DSW Inc. (DSW) CEO Roger Rawlins Hosts DSW and Authentic Brands Group Announce Acquisition of Camuto Group Conference (Transcript)

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About: DSW Inc. (DSW)
by: SA Transcripts

DSW Inc. (NYSE:DSW) DSW Inc. and Authentic Brands Group Announce Acquisition of Camuto Group Conference Call October 10, 2018 8:00 AM ET

Executives

Roger Rawlins - Chief Executive Officer

Jared Poff - Chief Financial Officer

Analysts

Camilo Lyon - Canaccord Genuity

Rick Patel - Needham and Company

Dana Telsey - Telsey Advisory Group

Dylan Carden - William Blair

Tom Nikic - Wells Fargo

Chris Svezia - Wedbush

Patrick McKeever - MKM Partners

Operator

Good morning. And welcome to a special conference to discuss our announcement of The Acquisition of Camuto Group. Please note that various remarks made about the future expectations, plans and prospects of the company constitute forward-looking statements. Results may differ materially due to various factors listed in today’s press release and our public filings with the SEC. And we assume no obligation to update any forward-looking statement.

I would like to remind listeners that this conference is being recorded with slides. The complete presentation will be available on the Investor Relations section of our website on dswinc.com at the end of this conference call.

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

Now let me turn the call over to Roger.

Roger Rawlins

Good morning. And thank you for being with us today. We’re thrilled to discuss an important milestone in DSW's history. With today’s announcement of the acquisition of the Camuto Group, a leading footwear design house, founded by the legendary Vince Camuto, the creative genius behind the growth of the Vince Camuto, Jessica Simpson and Lucky Footwear Brand. The Camuto Group has a track record of developing highly differentiated brand that reach consumers through 5,400 points of sale in 70 plus [Countries] [ph]. Our resources reinforce their ability to achieve Vince vision to become of global consumer franchise, and we’re committed to preserving Camuto's heritage.

We welcome this team to our family and look forward to realizing Vince Camuto’s vision together. This partnership transforms our organization into one of the largest footwear franchises in the North America with capabilities than enable us to reach customers across diverse points of sales. Our own industry-leading DSW retail network and now new to our channel of wholesale, brand owned direct-to-consumer, licensing and international franchising.

Let me share what brought us to this point. Our company has deep roots in retail, and has built a solid foundation in the success of Designer Shoe Warehouse since the first DSW opened its doors 25 years ago. We’ve also been serving third-party retailers for an independent division to develop and operate custom footwear retail solutions. Today, we’re a valuable consumer franchise operating on an international scale. For some time, we’ve been focused on growing share in a fragmented market, primarily relying on the combination of store expansion and comp sales growth. While this approach has driven market share, it's yielded relatively modest market share gains considering the significant investment required.

Most recently, we've acquired a new Canadian subsidiary in Town Shoes Limited, which has paved the way for our successful entry in Canada and advanced our market share position in North America. But what got us here won’t get us there. And so for the past few years, we’ve been developing a long-term vision to strategically grow share in markets with the most attractive growth prospects, specifically the [indiscernible] consumer. This is important because as the retail landscape evolves strong brands with the ability to build the direct-to-consumer model have captured increasing market share. This fundamentally changes the game for retailers like DSW who are essentially brands a brand. And so we’ve been on a journey to develop our own exclusive and proprietary brands to increase our competitive differentiation and have made good progress. However, to expand the business in a meaningful and substantial way, we need top-notch in-house design and sourcing capabilities.

For some time now, we’ve been evaluating several options to build or buy these capabilities. We began the journey by going directly to factory [indiscernible] establish design and brand building competency. Next, we developed the relationship with the large and reputable design and sourcing entity, which became the sole provider of our exclusive brands. However, we have determined that the solution is to own these capabilities ourselves to capture profitability and associated benefits, ultimately to control our own destiny.

Through this experience, we’ve gained a solid understanding of the cost and efforts required to build such capability from scratch. Not only would it require significant capital investments and operating expenses, but it would require navigating a steep learning curve involving securing design and brand building talent, sourcing raw materials, engaging multiple vendor partners, managing overseas factory relationships and delivering quality assurance throughout the process of transporting finished products back to the United States. This would introduce significant risk into our organization, which has limited prior history of managing complex manufacturing activity.

That let us to consider acquiring a sourcing and design organization. We evaluated many options, and we're very excited with the opportunity afforded to us by the Camuto Group given its successful track record of brand building, its reputation for high quality design and product standards, as well as the additional and immediate benefit of scale and design, sourcing, manufacturing, distribution and logistics.

We've partnered with Authentic Brands Group, a global brand management and marketing company, to acquire The Camuto Group for approximately $375 million. We expect to contribute $256 million to purchase the core wholesale and e-commerce operations. With the new state-of-the-art distribution center in New Jersey and licensing rights to Jessica Simpson, Lucky and Max Studio, of which DSW is among the largest customer. The transaction also gives our company a 40% stake in the newly created joint venture with Authentic Brands, which will focus on licensing and developing new category extensions to support the global growth of other Camuto brands. The acquisition transforms our business with new capabilities to design and source for other retailers in different distribution channels. We have the highest respect for the organization that Vince built and look forward to preserving and growing the relationships established across the wholesale channel. Recognizing Camuto Group's expertise in this area, we intend to integrate slowly, maintaining this line of business as separate and independent from our own retail operation, as we have done for the past 20 years with our affiliated businesses and most recently with our Canadian acquisition.

The Camuto Group will maintain its existing headquarters in Connecticut and remain under the leadership of their long standing CEO, Alex Del Cielo. We are committed to preserving the brand's equity, the Camuto Group has created over the last 17 years, and we'll continue to manage and grow its distribution with great care. An area of growth that we feel we bring substantial competency to the organization is the direct-to-consumer space. A healthy direct-to-consumer business is essential to sustain customer demand on the wholesale level. As Camuto grows their direct-to-consumer business, we believe our retail and best-in-class e-commerce expertise will boost their ability to deliver an exciting direct-to-consumer experience.

Let me now turn the floor to Jared to discuss the financial implications of this transaction.

Jared Poff

Thanks, Roger. We could not be more excited about this new partnership and the opportunities to create value and accelerate top and bottom-line growth for our company. As announced in our press release this morning, under the terms of the agreement, we have agreed to acquire the Camuto Group in partnership with Authentic Brands for approximately $375 million subject to customary closing conditions.

DSW will contribute approximately $256 million to this acquisition, while Authentic Brands and another co-investor will contribute the balance. This transaction provides us with complete ownership of Camuto's operational infrastructure and related business, a 40% stake in a newly created joint venture with Authentic Brands, which will earn the intellectual property of Camuto's own brands.

We intend to finance the acquisition with our existing cash and draw upon $150 million from our credit facility. We project our post acquisition debt-to-EBITDA ratio will remain well within compliance of our existing covenant, and believe future cash flow will provide us with the flexibility to pay down this debt within the next three years.

Let me provide you with additional background on the Camuto Group. The company grew out of a direct sourcing business for third-party brand such as Tory Burch, BCBG and Jessica Simpson, and founded the Vince Camuto footwear brand nine years ago, which has since expanded into other categories like apparel, jewelry, handbag and men's and kids footwear.

In 2017, the Camuto Group generated total revenues close to [ph] $435 million, 75% of which was in wholesale footwear sales led by the Vince Camuto brand. The company's expansion of its retail network and the opening of its New Jersey distribution center created significant liquidity [indiscernible] and earnings pressure over the last two [ph] years. These, along with the unexpected passing of Vince Camuto himself, led to the Camuto Group's family decision to put the business up for sale. The timing of this sale gave us a rare opportunity to acquire the design, sourcing and brand-building capabilities that we need, coupled with a substantial expertise of an established business for a comparable price to building out our own infrastructure.

What does it mean to Camuto Group? First, we bring best-in-class operational expertise and retail innovation to accelerate the growth of their direct-to-consumer business. Secondly, our distribution and logistics expertise will create opportunities to leverage our combined infrastructure and create operating efficiencies. Third, we provide additional scale to Camuto's sourcing operations with our own exclusive brand portfolio. And lastly, DSW's 25 million reward members provide vital test and learn data to inform future product development and speed to market.

What does it mean for our company? We increase exposure to new channels of distribution where consumers are purchasing footwear. That means we are growing a portfolio of intellectual property to establish a greater point of differentiation and a larger addressable market. We acquired a design and sourcing infrastructure that is vital to our continued growth, but also comes with a well-established revenue generating business. In addition, we expand our reach to millennial customers who shop for Camuto's brands and other channels.

And finally, the partnership with Authentic Brands provides marketing and brand-building expertise, an expertise which has allowed them to build an aggregate 230 million followers online and potential access to a portfolio of 33 lifestyle and entertainment brands for future category development.

Following the acquisition, our business model evolves from one that is 100% focused on North American retail to a model with new revenues from wholesale, licensing royalties and investment income. Furthermore, it diversifies our business by increasing our exposure outside the moderate channel to improve department stores, regional chain, independent boutiques, pure play online and digital marketplaces. This transformation also gives us indirect exposure to adjacent markets outside of footwear and accessories as these brands grow their global franchise. While the Camuto Group has been challenged with supply-chain constraints over the recent past, we believe the financial resources and credit strength we bring will allow them to return to a more normalized posture over the next 12 to 18 months.

We firmly believe the transaction creates significant revenue and profit synergies that exceed the benefits of simply integrating the Camuto Group. These synergies come from the fact that DSW is already one of the largest customers of Jessica Simpson and Lucky footwear. The gross profit we recapture for the enterprise versus leaving it to a third-party sets this business on a relatively quick path to accretion even when taking into consideration the new royalty to be paid to the joint venture between Authentic Brands and DSW.

As this new joint venture generates royalty income from brand licensing to new and existing partners, we will receive equity income from this investment. These immediate benefits deliver returns on investment sooner, and if we were to build these capabilities from the ground up and with much less execution risk. Based on anticipated synergies, we believe this transaction will generate significant earnings accretion long-term.

We expect the transaction to close in our fiscal fourth quarter. Pending this close, we will provide more detailed financial expectations during our third quarter conference call in December. As we integrate the business, we will develop a strategic roadmap and long-term financial outlook for the entire enterprise, which we hope to share with you some time next year.

And now, back to Roger.

Roger Rawlins

Thanks, Jared. This is a big day for our associates, partners, vendors and shareholders, as well as our new associates, wholesale customers, licensees and manufacturing partners. We believe this change is an exciting opportunity, and it's vital to ensure the long-term growth of our organization. We are honored to build upon Camuto Group's relationship with this exceptional set of wholesale partners. And we intend to earn that business everyday by tirelessly upholding the design and quality standards they have come to expect. We’re particularly excited about the talent we’re adding to our organization today. And I’m going to welcome our new associates and partners to the family, and pledge to continue earning your trust in our organization and our shared future every day.

In summary, this acquisition creates a brand powerhouse that will fuel new growth opportunities. We’re confident our disciplined approach and strategic leadership will position The Camuto Group to achieve continued brand loyalty and sustainable profitable growth.

We’re now happy to take any of your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Camilo Lyon with Canaccord Genuity.

Camilo Lyon

Very interesting transaction. Congratulations. A few clarifying questions. Number one, Jared, just at the end of your prepared remarks you talked about long-term accretion. Could you just give some details on what the EBITDA was of the company prior to or at the close? And what is long-term meaning of perspective? How do you -- how should we think about what the actual multiples paid on this business? And when does that accretion really start to materialize?

Jared Poff

Sure, Camilo. So, I guess, I want to set the stage sort of first how we were looking at the valuation. So as Roger had mentioned, we have been looking at building out our infrastructure for quite a while and we've done a lot of diligence through this transaction as well as through prior transactions and from our history of our private brand portfolio building. With that, we kind of look at a buy versus build valuation. And given some of the performance issues that Camuto has had over the last few years, as they opened up retail and then had to shutter that and as they try to bring in new distributions in their online and really ran into some liquidity problems, it gave us a chance to opportunistically buy this for something that, I would say, is certainly an opportunistic price. And so, we really looked at it from that perspective. What I would tell you, when you look at more -- they're more stabilized past, they certainly have healthy EBITDA margins, slightly dilutive from a rate standpoint to what we see, but still a very strong business. And one that has a lot of untapped potential in some areas where we bring a lot of strength to it.

From a sales to EBITDA standpoint, when -- or sales to enterprise value standpoint, when you look at what we’re paying versus what their sales are, certainly they seem to be right in line with something that is relatively well priced transaction. And from a timeframe standpoint for accretion, there are some things that we want to do to stabilize the business, they have been stressed on liquidity. So making sure that their factory partners understand who we are, what we’re bringing from a credit quality standpoint, so that they can make sure that their supply-chains are freed up. And there are some things that just naturally move into our benefit. I mentioned on my part of that recorded call. But we are already the largest customers in Jessica Simpson and Lucky Footwear. That is a healthy gross profit that right now we will start retaining within our organization versus letting that slip outside to what was going to Camuto. And then our 40% ownership stake and the joint venture with ABG, one returns a good portion of the royalties that we are paying, but then also allows us to earn royalties on the apparel business as well as the other ancillary lines. So long-term is -- I wouldn’t say accessibly long, but we do want to make sure we stabilize the business and get it back on good footing.

Camilo Lyon

Got it. Again, just -- I just have a healthy dose of questions. So just following up on that, it's my understanding that the only profit generating part of the business was the dresses piece of the business and that footwear was actually unprofitable. Was that -- were it to glean from the commentary around the issues that you spoke about with supply chain and some production and retail costs and distribution costs that they’ve gotten over their skis on?

Jared Poff

I would say that in the very, very recent past i.e the last 12 months to 24 months, that’s where they ran into the issues from the footwear business that really put a strain on their liquidity. Overall though, what you’re hearing is not correct. Their footwear business was absolutely profitable and something that, I think is a – is something we would certainly expect to return to profitability under our ownership.

Camilo Lyon

Okay. And then just you talked about the different revenue generating streams one of which is wholesale. So Camuto has a large private label business. Maybe you could talk why -- the first question is, did you speak to the wholesale partners or the customers of the Camuto Group prior to the announcement of this transaction? And should we expect any sort of disruption with that relationship now that there is a conceivable competitor that is also going to be sourcing product for one of its customers?

Roger Rawlins

Yes. This is Roger. I can take that question. And, yes, we’ve had a chance to talk to all of our partners. And I guess our lens is slightly different than how you just described that. If you are aware that we've actually done footwear sales within other retail partners for the last 20 years through our affiliate business group. So we actually have a history of what I would say is keeping a wall between what is the Designer Shoe Warehouse brand as well as the other brand affiliated business group that we operated. So, I think, we have that history. But what I really am excited about is we are experts in our space when it comes to footwear retail. And we can bring something to our partners. So how do we actually take the fact that we have a significant customer base that we can learn from, and how do we help Macy's? How do we help Dillard's? How do we help Nordstrom? How do we help those folks grow market share in footwear? And just as we've done with our affiliate business group partners, when we're driving footwear sales, it drives the whole box. And so that's the lens we're using to come with this. And there are other people that we work with day in and day out that also have the same capabilities that are out there doing this same thing, running retails, running wholesale. So it's not like we're the first people to go down this path. So my view is if we do what's right by the Camuto brand and do what's right for our retail partners, we're going to be in a very, very good place because we both should be growing in a big way.

Camilo Lyon

Got it. And then, I guess just my final question. Just going back to -- just understanding that these assets that you are purchasing -- so from my reading of the release when you are talking about the sourcing and operations of the Camuto Group, really talking about an agent right, you are running kind of the office and the infrastructure, have a buying agent in China and in Brazil, along with that new distribution center in New Jersey, right? Those are the -- as well as the working capital inventory asset. Is that -- is my understanding correct in terms of the actual physical assets that you are buying?

Jared Poff

Yes, and again just to break it down a little more for you. When you look at the $256 million -- and those are approximately, subject to closing adjustments so and so forth, but of the $256 million, roughly $56 million of that is for the -- our participation in the intellectual property fees of this transaction. The remaining $200 million, almost half of that is for working capital, which we've certainly scrubbed and done a fair amount of due diligence on. We feel very good about that. And then there also is a distribution center, which is actually brand new, although they had some integration issues, it's something we've got expertise in that we think we can easily turn into a well oiled-machine and help them make that into quite an efficient operation. So of those, you strip away those two things, what else we're buying is basically the proprietary kind of knowhow to build high-quality men's and women's shoes. And I've spent time as part of the due diligence going over to China, where they have a pretty substantial office over there. They have an infrastructure that has been perfected over years and years of experience. And it's something as we were looking to build this out. We said, if we were to do it ourselves, that's certainly is something where we see a high degree of execution risk on our side given that we've never done anything like that. And to be able to do it at the scale that we are talking about, even just at our existing private brand business, let alone growing that business, it's something that we felt very good with the infrastructure that they had.

Camilo Lyon

Got it. And then just last piece on that. Is the retail stores -- there is no -- are you also taking on the retail stores within this transaction? Are those being shuttered?

Jared Poff

They’re already shuttered. So there are three remaining leases, but no retail operations going on than they have. I think its seven franchise stores overseas. And that’s part of the business that will be managed by ABG, but that [indiscernible] brands -- but that is there is no retail operations anymore.

Roger Rawlins

Camilo what I would say is there are no retail stores, but we are in the game of retail because we have an incredible opportunity to take the digital experience we have as DSW, which -- I only see the market share data that we can give, which I think we are number one or number two in digital sales in footwear. We have the ability to bring that to life for these brands in a much bigger way. So I think our expertise there having that lens of the customer is really going to help this company grow.

Operator

And the next question comes from Rick Patel with Needham and Company.

Rick Patel

I have a question about the near-term potential dilution that could come from this. I just want to be crystal clear on this. Is that coming primarily from taking on debt to finance deal? Or is that because operating margins of Camuto are currently negative? Or is it a little bit of both contributing to that?

Jared Poff

Yes, I wouldn’t say anything for sure. We just wanted make sure we were conservatively posturing. There is a little bit of both. So there is some incremental financing costs, which normally we wouldn’t have in our infrastructure, right now. There is the potential that some of the integration of bringing them in and being able to make sure that they perform over the rest of this year with the liquidity constraints that they had. We want to make sure that they are able to get all of their orders that have been placed out to their customers. So there is some airfreighting going on right now to ensure that deliveries are made on time. We feel very good that that should not be a problem. But we -- there is added expense. And then as they bring the distribution center, still underutilized from an efficiency standpoint, there is some additional manpower to just kind of get that through the holiday season. So those things have been layered in from a conservative standpoint. And we just wanted to posture that way. Again, I think the fraying up of liquidity as well as getting the DC up to full operating efficiencies are areas that we see -- we think are relatively easy in our wheelhouse and being able to free that up as we go through the first 12 months of ownership.

Rick Patel

That's helpful. And can you help us understand Camuto's growth opportunities, as we think about the assets you're acquiring? What's going on in terms of wholesale, DTC and licensing across growth opportunities as you think about the most compelling brands and market?

Roger Rawlins

Rick, this is Roger. I think, truly four buckets is how I would describe it. First, obviously, the wholesale side, how do we ensure that we can help Dillard's, Macy's, Nordstrom, all of our partners grow their business. We think, again, our team can help the Camuto organization drive that. Number two, it's private brand for the DSW enterprise. When you think about the fact that today private brand represents roughly around 10% of our total sales. We think that is a low number. So we see that is growing in a much, much larger way across our enterprise of DSW brand. But not just the DSW brand, but remember with our acquisition of Town Shoes, we have the opportunity to grow private brand, the Shoe Company, Shoe Warehouse, all of the other retail outlets that we now -- that we manage. Third, on the licensing front, obviously, going into this relationship with ABG that we respect, they have a history of being able to grow these kind of brands. And we think that's a huge opportunity for us, which is why we took a 40% ownership stake. And then the fourth one is the direct-to-consumer that I had mentioned before. I think our penetration at Camuto is significantly below the overall market. And when we look at market share gains over the last six or seven years in footwear, the vast majority of market share gains have come from two places, Amazon and our brands going direct-to-consumer. And the fact that that hasn't happened in a big way here, again, with our expertise in the digital space, we think we can really help grow that. So those are the four big buckets of growth. But, as I know, we have a lot of folks on our team, as well as the Camuto team listening, we're not going to get really aggressive after that in the first 12 months. We're going to, as Jared said, we are going to make certain we learn the business that we ensure that our wholesale partners are getting what they expect from the Camuto organization, and then we’re going to build our strategy, so that as we move forward we’re very, very successful. We’re going to learn from some things we've done in past to ensure that this -- we move at a pace that can be digested by both enterprises.

Rick Patel

Any context on how much of Camuto's business comes from DSW stores as we think about sales in those 5,400 points of distribution?

Roger Rawlins

Yes, I would tell you Rick, we prefer not to message that when we get to our whole game plan together of where we're taking this that we can -- our goal would be in the next several months to be able to get in front of you with the bigger strategy around this that we can communicate. We can talk about that then, but not yet.

Jared Poff

Yes, the only thing I would add, and we mentioned this on the call is from the Jessica and Lucky brands we are one of the -- one of or not -- if not the top customer, and then if both of those brands. But on the Vince Camuto brand itself, that's actually not much of a business for us at all. It's a different product and different customer. And that’s where really Nordstrom has a very big business, Dillard's has a big business, and Macy's as well. So we think that there is some interesting differentiation there from a portfolio standpoint.

Roger Rawlins

Yes, I think, Rick, to reinforce that point, there is very little business that has done today through Camuto in a DSW. And that is our intent go forward as the commitment we made to our wholesale partners is big. That’s a brand that we’re going to keep in those channels as we said here. So again, that's part of the conversation we've had with our retail partners.

Operator

Thank you. And the last question from Dana Telsey with Telsey Advisory Group.

Dana Telsey

Hi, congratulations on the transaction. As you think about the integration of Camuto Group with DSW, will there be any new categories that you’re speaking to get into when you think about the margins of Camuto and your own margin? And you mentioned that the EBITDA margin was lower than yours even on a normalized basis. What moves that higher? And currently how do you see inventory levels positioned with the upcoming holiday season for both businesses? Thank you.

Roger Rawlins

So, I will take the first part of that, Dana. Picking up other categories, those types of things, that's not what is core to us as a footwear retailer. It is why we entered into our relationship with ABG. They know how to play in categories that frankly, we do not have experience in. So, on the apparel side and all of those areas, the growth that could come there, that’s why we took the ownership stake in the licensing side of the business. Jared, do you want to talk about?

Jared Poff

Yes, from an inventory standpoint, one of the things that we wanted to understand was what is a normalized inventory carrying level, we’ve actually worked extensively with Alex Del Cielo, and his sourcing organization to understand that. They have learned to be a very lean inventory company, but yet one that is still able to meet this obligation. So, without getting into too many details, I would say, we are looking at inventory that’s going to be somewhat -- somewhere little south of $100 million. And that’s what the Camuto organization feels is a good level for them to be able to, not only meet their holiday needs in the next couple of months, next few months, but also really be able to continue working in the future. So, we feel good, Alex feels good about the inventory levels that they stand today. As I mentioned earlier, there is some added expense to make sure that those are in place, but that’s being accounted for. And we feel good about the inventory.

Dana Telsey

Two quick last things. Is there breakup fee if this transaction doesn’t go through? I know earlier there had been a breakup fee with an earlier transaction with Camuto Group. And you mentioned there was another co-investor in this transaction. Who is that?

Jared Poff

Yes. So there is no breakup fees. This was entirely privately negotiated. The investors are ourselves, the line share, ABG, and then Ariel Chaus, who is currently the CEO of Chaus -- Bernard Chaus Inc., which the Camuto organization wholly owned, that’s been spun out back to Ariel. So he is also been participating.

Dana Telsey

And the licensing -- the length of the licensing with the brands that Camuto has, how much longer does those license -- what's the licensing timeframes there?

Jared Poff

I’m not sure if we are mentioning right now, what those are. What I will tell you is we have received consents. So the change of controls are -- we are making those as the condition of close. But we’ve already met with the license holders and feel that, that should not be a problem with that go forward.

Operator

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

Dylan Carden

Two questions. But quickly, I just wondered, Roger, did you say you were the largest digital retailer of footwear? Was that the comment you made a couple of minutes ago?

Roger Rawlins

That's one.

Dylan Carden

Okay. Thanks. I guess, my question here is, what this means sort of longer-term horizon for the private label business, you mentioned you want to grow that kind of what kind of penetration rates, even broadly speaking, are you kind of looking for? And what that means steady-state once you get this business back to health? What that means maybe for the whole DSW Inc margin profile?

Roger Rawlins

Thanks, Dylan. As I said earlier, we sit right now at right around 10% as our penetration. And we think that should be at least double that. Anything north of that, I think, you got to be careful of. But, again, we think we are extremely underpenetrated in that industry, especially when you look at a brand like Kelly & Katie, which does the vast majority of our private brand. We think with the help of the Camuto organization, they have done a fantastic job with some of our retail partners' ability in our private brand. They're brand experts, they know how to -- who the target customer is, and they put together brand and will support that customer. And I think that’s where the real opportunity lies. But in that 20%-ish kind of range is where we would see it, again, not just the DSW, but a Shoe Company, Shoe Warehouse and other brand.

Dylan Carden

Great. And the margin profile, should you get there?

Roger Rawlins

Significantly better than our current margin profile of -- Dylan, and it is a best example I can share is, we have roughly 700 brand partners we work with. And we think there is a significant opportunity, not just from us building private brand, but I think through this transaction what we've learned is how healthy the margins are for people that provides footwear to DSW. And what I mean by that is, how much Camuto essentially extracting from a margin standpoint on products sold to DSW versus our competitors. So there is a lot of information, I think, we're going to be able to extract from this that we think can ultimately impact the margins of the entire enterprise.

Jared Poff

And Dylan, I would add to that two points. One, we have shared with you, I think, in the past, our historical differential when it comes to private brand versus our rest of assortment. However, as we grow these brands to be more than just labels that actual brands, we do think that there is probably a little bit of that margin we want to reinvest that into growing the brand and building that as an actual standalone brand. So although they will still be highly, highly accretive to our balance of assortment, it might be a little bit less than what you are seeing today from just private label because we want these to become brands. Also secondly, I would point out one of the things we're very excited about with our partnership with Authentic Brands is that they have 33, I think, it is other brands that they own, many of which do not have a footwear component to them now. So being able to partner with them across different brands to make those exclusive at DSW retail or even wholesale, those in a different way through the wholesale operation to something we are excited about, and quite frankly one of the reasons we decided to partner with Authentic Brands here.

Roger Rawlins

Yes, Dylan, I would encourage you to go to the ABG's site and look at the brands they hold. I mean, that's a portfolio that we would be very proud to build footwear brands -- footwear product for those brands and either it's exclusive or wholesale, again an opportunity through this partnership.

Operator

Thank you. And the next question comes from Tom Nikic with Wells Fargo.

Tom Nikic

I was just wondering you kind of have quite a bit going on in your organization. The Canada acquisition and insourcing and integration, and then now this acquisition that kind of gets you into some channels that somewhat new to you. I'm just kind of wondering about sort of the ability to kind of juggle all these well simultaneously and execute on all of the different initiatives that you have in addition to just your core business, which, obviously, you're trying to sort of to grow and drive some results from. Any insight there would be greatly helpful. Thanks.

Roger Rawlins

Well, thanks, Tom. It's a great question. It's the conversation we've had with our Board and our leadership team as well. When you look at the decisions we made up in Canada to walk away from the Town brand, part of that was because we said, look, that team in Canada needs to focus on Shoe Company, Shoe Warehouse. And any integration, essentially from a back office standpoint, there's not a ton of what I would say opportunity in that space. I mean that business is pretty lien, and we've done a really good job there. So that's why we sent Bill Jordan from our team up there to lead that effort. So we feel like we've got that business in a pretty good place and marrying our team up there is going to drive that business. And we are going to figure out what the longer-term strategy in place for Shoe Company and Shoe Warehouse across North America. So I think that's in place. What I love is the fact that at DSW or DSW brand, as we have gone through this transaction, I mean, obviously, you get to get people engaged, but I'm really proud of our leadership team there that has stayed the course and stayed focused on what they do. And Jared, Simon, and I and my team, we were very, very engaged in this transaction over the last three to six months or wasn’t just this transaction, but looking at other opportunities. And we posted the best quarter essentially in our history. And when you look at rolling 12 months, I think, it is the highest EPS on a rolling 12 basis. So the fact that we built a strong team, when we talked about this three years ago that we were going to go after talent, and we are going to ensure we had that what we thought was the best talent in our industry. And I think we've done that. And our team at DSW, they don’t need the engagement from Roger or from Jared day-in and day-out, they can operate on their own. So I think we have done a good job of positioning that DSW team to be very focused, and play with the level of tempo that we talk about day-in and day-out that as far as pace. Our team up in Canada, I think, we have got in the right place and the right leader there with Mary and Phil. And now we get to take that same mindset and apply that to the Camuto organization through Alex and Simon from our team that's going to go over and help Alex with this. But it's why I mentioned earlier that these next 12 months to 18 months, it's going to be all about -- let's go learn this business, let's understand where the synergies are. We have these four big ideas that we just described to you, how do we pace those in a way that ensures whatever we do. We don’t jeopardize our existing book of business. And we have to make certain Alex, Dillard and the Nordstrom family and the folks at Macy's are happy with the Camuto enterprise, and the products we are delivering to them. So that’s in my head. That’s how I see it. And again, it will move at a slower pace than, perhaps, everyone will want to, but that is going to be delivered. And that’s the approach we are going to take. So we don’t create the potential conflict that also you can get to based on your question.

Jared Poff

And Tom, based on looking at other opportunities, not just Camuto, we export many different options, and many of them actually were relatively hollow. They had been wounded for one reason or another, which is why they were for sale, they were in bankruptcy. And one of the things that we are very attracted to with Camuto was they had a very healthy robust organization that was functioning quite well, had it not been for some missteps around retail and the integration of their distribution center. So from a distraction standpoint that the one gets, and as Roger mentioned, this is still Alex Del Cielo running the organization here and an organization that is still producing for some of that most selective customers that are out there. So that should limit the distraction on our core business because they are not needing a lot of fill-in help.

Operator

And the next question comes from Chris Svezia with Wedbush.

Chris Svezia

I guess, just first -- just to understand the revenue breakout, just wanted to understand that. So -- and how we should think about DSW? So you will be seeing the Jessica Simpson, Lucky as revenues and the P&L, and then the operating costs related to the distribution center on sourcing, but you will also be receiving royalty income from the 40% ownership, the other -- the Vince Camuto brand, and the other brand. Is that how we should think about? You are not going to actually see EBIT flow through from that -- from the joint venture is just going to be a royalty shrink. Correct?

Jared Poff

Yes. We believe that accounting will be for that right now is similar to what we had in equity investment in Town. Here you’re going to see income from equity investment below the line, coming back to us from the joint venture. So you will see a little bit of P&L geography in this match, because we’re going to have the royalties will be paid to the joint venture coming out of either gross margin and SG&A. And to be quite honest, I need to work with controller to exactly understand where that will come through. But it’s going to be above the line. And then you’re going to see the -- our portion of the royalty income come back to us below the line as income from equity investment.

Chris Svezia

Okay. Are you willing to at least talk about that $435 million and how much of that will be attributable to DSW? Or how we should think about that number that's attributable to DSW at this point?

Jared Poff

I think right now, I would rather -- we'd rather not -- when we -- bringing back together with the more strategic view of our overall enterprise, maybe we can share some of those details. But right now, I think, we'd rather not.

Chris Svezia

And how quickly can you transition your private label brand to the Vince Camuto sourcing agent at this point? How quickly is that transaction, because I assume you're still with Aldo, previously or still are? Any color about that.

Jared Poff

Yes. So, I mean, we certainly still have a partnership with Aldo. We also have a partnership with two other providers, one of which was Camuto on a couple different labels. So it is something. And to be perfectly honest, we’re still developing our strategy on how much we want to pump over the Camuto enterprise of existing, certainly of new and growing that's something that we think is makes a lot of sense. But we also think it may be healthy to have some additional support somewhere along the line. To be perfectly honest, that's still being fully baked, right now. But, before we could even do anything, I mean, we’re talking probably 2020. So we see something on the floor that’s been done from a DSW owned Camuto infrastructure.

Chris Svezia

Okay. And then just two last things, one, just in the world of -- that we’re in with regard to tariffs kind of sourcing. Any color you can add about your thoughts about that. And then lastly, just want to clarify something that you said, the EBITDA in your prepared remarks, you made some comments about EBITDA slightly dilutive to what you see as good. Can you clarify what you mean good in terms of where DSW Inc. stand today in terms of prior to Vince Camuto having some of these issues with regard to sourcing or -- just trying to understand the context with that comment?

Jared Poff

Yes. And what I -- and I don't remember the exact word I used. But what I was basically saying is I kind of an excluding your 2017 performance because that really got hit with these two missteps that I was mentioning before, and even a little bit of 16 as they were kind of experimenting into this retail and incurring some costs. So kind of three -- you take out that noise more on a normalized basis. They have a relatively healthy EBITDA margin that is slightly below what DSW traditionally is, not dramatically below, but some -- a little below what we are.

Chris Svezia

Right. And tariffs, just any color about that? Or how you think about that handbag or anything on those lines?

Jared Poff

Yes, it's certainly something even before this transaction, which we have been paying very, very close attention to. Unfortunately it's not -- there is not a lot we can control. And even unlike the border adjustment tax, which we were aggressively involved in their lobbying, this one has less influence to lobby because it’s at the sole discretion of the President. But, we – we’re going to have to watch and learn along with everyone else. From our retail operations, we think that our wide vendor base that we have does give us some opportunity to have some negotiations and then maybe pass some of that -- share some of that pain with some of our vendor partners. From the wholesale operation, we certainly will be one of the largest, especially once we start putting our private label business over this infrastructure, we'll be one of the largest procurement organizations of footwear. So again, that hopefully, can give us leverage with costing there. And it's more of a wait and see. I mean, it's not something that we have an answer to, but I’m not sure any of -- anyone in our space has that answer. We’re all going to be kind of watching each other and watching what happens.

Operator

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

Patrick McKeever

Thanks. Good morning, everyone. Just a question on the store base, the DSW store base, and specifically the lab store and some of the lab store features that you’ve been growing out to other stores. Does this acquisition or little shift into strategy here longer-term, does that have any implications for what you’re doing with the lab store and the nail bar and some of those other things, and a potential retrofit or remodel program associated with that? So that’s my first question. And then the second question is, you mentioned exploring other options, and it sounds like it was mostly distressed situation opportunistic or whatever you want to call it, types of things. Maybe you could just give a little more color there on what else you were looking at? Was it all in this wholesale brand area? Or did you look at some things outside of that realm in terms of potential acquisitions?

Roger Rawlins

Yes. I’ll take the first part. We are going to continue going after services. This will not, in any way, shape or form impact our game plan there. We now -- we just recently launched our second nail bar. We have four or five more that will be coming in the next -- very near-term. And we’re really excited about the results we’re getting there. So, again, we wouldn’t go after those in a meaningful way if we didn’t think it brought a sufficient return on investment. So we don’t see that this would anyway shape for form impact those services. And if you think about the longer-term of how this could play out as we build our private brands, in the new box that we’ve created, if we have flexible space meaning we have pop-up shops we’ve created for different brands like a Nike, we have the opportunity to perhaps display and present our private brands into different light in those stores versus the way we do in our other warehouses. So, I think, actually where we’re headed with the services and the new experience we’re creating actually could lend itself to actually driving more value for this transaction. As far as previous things, we’ve looked at a lot is what I would say. All of it around this wholesale footwear space. That’s what we’ve been looking at for, frankly about the last year.

Operator

Thank you. And this is all the time we have for questions at the present. I would like to return the floor to management for any closing comments.

Roger Rawlins

Thanks everybody for taking the time on a short notice to participate in our call. And we're excited to share this news now with the rest of our teams both here and in Connecticut, New York, Hong Kong, China, Toronto and Columbus. So thanks everybody.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.