Designer Brands Inc (DBI) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

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

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

Please go ahead.

Thank you.

Good morning, and welcome to DSW's First Quarter 2018 Conference Call.

Earlier today, we issued a press release comparing results of operations for the 13-week periods ending May 5, 2018 and April 29, 2017.

Comparable sales were calculated for the same 13-week periods ending May 5, 2018 and May 6, 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 due to various factors listed in today's press release in our public filings with the SEC, and we assume no obligation to update any forward-looking statements.

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

Now let me turn the call over to Roger.

Thanks, Christina, and good morning.

I'd like to begin today by discussing a few highlights from our first quarter and progress we've made against our 2018 priorities.

This quarter, we're proud to report a second consecutive positive comp for DSW Inc.

demonstrating a continued success of our strategic initiatives.

A revolving 12-month basis, we've grown our top line by 4% and our bottom line even greater at 16%.

Recent investments in inventory, marketing and payroll are beginning to move the needle.

And with the launch of our new loyalty program a few weeks ago, we are intent on further driving this positive momentum.

We will complete the last phase of our DSW Kids rollout this back-to-school season, capping a successful execution of a multiyear initiative, which is creating an important vehicle for market share growth.

Finally, as part of our strategy to grow market share in North America, we completed the acquisition of Town Shoes a few weeks ago.

Our expanded portfolio reinforces our position as one of the largest footwear retailers globally, with complementary retail concepts to pursue new market opportunities.

We've appointed Bill Jordan, DSW's Chief Administrative Officer, as the new President of Town Shoes.

Bill has a keen understanding of what has made DSW successful over his 12 years of experience for the company, and his leadership will guide us towards a successful integration.

Over the next 90 days, Bill will lead a comprehensive review of the Town business and develop our long-term strategy for unlocking revenue and cost synergies.

We will update you on the results of this assessment when we report our Q2 results.

Given the challenges of M&A integration, we will approach change management at a conservative and deliberate pace.

In addition, we are making progress towards completing the fair value of Town's assets and liabilities as we allocate our purchase price under the step-acquisition method.

Pending the completion of this process, we ask that you reserve any questions regarding Town Shoes until next quarter.

Let me now turn the call over to Jared, who will provide a financial update.

Thanks, Roger, and good morning, everyone.

Before I discuss our Q1 results, let me address a few housekeeping items.

We are going to primarily reference adjusted results, which excludes certain items included on a GAAP basis.

For reconciliation to our GAAP adjusted results, please refer to the non-GAAP reconciliation table in our press release issued this morning.

Second, following our decision to exit Ebuys last March, we completed the final liquidation of remaining inventory and recorded appropriate reserves against its home-office and distribution center leases.

This resulted in $0.07 of exit-related charges that were adjusted out of our GAAP earnings.

However, residual activity prior to the wind down of Ebuys resulted in a loss of $0.04 per share that did flow through our adjusted results.

By calling them out separately, we hope to provide visibility to our organic results.

And lastly, we implemented the new revenue recognition standard this quarter and have chosen to retroactively restate 2017 financial results for comparative purposes.

Under this new standard, we made changes primarily in the areas of gift card breakage and deferred revenue from our loyalty program as well as certain reclassification changes within our balance sheet and income statement.

The adoption of this new revenue recognition standard resulted in an increase of less than $1 million to the first quarter 2017 revenues.

These changes increased Q1 2017 gross margin rate by 30 basis points, offset by a corresponding increase in operating expense.

The impact to net income from the adoption of new revenue recognition was immaterial to the first quarter of 2017 as well as full year 2017 results.

With that, let me turn to our first quarter results.

Total company revenues increased by 3% to $712 million this quarter, including less than $2 million from franchise and other revenue.

Excluding the exit of Ebuys and Gordmans, total revenue increased 7%, driven by 2.2% increase in comparable sales compared to the 3% decrease last year.

Adjusted earnings were $0.39 per share compared to $0.32 per share last year.

And as I said earlier, adjusted EPS includes a loss of $0.04 per share from residual activity at Ebuys.

Let me turn to results at our largest business, Designer Shoe Warehouse, where sales increased by 7%, driven by a 2% growth in comparable sales.

Recent investments in digital marketing drove strong momentum in online demand, which increased by a remarkable 36%.

Both regular and clearance categories comped positively.

Transactions at the DSW segment increased in the low single digits with significant gains in new customer activity.

Average dollar sale was slightly lower than last year due to a higher clearance mix and marketing activity.

For the fourth quarter in a row, footwear comps increased in the low single digits, driven by women's footwear.

The athleisure category continued to drive positive comps despite tough comparisons.

Cooler temperatures drove strong boot sales, while delaying the start of sandal season.

Weather also negatively affected our Power 35 locations, given their regional concentration.

Nevertheless, we were encouraged with women's sandals posting a positive low single-digit comp in Q1, with a healthy snapback from the arrival of warmer conditions.

We also saw an improving appetite for women's fashion footwear outside these areas.

The men's business was equal to last year, and we look forward to seeing this category return to growth in 2018.

Finally, we were excited to see the accessories category turn positive during the quarter, as fresh receipts and an edited assortment stimulated full price sales.

We added DSW Kids to 109 locations in Q1 and expect to bring kids to an additional 94 locations by second quarter.

Given the solid results we've seen, we have begun to carry a higher in-stock position and broaden our kids assortment.

Equally important is that we are finding ways to add kids footwear, while preserving the balance of our existing offering.

With DSW Kids establishing a nationwide presence this year, we will be positioned to market the addition of kids at a national level.

DSW remain significantly underpenetrated in kids, and these results give us confidence and optimism for this category's long-term prospects.

Elsewhere, revenues at our other business were $41 million, including less than $6 million from Ebuys.

Comps at our ABG business increased by 5% this quarter, continuing the momentum from last quarter.

We're pleased to see the strong response to our marketing and merchandising initiatives at Stein Mart this season, and we'll continue to support their business.

The ABG business ended the quarter with 289 locations this quarter after net 4 closings.

Turning to gross profit.

The company gross profit as a percentage of sales increased 40 basis points, driven by a favorable business mix.

Gross margin at the DSW segment was modestly lower due to higher shipping costs related to the robust growth in digital demand.

Improvements in sourcing depth and cross-channel fulfillment offset the incremental markdowns we added to counteract the effect of unseasonable conditions this quarter.

We continue to focus on ways we can enhance gross profit with operational improvements.

Turning to SG&A.

First quarter expenses increased by 6%, and as a percentage of sales, the SG&A rate increased by 60 basis points.

We invested in marketing to drive new customer acquisition and awareness for the launch of our new loyalty program, DSW VIP, this May.

These activities drove a high single-digit increase in new rewards members and accelerated transaction activity from new nonrewards customers to some of the highest levels we've seen in the last few quarters.

We're seeing strong customer acquisition from our marketing spend, and we'll continue to allocate dollars for maximum impact.

Turning to Town Shoes.

With the acquisition of Town Shoes early this month, we are excited to have a new vehicle to expand DSW's market share in North America.

This will be the last quarter we report Town's results below the line, which was a loss of $0.01 in Q1, similar to last year.

As Roger said, we'll provide more specifics of our financial expectations after we formulate our priorities following the completion of Bill's strategic assessment later this year.

Finally, our first quarter income tax rate decreased from 40% to 25.3%, due to the implementation of tax reform.

Turning to the balance sheet.

Inventory on a per square foot was slightly below last year.

On a 2-year basis, inventory per square foot declined by 3%.

We ended the quarter with $269 million in cash and cash investments, a 6% increase to last year's $254 million.

Quarter-end cash includes the funding of Town's working capital needs but excludes the $35 million paid for the acquisition of its remaining stake subsequent to the quarter-end.

We spent $16 million in capital expenditures this quarter, driven by store maintenance and renovation expenses related to DSW Kids and the expanded pilot of our new store design.

We opened 5 locations for a total of 517 warehouses for the DSW brand and plan to open 3 to 6 net new locations this year.

IT CapEx priorities this year will support initiative to expand DSW's assortment and strength our brand's emotional connection to customers.

For the year, we continue to expect $76 million in capital expenditures for the organic business.

Turning to our outlook for 2018.

We're maintaining our full year outlook for adjusted EPS of $1.52 to $1.67 per share and low single-digit comp growth.

Pending the completion of our strategic review, guidance to-date does not include the impact of a consolidation of Town Shoes.

We'll provide our financial expectation for Town during our second quarter earnings call.

With that, let me turn the call over to Roger for an update on our strategic priorities.

Thanks, Jared.

As discussed last quarter, we're driving top line growth with a deliberate goal to grab market share.

And as you can see with Q1 results, we are on track and confident in our ability to execute this plan.

We are pursuing our strategic initiatives through both the DSW customer experience and engagement with laser focus, and we've made great strides in these key areas of investment.

First, product.

Having the right product in the right place is critical to driving sales.

And after 2 years of inventory destocking, we're beginning to see the benefit of a more productive inventory position.

Our key item program drove a higher regular price mix and gross margin improvements.

Our inventory depth enabled us to post meaningful improvements across all categories, with footwear posting a comp increase for the fourth consecutive quarter.

We were particularly pleased to see comps for the men's and accessory categories turn positive during the quarter, and athleisure sustained its momentum and expands DSW's presence in the athletic space.

We've started to consolidate our vendor base and expect to improve sourcing costs, as DSW becomes a more meaningful account to fewer vendors.

We will continue to hold our vendors accountable to our shared goal of profitable growth, and we believe these changes will contribute to a healthier marketplace.

These actions are part of our journey to evolve our model and gain control of our destiny with the right brand partnerships and the strategic opportunities to capitalize on DSW Inc.'s 1,000 points of distribution.

Second, marketing.

Following solid results last year, we're investing in customer-facing marketing to drive purchase frequency and new customer acquisition.

So far, results in digital engagement, rewards enrollment and new customer acquisition are all trending favorably.

Research also shows that we are gaining traction among teams with DSW moving up the ranks as one of the top 5 retailers in Piper Jaffray's annual team survey.

Looking forward, the launch of our new loyalty program will fuel more energy in the DSW brand and improve customer engagements.

In case some of you were not aware, our rewards program accounts for over 90% of DSW sales.

So we can't overstate how excited we are to announce the biggest changes to DSW Rewards in the last 10 years.

Customers will love the simplicity of our point system, birthday rewards, enhancing shipping benefits and the new ways to earn points through shoe donation or shoe repair.

These exciting features give us a reason to connect with every single member in our rewards file.

We've also updated our mobile rewards dashboard to enable customers to easily see benefits earned.

Although it is early, our launch campaign is driving higher traffic, redemption activity and rewards enrollment.

I want to thank our teams, who worked hard to make this all happen.

Third, people.

As part of our focus on improving customer engagement, we've piloted a new labor model in our warehouses.

With our warehouses fulfilling 40% to 50% of online demand, these changes will better match associates between back-of-house tasks and front-of-house customer-facing activities, as well as provide more coverage during peak hours.

As we roll out this model, we expect improved role clarity to help our teams drive better customer engagement and in-store conversion.

And finally, innovation.

DSW.com celebrates its 10th anniversary this year, and we're proud of the great strides we've made online.

Our leading-edge cross-channel capabilities have earned recognition as the best omnichannel platform in retail for the second year in a row.

We continued to push the envelope for our digital platforms as we refine our capabilities to deliver world-class mobile experience, centered around our vast assortment and new loyalty program.

As we move forward, our focus will shift to further personalizing this experience so that we can make it even easier for our customer to shop with us regardless of channel.

We are transforming our warehouses with a new fixture package that brings to life digital stability to amplify merchandising stories and introduce new retail experiences.

Following the success of our Lab Store, we've expanded our test to 4 additional locations this quarter, and we'll roll out 3 new locations later this year.

Turning to DSW's new service offerings.

We've been pleased with customer response to shoe repair, which is now expanded to 2 new locations in our home market.

Our services are now offered at a newly designed Sole Lounge, where customers can pick up and return orders, order custom insoles, drop off repairs or simply hangout.

With the onset of sandal season, demand at our Nail Bar has accelerated, and we're looking into opening our second location later this year.

As we bring more customer-facing innovation to market, we will expand DSW's appeal to consumers hungry for authentic meaningful brand connections and truly inspire self-expression.

In summary, our first quarter results demonstrate that we are on track with our goal this year.

We are capitalizing on our financial strength to tap the powerful synergy between our supply chain network and digital platforms and stay ahead of our consumers' needs.

We will leverage the opportunities to reach more customers with our growing retail portfolio, and we are committed to create long-term value and drive sustainable, profitable growth.

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

(Operator Instructions) And your first question will be from Steven Marotta of CL King & Associates.

First, can you comment a little bit about the rollout of the new store format?

You mentioned on the last call that there would be 4 new stores that had the increased SKU count.

Is there any additional update that you can offer there as it pertains to the nail salons, shoe donations, shoe repair?

Is there anything additional that can accelerate as a part of that rollout this year?

That's a great question.

I would say, on the new store design, or I should say, the fixturing package that we're working through, we got those in place really at the end of Q1.

So I don't think we're prepared yet to really callout how those are performing.

I will tell you, the first store that we have launched that in which is our, again, our Polaris store in Columbus has continued to, I think, exceed our expectations.

So I think everything we've seen so far, we're happy with how it's progressing, but we'll give you more information as we proceed throughout the year.

And we have a couple more locations that are going to open later in the year that we're working toward.

On the nail bar, again, we love the progress we're making there, and that's why we've decided to take it to another location right now.

It's all going to be in the Columbus market.

We want to get this into an entire market, so that we can really get behind it from a marketing perspective.

So again, getting that up and running in third quarter, I think, it's timing of when we'll have the other location.

And then we're trying to figure out how do we move quickly on all the other services.

But pretty much the stuff that we had in our opening comments really addresses, I think, sort of where we stand today.

Okay.

My follow-up question is -- and I understand, historically, you have been reticent to address quarter-to-date comp trends.

But with that said, would you agree that more seasonable summerlike temperatures help your business, one; and two, that the month of May has been more seasonable?

Again, Steve, we're not going to talk about Q2.

We've talked for years about Marpril and Septober and just how weather can impact those windows.

This was a unique Marpril for us, meaning March and April, because we really didn't have weather break until, really, the very end of April.

But no -- it was a tougher first quarter, I would say, as it relates to weather.

And obviously, when weather is warmer, it does help you to sell sandals and to get pedicures as well, which we're learning that people don't necessarily like pedis, the same way when they wear boots they do when they have sandals on.

So I think weather does help us.

That's helpful.

And you would agree that May has been more seasonable weather, month to date?

Yes.

I mean, we don't get into the -- but yes, obviously, you can do the -- it's been warmer, but...

I'm trying to triangulate.

That's helpful.

I appreciate it.

Yes, no problem.

The next question will be from Tom Nikic of Wells Fargo.

Jared, I was wondering if you could sort of give us a little more context around the guidance for the year.

I know you reiterated the comps and the EPS.

If you could give us some sort of indication as to how you're thinking about gross margin and the operating expenses.

In particular, I'm sort of interested on the operating expense slide.

I know it was up almost 6% in Q1.

Is that sort of a run rate we should consider for the remainder of the year?

Or is there -- is that abnormally high because you were doing a little bit of extra marketing for the new loyalty program?

Sure, Tom.

I would say the investments in marketing, we don't expect that to go down throughout the rest of the year.

So we are tracking that on a campaign-by-campaign basis and making sure that we're getting the returns that we expect.

And as Roger said in the script, we've been very happy with the traffic that, that has driven in, and more importantly, the new customers that, that has acquired.

Also, coming at us throughout the year to go is the relaunch of the VIP.

So that has some SG&A associated with that.

And then the rollout of the labor scheduling.

Although long term, that's going to give us more flexibility in our model and be able to better match traffic with headcount, but leading up to that, there was some training that went along with that, there was some pre-hiring and things like that.

So I wouldn't say that the 6% up rate is something that you should be a benchmark at.

But I think an increased level over LY continuing through the year is probably a safe bet.

As far as the margin goes, we are seeing opportunities to see expansion of that.

But then we've also got some things moving against us, especially in the tail end of the year when your calendarize out the calendar shift and the mix of business of clearance versus reg and losing that week.

It gets a little uglier towards the end of the year than what you'd have seen throughout the beginning or middle part of the year from the margin standpoint.

Tom, this is Roger.

I would -- as it relates to the margin, I want to just address.

I think there's huge progress we've been making as an organization in, I would say, the women's business in particular.

And the margins we are seeing there are stronger than what we have been experiencing in the last couple of years.

You have to remember the headwinds that as we grow kids -- and I'm talking margin rate only here, not dollars, obviously -- but kids, as we increase that penetration, that has an impact on your rate.

Athleisure, as that continues to grow, that has an impact on your rate.

Our private brand has not performed to the level at which we wanted to perform.

And we're going to be getting after that in a much bigger way as a team.

And so all 3 of those things have really been headwinds.

But the core business, the underlying trend of our women's business is very positive from both the top line perspective as well as a margin perspective.

And I'm really proud of our team and how they've gone after key items, how they are going after all door buys.

I mean, we're standing for the items in fashion that we think we have to stand for, for the consumer.

We're putting our inventory behind it when we talk about inventory investment, and we're getting paid for it.

So I think we're making really good progress on that front.

The next question will be from Jeff Van Sinderen of B. Riley FBR.

You're being a little bit more aggressive in inventory as you go after some of the stronger-performing categories.

Can you maybe give us a better sense of where you are planning to overindex or a fall and back-to-school this year?

In other words, just trying to get a sense of the biggest opportunities if really you can capture market share or retake market share that you might not had enough inventory to get last year?

We have -- we've been consistently talking about our best at categories, which are sandals and boots for us.

And so I think both of those as we -- let's say, as we proceed through Q2, Q3, you're going to see us play some more bets in those areas.

Extending the life of sandals, we think, we left opportunity on the table in prior years where we might be out of sandals completely by the time we got into early September.

So we think there's some opportunity there.

And then I think we did talk about this last year, we had planned both our boot and sandal categories down in the double digits a year ago.

And we're not going crazy and planning them up, I would say, flat on a 2-year basis.

But we think we left opportunity on the table a year ago in both of those categories because we were so conservative.

That sets where our efforts are really focused.

And then obviously, the athleisure is trend for us because we're still well underpenetrated in market share.

I think we still have opportunity there.

And then, obviously, it's a huge investment to have all doors -- all warehouses having Kids in it for back-to-school.

If you go back just a couple of years ago, we didn't have it in any stores.

And so I think those are the areas where right now we are focusing our efforts.

Okay.

And then as a follow-up, anymore you can give us on how you're thinking about the nonsneaker categories?

I know you mentioned athleisure, but I think you also said that some of the other categories in women's were showing improvement.

I'm just wondering how you're thinking about those evolving in the second half of this year?

No.

We -- again, our women's team has done a really, really nice job of getting us back, being aggressive, having open-to-buy, and we keep talking about playing offense versus playing defense.

And I think our team has embraced that and done a really, really good job.

I keep emphasizing women's because I know our team is listening to this, so is men's and accessories, they've done a really nice job, too, at DSW.

But at the end of the day, how women's goes is going to drive and dictate the performance of DSW.

And we're real proud of how our team has performed across every category.

The next question will be from Christopher Svezia of Wedbush.

I guess, first, Jared, for you.

I just want to go to -- I think, on the last call, you talked about moving more towards a 60-40 split of earnings.

I think last

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just...

Pardon me, Mr. Svezia, this is the operator.

Sir, your line is breaking up.

I'm sorry, Chris, you broke up.

We couldn't hear what you said.

I guess, we lost him.

Can you hear me now?

Yes.

There.

Yes.

Okay.

Sorry about that.

I apologize.

So just to go back

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moving more

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...

Chris, we're completely losing you.

Mr. Svezia, I'm going to move onto the next questioner.

If you could maybe reconnect or go to adjust your handset, we can take your question again.

We'll move on now to Paul Trussell of Deutsche Bank.

This is Gabby Carbone for Paul.

Just wondering if you could discuss the performance of the Power Stores.

You mentioned they were impacted by weather, but outside of that, kind of, how are these stores performing versus your expectations?

And have you been able to adopt any initiatives in these stores to other stores in the fleet?

That's a great question.

We've been talking a lot about this with our team.

I would say, our Power 35 doors have not performed to our expectations in Q1.

And we -- some of that is self-inflicted and some of that is weather is what I would share with you.

I think we still have opportunity.

We're just talking about this yesterday with the team of how important those stores are to the long-term success of our enterprise.

So we're still getting after those, and Michelle and team are going to address that.

I do think what's great is there were a lot of learnings from what we have gone through over the last 12 months in the stores.

And as a result, we've actually implemented some of the marketing strategies as well as assortment strategies that we learned through those Power 35 initiatives and have implemented those, which have helped lift the balance of the company.

But as I continue to share with our team, I'm not satisfied with where we're at with our P35, and we're going to keep addressing that with the team.

The next question will be from Camilo Lyon of Canaccord Genuity.

This is Pallav Saini on behalf of Camilo.

If you can remind us what the mix of men's and accessories is?

And what the issue was before you saw the improvement this quarter?

And how are you planning on growing this business going forward?

So I'll start with the accessory business.

I think Nancy and her team have done a really nice job of coming in and narrowing our assortment and getting behind some key items, which has improved our performance as an entire accessory category.

And then on the men's side, I think the casual side of men's has been an opportunity for us.

And I think we have now done a much better job of having some success there in the casual space dress.

Obviously, it continues to be a challenge, as I sit here today wearing sneakers on a board call -- or on a Street call, but we're making progress in both men's and accessories.

But accessories, in particular, Nancy and team have done a really nice job of turning that business.

And that's an important piece for us because it is a UPT driver and can really help us grab additional share from that consumer.

The next question will come from Sam Poser of Susquehanna.

First of all, you mentioned that Ebuys cost you $0.04.

Can you give us what that gross margin impact was of Ebuys in the quarter that related to that $0.04?

Yes.

Sam, it actually -- Ebuys net-net was a benefit to the quarter.

When you look at what flowed through our operating earnings last year versus what flowed through this year, it really resulted in roughly around a 40 basis point improvement year-over-year to our overall gross margin.

Got you.

And then can you give us -- this is -- can you just give us the total improvement or the changes in the merchandise margin and the fixed cost that you gave it for just the DSW segment in the press release?

Can you give us the total?

Yes.

So from an overall Inc.

standpoint, we saw our IMU was up a little over 100 basis points.

Markdowns were favorable.

But again, this is Inc., so it's not just the DSW segment.

Markdowns were favorable by roughly 70 basis points and e-com fees were favorable as well, roughly 30 basis points.

So then -- so it's the fixed cost that delever that?

Yes, yes.

Now what I would say though -- I mean, occupancy did lever.

DCFC was relatively flat.

We did see shipping deleverage, as we mentioned, with the increase in the digital marketing and the digital sales performance.

Got you.

And then lastly, you talked about the Power Stores.

There were some commentary -- I assume, most of the New York City stores are Power Stores.

Can you talk anything about traffic there and any impact you saw from improved or lack thereof of tourism in any of your markets where some of these Power Stores may or may not exist?

Yes, Sam.

I would tell you, I think, I really don't want to get into performance at a market level.

But again, I think our challenge in our Power doors -- yes, there has -- there was some traffic challenges in Q1.

But I don't know how much of that was weather versus tourism.

We don't get into how we would break that out, but traffic was a challenge in Q1.

And then lastly, could you -- you talked about the success of accessories, but you're also -- how are you fitting the floor from a floorspace perspective when you're rolling out Kids?

Sort of, how are you flexing the other categories?

Sort of, who wins, who loses?

Or how are you making space for Kids without impacting the other businesses?

So can you give some color there for us?

That's a great question, Sam.

That is why this has taken us a couple of years to get it out into the chain.

Because as we pursued this, we did not want to lose adult capacity.

So these last roughly 100 doors that we have moved it into, our team has worked really hard to strategize, whether it be narrowing an aisle, putting in a different kind of clearance fixture, perhaps reducing the number of accessory choices we have on the floor to recapture some space, we've had to do that on a door-by-door basis to ultimately not remove adult fixtures -- or adult footwear from the floor.

So it's been a mix of things is what I would tell you.

And every store has had a -- we have learned, has a different layout and a different challenge we had to solve.

And I think we've worked out the audio difficulties for Christopher Svezia of Wedbush.

We'll bring him back on.

Can you guys hear me now okay?

Yes.

Yes.

Sounds great.

Okay.

All right.

I apologize about that.

So Jared, I was just wondering in the last earnings

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more 60-40 bias versus last year's more 50-50 bias.

Can you just maybe talk about how that might play into this year if that's in fact potentially the case?

Or is it still more skewed potentially 50-50?

Just any color about that would be helpful.

Yes, Chris.

And you were breaking up again a little bit, but I think you were asking the 60-40 versus the prior 50-50.

I would say, as the year -- as the quarter unfolded, we are probably gravitating a little closer to maybe a 55-ish in the first half versus 45-ish.

And some of the drivers of that we wanted to make sure that our loyalty relaunch was ready and fully baked before we rolled that out.

And so there was some timing pushouts that we work through this year -- this quarter.

Additionally, the new labor model, we also didn't want to rush that, so we've adjusted the timing of rolling out that.

So there's been a couple of things that we're on our strategic radar that we've done some timing shifts.

So that's made us more -- start getting a little closer back to the 50-50.

I'd say, right now, we're probably more like a 55-45.

Okay.

And my second question

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customer acquisitions, in terms of what you're seeing so far?

How do they differ from your existing customers, in terms of how they buy, maybe what they buy, their average purchase size, et cetera?

Just maybe a little bit color as you roll out this new program.

So I think, Chris, the thing we are excited for with this relaunch is that we think it skews to more of a millennial customer and the results were all of like 3 weeks in.

So I would tell you it's tough to give you much more specifics than what we covered on the call, but what I'm really excited about is the shoe donation in particular.

And whether it's the photos that are being sent to us or being in stores, I was in a store where the bins are already full, and we're trying to figure out how do we handle now the amount of donations that are being made.

There are people walking in with 500, 600 pairs of shoes.

I think the impact we were having and how that can ultimately help us give back to our communities but also how it can help us attract a more millennial-based consumer than what we have historically, I think that is a big, big win for us on the relaunch of this VIP program.

Yes.

And I would add to that the digital marketing increase that we have invested in, that has driven substantial improvement in our transactions that are involving new and nonmembers, which as Roger mentioned on the call, traditionally were at about 90%, 92% of our transactions are with existing members to see the traction that we're getting with new and non as a result of the digital media, and that's coming through digital demand.

It's something we're very excited about.

We utilized a mix -- a marketing mix attribution model that helps us see with a lot of granularity who is coming to us, what they look like.

Obviously, what we would love to see is to see that millennial customer traction continue to grow.

And when we're speaking to them digitally and we're interacting with them in a digital medium, we think that that's exactly what's happening.

So very, very happy with early results so far of our digital marketing lead.

Yes.

I think, Chris, one other fact that I think is important to get your head around the progress we're making is we've been on a 2- to 3-year run, where our new and nonmembers had been declining pretty materially.

And the fact that we were able to really turn that around and see progress, we're actually getting an increase.

That's the first time we've seen that in several years.

So that also points to -- we're doing the right thing.

(Operator Instructions) And we have a question from Patrick McKeever of MKM Partners.

I don't know -- I had missed the early part of the call, but I was wondering if there -- unless it may have come up, but I was wondering if there was any impact on comps from the retail calendar shift and how that might impact the second and third quarters?

And then my second question is just on the overall competitive landscape with the department stores and some of the store closures we've seen in that space.

Wondering if you feel like you are picking up share from some of the closed stores?

And then also what you are seeing just from a competitive pricing standpoint with the department store -- just the department stores, overall?

I'll take the first question, Patrick.

The answer is no.

We do a like-for-like comp base.

So we've adjusted ourselves so that we are not seeing an impact in our comp calculation related to the calendar shift.

Yes.

And Patrick, on the competitive landscape, just come back to what we talked about in the last year that we really believe that there is a brand of brands that is not evolving its thinking is going to face challenges unlike anything we've ever seen.

And that's why this team, our organization, is so focused on figuring out how we differentiate our assortment, so that we're not having to compete on price.

How we expand our private brand offering to, again, differentiate our assortment, how we bring to life experiences that we've been talking through, whether it'd be nail repair, why we had to relaunch our rewards program to create a different experience for our customer.

I mean, that's the evolution.

That's the disruption that you've got to create in order to compete.

And are we grabbing share?

I think if you look at the MPD data, it said, yes, we did gain share, but we cannot settle for that.

We've got to get even more aggressive and how we disrupt what's going on around us.

So that, again, how do we play offense versus being on the defensive side.

And that's the approach we're going to take around our inventory investment, around our marketing and around our people.

And then on the relaunched -- the new loyalty program and the free shipping.

Just wondering how -- I mean, loyalty customers are about 90% of sales and you're extending free shipping to all loyalty customers now with some getting the 2-day expedited shipping.

So my question is, just how -- in thinking about the impact, just of shipping expense on gross margin for the year, how are you thinking about that?

With the relaunch of the loyalty program, how much of the e-commerce sales previously were covered by free shipping?

Yes, Patrick.

There's multiple things there.

But I would say the simple answer is the vast majority of our sales were already happening on the free shipping base as far as our digital-demanded sales.

So the ability to open it up to everyone isn't dramatically material.

What I would also say is there was also a shift where our priority members were getting next day.

They are now along with the second layer that we created are moving back to 2 days.

So that's actually a pickup of some expense dollars there.

At the end of the day, overall, that's the price of having a digital business.

And so we do believe shipping throughout the year will continue to be a headwind.

The materiality of that headwind starts to diminish as we keep growing that business and we are comping on that, but it's still a headwind, and it will show up for the year.

And then I think previously, I know you haven't given specific margin guidance but did say, I think, in response to a question on the last call that the operating -- or the guidance, sort of, the EPS guidance implied about a 40 basis point decrease in EBIT margin.

Is that still the case?

Roughly, yes.

And ladies and gentlemen, that will conclude our question-and-answer session.

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

Thanks, everyone, for listening in today and for your questions.

And again to our team that's participating, let's keep moving the business forward and being disruptive.

Thanks, everyone.

Have a great day.

Thank you, sir.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your lines.