying systems.

Frankly, they're 2 completely different types of businesses.

And when I flash back to 11 years ago when I started here and we were using Excel to plan the business because the vast majority of what we were doing was closeouts and you couldn't plan it, that's the way we operated Ebuys.

So I think -- I don't envision us going down that path with Ebuys any time in the near term.

Your next question comes from Jay Sole of Morgan Stanley.

Great.

Roger, those are some really interesting comments you made about the differentiator that omnichannel is at the top of the call.

And so I was just wondering if you can dig into it and maybe offer some -- really some statistics and quantify how much of a differentiator it is.

Because the question really is, is it just going to slow the transition to pure online selling?

Or can it really stop it?

And can you get to a point where omnichannel and your store base, and like you said, 20% -- 70% is within 20 miles, can it really be something that really is something that the online guys can't really match going forward once you really maximize the true potential of omnichannel?

Yes, Jay, I think the answer to that question is yes.

I think it is something that if you're a pure play, you cannot match.

And I think that's why you see many of the pure plays getting into the space where they have a location that they can open to the consumer day in and day out.

So I'm proud of the fact our organization -- and I forget who it was that recognized us as the #1 omnichannel retailer in the country.

I would tell you, we do not use that term here because it is just retail.

It is about our customer.

And when you have 70% of all of the engagement of people who come to a store or 70% of them engaging with you digitally as part of their experience, you can't think of it as stores versus dot-com.

That's just not the way in which we operate as a business.

So I think it is a huge competitive advantage for us.

And I think we've demonstrated with the work we've been doing and that roughly 50% to 60% of our digital demand is being fulfilled from a -- what has been historically called a brick-and-mortar location, that we have the ability to buy online and pick up, buy online and ship to, all of those things that we have spent the last several years building out, we're making those come to life in a meaningful way.

And when you add into that a whole new customer-facing technology that's in the physical warehouse that will allow that consumer to find their product more efficiently, to pick up their product more efficiently and, more importantly, give our associates information about that customer, we think the combination of those things, it is a clear differentiator.

And we've got to execute against that and make that come to life, but that's where we're playing.

We're leveraging the fact that, you know what, we're proud of the fact that we have warehouses across this country, and layering on a digital platform on top that is unique and different.

We think that differentiates our brand.

If, Roger, I can just follow up because, like you said, 70% of your consumers are engaging online.

And so if they're at home and they're researching what to buy, can you just take us through the mind of the consumer, how they think that makes them say, you know what, rather than just by this here, or if they're, I'm going to get my car and I'm going to go somewhere and I'm going to buy it?

And how do you feel confident that that's going to remain the same whether -- rather than maybe 5 years from now or 2 years from now, whatever the case may be, people just say, "Well, I'm pretty confident in my size.

I'm just confident in the delivery.

I'm just going to buy here, and I'm going to buy online through dsw.com and I really don't need to go to a store anymore?"

So I think, Jay, this is my opinion.

Other than the roughly 16,000 associates we have in this business, the second-largest asset we have is the data infrastructure on 25 million rewards members.

So if there's anyone that should be able to read how that customer is reacting, how they're engaging, how they're using digital to influence their brick-and-mortar experience or vice versa, it's us.

And so I guess my answer to that would be, we have all the data that we would need to understand what that customer is looking for and how we position ourselves to meet that demand.

Again, that's on us to execute against that.

But a lot of people get credit for their ability to play in this space in data.

We have our foundation.

I mean, it's genius.

25 years ago, whoever's idea it was, kudos to them.

But we started a rewards program before anyone had that in this space, and we have all this data.

We've got to figure out how we leverage it more efficiently and effectively to meet that customer's demand so that we know in advance where they're headed.

That's what I would tell you, Jay.

Interesting.

So it sounds like you're saying the question isn't stores versus online.

It's really about who owns that customer relationship.

And you're saying with the data that you have and the multiple ways you have of fulfilling customer needs, you can do it better than some of your -- some of the online pure-play competition that everybody talks about?

I absolutely believe that.

And this concludes our question-and-answer session.

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

Thank you.

Thanks, everyone, for all of the questions.

And again, to our associates listening on the call, let's keep the momentum going and let's have a great fall season.

Thank you, and everybody have a great day.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.

Have a great day.