DSW's (DSW) CEO Mike MacDonald on Q1 2014 Results - Earnings Call Transcript

| About: DSW Inc. (DSW)


Q1 2014 Results Earnings Conference Call

May 28, 2014, 8:30 AM ET


Christina Cheng - IR

Mary Meixelsperger - EVP & CFO

Mike MacDonald – President & CEO

Debbie Ferree - CMO


Camilo Lyon - Canaccord Genuity

Scott Krasik - Buckingham

Sam Poser - Sterne Agee

Christopher Svezia - Susquehanna Financial Group

David Mann - Johnson Rice

Seth Sigman - Credit Suisse

Kelly Chen - Telsey Advisory Group

Mark Montagna - Avondale Partner

Taposh Bari - Goldman Sachs

Patrick McKeever - MKM Partners

Jeff Van Sinderen - B. Riley


Good morning, and welcome to the DSWe's First Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Christina Cheng, Senior Director of Investor Relations. Please go ahead.

Christina Cheng

Thanks Emily. Good morning, and welcome to DSW's first quarter conference call. Earlier today, we issued a press release detailing the results of operations for the 13-week period ended May 3, 2014.

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

Joining us today are Mike MacDonald, President and CEO, Debbie Ferree, Vice Chairman and Chief Merchandising Officer and Mary Meixelsperger our new Chief Financial Officer. Mary will start with a short discussion on our first quarter reported results, then highlight the details of our adjusted results for the first quarter. She will discuss our outlook for the full year. Mike will then elaborate our results and describe our progress on our strategic initiatives. After our prepared remarks, we will open the floor to Q&A.

With that, I will turn the call over to Mary.

Mary Meixelsperger

Thanks, Christina and good morning, everyone. I've been here at DSW now for just over a months and I've spent my time listening, learning and getting to know the team. DSW has a history of growing market share and profitability and I am thrilled to have the opportunity to be part of such a great retailer.

I've personally been a fan and a long time customer of DSW and it is exciting for me to become part of the team. I am also looking forward to working with all of you in the near future.

Our net income for the first quarter of 2014 was $38.6 million or $0.42 per share. This compares against last year's reported net income of $34.5 million or $0.38 per share, which included a net charge of $11.4 million or $0.12 per share from our luxury test. Excluding this charge, our net income declined by 16% from the prior year.

All of my comments this morning regarding year-over-year comparisons will relate to adjusted results, which exclude the impact of the luxury test in the prior year.

Sales for the quarter increased slightly from $596 million in 2013 to $599 million in the current year. Comparable sales declined by 3.7%. In the DSW segment, which includes DSW stores and DSW.com, comparable sales declined 4%.

Traffic to our website increased, but that increase was offset by declines in store traffic, such that total traffic was flat for the quarter. Conversion rates in both stores and dot com increased, but the change in the mix of customer traffic caused our total DSW segment conversion rate to decline by 2%.

Transactions for the DSW segment declined 1%. As the company has noted before, with the changes in customer behavior, we believe total transactions for the DSW segment better reflect the underlying dynamics of our business.

Within the quarter, there were sequential improvements in our comparable sales performance, but we've posted negative comp performance in each of the three months in the quarter.

We opened 14 new stores in the first quarter, bringing us to a total of 408 stores in operation as of the end of the quarter. So far, results in these new stores have lagged our projections, but we attribute this performance to the weak overall climate.

We expect these stores to demonstrate performance improvement as we move throughout the year. We plan to open approximately 35 new stores in 2014.

In our Affiliated Business Group, first quarter comps increased by 0.9%, and total sales grew by 4.3%. ABG ended the quarter with a total of 358 departments in operation.

Gross profit for the quarter declined by 210 basis points. Merchandise margin contracted by 150 basis points, and occupancy costs deleveraged by 60 basis points. The merchandise margin contraction was due to the acceleration of slow selling styles in the clearance, an incremental promotional event and higher shipping costs from Charge-send offset by favorability in our rewards reserve.

SG&A expenses were 10 basis lower than the prior year. Modest deleverage in store expenses was more than offset by lower incentive compensation expense. We spent approximately $1 million on our omnichannel initiative in the quarter.

Turning to the balance sheet, we ended the quarter with cash, short- and long-term investments of $548 million. This cash position does not reflect the $69 million payment for our investment in Town Shoes of Canada. That transaction was completed early in the second quarter.

Inventories at the end of the quarter for the DSW segment were up 1.4% on a cost per square foot basis. Clearance footwear units were -- per average store were flat to the prior year as of the end of the quarter. Capital expenditures for the first quarter were $25 million, $16 million was spent on new stores and store remodels, and $6 million was spent on technology projects.

Full-year CapEx is now projected at $120 million, which is somewhat lower than our previous projection of $130 million. As we look forward, we expect full year comparable sales to decline in the low-single digits and full year total sales to increase in the low-single-digit range.

We expect full-year merchandise margin will be 100 basis points to 150 basis points lower than last year with most of the deterioration happening in the second quarter.

We intend to exit the spring season with inventories lower than last year. We are now projecting earnings per share to range from $1.45 to $1.60, based on a tax rate slightly higher than 39% and 92.5 million shares outstanding.

Our guidance includes incremental spending of $10 million or $0.07 per share on our omnichannel initiative. It excludes any impact from Town Shoes of Canada. We still expect Town to be modestly accretive, but we are waiting on asset valuations to ascertain the exact impact.

The guidance also does not reflect the impact of any potential share buyback. You should not interpret this lack of a specific buyback assumption to reflect our buyback intentions one way or another.

With that, I will turn the call over to Mike.

Mike MacDonald

Thanks, Mary and good morning, everyone. We were disappointed with our sales results this quarter. We had expected to post a sales increase given the cold start to spring that we experienced in the prior year.

Unfortunately, weather was even less favorable this year. These conditions created a very competitive pricing environment in the quarter, which is reflected in our margin results.

In terms of sales performance, women's footwear was the weakest part of our business, posting a 7% comp sales decline. Women's shoes, which excludes boots and sandals, comped down 9%. Shoes that provided the greatest foot coverage performed better than more opened up footwear.

Women's sandals posted a 12% comp decline with regions of the country with seasonal temperatures posting better results than the balance of the country. We actually extended the boot season well into the first quarter and that proved to be a good move given the cooler temperatures. The boot category posted a comp sales growth of 26% on a relatively small base.

As you know, we have new leadership in our merchant staff for women's footwear. They are working hard to improve the assortment and to strengthen our value proposition. We expect those initiatives to gain traction in the second half of the year. We've already seen improved comps from our fashion oriented, better, and contemporary areas of the business.

Our men's and our accessories businesses posted positive comps in Q1. Athletic footwear sales were down slightly, and we believe that was primarily due to weather. Geographically, our south and west regions performed better than the rest of the country, also reflecting weather differences.

As Mary mentioned, our merchandise margin contracted by 150 basis points in Q1. This performance reflects the pricing actions we took in response to a very competitive environment. We are working with our vendor partners to ensure we are offering the most competitive prices so that our customer recognizes DSW as the destination for best value.

We are taking aggressive pricing action on slower moving product and sourcing more opportunistic buys. Value is one of our three brand cornerstones, and we'll continue to uphold our value leadership in the industry.

We intend to support our value thrust with more direct marketing messages, and we plan to engage a new ad agency to assist us in this effort. We are also fine-tuning our media mix to ensure we are reaching all of our customer segments in a way that are most relevant to them.

While our current business results are difficult, we are continuing to support our strategic initiatives that will further differentiate DSW over the longer term. Omnichannel is one of our most important initiatives. Last fall we implemented our charge-send capability that allows our 400 stores to act as mini fulfilment centers.

Earlier this year, we put in place our omnichannel team and that team is making excellent progress. We've begun to expose products on our website that were previously only available in store. Later this year, we will upgrade our website, which will provide improved search capabilities, customer personalization and additional payment options.

Also this fall, we intend to test new technology that will give our in-store customers access to the full breadth of the DSW assortment, which is far greater than the assortment we represent in any single store location. We think this capability will help all stores, but it will be especially meaningful to our small format stores of which we now have four in test.

I am also pleased to report that we've begun to pilot our new assortment planning system in one area of the business. This system will help us be more precise in the way we develop our assortment mix on a store by store basis. The system will provide bottoms-up recommendations per store assortments based on customer preferences in the areas of brands, fashion, price point and end use.

We also continue to benefit from our size optimization program, which we implemented more than a year ago. Size optimization has contributed to better in-stock rates and incremental sales from increased size availability. Size optimization remains a positive margin driver for the longer term.

As Mary mentioned, earlier this month, we closed on the transaction to purchase a 49% stake in Town Shoes of Canada. A put to call mechanism in the purchase agreement allows us to acquire the remaining 51% in either three or four years. Town operates a 182 stores in Canada, some of which are very similar to DSW, only smaller.

We've been looking at Canada for some time now and considering a variety of entry mechanisms. We ultimately concluded the best option was to acquire an existing business whose management already understands the new launches associated with operating in Canada.

We intend to use the town base of operations to open DSW brand and stores in Canada. In that sense, Town will function much like a franchisee for DSW.

Let me turn to our Affiliated Business Group. ABG had solid quarter and posted a 4% total sales increase in a tough environment. Similar to DSW, Sandals also had a late start in the season even for locations in the warmer regions of the country. This segment help drive traffic at our retail partners through effective marketing, promotion and product assortments.

Next month, our Affiliated Business Group will open the first Yellow Box Store. Yellow Box is one of the top five national brands in the sandal category and is an important vendor to DSW. Currently, Yellow Box only engages in wholesale operations.

Given the strength of their brand at wholesale, we partnered to co-develop branded concept stores this year. ABG has agreed to open and operate several Yellow Box Stores on their behalf. If tested successful, it could lead to a significant Yellow Box Store base.

In April, we began offering a co–branded visa card to DSW rewards customers. The idea is to give our customers the opportunity to earn points towards reward certificates when they make purchases both inside DSW and at other establishments. Faster point accumulation will lead to earning reward certificates more frequently, which should increase shopping frequency.

So from the foregoing, I think you can see that DSW is investing both in its base business and in growth vehicles as well. In summary, we've had a difficult first quarter. The consumer environment was challenging for a variety of reasons and that led to an intensification of competitive pricing.

DSW has and will continue to improve our content, sharpen our values and clarify our messaging to the customer. Simultaneously, we are investing in those initiatives that will lead to sustainable competitive advantage and growth.

With that, I will turn the call back to the operator to open it up for questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Camilo Lyon - Canaccord Genuity. Please go ahead.

Camilo Lyon - Canaccord Genuity

Thanks. Good morning, everyone. I was hoping you could give a little bit more color with respect to how you saw -- really the last time we heard from you, I think it was month and half or two months ago, what really changed there with respect to how we are looking at the guidance now, the new guidance that was issued and marrying that with the commentary around how comps have improved sequentially?

Just trying to bridge the gap there between what looks to be dramatic gross margin contraction in Q2 and what really changed that was so sharp from what we heard from you last?

Mike MacDonald

Okay. It's Mike. I am not sure a lot changed. I think what our guidance and our margin performance reflects is the fact that the business didn’t recover as rapidly as we had anticipated. As Mary mentioned, there was sequential improvement in comps throughout the quarter, but we were still negative comps for all three months.

I think the other thing that we have seen is pretty intense pricing competition, which we've obviously reacted to in order to give the same great relative value to the customer, but also to control our inventory.

So, I don't think there is -- aside from the pricing thing, I don't think there has been a lot that's changed. Really what the guidance reflects is that we haven’t recovered the business as rapidly as we might have anticipated.

Camilo Lyon - Canaccord Genuity

And then will you assume that, just by the commentary around it being relegated to Q2 that the pick-up in the back half will look like more of a normalized selling pattern, will your inventories be more in line or is there more inventory workdown that you expect to see in the third quarter?

Mike MacDonald

Well, first of all, our basic assumption that we communicated in the last quarter is that the new merchandize team that we put in place at the start of the year is going to take a period of time to implement the changes necessary to re-stimulate growth, particulate in the women's business, and we continue to believe that.

In terms of margin and inventory, we expect to enter the fall season with clean inventories, and that's reflected in our margin projections for Q2, which I think Mary mentioned is going to be the most challenging margin performance quarter of the year.

In terms of what the pricing environment will be in the fall season, that's a little harder for me to say, and it's a little harder for me to assess right now how much of the pricing intensification that we've seen so far this year is the result of others having inventory and balances that they are really trying to react to.

So, if perhaps there has been some underlying change in the competitive environment not related to inventory and balances, there is the chance that, that could continue into fall. Right now, we are thinking it's mostly inventory related.

Camilo Lyon - Canaccord Genuity

Thanks for the color, and then just lastly Debbie, if you could just talk about some of the trends that you are starting to see. I know that Sammy is coming up next week. What are you and your buying team in particular on the women's side most excited about that can help turn around the women's category?

Debbie Ferree

Yes, good morning. So, I'll say that Q2 really is behind us at this point in time, and we are anxiously awaiting the sandal category to turn on for us because we said prior Q1, sandal business still didn’t turn on for us as we are continuing to comp strongly in boots . So we think we are well positioned in the right item for sandal for Q2, but that remains to be seen how the customer votes on that.

So let's talk about the back half, which is sort of where we are really trying to spend most of our energy. We are excited about the boot category. Again, boots is a major category domination and distortion for us. We will distort it more heavily this year than we did last year.

We are going to put, what I call, a boot campaign behind the boot category with a more deliberate focus on some very strong marketing messages going back and beefing up some key items and making sure that the assortment really does what's different from what we have last year.

So goes boots, so goes the season, because in the women's area, it's almost half of the business in the back half. So we are pretty excited about that. We've gone back and made some adjustments. We’ve bought some great deals for the eight weeks prior to Christmas that we can really go out to the marketplace and offer our customers some really good value.


Our next question is from Scott Krasik of Buckingham. Please go ahead.

Scott Krasik - Buckingham

Yes. Thanks for taking my questions. Just digging back into women's, Debbie maybe talk a little bit more about casual and dress also, and then last year you made the decision to extend sandals more of a buy now, wear now, just can you clarify because you talking so much about boots for the back half, do you intend to do the same this year?

Debbie Ferree

So yes, good morning, Scott. So let's take sandals, what it appears to be doing in the market right now is it looks like the sandal business is actually starting three months later than what you would normally position the sandal inventory. So for example you typically think that sandal starts in February as they did last year and as they are doing this year, they are taking a later start like three to four months.

How the customers will respond to the sandals we have on the floor, we've got some good items. We've got some tough items. It's really too early in the game right now to see. Just last week, I started to see that sandal business shift slightly, but I haven’t really seen it turn on yet the way that we thought that it might.

You could say, it's partly due to weather, maybe it's content, we don't know. So we are waiting another couple of week to see that.

Having said that, we'll pick the best key items for sandal and we will extend them into third quarter little bit -- in a little bit bigger way than we did last year. So -- and watching that very, very carefully with the merchants, I'll make sure that we'll respond according to what the customer votes on.

As far as casual and dress are concerned, that just levels that everything kind of falls over levels in the first quarter. So coming out of first quarter, we do start to see and we talked about this on the earnings call last time, we do start to see dress pick up a little bit.

You remember that dress is still a small portion of our business, but we did start to see that business turn a little bit and into last week for the first week in a long time it actually comped positive. So I am encouraged by that. Not overly excited, but I am encouraged by it. We are going to watch that carefully to see what the customer actually buys.

Casuals overall have not bounced back at all. If you remember at spring 2013, we had a very, very strong casual business. Casual business started to decline. The back half of fall last year, we attributed that to a couple of things, mostly flats were over-penetrated because they’ve been out for a long time in the industry and the class of casuals were not fresh.

So the market really lacks freshness and what they brought to us. We didn’t really see that change very much for the first quarter. We have gone out, we've tested some new resources, they happen to be contemporary comfort resources. We are seeing nice response to that.

We have repositioned our inventory and cash flow to reflect the contemporary and the comfort businesses we see kicking in for us right now, but we will continue that through third and fourth quarter and I am optimistic there because of some of the selling results I've seen in some of the new product and new brands that we've brought in.

Scott Krasik - Buckingham

Okay, no, that's great. And then Mike, can you talk about -- you alluded to new store productivity missing your pro forma, may be just a elaborate on that and how you think about that in terms of your ultimate store potential in the future?

Mike MacDonald

I think what I said Scott is that what Mary said was that we were missing our pro forma sales in Q1 in the new stores in the 14 new stores that we opened and what we really think is really following the pattern of the rest of the business, which is weaker than what we thought and we really don't believe it's indicative of our long term sales potential for those stores.

In terms of productivity, I just want to remind you that the stores that we are opening this year have a smaller footprint that the stores we opened last year and the stores we opened last year had a smaller footprint than the stores we opened in the prior year.

I am speaking to sales per square foot, I am speaking to the sales production that you can expect out of those stores and just because more of our stores are closer to 15,000 than they are to 25,000 that's bringing the average square footage down, which is going to mean as you do you modeling, the sales per store is going to be lower than what it had been last year and what it had been before that.


Our next question is from Sam Poser of Sterne Agee. Please go ahead.

Sam Poser - Sterne Agee

Thank you for taking my question. A couple of things, number one, when you talk about the promotional environment, what type of retailers or where is that competition coming from? Can you talk a little bit about that?

Debbie Ferree

Yes, sure Sam. Good morning. I will take that question.

Sam Poser - Sterne Agee

Good morning.

Debbie Ferree

So I think the promotional activity I would describe it as disruptive, chaotic and really is across the entire industry and I think what you are seeing is business has been tough and I think that most retailers do to address that are just price reducing in a degree that I've never ever seen before.

So we all know that we can't chase price down and drive a growth business and so what we talked about in the earnings call is that we are going to be very proactive as we are right now.

We always have been, but will be even more so sitting with our vendor partners to make sure that we are competitive with everything going on in the industry so that we continue to drive value to the customer, but it's happening across the industry in every segment.

Sam Poser - Sterne Agee

Thank you. I just thought I want to give you a couple more things, number one; can you give us the details same-store sales by category? Number two, can we assume basically that you are going to sort of tap your comp line for the second quarter to -- assuming that things even got better, you are not going to be chasing, your job right now is to get clean and set yourself up to the back half of the year?

And lastly, could we assume also that based on what you gave us at average selling price in DSW stores in Q1 were down about 3%, is that correct? Sorry, I put them all up together.

Mike MacDonald

Yes, Sam, you are going to have to repeat some of those. So I think we said, women's footwear was down 7%.

Sam Poser - Sterne Agee


Mike MacDonald

Men's was up 2%. Accessories was up 5% and was down fractionally less than a point, next question.

Sam Poser - Sterne Agee

Could we -- average selling price for the quarter, just based on sort of what you gave us, it sounded like it was down around 3%, is that about right?

Mike MacDonald

It is.

Sam Poser - Sterne Agee

Okay. And could we -- and then lastly, could we assume that you are sort of capping your topline for the second quarter, but just making sure you are going to get clean, take the aggressive actions to get clean and then move on from there rather than cancelling orders and so on. And are you having to relook at the way you deal with vendors?

Most often you guys negotiate all your prices up and you are sort of done with it. Is this become a direct enough situation where you're going to have to go back to the vendors and say time to give us some mark down money and stuff like that?

Mike MacDonald

Let me handle the first part and give Debbie the second part. I don't think we are capping anything. I think we are committed to exiting Q2 clean okay, but we've always shown an ability to react to the business quickly and in those spots where the customer is showing the most receptivity.

So I wouldn’t want you to think we are capping the business. We are like -- we are staying very vigilant on the business and ready to bounce to opportunities as they become apparent to us. So I don't like that term cap. I'll turn it over to Debbie for dealing with vendors.

Debbie Ferree

So Sam what I will tell you is we offer everyday value from the minute that product hits the floor until the minute it's exited out of our clearance area. We work those prices with the vendors upfront. That will not change.

What will change is how we are looking at how we continue to drive growth and profitability for both DSW and that vendor and so that we are mutually successful together.

For DSW to be successful the vendor may have to look at the kind of value and cost that they are giving us on certain products, but we will not go back and be reactive and ask the market to cough up -- markdown money at the end of the season.

I would much rather go in at the front of the season, make sure that our product is fairly priced, is competitively priced so that from the minute it is on floor, it offers value to the customer, which will drive sales and the kind of sell through we need to drive top line.


Our next question is from Chris Svezia of Susquehanna Financial. Please go ahead.

Christopher Svezia - Susquehanna Financial Group

Hi. Good morning, everyone. I guess Mike, question for you. Going back little over a year ago, you guys were comping down 5% when you went into the first quarter last year, when you had your fourth quarter call and I think you had some visibility to get guidance at that point in time when it's very difficult.

Assuming that the comp progression improves throughout this first quarter, I don't know may be where you might have been comping at that point in time when you gave your guidance, but what changed this time that you felt that you can guide through a low single digit positive comp? What you are seeing in the business or hoping for the business to really turn, in April, to give you that confidence? And then I've got a couple of follow-ups.

Mike MacDonald

Chris it's really just confidence in the new team we've got in place in women's. We've said previously that we can't be successful in total that we are not comping positive in the women's business.

Obviously, the women's business continues to be a drag on overall business and -- but we do believe that the actions the new team is putting in place right now are going to change the course of the trend of our business in the back half. So that really -- it's not more than that.

Christopher Svezia - Susquehanna Financial Group

Okay. I'll move on. And just so Debbie a question for you, I am just curious here, when you talk about the overall -- I am talking about merchandise for a second, are you sure that sandals were bought under the old team and I think when you think about causal and the challenges there, is some of that bleed or has bleed into how you think about the sandal business as well and I am curious some of the changes you are making may be you can talk a little more specific about your confidence you think about the back half and the ability to may be turn that category around and may be have it comp positive, is that what you mean as you think about your thought process in the back half of the year to get to that negative low single digit comp of the year overall?

Debbie Ferree

Okay. Chris, you had several questions in there, so let me try to answer those and if I miss something, you will come back at me. So the sandal business, the casual sandal business, the season sandal business is being bought by the same team that's how we bought it. That is a seasoned team. They have a proven record over many, many quarters in delivering very strong sandal business.

We believed that this past quarter because it had a very slow start because of the weather, we actually believed that we had bought the right things. We bought core items. We bought trend items. The trend items, the early trend items that we placed our bet on that seem to be the big deals in the industry didn’t play out for us. Example that would be Gladiator, they just didn’t play out.

So we took some bets and we lost those bets. The place that we took bets on our four items fashionable, not fashion directional, those are actually doing very well. So I think this is typical of any quarter where some of the fashion you place your money on, it does work, the weather worked against us, but we do have some bright spots in sandals, but we still haven’t started to see it comp positive yet.

So that had a tremendous amount of confidence in that team. The division that, that team has actually been at DSW more years than I've been. She has a proven track record. She has terrific merchants under her and has the confidence that they continue to manage their inventory and buyback into the things that the customer is voting well on.

So that addresses seasonal. As far as the new team that actually fits over better and contemporary that is the brand new team. We have a new DMM in there that actually ran business before.

She ran the athletic and men's and you know her Crystal Kirk right. Proven track record as a merchant. She needs time to get in there and make the appropriate adjustments that she needs.

She has made some changes underneath her in terms of the buyers. She is retraining them. She is looking at things, reviewing things with them she feels are important in terms of how we curate our assortment, how we price our goods and how we present goods on the floor.

So she's got a lot of work ahead of her, but she has a proven track record in this building and she will demonstrate that in the women's business similarly to what she was able to do in the men's and the athletic area and you know her very well. Chris. I had introduced you to her before.

There are few categories under the cover in that area. The better and the contemporary area that still need to be I'll say quote unquote “fixed”. The dress area has been weak for quite some time. As I just stated, we've just started to see -- started to turn the corner a little bit. I am encouraged, I am not overzealous about it, but I am encouraged and we need to make sure that we continue to read what the customers are voting on to continue to buy that kind of product back in.

And so and the casual area, the other piece that she manages under contemporary and better that still hasn’t turned on yet as I just said when I addressed Scot's question early on in the earning call.

So we are looking for things that are going to rejuvenate that and reenergize that area. We've made some bets there with some new brands, new products that are proving very strong for us. Now we just need to wait to see that play out.

Christopher Svezia - Susquehanna Financial Group

Okay. All right. Thank you and just last quickly here, just on the men's business only up 2%, is that just a function of just soft traffic overall at DSW dragging down or is there anything structurally changing there. So decent, but probably at the lower end of what we've seen in the past.

Debbie Ferree

I think the total business has been suppressed and I think the men's is just a function of that. Men's were actually very, very pleased with and even though we had several good quarters a very, very strong positive comp, we still think there is additional opportunity there and we'll taking advantage of that in the back half.


Our next question is from David Mann of Johnson Rice. Please go ahead.

David Mann - Johnson Rice

Yes, thank you. with the growth in merchandise margin over the years in your comment about needing to improve your value proposition, can you give us a sense on how much change in pricing you think you need to do to get better in line with what the customer expects?

Debbie Ferree

So, good morning, David. Let me address, while talking about the mix underneath the covers of the product. So I think what we said is we are going to be increasing to be able to pass additional value to the consumer there is three different buckets there. Number one, we are going to be increasing the amount of opportunity buys that we do and that has closed out.

We have already started that, we are right in the heat of it and we are aggressively out in the marketplace to procure additional opportunity buys. We will be pricing those very sharply and I want to stress very sharply.

The second piece of that is our big core and key items. We want to make sure that we really do pass incredible value under the customers. So we are going back and we are looking at those to make sure that those are priced very, very sharply. So the customer sees that as one of the best values in the industry when she looks at buying that trend item for the season.

Number three, we have to make sure on an everyday basis, one everything else we do, on the makeup product and in line that we are priced competitively with what our customers can find at other retailers and that's what we are doing and it's a model that we are -- that we think is needed right now and I think that's it.

David Mann - Johnson Rice

In terms of the inventory plan for the second half, how conservative will that look in terms of relative to last year?

Mike MacDonald

We are going to go in slightly below last year in terms of our ownership position David and then obviously the sales trends will dictate where we go from there, but that's our intention is to go in pretty clean and pretty lien.

Debbie Ferree

David, if I could just add one thing to that and I am going to let a bit of humility stuff in here as I talk to you, we believed in the sandal business that the weather we had bought the right trend items. We bought the right core items and we felt that our inventories were positioned appropriately.

We believe the weather was not going to be -- was not going to live with us as long for good and it did. I believe that we need to manage our inventories even more tightly that we demonstrated in the first quarter, when I say less humility stuff in, when I look back, I say maybe we shouldn’t have let the sandal inventory that live as long as they did because the weather didn’t turn for us.

So the one thing that we do know is when we are in a chase mode and we operate lean and mean. We deliver results and we don't take excess markdowns. We will be running our inventory level very wisely and tightly in the back half, so we make sure that we demonstrate that.

We are in a good chase mode. We have opened to buy liquidity and we don't wait for maybe the weather never turns.


Our next question is from Seth Sigman of Credit Suisse. Please go ahead.

Seth Sigman - Credit Suisse

Okay. Thanks. Hey guys. First just a question on capital allocation and specifically the buyback, just how you were thinking about this quarter -- that this quarter given the stocks pull back and then related to that, were there any block out periods at any point because of the acquisition and then just a quick follow-up.

Mike MacDonald

Yes, we effectively, as you know the buyback program that we've authorized $100 million buyback program is an opportunistic buyback program. So it requires two things, one it requires a price that some could be may be deems attractive and two, it requires an open trading window because we are subject to the same trading restrictions as any other insider and we really didn’t have an open window in Q1.

So -- and because of the impending count transaction that, that window never opened. We do anticipate that there'll be an open window in Q2 and so it will be we will have an opportunity to buy back if that's what the subcommittee determines they wanted to.

Seth Sigman - Credit Suisse

Okay. And just on the SG&A front, just to clarify I think you said 1 million of the 11 million omnichannel spend hit this quarter, is that right?

Mike MacDonald

Yes, one out of 10.

Seth Sigman - Credit Suisse

One out of 10, right, and so has the spending plan been firmed up for the remainder of the year and maybe you can just elaborate on where that's going and the timing for the next couple of quarters or so and then just bigger picture on SG&A given the sales outlook, are there other levers that you can pull at this point to may be help navigate the next couple of quarters?

Mike MacDonald

Sure. I don't think I want to give you by quarter color on our omni spend. Our omni spend is still projected to be $10 million, the way it's going to happen is in -- there is some payroll, we've got an eight person team dedicated to omni as we described in the last call and then we've got a variety of software purchases and consulting purchases that will either be directly expensed in the P&L or be expensed through depreciation depending on the accounting treatment. So that's primarily how we are spending our money.

The other thing that the guidance assumes is that we will beef up our marketing spend in the back half. So that's the other key assumption. Aside from that, I think you know that we will be prudent in filling positions and we are going to be tight but we are committed to pursuing our key strategic initiatives like omnichannel, like assortment planning because frankly the business is changing as rapidly as any of us have ever seen and those strategic initiatives become even more important and we can't lose any momentum on that.

We've got a lot of projects ahead of us. We are going to re-platform our website this fall. It's going to help us with search engine optimization, it's going to help us with internal search within the website, it's going to provide personalization to some of our customers and it's going to give us new payment options.

So we are excited about all that stuff because we think it can drive more traffic to the website. It can drive more conversion. So I don't plan on slowing down on that stuff. So again we are going to save where we can without compromising our strategic initiatives.


Our next question is from Kelly Chen of Telsey Advisory Group. Please go ahead.

Kelly Chen - Telsey Advisory Group

Hey guys, thanks for taking my question. Just wanted to dig back into just the sales trends this quarter a little bit more. I know you guys said that it improved, but it was still negative throughout the quarter, could you just give us a little bit more color on the differences by region. I know you said the south and west were better, but also just kind of the magnitude of the acceleration.

Ultimately trying to get a sense of how much was really impacted by weather, if you’ve done any analysis on the number of selling days that were impacted for example. So just more color there.

Mike MacDonald

Yes, I am not going to get quite that granular. The comps by region went from very low single digit negative to a mid to high single digit negative and the degree of acceleration or improvement as we went from the front of the quarter to the back of the quarter was I would say modest.

It was an upward improvement. So there was some incline, but it wasn’t a dramatic improvement from February to March and March to April.

Kelly Chen - Telsey Advisory Group

Got it. Okay. And then just on the Town Shoes, just wanted to confirm the potential accretion from that is not in the guidance, correct?

Mike MacDonald

It is not.

Kelly Chen - Telsey Advisory Group

Okay. And then just could you give us a little bit more color on your early thoughts to how you want to approach that market, how you think about the market in terms of how similar the consumer is and how they shop, the type of merchandize that they buy and more color around the potential that you see in terms of synergies might be coming down the road?

Mike MacDonald

Well, the reason why we picked the partner like Town is because we don't think we internally with DSW have a deep understanding of the Canadian market and the Canadian consumer. Town Shoes has been in business for over 60 years and they’ve been operating successfully over their entire time period and so they will give us the base of operations to use to grow the DSW brand.

We are in the process of working with them rather intensively right now on ways that they could emulate the DSW operation in Canada that as it relates to product, as it relates to pricing, as it relates to communication with the customer and most importantly as it relates to the customer experience in the stores themselves and so that's how we are operating.

And we think that they will operate much like the franchisee does. They happen to be in own franchisee, but they are going to operate like a franchisee. So they are going to operate the DSW brands in Canada according to our direction but it will be Town Shoes organization that is managing those operations.

And with respect to potential synergies, I do think there are some best practices synergies that will come out of the process. In fact, we've already identified a few. I think there may be some joint sourcing opportunities down the road particularly for private brand product, but in terms of some kind of a wholesale integration of the two operations, we don't have that in our plans either now or in the future. We are going to let them operate as a separate organization.

In terms of what's different about Canada? I think the biggest thing is that there is less time to sell warm weather product and more time to focus on cold weather product and based on our numerous trips to Toronto that has become very obvious to us.

So the timing of receipt flow will be much different, but again this is the kind of thing that Town and their merchant staffing planning and allocation staff understands very well and we have confidence based on their long track record of success that they'll be able to execute that on our behalf; hope that helps.


Our next question is from Mark Montagna of Avondale Partner. Please go ahead.

Mark Montagna - Avondale Partner

Hi. Questions about second half, you had in fact expressed optimism for the second half and I am wondering if the guidance reduction is solely centered on the first half or are you adjusting your own expectations a little bit downward for the second half?

Mike MacDonald

Without getting specific, we reduced our expected results both from the second quarter and the second half.

Mark Montagna - Avondale Partner

Okay. And then on the past call, you had mentioned trying to get the athletic pricing a little bit below -- basically below the $85 level where technical athletic is priced. Wondering where you stand on that in terms of how far into the transitions? When can we expect that trend to be completed?

Debbie Ferree

Good morning, Mark. So -- and what we said is that we were increasing the fashion piece of the athletic business that was under $85 that is -- and that technical will come down slightly and more commercial fashion piece would increase. That is well underway and we are executing that against the plan and I am pleased with the results so far and that's proving out to be strong for us.


Our next question is from Taposh Bari of Goldman Sachs. Please go ahead.

Taposh Bari - Goldman Sachs

Hi. Good morning. Just a quick one capital allocations. Beyond the Town Shoe acquisition, were there other deals that you look into or are they open to making or was that kind of the key deal as you think about capital allocation?

Mike MacDonald

We don't comment on that kind of thing.

Taposh Bari - Goldman Sachs

Okay. I guess may be if I could reword the question, where do acquisitions fall into your cash used criteria?

Mike MacDonald

Well, we think we've got a lot of growth initiatives. We've got significant growth opportunity in our base business as we build out our 550 stores that are full size. We've got as you know a small store, small format initiative underway.

We already have four of those stores underway and in operation, that's being supplemented in a major way by our omnichannel initiative, which helps the in store customer in that 1,000 choice store have access to 25,000 choices there somewhere in our system.

Acquisitions of regional players in the footwear industry is also of potential down the road. We think that, that is either a core area of strategy to our small format store expansion or out just of replacement because frankly we want to be the best there is catering to small markets and omnichannel helps us do that.

So if we are successful there, I think we weaken the operating effectiveness of some of those regional players and that might make them more vulnerable or amenable to some kind of consolidation.

So that's what I would say about that. Obviously we think that the DSW brand is exportable and our foray into Canada is obviously a reflection of that I believe and we are going to learn a lot from Canada.

I mentioned that Tom is going to operate much like franchisee because I think that that is the most likely format that we would use to expand internationally is through a franchise operation, but we are going to use the Canada experience to learn and evolve that international strategy from there.

So hopefully that gives you some sense for all the things that we are working and where acquisitions fit within that.\

Taposh Bari - Goldman Sachs

I appreciate that and just one quick follow-up, you mentioned, I guess part of the bookcase on DSW is the whole idea is consolidation is fragmented industry and I was hoping you can comment more on what you are seeing in terms of the smaller regional players out there as you can comment on -- do you think that there is still a lot of opportunity out there as the category moves into an omnichannel distribution model and obviously those players I would suspect are much less advantaged when it comes to that kind of strategy.

Mike MacDonald

Yes, I've got some statistical evidence and some anecdotal evidence, statistically we know that over the last couple of years the top 10 retailers and footwear have grown their market share by several hundred basis points. So what that means is in total they've grown their market share the top 10 retailers, footwear retailers.

So that means that all the other retailers have had market share losses and I think that what that reflects is the difficulty that smaller less well capitalized, less technologically proficient, regional footwear players that they are going to have very difficult time being competitive in the new way of doing retail and that way is that the customer wants to shop seamlessly from store to the dot com site to the mobile site and she wants to access all the product with -- regardless to where it is and she wants help making that decision on what she should buy and once she decides what she is going to buy, she wants it delivered to her wherever she wants it and whenever.

And that is a major trend in the industry that we see. It's reflected in the traffic trends, other stores into mobile and into dot com and so I do think that those smaller players are going to have a difficult time catching up and being competitive with the ones who are making strides in the omnichannel strategy and fortunately DSW has a successful website and we have an outstanding omnichannel transformation plan that we are pursuing pretty relentlessly right now.


Our next question is from Patrick McKeever of MKM Partners. Please go ahead.

Patrick McKeever - MKM Partners

Great, thanks. Good morning. On the sandals you said their comps are down, I think was it 12%.

Debbie Ferree

I think we said 13%.

Patrick McKeever - MKM Partners

Perfect. So what percent of total sales were sandals in the quarter? I think in the past it's about 25% -- that category is about 25% of total.

Mike MacDonald

Yes, it was almost exactly 25%, when you count both the seasonal sandals and the very casual young attitude sandals.

Patrick McKeever - MKM Partners

Got it. Okay. And then a question on the new fashion jewelry initiative, just wondering if you could -- I mean assuming that had, there was some impact on that as well from just the weather and the weather impact on store traffic in general, but just wondering if you could give us a little color on what you saw there as you rolled that new merchandize into the stores early on in the quarter?

Debbie Ferree

Yes, so we've actually been pleased with being able to achieve our $15 million jewelry plan this year. We are making some adjustments. We had originally gone with one player in jewelry and what we found is that we needed a little bit different assortment and more enhanced assortment I would say and so we've gone out, we've selectively chosen some partners that were going to start proceeding from new receipts from them more along the fashion line, a little bit higher priced than our average retail right now and that starts actually for July, August delivery.

So I am pleased with the traction we've made. We had a successful roll out. We will be enhancing the assortment architecture and we are on track to achieve our plan.

Mike MacDonald

Can I add one thing, on the last question, I though the question was percentage of sandals to total women's, which is about 25%. If the question was percentage of sandals to total business, then it's more like 15%. So if I would, if I answered the question incorrectly, I apologize, but those are both numbers that you need.

Patrick McKeever - MKM Partners

Okay. And then on the -- just on the buyback, I know you’ve had a couple of question there already, but when you say just an opportunistic buyback program may be just wondering if you could elaborate on that a little bit. I mean I think get it, but just we're -- many of us wondering why not be more aggressive there? Understanding that the window is closed in the first quarter for much of it anyway, but for all of last year I think you bought that $1.6 million worth.

Mike MacDonald

Yes and I think that buyback price was something with a four, it started with a four. So that gives you some sense for what we thought about in terms of value with the time. We didn’t have a window in the first quarter and unlike can be 5-1 plan, an opportunistic buyback plan requires an open window and the right price.

So as I mentioned, I think the window will open and I think we've got a three person subcommittee in the Board that will be meeting. As soon as that window opens to evaluate our opportunities.


Our next question is from Jeff Van Sinderen of B. Riley. Please go ahead.

Jeff Van Sinderen - B. Riley

Good morning. Just a follow-up on inventory, just trying to understand better I guess where the inventory overhang is going into Q2? Obviously I would imagine partially sandals, but is it also more widespread into the other parts of women's footwear, maybe you can just comment on that?

Debbie Ferree

Yes, so we've taken some pretty aggressive markdowns that you see reflected in our performance this quarter. We believe that we are well positioned right now in the right inventory and the right quantities to do second quarter business.

The only thing that is the big question mark is if sandals don't kick in the way that we think that they will in the second quarter, there may be some additional sandal markdowns to take there, but as far as the dress inventory, the casual inventory and the sandal inventory, we have done re-pricing, we've put more things in the unit letter and we have addressed everything that we know up until right now that we think that we need for second quarter.

We'll leave a little bit of a slush fund just to protect us if sandals don't kick in, but we believe that our inventory is positioned in the right way and that we are clean going into second quarter and as Mary mentioned earlier, we will come out of second quarter lighter than we did last year.

Jeff Van Sinderen - B. Riley

Okay. And then in the categories where you -- the main stay of your business is, as you look towards second half in the women's business, do you think that there is enough newness in terms of let's say trends -- product trends to drive that business to be positive for you and again speaking towards second half and may be for example you can just touch a little bit more on boots what you see being the driver in boots versus relatively strong prior seasons?

Debbie Ferree

Yes, so in the boot area, I think that there is enough newness and we really did force that newness. We struggled a little bit with some of the product that the marked showed us. We went out and we re-detailed things in a different way to trade add freshness to the product.

So we saw a little bit of newness in the industry, not as much as I would like to have seen, like I said, we kind of forced that because we have a strong SMU make-up program here, but we actually influence material and color differently than what the market shows us.

So I am actually encouraged by the last line review that we just did in boots and more encouraged by the very strong marketing campaign that we are going to have behind boots that we really feel will position DSW as the dominant go to player for the boot business.

Dress, like I said, we just started to see that turn around. It's too early in the game to call that and we are not seeing a lot of freshness in the industry. What freshness we will put on the floor will be through material and color changes, not so much silhouette. There's not a whole lot of new silhouettes in the industry.

Casual, I am concerned about and I am concerned because some of the new brands that we brought in are doing exceptionally well, but will that be enough to offset some of the big players that locked freshness that actually started last fall by not performing for. So I am cautiously optimistic.


And this concludes our question-and-answer session. I would like to turn the conference back over to Mike MacDonald for any closing remarks.

Mike MacDonald

Thanks very much. I want to thank all of you for your interest in and your support for DSW. We're obviously pretty keenly aware of our obligation to maximize shareholder value, but at the same time managing the business with a long-term perspective and as you’ve seen in recent years, you can count on the DSW team to do exactly that going forward.

So thanks again and have a productive day.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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