Designer Brands Inc (DBI) 2019 Q3 法說會逐字稿

Good day and welcome to the Designer Brands Third Quarter 2019 Earnings Conference Call.

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

I would now like to turn the conference over to Stacy Turnof.

Please go ahead.

Good morning.

Earlier today, the company issued a press release comparing results of operations for the 3 months ended November 2, 2019, to the 3 months ended November 3, 2018.

Please note that 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 and the company's public filings with the SEC.

The company assumes 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 over the call to Roger.

Good morning and thank you for joining us to discuss our results for the third quarter of 2019.

We continue to make meaningful progress against our strategic initiatives to design and source differentiated products, build our partner to create differentiated customer experiences and grow market share.

Our long-term initiatives remain in place and integration of Camuto and The Shoe Company is progressing as planned.

While we faced headwinds during the quarter and anticipate facing several hurdles in the coming quarters, as both Jared and I will touch upon, we are working tirelessly to ensure we are well positioned to succeed in a continuously evolving retail landscape and remain optimistic about our ability to deliver on Designer Brands next phase of growth.

Touching on this quarter's performance.

During the third quarter, we delivered comps of 0.3%, in line with our expectations.

However, gross margin decreased 370 basis points from 32.6% last year to 28.9%.

The decline in gross margins were primarily related to 2 key challenges.

Number one, weather, which hindered our performance across our entire business.

And number two, the mitigation of tariffs, which led us to pull back inventory and cut marketing investments in anticipation of a change in consumer spending that in hindsight was not the right decision to make.

Let's start with weather.

Due to the unseasonably warm weather in the critically important Septober selling period, our historically busiest and most profitable time of the year, sales were affected at DSW, Camuto and in Canada.

As soon as it became apparent, weather was becoming a meaningful impact, our team took a proactive stance to protect the top line and ensure our inventory positions were clean coming out of the busiest time of the year.

Our inventory was down 5.6% at the end of the third quarter in our retail businesses.

Second, we've continued to work tirelessly to find ways to mitigate the impact of the new tariffs and believe we've been largely successful with several of the initiatives that we outlined at the start of the year, which included: moving product out of China, sharing costs with vendors, accelerating our private brand rollout, taking positions on raw material, creating alternate components in our footwear production and testing innovative in-store services.

As we discussed last quarter, we decided to cut back our marketing spend and to cancel certain product receipts in preparation of a likely reduction in consumer spending.

The cuts in marketing disproportionately impacted our store-only customer, which drove a subsequent increase in promotion, specifically driving digital engagement.

On the inventory front, given our desire to protect our growing and best ad categories of seasonal, athletic and kids, the resulting cancellations penetrated deeply in the remaining category, especially dress, where inventories were down 20% and correspondingly, comps ended down 17% for the quarter.

We, of course, now know that the feared consumer pullback did not materialize, but we, unfortunately, we're not able to make up the impact of these actions within the quarter.

We've begun to restore the open-to-buy in these categories and continue to watch the actions around tariffs daily.

As we look ahead, the unmitigated exposure to tariffs is incredibly meaningful to our business, and we have found ways to mitigate the majority of the current tariffs across both DSW and Camuto.

However, especially at Camuto, the ability to mitigate 100% of the tariffs has proven to be challenging, and we now anticipate having the ability to mitigate approximately 80% to 90%.

While this is a slight diversion from what we have previously messaged, we think it's important to point out that mitigating $140 million to $150 million of the $170 million exposure is an achievement we are proud of and another proof point to why our acquisition of Camuto is pivotal to our company's future.

It is important to keep in mind that as we significantly grew our business with the acquisition, naturally, our exposure to tariffs increases.

We have to work even harder in our mitigation efforts.

We are fortunate that we have been able to use Camuto as a mechanism to push back with our DSW vendors, and it has allowed us significant leverage to mitigate the impacts of tariffs.

Our position with Camuto is a clear differentiator in the marketplace.

And over time, will enable how we grow market share.

Lastly, and to a lesser extent, we faced internal issues during the third quarter regarding our newly upgraded POS system.

We're excited about the launch of the upgraded POS system at DSW that will convert our consumers faster on the floor and improve efficiencies at the register.

However, our acceptance of new functionality and challenges related to adoption resulted in issuance of more discounts than expected for our promotional campaigns.

We have taken action that will provide the tools to drive conversion while also protecting margin and preserving the customer experience.

We did see some bright spots in our portfolio during the quarter.

We saw strong performance in categories not impacted by weather, such as Kids and athleisure.

We also continued to gain strength in our key items.

Additionally, we continue to focus on driving our exclusive brand assortment at DSW and The Shoe Company, which resulted in comps, up nearly 30%.

I'd like to take a moment to reflect on our 2 acquisitions, which have already proven fruitful, and we are extremely pleased with the results we have seen so far.

We have had huge successes this year, driven by our Camuto and Canadian acquisitions which are driving growth and market share, further solidifying our position as the leading footwear retailer in North America.

A key contributor to our differentiated products is our acquisition of Camuto and the integration is moving forward.

We continue to see notable synergies between DSW and Camuto.

The lift and shift from our previous provider to Camuto is progressing ahead of plan, and we're excited for the Camuto produced exclusive brand product to hit our selling floors in the coming weeks.

We are projecting nearly $500 million of retail sales in 2020 of Camuto produced products.

And over time, will enhance our product offering across multiple channels, utilizing Camuto's production capabilities, coupled with the retail footprint of our existing store base and digital platforms.

We are also on track to increase our private label penetration from approximately 15% currently to nearly 30% over time, which will help drive the overall profitability of our business.

Lastly, we're also beginning to see the benefit of selling closeout products from Camuto.

Previously, we would have moved this inventory by selling to off-price peers at a lower price point.

Now we are better able to bolster our top line and maintain clean inventory levels.

And lastly, we are still on target to hit the $725 million of Camuto produced brands across our retail platform.

In Canada, we are seeing great momentum with The Shoe Company and DSW.

We are successfully leveraging our DSW U.S. expertise, applying infrastructure, enhancing digital capabilities and implementing inventory discipline, all of which are yielding tremendous results for our Canadian operations.

Additionally, we continue to increase our digital penetration and brand awareness in Canada, which is a significant driver behind The Shoe Company being the second fastest growing footwear company and the #1 women's footwear retailer in Canada.

While we recognize that DBI had a challenging quarter, particularly at the DSW U.S. operation and has several headwinds to face, we think it's incredibly important to note that we remain excited about the future of our business.

We continue to be among the largest nonathletic footwear retailers.

And with our Camuto acquisition, we now have a fully integrated supply chain, which will allow us to continue to maintain our leading position in the market.

Unlike other footwear retailers, one of our most unique attributes and differentiators is our enhanced programs and innovative services at DSW U.S., and we continue to enhance the shopping experience for our customers.

Innovation remains a priority for our company as we seek to constantly improve the shopping experience across our entire business.

We continue to expand our nail bar offerings and believe these unique experiences are the reason customers will continue to shop DSW.

We are extremely pleased with the results so far, including increased frequency, attachment rates and most importantly, a 40% increase in annual footwear spend when a rewards member becomes a nail bar customer.

As our world grows increasingly digital, we continue to enhance our digital capabilities, which are producing solid results and helping to position our company as a leader in omni-channel footwear retailing.

With that, I will turn it over to Jared.

Jared?

Thank you, Roger.

Our third quarter generated positive comps as a result of successful promotional activity taken to protect our top line.

As Roger shared, this enabled us to drive digital traffic, exit the quarter with clean inventory levels and mitigate top line weakness.

However, our overall earnings performance was dampened by several factors, both external and internal.

As Roger mentioned, we do not believe this is a reflection of our business model, and we remain confident in our long-term strategy.

But the quarter was disappointing nonetheless, and the impact of these items will continue to be felt for a while.

Please note the financial results that we will reference during the remainder of today's call exclude certain adjustments recorded under GAAP unless specified otherwise.

For a complete reconciliation of GAAP to adjusted earnings, please reference our press release.

In the third quarter, our total revenue increased 12.4% versus last year to $936.3 million, which included $25.6 million in intersegment revenue that was eliminated in consolidation.

Total comps were up 0.3% versus 7.3% last year with a 2-year comp of 7.6%, continuing the industry-leading 2-year comps we have driven all year.

Sales were negatively impacted across all of our businesses by the unseasonably warmer weather throughout the country and at our DSW U.S. business, this caused our seasonal business to notably underperform other categories in the start of the quarter.

Our promotional activities were highly successful in turning that around and offset the initial top line weakness later in the quarter.

We were able to exit the quarter with a clean inventory position, and we are pleased with the proactive steps we have taken to manage inventory levels.

At the U.S. Retail segment, comp sales were flat versus last year's comp growth of 7.3%, delivering a 2-year comp of 7.3%.

We continue to see traction in categories such as Kids that grew by 23% and athletic, up 4%.

Despite pressure on our seasonal business related to weather issues, we still posted a respectable 3.8% comp in boots, driven by an acceleration in promotional activity.

As mentioned last quarter, our new merchant leadership in men's is helping drive the recovery across the category.

In fact, although, we posted a 6.1% comp decline in men's for the quarter, we saw comps turn flat in October, and we expect further improvement in spring 2020.

We were pleased with our performance of our key items that reported a 9% comp, which is in line with our expectations.

These items were 33% of sales this year versus 31% last year.

As we grow penetration into these items, we continue to get better average cost.

The key item merchandise margin is approximately 640 basis points better than non-key items.

This level of growth is expected for the balance of 2019.

We saw softness in the categories such as dress, accessories and sandals.

Digital demand at the U.S. Retail segment was strong during the quarter.

The combination of agile investments and higher volume promotions drove the significant increase in digital activity.

The U.S. consumer remains committed to an omni-channel experience and online sales further increased during the quarter.

We continue to grow our VIP rewards program with active members growing 3% over last year.

We are focused on the growth of our rewards program as it allows us to interact with our customers in a more targeted and efficient way, increasing conversions and bolstering the top line.

At our Canadian Retail segment, comp sales grew 4.4%, driven by strong comps at the DSW banner and digital demand.

Canada remains a bright spot in the portfolio as we apply our successful learnings from scaling our U.S. operations to our newer Canadian segment.

As a reminder, during late Q1, Canada relaunched their digital site and operations, leveraging DSW's expertise and technology infrastructure.

Digital penetration in Canada remains below the U.S., so we are -- so we continue to see good upside for this channel in Canada.

This business continues to reap the benefits of the U.S. digital platform, a relaunched rewards program at DSW, and we have relaunched a new rewards program at The Shoe Company, which went live in November.

I'll now dig into the Camuto business a bit.

As a reminder, we did not own Camuto during the third quarter of last year as the transaction closed on November 6. Therefore, any reference to last year is for informational purposes only.

Total net sales, Camuto, including sales to DSW were $131 million, $3 million below last year.

The decline to last year was primarily a reduction in solesociety.com direct-to-consumer sales, which were depressed after a pullback in consumer acquisition marketing, which did not generate an acceptable level of ROI.

We are continuing to evaluate the proper operating and marketing model for this brand.

And $117.4 million, wholesale sales were down slightly or 1.4% versus last year, including sales to our own retail segments, which totaled approximately $23.9 million.

vincecamuto.com continued to gain traction, leveraging the digital retailing expertise from DSW and saw an increase in sales to $4.5 million, similar to the trend that we saw last quarter.

solesociety.com saw sales declined 21% to $8.7 million.

Commission income increased 13%, including income earned from our own retail segments on exclusive brand business, which totaled $2 million.

Finally, at ABG, comp sales declined 2.4%.

This decline related to unseasonably warm weather as well as continued struggles at ABG's largest customer.

We are exploring some new, exciting and innovative opportunities to grow this channel, and we'll share details as soon as it is appropriate.

As Roger referenced, we are working to leverage Camuto to increase DSW private label products sourced from that arm of the business.

Sales exclusive brands at our retail segments still produced, primarily by a third party, grew by 28% for the quarter, representing approximately $120 million of sales.

Additionally, we sold approximately $30 million of Camuto's national brands through our retail segments, in addition to the nearly $14 million we sold in our direct-to-consumer channels of vincecamuto.com and solesociety.com.

Our consolidated gross profit declined 1.1% for the quarter to $268 million and gross margin rate decreased 370 basis points to 28.9% versus 32.6% last year.

This was mainly due to increased promotional activity in the quarter.

U.S. retail gross profit rate for the quarter decreased to 28.1% versus 33.2% in the prior year.

The majority of this was, again, due to increased promotional activity, including markdowns associated with our new POS rollout.

Our Canada gross profit rate for the quarter increased to 36% from 31.7% in the prior year.

Mainly due to the continued benefit of having installed the inventory disciplines of our legacy U.S. business and operating with much fresher and leaner inventories.

As we continue to increase our penetration of Camuto produced goods across all of our retail segments, we believe that our margins will continue to benefit over time.

Building on Roger's comments on tariffs, we are proud that we have been able to mitigate approximately 80% to 90% of the direct impact of tariffs versus our previously anticipated 100%.

Thus, in FY '19, our revised guidance includes approximately $2 million of direct costs we must absorb as Designer Brands.

But on an annualized basis, it looks like it may be closer to $20 million to $30 million of direct cost that will be retained.

And we feel we will continue to find ways to help mitigate even this identified $20 million to $30 million, such as leveraging the dramatically growing scale of Camuto production as planned to increase from roughly 23 million pairs of shoes to eventually over 40 million pairs.

However, some of the gross margin upside we had hoped to extract from Camuto may not materialize to this extent originally anticipated.

Additionally, as Roger discussed, the indirect impact of the tariffs and the associated mitigation efforts and focus have had very real implications to our current results and will continue to impact us for some time.

Turning to Designer Brands' total operating expenses.

Consolidated SG&A for all of our businesses, excluding Camuto, decreased by 8.8% and improved 120 basis points versus last year, driven by targeted expense reductions and disciplined expense control.

Camuto added $36.3 million to Designer Brands' consolidated SG&A, which was about 10% lower than their operating expenses last year on similar sales.

Depreciation and amortization totaled $21.7 million in the quarter as compared to $19.3 million in the prior year.

Adjusted operating profit for Designer Brands came in at $63 million in Q3, down 17% from $75.9 million last year.

The challenges at our legacy DSW business accounted for the decline were offset by the successful performance of our recent acquisition with a 22% increase in the operating profit contribution from our Canadian segment, and our brand portfolio segment turning in a positive operating income contribution for the first time since the acquisition.

Net income for the third quarter of 2019 was $43.5 million or $0.60 per diluted share, which included net after-tax charges of $5.1 million or $0.07 per diluted share, primarily related to impairment charges and integration and restructuring expenses associated with the acquired businesses.

Excluding these charges, adjusted EPS was $0.67 per diluted share.

As I look at our consolidated P&L, the third quarter story consisted of headwinds associated with weather, tariff mitigation and POS rollout issues, partially offset by expense reductions and some tax rate favorability.

Moving on, interest expense was $2.2 million versus interest income of $0.9 million in the prior year.

Our effective tax rate was 20.2% versus 24.5% last year, and total weighted average diluted shares outstanding during the quarter was $73 million compared to $82 million last year.

Turning to the balance sheet.

We ended the quarter with $113.8 million in cash and investments and $235 million drawn on our revolver compared to $294.3 million in cash and investments and no borrowings on the revolver last year.

The primary driver of the change was the funding of the 2 acquisitions in fiscal 2018 and share repurchase activity.

With a solid track record of capital return to our shareholders, a strong balance sheet and our conservative capital structure, we are in a dominant and healthy position.

We repurchased 1 million shares in the quarter for $16.6 million and have returned nearly $200 million to shareholders year-to-date through share repurchases and dividends and are consistently focused on creating long-term value for our stakeholders.

During the quarter, we opened 3 DSW stores in the U.S., ending the quarter with 521.

In Canada, we opened 7 Shoe Company stores, ending the quarter with 119 Shoe Company stores and 27 DSW stores.

For the balance of the year, we do not expect to open any additional stores and are closing 1 Shoe Company store.

Lastly, I would like to share our guidance for the year.

The headwinds, which continued throughout Q4, combined with our shortfall in Q3, are resulting in us lowering our year-end guidance.

Most of the headwinds we faced in Q3 are nearly equally impacting Q4 in addition to additional pressure in Q4 related to increased shipping in this extremely digitally heavy quarter and more pronounced holiday promotional cadence.

Also, as Camuto's model continues to evolve, like most of their peers, into one, whereby their legacy customers shift more of their inventory risk to the vendor, they have not developed the muscles of strong inventory and sales planning that are required of someone being further down the supply chain.

As such, they have found themselves in an overbought situation on a few items.

We have since made several changes at the Camuto organization to help bolster their planning infrastructure, leveraging this highly developed skill set at DSW.

However, we now anticipate incurring roughly $0.10 of pressure in Q4 as we liquidate this inventory.

Thus, we see a little more headwinds in the fourth quarter than we saw in the third quarter and less tailwinds from expense reductions, given the reversal of our incentive compensation accrual that occurred in the third quarter and won't be a benefit to the fourth quarter.

With that, we are now seeing the full year EPS coming in between $1.50 and $1.55 per share.

Comp sales are expected to be flat for the year, and we expect total revenue to be up low double digits.

I echo Roger's comments that we do not take this reduction lightly.

We are laser focused on execution and delivering our new guidance for the full year.

With that, I will turn it over to Roger for some final remarks.

In closing, we faced a challenging quarter, and we know we have a lot of work ahead of us, particularly in the face of tariff mitigation.

However, we do remain encouraged by our ability to provide unique products and experiences both online and in-store to our 30-plus million active rewards members.

Based on our Q3 performance as well as our expectations for the remainder of the year, we lowered our full year guidance target.

This is not something we take lightly, and our full management team is committed to driving execution throughout the organization.

As we look forward, our business model and growth pillars remain intact.

We are making substantial progress towards our vision to develop capabilities to design, source and market differentiated products.

And with the integration of Camuto into Designer Brands, we're building a platform to drive growth and consolidation.

We have a long runway for growth ahead of us and are confident in our strategy will result in meaningful value creation and increased market share.

With that, we will open the call for questions.

Operator?

(Operator Instructions) The first question today comes from Sam Poser of Susquehanna.

Just a couple of questions.

One, why do you think there was such a differential between the comps in the margin in Canada versus the U.S., given that the weather impacted both?

That was my first question.

The -- I think it's -- the big thing, Sam, is that the inventory positions that have been taken up in Canada.

As you look at the direction we've headed is we've cleaned up inventory in such a way that we were able to manage the challenge that we had with weather.

Meaning that we were able to be in the sandal business in a more meaningful way there compared to where we were in the U.S. So -- and one of the big challenges that we had was we had a strong second quarter sandal season in the United States.

And the inventory positions we had hoped to have as we went into third quarter, we just didn't have the product from a sandal perspective.

And in hindsight, I wish we had a -- planned a higher sandal business, and that's how we told you before, we were going to mitigate it.

But the sell-throughs in second quarter ultimately limited our ability to be in stock in sandals as we went into Q3.

And then 2 more.

One, why did the -- in more detail, why is the POS rollout or margin -- I mean, what's going on with the margins with that POS rollout?

Yes, it's a good question.

As Jared had touched on.

Whenever we -- when we rolled this out, there were some capabilities around promotions that became available to the customer, and I should say, to our associates.

So an example would be you're standing at the register, and we have 5 or 6 or 1 or 2 promotional offers that are out there in the marketplace, and it provided visibility to a store associate to what those promotions are.

So you're standing at the register, you're checking out and all of a sudden, someone says to you to try and provide great service to, did you know Sam, you have a 20% off coupon.

And guess what you were already planning to buy because you were standing at the point of sale, and so we gave you a 20% coupon.

And frankly, we didn't need to get you to convert the sale.

So that's been really the big incremental charge.

And that is -- No, I'm going to say, and that is -- the fix for that is going in as we get through the, sort of, the closure of the holiday shopping that's going on really right up until about the 20th, 21st, something like that.

And then lastly, when are you consolidating the financial systems of all store segment?

And when do you plan on getting everybody on the same merchandise accounting system across the company?

Go ahead, Jared.

Yes.

We are still evaluating, Sam, the appropriate time.

We had started doing our RFP this year, as we shared with you.

During the quarter, we actually put that on pause as we were looking to diagnose what was going on in the business and streamline our resources and focus our efforts on projects.

So we're going to re-kick that RFP off again next year, and then we'll put a plan together from that point.

And do you think that they have more -- is there more visibility of their business in -- do they have more visibility of their day-to-day business with more control of it in Canada than they do at DSW in the States?

Oh, no.

I think the Canadian team would love to have the capabilities that exist in the U.S. is what I would tell you.

There's still a lot of work we have to do up there to give them access.

Frankly, it's more to reporting, Sam.

That wasn't an area that they had invested in over time.

So that's work we're doing right now actually.

And Sam, we're winning in Canada is we've got a great assortment, and we have been able to take the years of history that we have at DSW around the customer experience.

What the kind of assortments we could invest in, the digital experience that we could create, and we've relaunched rewards programs up there for both DSW and Shoe Company this fall season, and those things are paying gigantic dividends for us.

And then when you add into that, the inventory disciplines that we've put in place that, frankly, just weren't there, the combination of all of those things is what's really been driving the performance with an amazing team that Mary has pulled together.

The next question today comes from Rick Patel of Needham & Company.

Roger, you talked about headwinds from pulling back on marketing and inventory.

How quickly can you course correct on those things?

And is this something that we should expect to see in the fourth quarter or is this more of a 2020 event?

And then should we expect an acceleration in marketing efforts here in the coming quarters as you try to get people back into stores?

And if so, what does that mean for margin?

Yes.

I think the challenge that we've had in Q3, we've continued to see that challenge as we go through Q4.

We've gotten back after some of the marketing, but frankly, it was -- when you get into the holiday period, as you guys know, there's so much noise out there.

It doesn't cut through as clearly as when you're in your peak season, which is Q3 for us.

So we put some things back in place, but I would say it's more a 2020 as when you would see it sort of aligned with what we were spending in prior years or be perhaps a little bit higher.

And I would add to that, Rick, as part of your question.

From a margin -- bringing back margin standpoint, we do think that some of the headwinds facing the margin at DSW retail does subside, and hopefully, it starts turning positive.

However, as we mentioned on the call, we are calling out now $20 million to $30 million of tariff, direct tariff cost that we have been unable to mitigate, primarily at Camuto, but we'll see where all that shakes out at DBI.

But of the $170 million, we've been able to mitigate about $140 million to $150 million.

So there's going to be some gives and takes both within the coming year.

Yes.

And on that point, Jared, you talked about the -- some of the anticipated Camuto benefit to gross margins not materializing, given this incremental headwind on tariff.

So your initial plan was to improve gross margins by 240 basis points by 2021.

If we reduce that by roughly 80 basis points at the midpoint to reflect that incremental $20 million to $30 million related to tariffs, it would still imply about 160 basis points of gross margin improvement, which is pretty significant.

Is this a reasonable way to look at the long-term opportunity here?

Or are there other things to keep in mind?

I think that's very reasonable.

That is exactly how you should be looking at it.

I don't want to say that we have rerolled our LRP.

We'll be doing that and talking about that early next year like we planned on, but that's directionally the approach I would take.

Next question today comes from Paul Trussell of Deutsche Bank.

Just for a clarification on kind of the near-term outlook.

As we think about the factors mentioned, could you kind of rank, if you will, that the impact seen in third quarter as well as your updated fourth quarter outlook as we think about weather impact, higher shipping costs, the tariff mitigation and pullback on marketing and the POS issues.

Could you really dissect that a little bit more for us, please?

Yes, sure.

One of the things that we will have a very hard time getting specificity around is of our significantly increased promotional cadence.

How much was exactly driven because weather was suppressing interest in boots and traffic.

How much was -- because people were coming in and getting offers offered to them that they normally didn't even know they had out there through the POS system, and how much was our marketing not cutting through because we pulled back on it.

So we tried quite a bit to parse out those.

And to be perfectly honest, I've got 3 different models that attribute different for different amounts of impact to each one of those.

So what I can tell you is that our total markdowns at cost deleveraged about almost 350 basis points of margin at the DSW segment.

So we had about 100 basis points improvement and just our IMU, about 350 basis points of hit from markdowns.

So net, almost 250-ish basis points of headwind at the DSW margin side.

Shipping came in almost 130 basis points higher than LY, again, because we were very successful in promoting and driving traffic on the digital side to offset what we were seeing on the other side.

Going into Q4, I don't see those same levels staying the same for DSW.

In fact, I see pretty much tailwind to some extent.

We still are going to deleverage a little bit on the promotion side.

Shipping is going to be probably flattish to down a little bit of a deleverage.

Unfortunately, as I was mentioning in my script, what offsets the goodness, if you will, from turning around some of that is the Camuto liquidation.

And so cleaning up that inventory overbought that they did, that's going to come in at about $0.10 of headwind, and then the $0.02 of the direct tariff cost being absorbed within this year yet that we mentioned, that all adds additional headwind into our margin picture.

Paul, I think, to just give you a sense that -- I know the conversations that we've had for years about the the challenge we have during the Marpril time period, March, April, that 9 week period as well as the Septober.

And how we are always trying to figure out how can we take advantage of those weather swings in that window, either to sell more sandals when it's warm or to sell more boots when it's cold.

So I'll give you an example of how our third quarter played out.

For the 9 weeks of Septober, for the first 8 weeks, temperatures, primarily in the Northeast and Midwest, where the vast majority of our business is done, the temperatures ranged anywhere from 5 to 10 degrees warmer than the prior year.

We got to the last week of October, and temperatures dropped down significantly below the prior year.

And in that week, we did a 14 comp.

That's the roller coaster ride that we generally play in that time period.

And so I think our team, as we were going through that window, and we were seeing that we weren't delivering on the boot expectations we had, we had to get promotional.

And as we got more promotional, as you know, that means more markdown.

The fact that we had pulled back inventory in a material way related to the tariff concerns that we had and the impact it would have on consumer demand.

The combination of those things is what created the real margin drag that we had.

So in a nutshell, it's hard to point to what was weather versus tariff, but it's a combination of those 2 things created a quarter for us, that was just unacceptable.

And go forward, we're going to be thinking about how do we remain balanced in those windows of time.

That's helpful.

Bigger picture, maybe just talk a little bit more about what the tariff mitigation strategies were and to what extent has some of that effort actually played out in higher retail prices to the consumer?

And then you also make this comment in the press release, and you've reiterated that on the call about how some of these headwinds you faced this quarter will likely continue to impact results on a go-forward basis.

And I just want to make sure I understand which headwinds, specifically, you're kind of referencing there.

Okay.

No, thanks, Paul.

So I think the lack of diversification and the sourcing of footwear and handbags, frankly, it's been an issue at DSW, and I think other nonathletic footwear retailers for many years.

And when you look at where do you get the best product at the cheapest prices through a factory base where you have relationships for both us and Camuto that has been China.

So the biggest challenge we have faced is when we acquired Camuto, we hadn't planned on there being these tariffs.

And so what we've been trying to do is to transition this already large business called Camuto, which is one of the largest manufacturers of non athletic footwear in the world.

We've been trying to move that out of China.

And at the same time, we're doing that, we're trying to increase their production by almost 100%.

So the challenge that's put on us is, obviously, we're growing the Camuto enterprise in a big way, and we're trying to move it to places where, frankly, we haven't done business.

So we started by moving some of the key items through Camuto and DSW.

Moving those quickly into other countries, and we found some success in doing that.

But it couldn't offset the fact that we have this gigantic growth in private brands because it's so material.

And think about you're trying to grow outside of your core factory base on the first time you deliver product, if you're Camuto, for the DSW brand, that could have huge short-term sales risk as well as long-term reputation risk if we don't deliver the right quality of product for our DSW customer.

So our decision was initially to produce all these goods that we're doing in the factories where we already had existing relationships.

Because, frankly, we didn't want to create product that we thought could have some quality or delivery issues.

So that's one challenge that we faced.

But as we looked at what were the things we are doing to mitigate, again, $170 million, $170 million, the impact of the tariff.

We've mitigated $140 million to $150 million.

We've moved product out of China, and we're getting into other countries and roughly a dozen countries, we'll be doing business in.

We are leveraging the fact that we are growing Camuto in a huge way with existing factories to get better costing.

We're pushing back cost on our vendors.

I'm so proud of what the DSW team has done.

The vast majority of that mitigation has come from the DSW team sitting across the table from people they've had relationships with for 13 to 25 years or, in some cases, 50 years.

And saying, you know what, we're not going to be able to absorb the tariffs, and we've been able to work with our vendor partners to have them absorb that.

We've accelerated the private brand rollout in a meaningful way.

We've got product already hitting the floors that we're getting a good response to that will help us mitigate some of the risks.

We went back to every single supplier, and I'm talking non-footwear supplier and said, we are asking you to reduce whatever it is, we have in a contract with you by 5%.

Because if you're our partner, you'll come along on this journey, and we saved millions of dollars just by doing that.

That's sort of a different way of thinking about it.

We are passing some very small portion on to consumers.

On primarily key items and items where there's map pricing, we're taking some positions on raw materials, so we can be better positioned to and leathers and those kind of items.

And finding ways to grow in categories that are not manufactured in China is something else that we're looking at, athletic being a big part of that.

So for the most part, we've mitigated the big chunk of what I would say is the long term, which is the $20 million to $30 million we haven't been able to solve that will impact this go forward.

In the short term, the 2 pains we felt was we sat as a team, we had conversations.

And frankly, we were playing back to 2008.

And we said, what were the actions we took back then, when we saw a consumer pullback in a meaningful way.

And 2 of the big things we did was we pulled back on inventories in a meaningful way, and we cut our SG&A in a meaningful way, and we took both of those actions as we were exiting second quarter.

And in hindsight, given that the consumer still was out there spending money, I wish I hadn't made that decision.

And so those 2 things are the things we're feeling both in Q3 and in Q4.

So I apologize for the long-winded answer, but that -- I mean, we've done a lot of heavy lifting and work to mitigate the long-term impact, some of the decisions we made in the short term, frankly, weren't the right decision.

The next question today comes from Chris Svezia of Wedbush.

I guess, first, I just want to go back to the comment about Camuto and the supply chain and you guys just having a little bit more inventory for the fourth quarter.

How do we think about that as you kind of roll forward?

Is this just the fourth quarter or just due to the fact that the boot season didn't play out as well, and there are just something more inventory?

Or was there something more structural that you're learning about Camuto, it's capability relative to its retail partners?

Well, thanks, Chris.

I think our big learning is that as retailers are looking for their wholesale partners to take on larger inventory positions and being able to drop ship goods on behalf of the retailer.

The Camuto organization had really never built out a a strong planning organization.

So what we are doing is taking the planning capabilities.

We have built a DSW and up in Canada, and we are implementing those at Camuto, so that we ensure that we don't get hit with these kind of things go forward.

So I feel really good about the fact that while we had an issue in Q4, we're on this, and that will not happen again.

Okay.

And just an optic.

When we think about the private label rollout as you go into next year, anything we should be thinking about in terms of timing, things we should be thinking about supply chain as that starts to roll off?

Is it pretty even as you roll out next year or is it more weighted to the back half, or any color about that?

And the final question will be just on marketing.

When you said you pulled back on marketing, I guess, to us maybe it's the first time we're hearing that.

But when we think about sort of the loyalty programs and e-mail that went out, pretty comparable just in terms of frequency versus last year.

So I'm curious where you pulled back on marketing?

Maybe add some color about that in the third quarter versus last year.

Yes, I'll start with the marketing.

So really, I would describe the marketing pullback is more top of funnel, which frankly, is a broader reach than the very specific things we do around the rewards program, and it was a material pullback.

Again, we felt because we thought there would be a pullback from consumers that, that investment wouldn't generate the kind of return that we knew we could get out of a more detailed targeted communication.

So hopefully, that answers your question on the marketing.

On the Camuto side, the private label rollout.

You're going to see, just as we've done over the last couple of years, we're going to continue to grow that in the 30% to 40% range year-over-year.

There will be 1 or 2 of the brands that will be more, let's just call it, a launch because we really are doing some new things in those brands.

I don't want to get into the specifics of that.

But in general, you should see a steady flow or a steady improvement throughout the year around our private brand.

The next question today comes from Tom Nikic of Wells Fargo.

First, a quick clarification.

So the comp -- full year comp guidance of flat, you're up a little bit year-to-date.

Does that imply that Q4 is negative, something like a negative low single digit?

Q4 is flattish, I would say, to little tiny bit of negative, maybe a little tiny bit positive.

But it's more -- we guided to flat and that's for DBI, that's where we are, that's what we feel good about it.

Okay, got it.

So flat, maybe plus or minus a little bit?

Yes.

All right.

And then just kind of bigger picture on the comp.

All right, like, 2018 was a good year.

But when you kind of look over a longer-term period, I think if you basically take the average comp over the last 7 years, you are basically flattish, and you're flat this year.

I know at the Investor Day, you talked about targeting a low single digit comp.

But do you think maybe this is just a, sort of, a flat comping business at a high level and if you still believe that this is a low single digit comp or over the long term?

Like what are the drivers to get back to positive next year and beyond?

No, I think we still very much believe that this is a low single-digit comp retail story.

That is what we should be targeting.

And I think when we deliver the differentiated product, and we continue to work on the differentiated customer experiences and bring those to life, we still believe this should be kicking out comps.

There's no reason why it shouldn't be.

So yes, we still believe in that.

I would add to that, some of the things that we are doing related to differentiated services are what we are really looking to say how we make our experience different when it's not just a product, where is there a differentiator, either through our VIP rewards program or our services component, and we are excited with what we're seeing there.

And we think that our rollout of that should bring a lot of opportunity.

Got it.

That's helpful.

And then just one last follow-up.

You talked about Camuto having some of the headwind to Q4 from the overbought inventory positioning.

But when I think of, sort of, all the puts and takes, I recall that Q4 of last year was the first year that you owned them, and you had -- the inventory that you had that you sold through in Q4 last year was high -- very high AUC because you had the risk premium that the factories had built in to that inventory.

So I mean, how do we kind of think of the benefit of maybe some of the AUC headwinds that you had last year rolling off versus the promotional headwinds this year on the Camuto side?

Yes, I'm not -- I'm sorry, Tom, I'm not understanding the AUC headwinds last year.

We actually had made improvements on AUC.

Yes, yes.

My point is that last year in Q4, you had -- you sold product at Camuto that had very, very high AUCs because it was purchased -- it was inventoried, it was purchased before you owned the company.

So you should have an AUC tailwind this year, but then you also have the headwind from the promos.

And I'm just kind of thinking how do -- how does the tailwind from AUC compare and contrast to the headwind from promos and liquidation this year?

Yes, I see.

So I get what you're asking.

I think they probably offset one another, but it's more the bigger challenge that we have around AUC go forward is the tariffs at Camuto.

As we've said, the $20 million to $30 million that we see go forward, those are really, frankly, more targeted to the Camuto relationships than they are to the product that DSW is selling.

Is that -- hopefully, that answers your question.

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

Most of my questions has been asked and answered.

But just 2 really quick ones.

One is as it relates to the fourth quarter comp guidance of relatively flattish, considering that we're in a bit of a normalized weather trend now.

Can you talk about why comp wouldn't be a little bit incrementally better than the first?

Also, as a follow-up, when will you decide to to begin to reinstate normal levels of marketing spend?

Will marketing spend be relatively normal in the fourth quarter versus last year?

And I know you did mention in the -- for next year, you planned similarly, but can you talk about is there a ramp to it or, sort of, starting on day 1 of the new fiscal year, it will be normalized?

I would say it's it's more targeted to 2020.

While we did add back we found that it would make sense, given where our inventories are positioned to overspend in the marketing because we just didn't need to, frankly, be out there promoting in a huge way.

I think in general, as you think about the Q4, the pullback of inventory and pullback of marketing, it wasn't just a Q3 story.

It does lean into Q4.

And so while, yes, boots and weather has become more favorable.

You take a category like dress that was down roughly 20%.

When you don't have a level of inventory in there like we had pulled back, it's tough to convert that customer.

So again, in hindsight, we should not pull back our inventories as much as what we did because that consumer was still outspending.

So that's the that's the bigger challenge we face in Q4 is it's the combination of the marketing pullback, but also the fact that, frankly, we just don't have the inventory in some of the categories that, if I could do it over again, I'd want to have in our stores.

This concludes our question-and-answer session.

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

Thanks, everybody, for participating in the call, and I want to just share that back in March when we talked through our vision that where we were headed, we still very much believe in that vision, and we are very, very focused on delivering that plan of low single digit comps, as Tom had mentioned, holding our wholesale business flat and selling over $700 million of Camuto produced brands in our retail channels.

And despite was a very challenging fall season for us, I still really, really believe in that strategy and the direction we're headed.

So thanks, everybody, and happy holidays.

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