Designer Brands Inc (DBI) 2017 Q3 法說會逐字稿

Hello, and welcome to DSW's Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I now will turn the conference over to Christina Cheng.

Ms. Cheng, please go ahead.

Thank you.

Good morning, and welcome to DSW's Third Quarter Conference Call.

Earlier today, we issued a press release detailing the results of operations for the 13-week period ended October 28, 2017.

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

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

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

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

Let me turn the call over to Roger.

Thanks, Christina, and good morning.

I'm encouraged by our progress on the initiatives we are pursuing to differentiate and grow the DSW brand.

Our third quarter results give us confidence, we are on the right track.

Let me share a few highlights.

Our DSW merchandising team drove a low single-digit comparable sales increase in footwear despite challenging weather conditions across the entire country.

Our Power stores are significantly outpacing the balance of our chain.

Our DSW kids sales exceeded our expectations.

Our Lab store in Columbus continues to post robust results that validate our new store design and we started testing new services as part of the relaunch of DSW's loyalty program.

At Ebuys, we completed the consolidation of the new fulfillment center and continued to clear out a sizable amount of slow-moving inventory.

This has pressured their performance during the quarter and based on our results to date, we've tempered our long-term expectations for Ebuys.

As such, we've reduced the carrying value of goodwill and intangible assets as well as the remaining earnout liability.

Let me turn the floor over to Jared to discuss our third quarter performance and our outlook for the remainder of the year.

Thanks, Roger, and good morning.

Third quarter revenues increased by 2% to $708 million, driven by flat comparable sales at the DSW segment.

Our third quarter performance brings our year-to-date top line to $2.1 billion, a 2% increase with modest store expansion and acquisition revenue partially offsetting a 1% comp decline and lower ABG revenues from our planned exit at Gordmans.

Third quarter reported earnings of $0.05 per share includes net noncash charges totaling $0.40, primarily related to the impairment of goodwill and intangibles associated with Ebuys.

Excluding these GAAP items, adjusted earnings were $0.45 per share compared to $0.51 per share last year.

Year-to-date adjusted earnings were $1.14 per share compared to last year's $1.26 per share.

The rest of our comments will refer to adjusted results.

Let's start with the Designer Shoe Warehouse segment, where sales increased by 2% on flattish comps.

Comp exclude our 2 locations in Puerto Rico, which remained closed due to Hurricane Maria.

We opened 6 new warehouses and closed 2 locations for a total of 514 warehouses at the end of the quarter.

Footwear comps increased in the low single-digit range.

Accessories declined in the low teens.

Monthly comps were consistent with softness during the middle of the quarter as temperatures turned unseasonably warm during our important September and October boot-selling period.

With the onset of more seasonal conditions, sales have improved starting with the back half of October.

While we were disappointed with this slowdown, our conservative-boot position and inventory liquidity gave us flexibility to manage receipts and end the quarter at 3% per square foot below last year.

Successive hurricanes negatively impacted comps by approximately 50 to 60 basis points.

Outside of Puerto Rico, we fortunately incurred minimal property damage and our emergency readiness program enabled our field leadership team to account for all of our associates within the first 24 hours of the various storms.

We estimate the net impact of weather-related disruptions amounted to $0.05 per share for the quarter.

Weather posed some challenges during the quarter, we were encouraged with the progress in several of our key growth initiatives.

For the second quarter in a row, we achieved our target for the women's business, with demand better balanced between our women's athletic and nonathletic assortments.

We started to chase receipts in women's footwear and are pleased with the results of our seasonal transition strategy.

Our digital demand continued to accelerate with a 26% growth rate.

Our recent site redesign, growth in dropship and enhancements to inventory mobility drove a significant increase in online conversion and set new records for digital demand this quarter.

In addition, demand on our mobile site grew at a very strong rate, with the number of active monthly app users triple to last year.

After closing the gap with the balance of the chain, performance in our Power 35 group exceeded the balance of the chain this quarter.

Given the disproportionate importance of our Power 35 group, we are excited with these results and we'll remain keenly focused on driving this momentum.

Our kids business exceeded plan and delivered strong positive comps even as we anniversaried our Phase 1 rollout this year.

Demand across all categories was strong, from both new and existing customers.

Currently 60% of our warehouses have DSW kids, and we plan to roll this to the balance of the chain by back-to-school 2018.

Turning to the ABG group, comps increased by 1% against last year's 5% decline.

Revenues declined by 14% in Q3 and 7% year-to-date, driven by the planned exit at Gordmans.

We opened 4 new locations and closed 3 locations for a total of 351 stores this quarter.

Hurricane activity impacted ABG group sales by 80 basis points.

Even while adding incremental markdowns to keep inventories clean and recapture lost sales, we are encouraged with the gross profit performance this quarter.

We will continue to operate the remaining 58 Gordmans locations that were acquired by Stage Stores through the end of the year and expect to wind down operations at the end of the year.

Turning to inorganic growth.

Let me begin with a discussion around Ebuys.

Revenue from Ebuys increased by 6% this quarter and 17% year-to-date.

Gross profit, however, was negative for the quarter as we took substantial markdowns to move through sizable amounts of slow-moving inventories.

During the last 18 months, we have encountered challenges in sustainably sourcing goods at the right cost that support the economics of this legacy business model.

As such, we've revised our growth expectations assumed at the time of acquisition and have moderated our go-forward expectations for the business.

This resulted in net noncash impairment of $53 million, which impairs almost all of the remaining goodwill, intangible assets and contingent consideration liability.

We still believe Ebuys' experience and expertise operating in multiple marketplaces simultaneously and serving customers across the globe is valuable and unique.

To that end, we've installed new leadership at Ebuys and are deeply evaluating this model go forward and how it best fits within DSW's growth strategy while simultaneously aiming to shore up the operating losses of this business.

Finally, we recorded $1.6 million of income from equity investments in Town Shoes this quarter.

We have a total of 24 DSW Canada warehouses in addition to 157 locations that operate under the Town Shoes, Shoe Company and Shoe Warehouse banners.

Let me share more details about our Q3 financial performance for the total company.

Total company gross margin came in generally as expected, 130 basis points lower than last year, with Ebuys accounting for 45 basis points of this decline.

Our gross margin performance was driven largely by higher marketing promotions this fall, most of which was planned and to a lesser extent, shipping expenses from greater omnichannel fulfillment in dropship.

We invested in more marketing events this quarter to capture market share and make up lost ground due to weather disruptions during the quarter.

This position contrasts to our strategy last year, which focused on maximizing profitability with a significant pullback in promotional activities, ultimately driving 145 basis point increase in gross margin at our core business.

Our Q3 marketing campaign activated more new, existing and last members and drove a mid-single-digit increase in transactions compared to the low single-digit growth this past spring.

We leveraged occupancy expenses by 10 basis points while DCFC expenses remained flat to last year.

On a year-to-date basis, gross margin was lower by 85 basis points due to the incremental clearance rotation during the first quarter, our elevated marketing this fall, shipping cost and the ongoing integration of Ebuys.

Operating expenses increased 4% due to selling, technology expenses and the planned investment in marketing.

As a percentage of sales, our SG&A rate delevered by 50 basis points.

Year-to-date, our operating expenses increased by 3%, driven by an increase in marketing and IT expenses, partially offset by benefits from our cost-savings initiative.

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

Our inventory positioning gave us a cushion to absorb the choppiness from weather this season.

Our open-to-buy capacity remains liquid, which will position us to better react to buy-now-wear-now demand and chase goods with less markdown risk.

Our experience tells us, we are entering a new fashion cycle, and we are distorting our inventories to the appropriate market opportunities go forward.

Cash and cash equivalents increased to $330 million.

CapEx spending of $13 million includes $5 million from new warehouses and the balance for IT, supply chain and other business projects.

We are on track to spend approximately $75 million in capital expenditures this year, which brings us back to 2011 levels.

We bought back 500,000 shares for $9 million this quarter and have $524 million remaining on our share repurchase authorization.

Since 2013, we have returned over $600 million to shareholders in the form of dividends and share repurchases.

Finally, let me share our perspective on our 2017 outlook.

While we experienced approximately $0.05 of EPS impact related to weather disruptions, the recent traction we've seen in boots with the advent of more seasonal weather and our chase opportunity in women's, gives us confidence we can earn back much of that miss.

On the other hand, our revised projection for Ebuys represents an incremental $0.05 drag on earnings that we don't believe we can recover during the fourth quarter.

As such, we've revised our full year guidance by $0.05 to $1.40 to $1.45 per share, excluding nonrecurring items.

Our guidance assumes full year revenue growth in the 3% to 4% range with flat comps.

This is unchanged from previous guidance, with fourth quarter comps in the flat to up low single digits.

We expect 9 to 11 net openings this year.

Full year gross margin rate is expected to be lower than last year.

This is also unchanged from our previous guidance.

We've added marketing events in the fourth quarter to support our top line expectations during the holiday selling season, and we expect favorable occupancy leverage from the 53rd week to result in flattish fourth quarter gross margin and a 60 basis point lower for the full year.

Long term, we continue to optimize markdowns and shipping expenses, leverage our buying power and maximize profitability as we drive faster inventory turns.

Full year operating expenses are projected to increase in the low single-digit range, with fourth quarter SG&A in the mid-single-digit range.

We anticipate a tax rate of approximately 39% and shares outstanding of 81 million shares for the full year.

As always, our guidance does not assume any share repurchase activity.

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

Thanks, Jared.

Last quarter, we shared DSW's new mission to inspire self-expression, with external audiences such as the Street, our vendor partners in the retail industry.

Our comprehensive end-to-end distribution capabilities across all 5 of our brands, make DSW one of the few growth platforms in a tough retail environment.

We've begun to showcase the full scope of our integrated enterprise to our vendor community and are actively working to identify ways we can elevate their brand and reach a broader market through our retail portfolio.

Today, I'd like to provide an update on progress we have made on 3 strategies that support our mission.

First, as we mentioned last quarter, we're launching a new loyalty program called DSW's Rewards VIP, which will offer new services and perks to over 25 million rewards members.

Apart from normal purchase activity, members can earn points by downloading our app, writing reviews or even making a shoe donation.

Premier members will be provided early access to new trends and product releases ahead of other customers.

We are also excited to be introducing new services as part of the differentiated experience.

These include elevated nail services, custom-made insoles that provide comfort and cushioning at accessible prices, repair and refurbishing of shoes and handbags, shoe storage and rental.

With these offerings, we will create an elevated value proposition to fulfill our customers' complementary needs.

Our voice of the consumer research has uncovered a very strong interest in these services, and we believe this new offering can give consumers a new read and to visit DSW, drive traffic and aid new customer acquisition.

We are gaining important insights and learnings while these services are under development, and we will keep you posted on our progress.

Second, we continue to be pleased with our new store design, which brings various elements of DSW's warehouse heritage to life in the digital age.

Our Lab store in Columbus continues to outperform expectations and remains one of our top performing warehouses throughout the chain.

We will pilot our new store design and fixture package at 4 additional locations early next year.

We believe this new store design has the potential to unlock significant productivity and drive sales out of the existing box with an expanded assortment, trend and size distortions and new service offerings that will make DSW our customers' top of mind footwear destination.

Finally, we continue to develop our future point-of-sale technology, which will improve associate productivity in store by reducing the demands of day-to-day tasking and creating more capacity for proactive customer engagement.

This will allow DSW to operate our physical network more efficiently as both a warehouse fulfillment center and a unique and differentiated selling floor.

We believe all 3 of these strategies are critical to our long-term success.

Now turning to Town Shoes.

We kicked off the strategic planning process with senior management and believe Town has significant opportunities to expand the DSW brand in Canada through both the brick-and-mortar warehouses and digital growth.

We started to leverage shared services and have identified digital and supply chain synergies, we can unlock with DSW's existing capabilities.

In addition, we're at the early stage of exploring how we tap into Town's expertise in serving family footwear consumers in smaller U.S. markets.

We will share more details after we close the acquisition next year.

Before we open it up for Q&A, I'm going to thank our teams and customers for their generous support provided to communities affected by the recent natural disasters.

Together, our associates and rewards members raised funds that enabled DSW to contribute $0.25 million to the Red Cross in the industry's Two Ten Foundation for Hurricane Relief.

We are proud of this spirit of generosity and the hard work that went into keeping our associates safe and delivering a solid performance this quarter.

In closing, we've made tremendous progress in repositioning our business for long-term growth.

As the retail climate grows ever more challenging, we must remain focused on executing our vision.

The success we are having in our long-term growth initiatives, gives us confidence we are on the right track, and I look forward to reporting on our progress after the holiday season.

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

(Operator Instructions) And the first question comes from Steve Marotta with CL King & Associates.

Just one question.

First of all, you mentioned a new fashion cycle in the middle of the call, can you go through that a little bit and what you're seeing, obviously, without disclosing anything that would be competitively disadvantageous?

Sure, Steve.

This is Jared.

What -- I think you can see this across much of the apparel landscape right now where you're seeing a lot of resurgence back towards nonathletic, a denim resurgence by far and, kind of, a little bit more dressed up type of look than what we had seen, which was very heavy, yoga pants and very casual lifestyle.

So when you see the comps that we're seeing at Abercrombie and even some of the comments from Gap and things like that, that's what we're pointing to at that point.

I understand.

And you also mentioned that the test store rollout, there will be 4 additional earlier in 2018.

Can you talk about how quickly you might be able to roll that out assuming that these 4 go as anticipated?

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

I think the first half of next year is our goal for the 4. And then we've got to take some time to read it.

We've had great results here in our Lab store, but honestly, we are all in there every single day.

So we want to make certain this is something we can take to markets where we're not all engaged in, in every day and we see the same kind of results, and then we have the ability to move pretty quickly: one, because we have the capital but also operationally, we've proven over time that we know how to remodel and open stores quickly when we need to.

Okay.

Lastly, can you please quantify exactly how much the 53rd week is in sales and EPS?

If you did that, my apologies, I didn't get it.

Yes.

Steve, we typically haven't given that specificity.

What we have said is that if you take the fourth quarter and generally divide that by 13, you can assume it's relatively average there.

So -- and a pretty similar flow-through rate other than we will see some benefit on some of our fixed cost leverage that comes through there.

And the next question comes from Jeff Van Sinderen with B. Riley FBR.

Maybe you can just give us a sense of the penetration in athletic and athleisure this year versus the same time last year.

And given the strength of that category, although it sounds like it's shifting a little bit with the fashion cycle, I'm just wondering how you're planning that for spring.

Yes.

I think, Jeff, we have continued to see growth there.

And I don't think we've disclosed the exact penetration percentage, did we?

Yes.

We said it was around 1/3.

And that's -- we're there again for the third quarter.

That's a few ticks higher, a few percentage points higher than where we were last year.

But we're about 1/3 of the penetration.

But as we head into next year, we think there is continued growth here: one, because we are way under penetrated to market share compared to the balance of our assortment.

So we believe there is still headroom there for us.

Okay, good.

And then you mentioned the kids business being really strong.

Just wondering if there is anything more you can share on how -- I guess, the penetration in that business, where that is now and then as you're growing that next year, how do you think about that longer term as sort of how big that could become as a part of your overall business?

We think so highly of it that we are accelerating the next phase.

So our goal is maybe with the exception of 1 or 2 doors to have this in the chain for back-to-school.

And in all honesty, that was not our roadmap when we started this journey.

So we feel really good about the direction, but as far as penetration, I think it provides an incredible opportunity for us to build a relationship with our consumer in a different way than we have in the past.

And we shared this before but when we see a customer start their journey with DSW, when they're 18 to 20 years old and over their lifetime, we see a significant dip in adult footwear purchases in that window of time when they bring children into this world.

And so yes, this is about growing kids but it's also about keeping that consumer throughout their entire lifetime.

And that's the work that we're seeing kids paying off for us.

I would add to that.

We are seeing the hypothesis play out and we shared this last quarter where we have stores that have kids and we have not removed adult footwear to fund that space.

We are seeing an overall lift to the store because what Roger said, they are continuing to buy not just the kids product but the adult product.

And that's the basis that we're using for the rollout.

I will also mention, we were very excited to see with the anniversary of our Phase 1 rollout, those same stores and kids product were comping in the high teens with that kids' category.

So we think there's a maturity curve there similar to new stores and there's more upside even for the stores that are lapping.

And the next question comes from Dylan Carden with William Blair.

Can you just speak to the weakness in accessories and remind me whether or not that category is subject to service and inventory management and merchandising strategy that you put in place for footwear?

Yes.

Our real challenge in accessories, of late, has been around the handbag, small leather good categories.

And the hosiery, sock kind of area we're actually very pleased with the kind of results we're getting.

So there's some work that we have to do.

As we mentioned on the last call, we've made some organizational changes there.

We do not see this turning around until the first half of next year.

So there's some work that we are doing to improve the direction.

But a lot of it is -- it's in that handbag area where we're really experiencing the softness.

Okay, great.

And then just unpacking sort of the weakness at Ebuys in the forward outlook being sort of dimmed on questions on scalability it sounds like.

Is there not a capacity there to sort of fund that or sort of fuel that business with DSW product?

Is that something that you're not taking out a more dim view on.

That's exactly what we're doing.

So we're trying to figure out ways that we can take goods, today we are selling not just the DSW but Town, Shoe Company, Shoe Warehouse, all of our other brands that we engage with day in and day out and how do we liquidate that excess inventory or inventory that's at the end of its life cycle through the marketplaces.

And so we're trying to focus our efforts there rather than going out and taking large inventory risks the way that we had in the first half.

Dylan, and I would add, I'm glad you brought up those 2 subjects.

When I look at the quarter and kind of assess what was working and what we had challenges with, and I can point to the fact, as Roger mentioned, our footwear comps positive, biggest obviously core piece of what we do.

Comp positive, the strategic initiatives that we're counting on for our future strategic growth as Roger mentioned in his comments, all performed at or better than our expectations.

We've got 2 areas that are our biggest challenges right now and that's accessories and the Ebuys.

And with the accessories, as you know, we have a new GMM that started a few months ago, and she's tackling that head-on.

And with Ebuys, as we mentioned, we've taken some medicine on the balance sheet and we're trying to rightsize that business and get it back to how it fits into the overall DSW Inc.

portfolio.

So kind of a tale of two cities but I'm pretty excited for what's going on in the core business on which is the footwear side.

And the next question comes from Paul Trussell with Deutsche Bank.

This is Damon Polistina in for Paul.

So you spoke with -- about the cold weather with the boot business.

Could you just speak to how improvement you see moving into 4Q and do you see the, kind of, more temperate weather, colder weather improving in that business and besides that, what are the risks you see for growth prospects for 4Q and moving into the next year?

That's a great question.

So for us in our business, that September time period, that is really our holiday.

I mean that's when we really make progress.

And in the early part of August and the late part of October when weather was more seasonable, that became something that was really driving our business.

So we actually had positive comps and we saw real strong performance with the boot category.

And that's where we have opportunity as the weather continues to remain the way that it is right now, that creates upside for us in fourth quarter compared to how we performed in third quarter.

When we had the very warm weather that hit in that September -- late September, early October time period, we were running significant negative comps.

And it was sort of a tale of two cities.

Throughout the quarter, each month was relatively flat.

But embedded within those months, there was real volatility that we could see clearly day in and day out that was driven by the weather.

And the next question comes from Patrick McKeever with MKM Partners.

Just a question on the all the competitive -- the competitor store closings, both in the department store space but also some in specialty footwear.

I'm wondering, if you think that had much of an impact one way or the other on sales in third quarter, either on the negative side with some of the liquidation sales or perhaps on the positive side with some of the store closures.

And just where you think we are in the cycle there and how are you thinking about market share opportunity as fewer stores -- as there are fewer stores out there.

And then my second question is also on the boot business and just how much of the business right now would you say is sensitive to the weather and how much is more fashion-driven.

And on the fashion side, what are some of the call outs in terms of trends?

Patrick, I'll start with the competitive landscape.

I think we've been very transparent in our view, and we could use the analogy of ice melting.

That ice, we think the temperature continues to get turned up and people are being pressured and are taking actions that I do think impacts all of retail, but we continue to see that we are grabbing market share and the footwear category, at least the data that we've seen has been challenged and has not been growing over the last, I would say, rolling 12 months, but yet, we have.

And so we feel pretty good about our direction.

I will tell you though for us, it comes back to our mission, vision and strategy and how do we leverage the warehouse capabilities that our brand offers that others do not have the capability to deliver on.

How do we leverage our rewards program with our relaunch that I mentioned in our opening comments?

And then how do we take customer-facing, kind of, technology that allows us to engage differently with the consumer.

If we're doing those things.

We believe in the direction we're headed with DSW, the brand, regardless of what's happening in the competitive landscape and our results, I think, demonstrate that for the core DSW brand.

So I think we feel pretty good about the direction we're headed with DSW.

From a boot perspective, boots is our largest category when you're in the fall season.

It is also our highest margin category.

And we've got to figure it out.

And that's the challenge we've given to our merchant team that despite the weather, you've still got to figure it out how we get sales and I think you're going to see us, perhaps, think differently about how we weatherproof, can't say that you can completely weatherproof the business but how do we engage differently during these periods, both in spring and fall, both on sandals and on boots in the fall season.

And next question comes with Scott Krasik with Buckingham Research Group.

This is Matt Gulmi on for Scott.

So core merchandise margins are down roughly 100 basis points.

Just want to know how that compares to your original expectations for the quarter and the drivers and then, I guess, what you expect for merch margins in 4Q.

Yes.

So, Matt, gross margin was down as I mentioned.

And I would say that was mostly in line with expectations.

We did have a little bit of reactionary add back of some marketing promotions when we saw the slowdown in that very important boot category.

So that came at somewhat of an incremental hit.

But overall, it is relatively in line with what we were expecting.

For fourth quarter, we are expecting merch margins to be down again a little bit to the last year, about probably half the decline that we saw in third quarter.

But we also are expecting some occupancy leverage as we have a 53rd week.

And so net-net, we're actually expecting flattish to slightly up gross margins for the fourth quarter.

Yes, Matt, I'll also share, I think, the margin challenged LY that we faced in Q3.

We had planned that because we wanted to get much more aggressive in communicating to consumers who had not shopped us in while.

So going out there with different campaigns, either direct mail or e-mail that would drive inactive customers back into the DSW brand.

I'm real happy with the results that we get out of that.

Now we took some margin hit for that but in Q3, we had our transactions actually increased in the mid-single-digit range.

So that was progress compared to where we were in Q2 or Q1.

So the investment we made in marketing is really what drove that challenge that we had in margin.

But again, to customers that had not been shopping us.

Okay, great.

And then another one, I guess you guys have kind of spoken to a more constructively on Ebuys business going forward.

Would you be able to comment on your long-term sales and margin expectations for the business?

Right now, we're still kind of assuming that, that things don't change dramatically for the fourth quarter.

So we've got it projected at relatively flattish sales for fourth quarter and basically flat gross -- no gross margin.

And so therefore, again a slight operating loss.

I think longer term, as Roger said, we are really trying to assess what the best way to fit them into the overall DSW Inc.

infrastructure and that can be something that looks different, feels different than what we're operating at right now.

So I feel a little uneasy trying to give really long-term views but we have moderated what we had originally assumed obviously, which is why we took the actions we did on the balance sheet.

Okay.

And if I could just squeeze in one more.

You guys have spoken to the boot category a little bit here.

Just wondering when the business wasn't performing as well in the beginning of October, late September, did you guys start to delay or cancel orders for 4Q?

And then kind of aside from these past few weeks at (inaudible) they've been doing good, what are your expectations for the back half of the quarter?

Matt, I think our team has reacted to the business appropriately.

Our inventory's positioned based on sort of our outlook for Q4 and as we head into Q1, I think in a very good place, not just in boots but across the business, which is why our inventory was down roughly 2.5% per square foot.

So I think our inventories are actually pretty clean and even in the boot category despite some of the challenges we had, we had kept open-to-buy.

So I think our team has done a really good job of managing through the inventory.

And we are more in chase mode now, is how would describe it, and I would prefer us to be in that mode than the other way around as we sit here today.

And the next question comes from Christopher Svezia with Wedbush.

Just a follow-up on that prior question.

When you talk, Roger, about being able to chase or in chase mode, can you maybe talk to what categories or classifications you're chasing into and does that still encompass boots?

Do you still have that given the turn in the weather and some capability, do you still have that capability to chase into that category for Q4 to build on maybe some comp and margin or not, maybe.

Just a little more color about where you're chasing and how that's thought as that pertains to your fourth quarter outlook.

I think, I would say there are 2 areas right now where we're trying to be more aggressive in how we chase in.

One would be boots, or as we head into spring, obviously, sandals because those seasonal categories, they are so critical to the success of our business and we are for the most part, one of the top 2 or 3 retailers for just about every major brand that plays in the boot category.

So when we can have a conversation with one of our vendor partners, we'd say, look, we have an opportunity to put more product in our warehouses, get us product.

They find ways to get us product.

So I like the fact that our merchant team is positioned to be able to chase.

So I'd say boots is one.

And then the other one is Kids.

I know we have left sales on the table in the kids category because it's outperformed our expectations.

I think also I have a little one at home and we've been challenged to find his size, so we've had lots of conversations with our merchants to make certain that we're buying in the kind of depth that ensures that we're able to keep that product there for our consumer.

And looking for closeouts in both of those categories, I think is an important part of what we're doing.

Okay.

And then just to clarify, is some of that thought process around chase factored into the flat to up low single digit comp for the fourth quarter?

Yes.

And when you think about the core women's business has delivered positive comps now for 2 consecutive quarters.

So I would say, it's not just the boot category.

It's everything that we're doing in women's.

We've had some success with like we haven't had in the last 3 years.

So all of those are going to be things that we're going to be able to pursue as we go through fourth to really drive comps.

Okay.

Final question just on Power 35, what's the -- I guess, what's the spread or the delta between, I guess, the overall DSW base and how those stores are performing and thought around Q4, if you can add some color about that.

Yes.

So if you replay back to where we were at this time 1 year ago, those Power doors were performing 4 to 5 points worse than the balance of chain.

And we really got after those stores.

And I would say it was really in 2 areas.

The first was around product.

We could see when we visited those locations that we did not have the kind of product that the customer in those markets were looking for on a regular basis.

And our merchant team went out and did one heck of a job and we've seen significant improvement in averaging at retail there.

That got us to the point where I would say this time -- or it was in second quarter, we started to see where they were about equal, and while all of that was going on, our field organization was also looking at the talent there and really upgrading talent within each of those locations, whether it was the manager or the entire teams that were in those locations.

And we took talent that was in non-Power doors and transferred them in to the Power doors to really get the best foot forward with the consumer.

And as we've headed through into third -- through third quarter and into fourth quarter, those locations are now performing 4 to 5 points better than the balance.

So it's essentially about a 10-point swing in a 12-month period of time.

It's exactly the challenge that we gave the team a year ago and they delivered.

And so when we talk about why are we feeling good about our core DSW business, it's because what we've learned with this Power 35 as we head into 2018?

We got to take that to the balance of our organization.

And so that's the approach we're going to be taking and turn on some additional marketing, which we also think will help us drive.

And the next question comes from Camilo Lyon with Canaccord Genuity.

A few questions here.

Just finishing up on the boot and the chase topic.

I think boots in general was planned down across the industry.

Clearly, that started off slowly.

Are you finding many partners that can fulfill that chase or are you kind of sticking to the key suppliers that have that ability to turn product quicker than most?

We have -- we found that there are vendors out there that have product that is available.

And again, because we hold a pretty strong position in the vendor community, we can make those phone calls and get product that might have been intended for someone that is much smaller, that the vendor will make the right decision and support us.

I mean that's the strength of being a #1 or #2 player with those brands and that's our expectation when we're working with our vendor partners.

Great.

And then just going back to the fashion shift comment, I thought that was an interesting comment.

Could you parse out where across your store base you're seeing that fashion shift unfold first?

Is this -- and I say that from a geographic perspective, is this more happening on the coasts and then starting to filter through to the middle of the country or are you seeing that from a broad-based perspective?

And, I guess, what types of areas within your footwear assortment are you impacting the most now?

Camillo, I'd say, really don't want to get into the geographic where it's located.

What I'd tell you, we're really seeing an impact within our Power doors.

And again, having a significant increase in our averaging and retail there is one indication.

But it's really across the nonathletic women's categories is where we are seeing strong results.

And we're excited about that because, frankly, that's not the result we've seen in the last 3 years.

And again, we're going to chase after that.

And by the way, margins tend to be a little bit better on the athletic segment.

We like that as well.

Right, perfect.

And then, I think, your services initiatives are very interesting.

I know it's very early days and I think you've only got them tested in your Lab store.

But from ones you can tell now, from what you like to share, can you talk about how you view any sort of incremental margins that you might see in the services fulfilled store and as we think about the longer-term potential of incorporating these services into your base, I'm assuming that you can't do everything to every store.

So is there a thought around as to how many of these services can really expand to the base and what kind of time frame you'd like to do this.

That's a great question.

So I want to start first with how we landed here.

And Camillo, we've really started with the voice of our customers.

So we went out to our rewards member base and said what are the additional services you would be looking for from a brand like DSW.

And that's where we landed on rental, repairs, storage orthotics.

And actually Sunday evening, we attended an event at our Lab Store where we opened or I should say getting ready to open our W Nail Bar.

So we'll have mani and pedi stations set up there that will be opening here in the next week or so.

And that is an exciting opportunity for us to see how does our consumer react and when you merge that into our rewards programs, so that your footwear purchases earns you essentially discounts or rewards points toward other services, we think that has an incredible upside to us.

And I think if you're familiar with that industry at all, it operates at different margin rates in a very favorable way to what you do in footwear is what I would share with you.

On the others, I think it's too early to highlight exactly what the financials look like.

Right now, we're trying to operationally figure out how we can execute it and we've started with our associate base first and then in early December, we will actually take it more to the public-facing consumer rather than just internally.

But we think all of those services can provide a different reason for you to shop DSW the brand than you've historically thought of DSW.

And the next question comes from Sam Poser with Susquehanna.

I guess my first question is about Ebuys, just to, I guess, beat this one a little bit more.

How long -- I mean, you talk about your core business being really good -- starting to improve here.

At what point do you decide it may have been a mistake?

It isn't a core competency kind of thing you want to move on?

Or in the bigger picture, is everything on the table right now in the decision-making big picture.

Yes, Samuel.

I think we went into this with a thought process that we could grow it aggressively.

And when I say aggressively in the 30%, 40%, 50% kind of range.

That was in our head because bringing to bear the DSW product mix in those marketplaces, again, end of life product mix that we think that, that could really drive the business.

And we've seen that, that works, that the product that we carry within our brands at the end of life cycle, we can liquidate those goods and make more profit for DSW Inc.

And that's where I would say, you're going to see more of our focus as we move forward.

Okay.

And then you talked about how the boot this October time period and how the boot business doesn't really match your back-to-school or holiday business.

Can you talk to me about like when you look at the planning of it, is this just that the consumer's switching to more buy-now-wear-now, so basically you don't need to bring your boots in until, let's say, mid-October and you need more sneakers earlier than that or more sandals earlier than that and then when you think about sandals with the exception of stores in the South, you really don't need to get into that business until late March and rather than trying to convert in February.

Yes.

Sam, I think it's a great question.

I think as we headed into the fall season, we actually had boots planned significantly down throughout August and even early September.

And I think -- frankly, I think that was a bit of a mistake.

I think we were too deep in the edits that we had made.

But there is opportunity to sell in those windows.

But it is what you just described.

How do you hit we call it, the smile line for the sandal area and the frown line for the boots.

How do you get those earlier into the season without taking at the full chain and that's work that our planning and allocation team is doing.

So I think, yes, there's a more buy-now-wear-now.

But I think it's our responsibility as a retailer to make certain we're getting that out there in the right markets and putting in front of the consumer using digital to help drive some demand there.

And then lastly, your inventory on a forward basis is quite clean.

But can you give us some idea how that breaks out, as you look to your accessory business, it's been challenged and you're doing a lot of these other new things, be it with the new testing due to the Lab Stores and the new services.

Is this a situation where you just need to optimize your footwear business across categories and have accessories be the exception and then improve the experience within, again core competency footwear (inaudible) question?

I think you -- yes, you just answered your question, yes.

That's actually the conversation that we've been having.

Sam, we've talked about this.

But I use the words focus and tempo a lot.

We've got our merchants very, very focused on the footwear.

And the accessory thing, we will get that righted.

But right now, it's about continuing the momentum we have within footwear.

Well I guess the question is this righted mean that your accessory business is half the size of what it is today and your footwear business eats up some of that real estate as well as services and so on.

What is righted mean I guess.

I don't see this as being half.

But I do think we're doing some work to say how do we reduce the choice count we have in some of the accessory handbag area in particular, and how do we create space.

And remember, we only utilize about 20% of the cubic capacity of our warehouses.

And that's why we're so excited about the Lab Store.

That location now has over 60,000 units embedded in 1 warehouse.

And it's also got embedded in there services and it's loaded with kids.

And I still see, just being there Sunday evening, there's still opportunities.

When we looked, we didn't have enough kids product in there.

So yes, we're trying to find what's the right balance between accessory handbags versus our core competency, which is footwear.

Lastly, can you give us some idea of where those 4 stores are going to be in the spring?

We haven't announced that yet, Sam.

But you'll be the first person I'll tell.

And as that was the last question, I would like to return the call to management for any closing comments.

Just I know we have a lot of associates on the call and say thank you for everything you've done in third quarter, and it's going to be a great week this week.

And everyone, have a Happy Thanksgiving.

Thank you.

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