Designer Brands Inc. (DBI) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the DSW Inc. Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christina Cheng, Director of IR. Please go ahead, ma'am.

Thank you. Good morning, and welcome to DSW's third quarter conference call. Please note that various remarks made about the future expectations, plans and prospects of the company constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those listed in today's press release and in DSW's public filings with the SEC. Joining us today are Mike MacDonald, President and CEO; Debbie Ferrée, our Vice Chairman and Chief Merchandising Officer; and Doug Probst, our Chief Financial Officer. Doug will start with our prepared remarks, with a short discussion of our reported results and then highlight the details of DSW's adjusted results for the third quarter. He will also provide some color on our outlook for the balance of the year. Mike will then elaborate on our ongoing strategic initiatives. After our prepared remarks, we will open the call for Q&A. But before we begin, we want to take a moment to express our sympathy and support to all those affected by Hurricane Sandy. Our hearts go out to the millions who have lost family, friends and property during the past few weeks. We are grateful for associates in the Northeast and mid-Atlantic regions who have shown remarkable teamwork in securing our stores and facilities during the storm and in raising funds to support the Red Cross. With that, I turn the call over to Doug.

Thanks, Christina, and good morning, everyone. Our reported net income for the third quarter ended October 27 was $50.1 million, which includes a net benefit of $3.5 million due to the -- due from a favorable resolution of litigation stemming from the credit card data breach in 2005. Including this net benefit, our reported earnings were $1.10 per share compared to last year's $0.75 per share. Excluding the onetime benefit and charges from the merger of RVI, our adjusted EPS was $1.02 per share compared to last year's $0.88 per share, an increase of 15.9%. You can find these items detailed in the Consolidated Statements of Operations and Reconciliation of Adjusted Results attached to our press release. The balance of our comments will focus on adjusted results for the third quarter, which reflect the performance of our DSW operations. Sales for the third quarter increased by 11.7% to $593 million, and comparable sales grew 6.3% on top of a 5.2% comp growth last year. Comps for our DSW segment, which includes DSW.com, were up 6.6%. All 4 of our store comp drivers: traffic, conversion, average unit retail and units per transaction, had increases for the quarter. We recently renamed our former lease business division to the Affiliated Business Group. We believe this better reflects the broad range of capabilities and formats we can offer to our potential partners. Comps for our Affiliated Business Group increased by 1.8% after growing by 4.9% last year, representing the 12th straight quarter of positive comp growth. Total segment sales declined by 14%, however, due to the discontinuation of the Filene's Basement operations last year. We added net 2 locations in our Affiliated Business Group, bringing our total to 345 departments at the end of the third quarter. For the company, gross profit was 33.8% for the quarter, a decrease of 20 basis points from the record lever -- levels a year ago. This decline was due mainly to a 40-basis-point decrease in merchandise margin, driven in part to incremental certificate redemptions from our rewards members. Our distribution and fulfillment rate also increased by 20 basis points as a result of the greater mix of online sales and additional costs from the expansion of our fulfillment center. These reductions to the gross profit rate were partially offset by occupancy leverage generated by our 6.3% comps for the quarter. Our adjusted SG&A rate as a percentage of sales decreased by 50 basis points to 21.2% despite a $4.4 million increase in preopening cost associated with adding 26 new stores in the quarter. Reductions in the adjusted SG&A rate were driven by leverage of fixed cost, marketing expenses and lower incentive compensation. As a net result, our operating profits increased by 15% to a record third quarter operating profit rate of 12.6% compared to 12.3% last year. Our effective tax rate for the quarter was 38.2%, but we expect our tax rate to be slightly below 39% on an annual basis. The end result was an adjusted net income of $46.6 million or $1.02 per diluted share. This compares to adjusted net income for the same period last year of $39.8 million or $0.88 per diluted share. Turning to the balance sheet. Our inventory position at the end of Q3 represents an increase of nearly 12% to $422 million. However, on a cost per square foot basis, inventories in DSW's stores decreased by 1% from a year ago. We are pleased with our inventory levels and content. We ended the third quarter with cash and investments of $430 million after the payment of $91 million for our $2 per share special dividend in October. Capital expenditures for the third quarter were $38 million, of which $29 million was for new stores and remodels and approximately $6 million for the investments in our fulfillment and distribution centers. We did not repurchase any shares this quarter under our $100 million buyback authorization announced last June. Now for guidance. We are revising our full year adjusted EPS guidance to $3.30 to $3.40, a $0.05 increase in the low end of our range. The midpoint of this new range represents a 12% growth over last year's $3 per share. This is based on mid-single digit comps for the full year and the opening of 39 new stores. Our guidance reflects our estimates of the impact from Hurricane Sandy. Please also note that our guidance does not assume any share buyback activity during the year. And with that, I'll turn the call over to Mike.

Thanks, Doug. Good morning, everyone. We were very pleased with our third quarter performance. We set new quarterly records for sales and profits. Total revenues grew by almost 12%, with comp sales advancing by 6%. This comp growth, which was nearly identical to our comp growth in the first half, was particularly satisfying because it came on top of 3 years of significantly positive comps that began in the third quarter of 2009. We've now had 13 consecutive quarters of positive comp sales growth. We had a healthy mix of selling in both regular and clearance-priced merchandise. We also had a nice balance in our performance by store region, with all regions achieving positive comp sales growth. Our business by category was also strong across all major merchandise classifications. Our largest category, women's footwear, grew by 4%. Athletic footwear grew by 9%. Men's footwear and accessories, both of which are targeted areas for penetration growth, grew by 11% and the 13%, respectively. We also increased our private brand penetration to 11.4% from 10.3% last year, which represents a continuation of good progress on this strategic initiative. I know there's always a lot of interest in our seasonal business results, so let me comment briefly on our women's boot business. For the quarter, comp sales in women's boots were flat. Within that overall result, we saw fashion boots perform better than functional boots, and we saw short booties perform better than tall-shafted boots. Based on how boot sales ebbed and flowed throughout the quarter, we interpret this mix of selling to be primarily reflective of the mostly warm weather we experienced in the third quarter this year. As usual, we actively managed our receipts within the quarter and ended Q3 with inventories that were consistent with our plans and well balanced by category. Regarding new stores, we opened a total of 26 new stores in the third quarter, of which 4 were in small markets and 1 was in Puerto Rico, our first store outside the continental United States. Through the end of the quarter, we've now opened a total of 38 new stores this year. As a group, these stores have exceeded their sales plan for both the quarter and on a year-to-date basis. Let me now give you an update on the impact of Hurricane Sandy on DSW's performance. As you know this storm began to directly impact residents of the mid-Atlantic and Northeast on Monday, October 29, but we actually saw decreases in store traffic in these regions in the days leading up to October 29, as residents prepared for the storm. Many DSW stores were affected by the storm. We have 100 stores that were closed for at least a day, and a few stores were closed for several days. One store in Lawrence, New York experienced severe flooding, and that store remains closed today, although we do expect the store to reopen by year-end. The storm also delayed the opening of our new store in Riverhead, New York, and that store is scheduled to open later today. In the first 2 weeks of the quarter, DSW dropped several million dollars in sales against our previous forecast. Virtually all of that sales loss can be attributed to Hurricane Sandy. I am pleased to report that since that time, business has returned to normal. However, our current sales forecast for the balance of the quarter does not assume we will recover any of the lost sales from those first 2 weeks of the quarter. When Hurricane Irene struck the East Coast in late August of 2011, we also experienced some sales disruption, but by the end of September, those sales losses had largely been recouped. We view the current situation differently. Sandy was much larger and much more severe than Irene. As a result, more people experienced more significant damage and financial loss. Even today, many residents are still struggling to restore their property and their lives. It's for those reasons that we've assumed we will not recover those sales losses that we experienced so far this quarter. Let me now give you an update on some of our strategic initiatives. As previously mentioned, we've opened 38 new stores so far this year, and we'll open 1 more later today. This was a big effort for the organization, particularly in the third quarter. Nonetheless, we accomplished this effort with quality in terms of the caliber of our personnel and the content of our new store inventories. This experience has given us the confidence to believe we have the organizational horsepower to open this many stores in the future, if the right opportunities present themselves. Right now, we're planning to open 25 to 30 new stores in 2013. In terms of merchandise initiatives, there are a couple worth mentioning. First we've initiated a 25-store test to evaluate our ability to sell jewelry in our stores. Each of these stores has a 1 or 2 fixture presentation depending on store volume and space availability. We will read the results of this test over the next several months and then determine whether jewelry is a category we could make a permanent component of our assortment. Recently, we also expanded our offering of luxury goods on DSW.com. You can see what we have done by clicking on the Luxury tab at the top of our homepage. We have footwear, handbags and accessories from a number of well-known international designers. As you may know, we've dabbled with luxury goods in past years. The current offering is fuller than what we've carried in the past. And similar to our jewelry test, we'll read the results of this test over the next several months and then determine whether luxury goods will become a permanent offering on our website. We continue to make investments in our future. In the systems arena, we began using our size optimization system earlier this year. This system will give us the selling information we need to determine how to allocate sizes by store. Ultimately, we expect this system to reduce lost sales and avoid markdowns arising from inventory imbalances by size. We should begin to see benefits in 2013. In the logistics area, we've also made some major investments. In Q3, we opened an expansion area in our fulfillment center to accommodate the continued growth of DSW.com. And later this quarter, we expect to activate a new high-speed sortation system in our Columbus distribution center. This system will improve the capacity and efficiency of our unit replenishment process. Recently, we announced the acquisition of both our Columbus distribution center and our corporate office facility. When these previously leased facilities came on to the market, we seized the opportunity to secure previous investments made in these facilities and to guarantee our potential for future expansion. As mentioned in the press release related to that transaction, the purchase of these facilities will be slightly accretive to DSW earnings. In terms of current initiatives, we've begun development work on both our assortment planning system and our charge-send system. Assortment planning is a multiyear effort that will allow us to develop our by-store assortments with much more precision. The charge-send system, which we hope to implement in Q4 of 2013, will allow us to fill unmet demand originating from either DSW.com or DSW stores from inventory that's housed in other stores. We view both of these systems as integral components to our omni-channel initiative that will allow us to serve our customers better and more seamlessly. So that gives you a brief summary on our results of operations, our recent investments and current initiatives. We believe we're becoming more relevant to more customers and that we're pursuing the strategic initiatives that will continue to propel our business forward. So with that, I will turn the call back to the operator so she can open it up for questions.

[Operator Instructions] The first question will come from Steve Marotta of CL King and Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Wanted to talk a little bit about SG&A cost and the delta on a year-over-year basis. Doug, could you tease out a little bit what was marketing, incentive comp and fixed cost leverage?

Well, the components of that, we're not going to break it out in that kind of detail. But I'll tell you, the preopening costs, which I mentioned, were a big negative factor to our SG&A rate. That was pretty much offset by the decrease in incentive compensation expense. That was the largest piece. The next pieces would be marketing and overhead. So hopefully that gives you some perspective. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. That's great. And as it relates to the preopening expenses this year, if I remember correctly, it's roughly budgeted around $16 million versus $6 million last year. Given the 25 to 30 stores that are going to be opened now next year, what are your expectations for preopening expenses next year?

I would think you could start to assume about the same cost per store, although it should be a little bit lighter because we're not having the big 34th Street type openings as we think [ph] of our mix for next year. But we've yet to lay out those plans in full detail yet, but I think you can use that as an assumption. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. Lastly, if you could just remind us what boots were as a percent of sales last year in the fourth quarter and your expectations for this year as well.

Yes. Last year, boots represented about 27% of our total business in Q4, and I think Debbie Ferrée, in an earlier call, said that for the fall season, she expected boot penetration to remain stable year-over-year. Obviously, we had a slight decline in penetration in Q3, so in order for Debbie's prognostication to come true, we'll have to actually increase the penetration slightly in Q4.

Our next question will come from Mark Montagna of Avondale Partners.

I was hoping you could talk to us about what you're hearing in the marketplace in terms of promotions at department stores. It came up on a conference call yesterday that the expectation is for a very promotional Christmas towards boots. And was hoping you could address whether you had anticipated that into the plans that you had for guidance for the fourth quarter. Deborah L. Ferrée: This is Debbie. So I know the same thing that everyone else knows right now in terms of all the e-mails and the chatter that you hear in the market about how promotional boots will be. I will tell you as far as DSW is concerned, we did have a flat comp for the segment for third quarter, down just slightly, boots as a penetration to total women's and to total DSW. I believe that we'll be able to make this up in fourth quarter. And so when you look at the mix and the content of our assortments, I believe that we have the right assortment. We have made the appropriate pricing adjustments to reflect what the customer is telling us in terms of what they want to pay for certain things within the boot business. So for DSW, we are not going to take an overly aggressive position in giving away the farm in boots because we don't have to. After studying our content, we're very comfortable that we've got the right core items. We've got the right fashion and that they are priced appropriately.

Okay. And then with the comp -- with the earnings guidance, third quarter, you had a very sizable beat to expectations. Were your internal plans for third quarter to -- were they higher than where the street was?

I'd have to go back and look, but obviously, we didn't anticipate a 6% comp for the quarter. So when we started to see that comp getting closer, then yes, I would say that's starting to drift up above where the external expectations were. But the comp was the biggest disparity between the 2 different expectations, I would guess. Likewise, I think the SG&A rate came in lower than probably it was anticipated. That had a lot to do with the incentive compensation, as we already talked about, so maybe that was another element.

Okay. And the jewelry that you're testing in stores, is that going to be brand name or are you looking more at private brands? Deborah L. Ferrée: Yes, we did 2 different labels. One of them, we're using a manufacturer's brand that they have, but it is considered private label. And the other one is under our Kelly & Katie brand. So there'll be 2 different brands out there that will be test.

Okay. Then just lastly, are you expecting any benefit from retail price increases in the fourth quarter in terms of the vendors passing their costs along to you and then therefore, you having to raise your prices? Deborah L. Ferrée: When you look at third quarter -- and we've talked about this on the last earnings call, when you look at third quarter, our cost increases were in the low-single digit, and we have been able to pass that on to the consumer. We don't really see costs mitigating right now. We see them staying pretty much at that same level as we look forward into first quarter. So I think we are able to pass those cost increases where they're appropriate.

The next question will come from Chris Svezia of Susquehanna Financial Group.

I guess, first question I have for you is just on product margins. Any thoughts about the cadence as we close out the year? You continue to make up some ground there, less of a drag. Just any thoughts as we think about the fourth quarter? Deborah L. Ferrée: No, not really, Chris.

Okay. So I mean is it fair to say it's flattish based on product mix or do you feel promotional cadence might be a little higher than you initially thought? Any color at all? Or... Deborah L. Ferrée: Yes, so let me see if I understand your -- would you restate your question? Because there were a few different things that you asked in there.

So I guess what I'm curious about is product margins. You continue to show less of a drag relative to earlier in the year in terms of the decline. So I guess what I'm just curious is, as we come to this fourth quarter, the comparison relative to last year is a little bit more favorable. So I'm just curious whether or not -- based on your inventory, what you have in the bag in terms of promotional thought process for the quarter, whether or not we can think about the product margins -- do they flatten out or is there a continued modest drag in the fourth quarter.

Well, actually it's kind of ahead of -- toward plan. The reason maybe we were a little puzzled on the question is it's really back to the plan that we had the beginning of the year that we thought that the biggest pressures on merchandise margin would come in the first half. And they did with a 70-basis-point decline in the spring season -- third quarter, in merchandise margin rate and the 40-basis-point decline in the third quarter. And we anticipated that, that variance to last year would tend to narrow as we got a closer to the fourth quarter, and we still believe that. So there hasn't been a modest change as to the expectations on that, and certainly, within categories, I'm sure there is. But on a general basis, it's pretty much as we had originally anticipated.

Okay. Fair enough. Debbie, for you, as you just sort of think about moving toward here into the spring selling season, any particular call outs you can maybe share with us or talk about? Just what you're seeing preliminarily, whether it's on sandals, styles, colors, the boat shoe business. Anything -- I know you've made some progress on athletic. Just add a little color in terms of what you're seeing as you move forward into spring. Deborah L. Ferrée: Sure. Chris, what we're continuing to see as -- and I talked about this, I think, the last couple of calls, is the casualization of shoes. So it could be the casualization of dress or just the increased importance of just casual in general. And we're seeing that across all genders. So in women's, the casual piece of our business is very strong. And dresses, got a little bit under pressure, and we're making sure that we make some material changes and some construction changes to try to address that. As you know, we have a very strong dress business, and we need to protect our turf on that. So we're doing everything we can to make sure we make the appropriate adjustments there. So casual and women's is very, very strong, both in dress and casual flats, and the same in the men's business. When you look at where the big comp increases are coming from, it also points to casual. So that trend actually continues. We've seen a little bit of a softening in the social occasion business. I don't think that so much that social occasion shoes are down trending as it is what customers are defining as their social occasion footwear is changing. So rather than the traditional satin and traditional evening shoes that you typically would see, they're starting to -- customers are starting to go to other things, and it could be a plain pump, which is why plain pump business is so phenomenal right now, or it could be another choice. So I think that the trends that we're seeing right now are just continuing into the spring season. We're very excited that the market actually has introduced some really exciting things in terms of material changes and colors. And there'll be a lot of color on the floor again next year, and it's going to be a little bit different, in 2 phases. There'll be a pastel phase. There'll be a bright phase, and I think that we're very well matched to the ready-to-wear that you're going to be seeing in spring '13. So I'm actually pretty excited about what spring is going to see. The thing I'm most excited about is in the men's business. Men are really embracing the fashion component. Not only is casual strong, but the fashion piece of men's is strong. That continues to translate into our men's accessory business, which is another category that Mike mentioned is very strong for us. So I think there is a lot of opportunity, not just to protect the women's business with new styles, colors and materials, but there are new categories that continue to offer big growth opportunities for us, and that is men's and accessories.

Okay. And last question I have is just on new store productivity. I was wondering if maybe you could just talk about over the past 12 months, in terms of what you've seen those stores that have opened earlier in the year. Maybe any color at all you can add on the New York City stores, how they are performing, would be very, very helpful for us.

Yes, Chris, as I said, as a group, the stores beat their real estate sales plan in Q3, and they have beaten their plans year-to-date. I don't really want to get into performance by district or region or store in terms of new store performance. But it's a little bit hard to read particularly because so many of the stores opened up late in the third quarter, and you just don't have good selling information that's predictable and projectable. And the other thing is then you've got the weather impacts of Sandy in Q4. So look, as a group, we're pleased with the store performance. We're exceeding our real estate plans. And I'm going to be excited to have those stores in operation for a full year next year.

Our next question will come from Seth Sigman of Crédit Suisse. Seth Sigman - Crédit Suisse AG, Research Division: On the new stores,you announced 25 to 30 new stores for next year. How are you thinking about that in terms of new markets versus fill-in? And then, I guess, related, I know it's early, but what are you seeing in terms of cannibalization? I believe you were expecting some, maybe reflected in the guidance. But is that playing out pretty much as expected?

Yes. So I think there's probably going to be maybe half of the stores next year that will be in new markets. And of that, about 9 are going to be small-market stores. The other part of the question was cannibalization. We're still looking at that, but based on what we've seen so far, the cannibalization impact on our comps has been a little less than 1% so far. Seth Sigman - Crédit Suisse AG, Research Division: Okay. That's helpful. And then, can you maybe just elaborate on size optimization, how many categories you're touching now and how to think about that opportunity in 2013?

Yes. Size optimization is a very big initiative that will affect probably 80% -- 80% or 85% of the product that hits the floor because it is related to how you allocate sizes by store. And that affects all of our goods, not just replenishment goods, but all of our goods. The only goods it won't affect are things like closeouts and other odd purchases. So the vast majority of our goods are going to be affected by size optimization. And the orders that were written with the size optimization intelligence will start to hit in Q1 of next year. And we'll tell you that one small area we've been able to read so far is in the replenishment area, where we have had goods in the DC in support of replenishment categories, and we have allocated fill-back goods in support of those replenishment categories using the intelligence from the size optimization modeling. And what we've seen, in a very small way, is we've seen better in-stock positions, and we've seen better sell-throughs in those categories that have had the fill-backs utilizing size optimization. So it's a small indicator, but it's going in the right direction. And as I say, it's going to have a big impact in 2013.

Our next question will come from Jeff Van Sinderen of B. Riley. Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division: I think you said that you've seen kind of a normalization in the hurricane-impacted region in terms of your sales there in recent weeks, and I'm just wondering how you think about those -- that region for holiday business. Do you think it will be sort of normalized holiday business? Or do you think that it's slower? Or just any color or any thoughts you have on that.

Sure. I really don't have a lot more to say than what I commented on in my prepared remarks. I mean we have seen -- you're right, we have seen a normalization of the business trends since we cleared Veterans Day. And we read this and observed the same things that you do that there's still a lot of cleanup work. There's still some rationing of gas, which impedes traffic. There's still isolated power situations, and there's an awful lot of people who are displaced. So that's why we have assumed, for purposes of our sales projections and our guidance, that things will be normal, which is to say that we're going to say goodbye to those sales that we've lost and we're not going to be able to recoup them. Whether that turns out to be true or it turns out that we do get some bounce back, we're going to find that out together. But for purposes of projections, we've assumed that we returned to normal and stayed there, no better, no worse.

And I might also add, for people that are new to the story, is that our fourth quarter represents about 22%, 24% of our year on an average store basis. So it's not a significant quarter for us. In fact, it's our smaller on an average store basis. So that tends to influence -- or decrease the influence of that time of the year. Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division: Okay. That's helpful. And then just as a follow-up on inventory, I think you said inventory per foot is down slightly at the end of the quarter. Just wondering how we should think about that for the rest of the quarter. Is it uptick? Is it up slightly now? Or just maybe if you could kind of frame that versus your comp expectation.

Well, we define it as cost per square foot, so that's the store inventory in our new stores as well, and it would reflect a negative 1% decline in our cost per square foot basis. So we like to keep our inventories somewhat in line with our comp expectations. So that's why we're pleased with the level of our inventories, as well as the content, as we mentioned. So if we have a slight increase in inventories at the end of this year, on a cost per square foot basis, that would be okay. Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division: Okay. And then also, just curious on the jewelry test, kind of what the price points are there. Maybe just give us a sense of what kind of jewelry that is. Deborah L. Ferrée: Yes. So we're really covering the 3 big categories: ears, necks and bracelets. And the average price point would be anywhere -- the sweet spot would be anywhere from $15 to $28.

Our next question will come from David Mann of Johnson Rice. David M. Mann - Johnson Rice & Company, L.L.C., Research Division: Great job in opening all those stores. First question, on average unit retail, a little surprised that you were able to get that up given that you had that increased penetration of booties and actually lower boot penetration overall. So can you talk a little bit about where that's coming from? Deborah L. Ferrée: Yes, David. So we were up right around 1.5%. I think that -- in the boot average retails. And I think when you look at it, the places that we're actually seeing the biggest increases, we increased our penetration in better boots, so you get a little bit of it there. We also -- when you look at booties, don't think of booties as being actually the really inexpensive goods. I mean, our booties were anywhere from $58 to $62 last year, and they're actually, on the average, this year, $62 to $63. So we're actually able to increase over AUR and AUT in booties a little bit this year based on the kind of products that we selected. So it's only up by 1.5%, but we're pleased with that. David M. Mann - Johnson Rice & Company, L.L.C., Research Division: Great, Doug or Mike, when we're thinking about fourth quarter same-store sales, you've been -- you ran about 6% year-to-date. Should we basically think that your trend outside of the Sandy-affected region is still relatively intact, and that any kind of adjustment to comp in Q4 will mainly be that 6.1% less some Sandy impact?

That's certainly one way of looking at it, David. But we have always anticipated that the fourth quarter, on a comp basis, would be a little bit lighter at the beginning of the year before the storm. So I think that's a smart way of looking at it, the way you described. David M. Mann - Johnson Rice & Company, L.L.C., Research Division: And if we take that kind of comp expectation, it would seem that to get to your kind of implied earnings guidance for the fourth quarter, that we'll see more meaningful impact or drop in gross margin. Is that correct? And if so, how should we think about the components there?

Well, because of the 53rd week, we expected -- again, we expect since the beginning of the year to see good profit -- gross profit expansion, so that doesn't change from what we're enduring right now with the storm in the Northeast. So I would still expect some gross profit expansion in this particular fourth quarter. David M. Mann - Johnson Rice & Company, L.L.C., Research Division: Okay. And then in terms of the new stores and the new store expansion for next year, any new thoughts about -- given the success of the new store ramp, about the long-term opportunity in terms of what you think you can do in terms of number of stores?

Yes, I think we're on record as saying the build-out is 450 to 500. And that really is inclusive of normal -- our traditional markets where we've targeted 400,000 population and above. And it also includes what we're calling small markets of 250,000 to 400,000 in population. What it does not include is any penetration of what we're calling micro markets, which are population centers of under 250,000. So that represents a future opportunity, and we've yet to size that opportunity.

Our next question will come from Camilo Lyon of Canaccord Genuity.

Mike, you gave some great color on size optimization and the potential impact for next year. I was hoping you could do the same for assortment planning and maybe when we could start to see some of those benefits manifest in the gross margin line.

Sure. Well, assortment planning -- I mean ultimately size optimization is going to be a component of assortment planning because assortment planning does the same thing for tailoring the assortment by location, only it does it for aspects such as end-use mix, fashion content, price points, and those are the 3 big ones. So if you think about it, assortment planning is going to have a precision assortment by location that incorporates size, fashion, price point and end-use mix, and so it's a big deal. Now it's a project that is not going to be done fully until, I think, toward the end of 2014. There will be phases that are folded in, and we may begin to see some benefits in the back half of '14, but it's a big project. And it's a complicated project, and it's intense in terms of just work processes that are going to be changed. So that's a story that we'll probably be talking about for the next couple of years.

So 2013 should not really see some of those benefits come through. It's much more of a 2014 story. Is that correct?

Yes, and really I wouldn't anticipate full year benefits until '15.

Okay, great. And then just on the jewelry test, how should we think about the gross margin contribution from that category? And what do you need to see, whether is it sales benefits or is it just merely a timing issue as to when you feel comfortable to roll that out to the entire store base? Deborah L. Ferrée: Yes. So let's remember that we launched this on November 9, so we're only 10 days into the game here. But I'm actually very pleased with the initial response from our customers. So it's too early to call what we're going to do on that. Right now, what we plan to do is read the test through spring of '13 on those 25 doors, both from a door perspective and from a brand perspective, which brands perform the best in which categories. And then, we'll have kind of information we need, the intelligence we need, to make a decision as to whether it rolls, how far it rolls, is it a total company roll or is it a partial company. So we really don't have a whole lot to report right now other than I'm pleased with the first 10 days of what we've seen. In terms of what the margin contribution can mean, when you're going in with 70-plus IMUs, which is typically what the jewelry business is, you can expect to margin in the low- to mid-60s depending on what your performance is. So it would be accretive to the accessory performance if, in fact, we rolled it out to the chain.

Debbie, I might add one thing. I think the margin rate is one aspect of it. Of course, you got to also consider sales per square foot, which, together, will give you gross margin dollars per foot. And if we were ever in a situation where, in order to carve out space for jewelry, we had to take back footwear, we'd probably look at it on a gross margin per foot basis. Deborah L. Ferrée: Absolutely, absolutely.

And one more addition is we're also looking, in this test, the store operations element of this, so the fixtures that we have and how we display it. We're going to learn a lot from how the stores have to execute to it, too. So all those things need to be incorporated. So we'll need plenty of runway to get a good determination on this before we would roll it out further.

Great. And Debbie, you know that we're an impatient bunch, so thanks for the color on that. And then just lastly, I was wondering, Doug, if you could just maybe give us a little bit more color on why incentive comp was lower in this quarter. What was the driver behind that so much that it offset the preopening expenses?

Well, maybe I'll do a comparison to last year. At this time last year, we had raised our earnings guidance from -- or about 15% from our first guidance of the year, so the sales guidance -- or sales and earnings guidance continued to increase. If you reflect back on 2012, our initial midpoint was $3.28, and now we're at a midpoint of a $3.35 so we did not raise the level of incentive compensation like we did in 2011. A bunch of that increased incentive compensation expense was recognized in the third quarter last year. Because we're coming in closer to our original expectations, that's why there's a variance in the third quarter. I hope that helps a little bit without getting too deep into the accounting.

Our next question will come from Scott Krasik of BB&T Capital Markets. Scott D. Krasik - BB&T Capital Markets, Research Division: So just a couple of questions, Debbie, first on boots, you have -- you said the utility boots, I guess, underperformed fashion boots. Do the comparisons in December and January get much easier for the more utilitarian-type boots? And also, have you been adjusting in-season inventory? Or do you feel comfortable with where you were going in for these categories? Deborah L. Ferrée: Sure. So you would expect the functional piece of our business with those true cold weather and rain to actually increase, so we really need those categories to pull for us in fourth quarter. But remember, that this piece of our business is still very small as a percent to our total. So do the comparisons get easier? Not really. I mean we're up against some weather business from last year, and it's too early to call that. But knowing that the penetration of weather and rain is the smallest piece of our fourth quarter makes the comparisons probably a little bit easier. Scott D. Krasik - BB&T Capital Markets, Research Division: Okay. And to the extent that you wanted to talk about the taller shafted boots, one of your big suppliers said that their business picked up meaningfully in October. Did you see the same type of lift towards the end of the quarter and into November? Deborah L. Ferrée: Actually, the strongest piece of our business is in the Young Attitude in terms of comp increase. So I'm not sure which brand you talked to. It really doesn't matter, but we have seen the tall-shafted piece of our business when the weather picked up to come into more normalized expectations and performance, so you really do need the weather for that. I mean that triggers customers' thinking that they need to buy that tall-shafted boot. The short booties have been the fashion trend of the season, and they have been good from the very beginning. So you do need a little bit of coldness in the weather to be able to trigger that customer into buying the tall shafted. We've seen that happen, and that has started to happen, so I'm a little bit more comfortable moving forward. We're starting to move into that kind of a weather pattern. As far as -- I want to answer your question on inventories. All season long, all year long, I think one of the strengths of our merchant and planning group is that we're always trying to rightsize the inventory to match the sales. And I think fall season -- this fall season just demonstrates that again based on how we managed through third quarter and how we've really managed the inventories to match what our expectations are for fourth quarter. So we've been making those adjustments all season long, either by working with our vendor partners, to change things out or to release some maybe orders we had in the pipeline and to move them into other things. So I think that's one of the core competencies of this business, and I think that was demonstrated this season, which is why we do not anticipate having any boot issues. Scott D. Krasik - BB&T Capital Markets, Research Division: Good. Okay, just 2 more. Any changes in your promotional cadence for Black Friday or what your marketing plans are for Black Friday? And then how do you view footwear this year as a gift-giving item?

We are going to be -- as you know, we're not a big Black Friday business. It is the biggest day of the year, but we don't have those below-cost kind of deals, but we are going to be slightly more promotional this year Black Friday. I think we're going to have a python tote G [ph] with a $49 purchase, and that compares to a free tote last year that was of much lesser quality. So hopefully, that should drive more business. Also, we're going to have about a dozen big deals, like -- which is part of our big deal program, which is 40%-or-more off of reg price, and I think that compares to only 2 or 3 last year. So in-store, we're going to be slightly more promotional than last year. And in dot-com, we're going to have our typical tiered offer, where the more you spend, the more you save. And that will be an online-only offer, and that starts on Saturday for the Cyber Monday weekend. In terms of hours on Black Friday, about 80% of our stores open up at 8 a.m. on Friday, not on Thursday, and we're going to try and keep that consistent this year. We think that there's a lot of craziness going on out there, and our perspective is that the incremental benefit in the sales column is probably not as significant as the incremental equity we build with our associate population. So we're going to be -- our hours are going to be about the same as last year. Scott D. Krasik - BB&T Capital Markets, Research Division: Okay. And then just a thought on shoes as a gift-giving item. I mean, these last few years, Uggs has been the #1 gifting item, and it seems to be less so this year. Are shoes a good gifting item?

Yes, they are. But we -- how we've been attacking that opportunity, Scott, is really through our gift card program, which kicks off on Black Friday. And as you recall, you get a bounce-back card, $5 on every $50 of gift card purchases, and we're going to repeat that this year. We've been growing the gift card business as a percent to our holiday business pretty steadily in recent years, and we've done that through awareness and signing and fixturing and associate communication to the customer. And we'll continue to do that, and we think it is a great way to represent gift-giving for the holidays in the footwear category. Scott D. Krasik - BB&T Capital Markets, Research Division: Okay. Just, sorry -- Debbie, on the jewelry, 90% of your traditional sales are in branded businesses. So why wouldn't you think about doing branded jewelry? Some of the same branded vendors sell -- make jewelry. Deborah L. Ferrée: Yes, it's interesting. We visited probably upward of about 14 different vendors in New York trying to assess how we wanted to position getting into the jewelry business, and they're all strong in and of their own right. What we decided is, is that rather than go with just a particular brand or there was probably -- it's a very highly promoted category, as you know. So rather than face that and then pick -- out of all the terrific brand names that are out there in the market and just pick the top 2 because remember, it's a small footprint in our store right now. You have 1, possibly 2 fixtures. We just decided that number one, we wanted to extend our very strong presence in our Kelly & Katie private brand. It's worked very well for us in footwear and accessories and handbags. So number one, we knew we wanted to do an extension of that because our customer is really embracing that brand and our research shows that. And then, we picked another name, a particular company that does branded jewelry, but they had kind of a fun label that we thought would be more relevant to our customer experience. So that's how we kind of went about it. It's proving to be pretty positive right now, so we'll see how that plays out.

Our next question will come from Jane Thorn Leeson of KeyBanc.

I just had a question on luxury. I know you're expanding luxury. Could you just elaborate on what some of the brands are and how big this could -- you're thinking about this could be?

Yes, sure. I think the best way for you to identify the brands is just go to our website and click on the top navigation Luxury tab, and you can see exactly what we have there in terms of brands. The way we think about this luxury business is that it provides a point of differentiation versus others. It gives us a chance to broaden and expand our customer base to include more fashionable and upscale customer and if we're successful doing business with these well-recognized international designers, can have some favorable effect on discussions we might have down the road with other high-end resources we want to represent in our stores. So those are really the 3 things that we look to for why we're pursuing luxury. And I guess what I'd say, as I mentioned in the remarks, is that we've tested luxury in the past. And in the past, our luxury product has been primarily housed in stores, like 80% in stores and 20% in dot-com, and what we've come to believe is that the opportunity is much larger on dot-com. And so the inventory mix as it's positioned today, is probably 80-20 dot-com to store inventory. So we're going to read the test. It's going to take several months, and it's a unique differentiator for DSW. And hopefully, it can be both accretive to earnings and have those other benefits that I mentioned as well. In terms of the size of the business, I wouldn't want to put a number on it.

Okay, great. I mean, so on the margin front, is that a higher margin?

It's all a function of sell-through. I think you should think about markups as being comparable to our -- to the rest of our business and then it's just a question of customer reaction.

Okay. And then secondly, just how -- an update on your e-commerce.

Yes. It's doing fine. It's the fastest-growing part of the business. We don't separate that part of the business out in terms of sales and profit performance because it's so interconnected to the store business, and we actually promote cross-channel shopping because those customers tend to spend about twice as much as the single-channel shoppers. But is there something specific?

Yes. And just the children's business on that channel as well and other things that you're -- if you've added anything additionally.

Well, the luxury was the big add. In terms of the kid's business, it's about a year old now, and I think what we've said is that kids as a percent of adult footwear nationally is about 10%. And because we're only offering kids on dot-com, we have a goal of giving to 5% of our dot-com business in kids. We're not there yet. We're probably half way there. We did do a minor test during the third quarter of putting some children's footwear. I think they were boat shoes for boys and girls, and we've put them next to the same style or close to the same style in the adult counterpart on the floor -- just to see what would happen. And what happened is, we sold out of the product in the store. And as near as we can tell, it may have had a salutary effect on selling on the dot-com channel from those areas. So it was just a little test, and I don't know where we're going to go with it yet, but it did seem to work.

Our next question will come from Danielle McCoy of Brean Capital. Danielle McCoy - Brean Murray, Carret & Co., LLC, Research Division: Just please go back to the overall promotional cadence during the quarter and how you guys are viewing it in fourth quarter.

Our business is fundamentally not promotional. We have an everyday discount pricing policy, which offers the customer 25% to 30% off of manufacturers' suggested retail on an everyday basis. We read selling and sell-through rates, and we move goods into clearance, either when they've sold down so that we're broken by size or where the product didn't sell. And then we do rotations where 30% offs go to 40% off and 40% to 50% and 50% to 70% as it moves through clearance and then it eventually evaporates. That's our business model. So when you talk about promotion, it really doesn't much apply to DSW. We'll run some dot-com promotions, like we're going to do for Cyber Monday weekend. We'll have gifts with purchase. But basically, we don't run price promotions. Danielle McCoy - Brean Murray, Carret & Co., LLC, Research Division: Okay. And then how are you guys feeling about your full price balance versus the clearance?

We feel very good about it. That's what we meant to imply when we said we're pleased with the content of our inventory at the end of the quarter. Danielle McCoy - Brean Murray, Carret & Co., LLC, Research Division: Okay, great. And just lastly, is there any color you could put on the Puerto Rico store, how consumers are responding to that and any potential growth in that area or other areas outside the U.S.?

Sure, yes. We think Puerto Rico is an opportunity for 6 to 10 stores, and we're looking at those opportunities right now. I think the reception to DSW in Puerto Rico has been good, and it's building in terms of the recognition of the brand. And so we continue to be optimistic about that as a growth vehicle. We are reading very carefully the results in terms of category selling and in terms of conversion rates, and we have actually retained a longtime executive who has operated in Puerto Rico for over 20 years to help us evaluate our assortment mix so that we can get it right as soon as possible and not have to go through several seasons of pain before we get our mix to the point where the customer is going to respond to it in Puerto Rico. In terms of -- I guess the other thing I'd say about Puerto Rico is that it was harder than we anticipated in terms of the legalities, in terms of the employment requirements, in terms of the systemic requirements and everything else. But the good news is, we got it open. We got it opened on time, and I think we can apply a lot of that learning to future international opportunities. And we do have international aspirations, and we'll let you know when we have something to report on that front.

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

Okay. Thanks very much, and thanks to all of you who are still on the call. We appreciate your interest and your support of DSW. And we wish you all a very happy Thanksgiving.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.