Designer Brands Inc. (DBI) Q3 2014 Earnings Report, Transcript and Summary

Good morning. And welcome to the DSW's Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Also, when asking a question, please limit yourself to one question and one follow up, to allow time for all questions to be addressed. Please note that this event is being recorded. I would now like to turn the conference over to Christina Cheng. Please go ahead.

Thank you. Good morning. And welcome to DSW's third quarter conference call. Earlier today, we issued a press release detailing the results of operations for the 13-week period ended November 1, 2014. 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 due to factors including those listed in today's press release and our public filings with the SEC. Joining us today are Mike MacDonald, President and CEO; Debbie Ferrée, Vice Chairman and Chief Merchandising Officer; and Mary Meixelsperger, our Chief Financial Officer. Mary will start with a short discussion of our third quarter reported results, then highlight the details of our adjusted results and discuss the outlook for the full year. Mike will then elaborate our results and describe our progress on our strategic initiatives. After our prepared remarks, we will open the floor for Q&A. With that, I’ll turn the call over to Mary.

Thanks, Christina, and good morning, everyone. Our reported net income for the third quarter of 2014 was $49.6 million or $0.55 per share, which included an adjustment of $0.01 per share from a tax provision adjustment related to RVI. This compares against last year’s reported net income of $55 million or $0.60 per share, which included an after-tax income of $1.4 million from our luxury test. Excluding these items, adjusted net income was $50.4 million or $0.56 per share on 89.8 million shares outstanding, compared to last year’s adjusted net income of $53.6 million or $0.58 per share on 92 million shares outstanding. Our adjusted earnings per share included $0.03 per share in charges from assets impairment. Our equity investment in Town Shoes contributed $0.01 per share -- $0.01 towards earnings per share for the quarter. All of my comments this morning regarding year-over-year comparisons will relate to adjusted results, which exclude one-time items from RVI in both years in our luxury test last year. Sales for the quarter increased 7.2% to $670 million, driven by a comparable sales increase of 2.6%. Comparable transactions for the DSW segment increased 5%. Store traffic declined in the low single-digit range but continue to improve from Q2 levels. Online traffic increased at a healthy rate. Our conversion rates increased in both store and dotcom. We believe many customers are using mobile to survey their choices, but ultimately they choose to complete their transaction in store. Average unit retails declined in the low single digits, partially offset by an increase in unit per transaction in the low single digits. We opened 21 new stores for a total of 37 new locations this year. This included five small format stores and brings us to 431 stores in operation at the end of the quarter, an increase of 9.6% in units and 7.1% in square footage. Our new stores continue to ramp towards our sales plan. As we stated during our last call, our new store performance mirrored the performance of our base business, including the improvement this quarter. In our Affiliated Business Group, this quarter comp increased by 0.3% on top of a 3.6% increase last year. Total sales grew by 3.9%. ABG ended the quarter with a total of 369 departments in operations. Gross profit for the quarter contracted by 100 basis points, merchandize margin declined by 40 basis points, regular price comps grew slightly faster than clearance comps, lower markdown rates and better category mix were offset by planned sharper pricing that created IMU pressures. Also driving margin -- merchandize margin were shipping costs related to our charge-send or ship from store fulfillment, which resulted in 50 basis points of margin contraction. We anniversary our rollout of ship from store fulfillment in the fourth quarter. Occupancy rate increased 60 basis points, which includes 55 basis points for asset impairment charges. Our SG&A expense dollars increased by 11.9% and deleveraged by 90 basis points, due to planned investments in omni-channel and marketing, offset by lower incentive compensation. Turning to the balance sheet, we ended the quarter with cash, short and long-term investments of $427 million, compared to $517 million last year. The decline reflects our significant return to shareholders through dividend and share repurchases. Inventories for DSW, Inc. ended above last year by 7.4% on a cost per square foot basis. This included a material increase in opportunistic pre-buys that we secured to deliver compelling brands at exceptional values in 2015. Excluding pre-buys, inventory cost per square foot increased by 3.8%. Capital expenditures for the third quarter were $27.8 million, with $16.4 million spent on new stores and store remodels, and $11.4 million spent on technology, projects and improvement to our distribution and fulfillment centers. Our capital allocation priorities have not changed. Growth is our number one priority. We expect capital expenditures of $105 million for the full year, with cash going into new stores and remodels, and the balance going into omni-channel investments and other business projects. Dividends and share repurchases are DSW’s other two priorities. We repurchased 1 million for $30.2 million during the third quarter. With the Board’s additional authorization of $50 million, we have $63 million available for future share repurchase activity. We have also paid $50.4 million in dividends so far this year for a dividend yield of 2.2% based on yesterday’s closing price. Turning to guidance, we expect full year comparable sales to be slightly positive and full year total sales to increase in the mid single-digit range. As we indicated last quarter, full year merchandize margins will be 100 to 150 basis points lower than last year, reflecting our typical spring performance, IMU compression associated with selected sharper pricing and higher shipping costs. Shipping cost pressure in the fourth quarter will be more modest as we anniversary the full chain rollout of our ship from store capability in November. We expect SG&A expenses to increase in the midteens in the fall, reflecting investments in omni-channel and marketing. We are now projecting our earnings per share range -- our earnings per share to range from $1.55 to $1.65 per share. This compares to our prior guidance of $1.50 to $1.65 per share. Our income tax rate is assumed to be slightly below 39%. Our guidance assumes 90.5 million shares outstanding for the full year, which has been reduced to reflect the impact of shared repurchase supply this year. With that, I’ll turn the call over to Mike.

Thank you, Mary and good morning everyone. In the third quarter, we continue to make progress on number of fronts. And I’d like to share some of those points of progress with you this morning. Most obvious improvement area was our sales performance. After posting a negative 3.7% comp in Q1 and a tenth of a percent comp in Q2, we rebounded to a plus 2.6% comp in Q3. Our sales performance strengthened across all major footwear categories. In a critically important women’s footwear area, we had a plus 1% comp increase which represented a turnaround from the negative comps we saw in the first two quarters of the year. Comps were solid in the seasonal categories and in dress footwear. We distorted our inventory position in boots to grow that category at an accelerated rate. So far that plan paid off with the category increasing plus 6% comp in the quarter, driven by both tall boots and booties. In sandals, we made a conscious decision to extend the sandals season in our warm-weathered regions in the south and the west. The customer response to this movement is extremely strong. We comped off that double-digit rates in sandals in both of the effective regions. For the quarter, sandals still comprised off relatively small portion of total women’s but the category posted a plus 8% comp. We are also pleased with the performance in our women’s dress footwear which comped up 4% in the quarter. Contrary to the perception of the absence of trends in the women’s footwear, our customers responded to the fashion and product choices that we’ve injected into our assortment. The only category in women’s footwear that posted negative comps in the quarter is casual footwear. But I would note that casual and athletic planned down. Just as in dress footwear, the more fashion forward segments of casual footwear posted positive comps while traditional styles comped down. Additionally, we saw a shift out of casual footwear into the fashion athletic category. It’s no secret that customers of all ages are wearing sneakers more often and for more occasions. We recognized this trend early on and shifted inventories accordingly. We also exploited that trend in our marketing. You may recall that in one of our recent television commercials. We showed a bride wearing sneakers. So with declining experiencing sales of women’s casual footwear was not entirely unexpected, men’s footwear posted a plus 3% comp in the quarter, driven by strong selling in men’s boots and solid performance in our men’s dress shoe business. As you might have expected from my prior comments, the athletic category was the strongest footwear category in the quarter, hosting the plus 7% comp increase. This was driven by very strong increases in fashion athletic across both genders. We continue to distort our inventories in support of this strong trend. Our accessories business comped up plus 9 in the quarter led by our core businesses and the expansion of jewelry. Newness continues to be the driver of our accessories business. As part of our omni-channel strategy in early November, we began selling an expanded assortment of accessories online. Geographically, our sales performance was relatively even with slightly better results from the south, reflecting both the success of our sandal strategy and stronger customer engagement. Our marketing campaign helped to lift our traffic trends, allowing DSW to outperform overall industry traffic quite meaningfully. We also improvements in our rewards program with higher enrolment, average spend and retention compared to last year. As Mary mentioned, we finished the quarter with inventory up 7.4% across the square foot basis or up 3.8% excluding pre-buys. For all of August and September, we operate with inventories lower than we had planned due to late deliveries and transportation delays. We feel good about the level in currency of our inventory position right now and we are closely monitoring the West Coast port situation. Our higher level of pre-buys gives us some flexibility. But our work stoppage in the West Coast ports would have negative consequences for all U.S. retailers. Now let me update you on several projects that are either in place underway or in the planning stages. We implemented our assortment planning system for all footwear categories two weeks ago. This system will dramatically improve the precision of our merchandise plan and allow us to localize the assortment price store which will increase sales and reduce markdowns. The first module of this overall system is preseason planning which will affect assortments in the fall of 2015. The second stage is in-season planning which improves our ability to react actual selling results in season. We expect to see meaningful benefits from assortment planning beginning in 2016. This fall we’ve been testing selling children shoes in plenty of our stores. Results have been encouraging and we are learning a great deal. The customer feedback has been positive. We will continue this test into 2015 to complete our learning. We now have seven small format stores open and doing business. The performance of each stores is mixed. We are beginning to learn those factors that have led to this diverging performance. This was exactly the kind of learning that we expected to get out of these test stores. We anticipate learning even more when we initiate tests of new technology and modified service levels beginning in January. The bottomline on this growth strategy is that we’re moving forward with additional locations while we simultaneously fine tune the location and operating the projects that will make these stores most successful. Mobile engagement and traffic continues to grow very rapidly. In recognition of this trend, we commissioned our first mobile app in October. This app gives customers a convenient way to shop, check rewards, point balances, make purchases and much more. So far customer reaction has been strongly positive. In the first four weeks of availability, the app has been downloaded over 80,000 times. We also recently implemented PayPal, the payment method on our ecommerce site. Since its implementation, approximately 50% of all dotcom transactions have been completed using PayPal for the payment method. This immediate utilization demonstrates the popularity of this payment tool. We’ll leverage this new capability by partnering with PayPal for market to over 20 million of their customers in the next several months. A number of additional omni projects are in planning for implementation in 2015. These include redesign of our website, buy online pickup and store and optimize store selection algorithm for omni-channel fulfillment and the use of new in-store technology to facilitate and amplify access by store customers. I mentioned at the outset that we made progress in the quarter on a number of fronts. We managed inventory quite well and so doing, we were able to reduce our markdown rate. We also stimulated comp sales growth across virtually all categories of business and we continued to add new store to our base. We’ve also made a good deal of progress on our major initiatives, most of which are geared to making DSW an even more customer-centric company in the way we operate the business. Specifically, we have turned all of our stores into mini fulfillment centers in support of dot-com demand and demand from other stores. We selectively sharpen prices and sourced the higher level of opportunistic buys in order to retain our price leadership position. Our new leadership team in merchandising and merchandised planning made progress in stimulated sales and managing inventories. We’ve increased and reallocated our marketing spend in order to breakthrough the clutter. We are delivering stronger, more comprehensive messages regarding DSW’s fashion authority, broad assortment, great shopping experience and our compelling everyday value proposition. And we dedicated a team of talented individuals to drive innovation and change throughout our organization in order to become fully omni-channel proficient. We’ve made each of these decisions very consciously because we firmly believe that over time the customer will demand that retailers can form their business practices in the way the customer wants to shop. Those customers that -- those companies that make those changes will thrive. Those that don’t change will struggle to survive. We are committing to making fundamental change to our business that will keep us on top, capture new customers to grow market share. Investments we are making are helping us redefine our brand cornerstones in an increasingly omni-channel world. And those updated cornerstones of assortment value and convenience will enable us to grow sales and market share going forward. With that, I will turn the call back to the operator to open it up for questions.

Thank you. [Operator Instructions] Our first question comes from Kelly Chen of Telsey Advisory Group. Please go ahead.

Yeah. Congrats on a nice quarter. Just wondering, just to sort out, could you talk about - did you see any notable call-outs in terms of a difference in sales cadence throughout the quarter or any major differences by regions?

Could you repeat that?

Sure. Just wondering if -- did you see a difference in terms of the sales cadence throughout the quarter or any major differences by region when you look at dot-com?

Yeah. I think I called out the regional strength in the south, both because of the sandal business and because we know from our convergence statistics and our compliments to complaints ratio that the south enjoyed stronger customer engagement. So the south was stronger than the other four regions. In terms of growth within the quarter, I would say it was relatively even, even although we don’t intend to comment on intra quarter performance just because the finer you get, the more blips you get and less indicative it is of overall trends.

Got it. And with women’s, I mean, we were excited to see that positive comp and I’m sure you guys were as well. Could you just talk a little bit more about some of the initiatives that you have put in place like the opportunistic buys? Is that back about the 10% mark, the sharper pricing? Is that where you wanted to be now, or will that continue to be a pressure point in the next couple of quarters? Just kind of talk to you some of that. Debbie Ferrée: Yes. Thanks for the question. So there were actually two places that really resonated very strongly in the women’s area and as we called out in the earnings call that really was the dress area and the boots area so. In dress, we actually -- our initiatives were really very simple. We kind of got back to basics. First of all, we spend a lot of time on products development and infused excitement in very simple styles, so paid a lot of attention to styles and materials because there really weren’t any new silhouettes or new styles that were really coming out of the marketplace. So we really have to make that happen. And I think we actually did that. We did some other simple things. We also balanced heel heights a little bit better than we have in the past. Once again, it was simply we did on our end because that really wasn’t the direction coming from the market. In terms of closeout buys, we were very, very focused on that. I think we kind of walk sight of that, probably over the last three quarter and we just -- we got back to basic where we paid more attention to closeouts. So we have increased our closeout percentage to the total receipts significantly. We will continue to do that and the positive thing is we are seeing faster sell-through rates on those products. Once again, they are more sharply priced and appeal to that value consumer. And the last thing and probably most importantly is we said, really want to go after that better and contemporary consumer and we actually saw our strongest comp in the better and the contemporary area. So that was the first thing we did. As we noted the last time, we were in search of a closeout buyer and we have a closeout buyer in place now for about four weeks. She is brand new with us, so she is still learning about DSW, which comes with a very strong background. She is based in New York and she is in the market four and half days a week. So that is -- her job is to make sure that she uncovers all the opportunity buys out there and elevates us very, very quickly, so that we can now go ahead and take advantage of this opportunity. In boots, we really -- we had a good comping business with plus 6%. We’ve kind of evenly dispersed between tall boots and beauty. So we were really pleased with that. We paid attention on not only fashion but also some good quality, clean investment footwear. So, I think we have a nice balance of products in that area. So overall, I will tell you we paid attention to the products that we were putting on the floor. We were deliberate about going after the closeout opportunities in the market and we actually enact to make quite a bit. At the beginning of the year, we actually changed the team significantly in the women’s area and we feel very strongly that we have the right impact players in those areas to continue this performance for the future.

Our next question comes from Kate McShane of Citi. Please go ahead.

Hi. Good morning. This is Corinna Van Der Ghinst on for Kate. You mentioned your ability to reduce the markdown rate in the quarter. I was just hoping you could talk a little bit more about the promotional environment that you are seeing this fall, particularly in the context of your competitors and specifically department stores you’ve been running some pretty aggressive promotions on through? Debbie Ferrée: So we stated our objective to make sure that we put the right product at good values on the selling floor for customers. And that really is the thing that we really focused on. So we were very deliberate about looking at every single item, how we priced it, what is the ability you think the market could there, what would the customer pay. So rather than be on the defense, we were very offensive in terms of being deliberate about the product and also the pricing. Opportunity buys allow you that opportunity to be even sharper on some key items and I would just tell you that was the overall strategy and that probably continue to approach the market environment.

Okay. Thank you. And just as a follow-up, can you please tell us what your guidance assumes for the fourth quarter for the boot, dress and comfort category, please?

Could you repeat that? You broke up a little bit.

I’m sorry. Just how you’re thinking about the Q4 comp guidance, what you’re assuming for boot, dress and comfort categories?

Yeah. We really don’t give quarterly guidance and certainly not by category.

Okay. Thank you.

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

Yes. Good morning. Nice job. My question relates to marketing. Can you quantify to some extent how much you spend more this quarter versus last year? And also maybe elaborate a little more on the traffic impact that you saw?

Yeah. We spent -- I’ll let Mary give that number for me but it drove up our SG&A rate meaningfully. What I’d say is that we monitor our traffic trends in both stores and dot-com very closely. And as I think we said, the traffic improved into stores. It was still negative but it improved and we have a very nice traffic increase to our dot-com side. We measure our store traffic against industry traffic trends that we get from, probably the same place everybody else gets their traffic data from. And early on in the year, we were operating at a slight deficit to the traffic trends in the industry, that turned around to plus 2% net relative in Q2 and it improved to a plus 4% net relative in Q3. So, we can’t say specifically that it was due to marketing but we did increase our spend. We reallocated our spend and we think that the customer responded.

And, Mike, an answer to the question regarding the total spend increase, the spend in Q3 relative to last year increased by $4.6 million.

Great. And then if I could follow-up on the comment you made about the port delays. Any sense on how much that might have impacted you in terms of sales? And also if you could just say if you believe to have any weather impact, especially as some talked about October if that’s the case?

Well, let me try on weather first. I mean, what we saw is that when the weather was cooler than last year, we had nice positive comps and when the weather was warmer than last year, the comps were softer. It was a day-by-day thing. I don’t think for the quarter as a whole, we would attribute any aberration to weather quite honestly. In terms of the port situation, we did operate with four receipts and under planned inventories for August and September. And I have some calculations that were done by some of our merchants on how much that cost us but that’s a little bit like the fox guarding the henhouse, so you got to be careful. And besides, we’ve got such a broad assortment that often times if one style is in place, they’ll transfer that purchase to another style. The one area that I do think was impacted and it was also our weakest category was casual, women’s casual footwear, particularly in the classic area. So it wouldn’t have turned -- it wouldn’t have turn the category, I don’t think into a positive but there was an impact. But I don’t want to quote a number just because I haven’t spent that much time looking at it and because of the breadth of our assortment.

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

Good morning, everyone. Nice job on the quarter. Debbie, a question for you athletic, maybe if you can just talk about nice and see the improving trend line sequentially, where are you seeing that strength? Are you getting access to either improve brands or a brand just giving you better product and what are your thoughts because you kind of think about that category as you had into spring, seasonally a bigger sales period for athletics? Debbie Ferrée: Yes. Good morning, Chris. So we have a nice comp in athletic plus 7% as we’ve stated. There is really a couple of different areas. First of all, the iconic brands are actually doing well, things like Converse and Vans and that’s pretty consistent, plus everything that I read, vulcanize as a category exceptionally well. The fashion piece of the business both for men’s and women’s, comp up significantly very, very large double-digit comp increases and the penetration of fashion in both men’s and women’s is up. So we are really seeing all the strength coming from the fashion piece of the business. Do I think that will continue, yes, I do. I think there is enough newness in these categories as well, but actually will kind of take us into spring and that kind of excites me, because the casualization of apparel and footwear plays very, very well into what’s happening in the athletic area and we saw great strength in third quarter and I just think it plays well into our core customer for spring of 2015.

Okay. Thank you. And then just on the opportunistic buys and your comments about that. Could you add any color about either where that is, I assume its open toe or seasonal products? Is that really where it is for 2015 or just your thoughts about that increase in opportunistic buys? Debbie Ferrée: So, we’ve seen some pretty healthy lifts come trough which we are pretty excited about that and that really crosses both spring and fall products. So, we’ll select the best product that we see of those lifts and negotiate some very sharp retail, so we pass great value to the customer.

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

Hi. Good morning. Quick housekeeping item actually on the impairment charge Mary, $0.03, what was the nature of that and was that your guidance that you provided last quarter? Is it included in your new guidance you provided this morning?

The $0.03 is specifically related to assessment of store level cash flows and the ability of those forecast the cash flows to cover the net book value of the assets in those businesses, it’s a typical impairment assessment. That $0.03 we did have a charge of about a penny in Q2 associated with that, actually on a rounded basis that was just over a half a penny. And in Q3 we had an additional just under $0.03, so for the year-to-date now we are at about $0.03 in impairment charges. And certainly, that Q2 charge was in our guidance. The Q3 charge was not in our previous guidance, but is now in our full guidance for the year.

Well, is it fair to believe that that charge would not repeat in 2015? That is kind of one-time in nature?

No. We always assess impairment on an ongoing basis and to the extent that we see in these stores that have a substantial change in trend relative to their cash flows. We are doing that assessment on an ongoing basis. I would say that we have a very, very small number of stores that have a negative cash flow that have not been impaired.

Okay, that’s helpful. And the follow-up is on your website. I believe you are planning on upgrading certain capabilities and expanding the SKU selection online. Has that already been implemented? If so, I was hoping you could provide some more detail around how those upgrades have kind of been received by the consumer?

Yeah. The upgrade is still ahead of us. That will happen after holiday. In terms of the assortment throughout the year, we have gradually taken photographs and are now highlighting styles that were once store-only product. So our philosophy is we want to make all of our product available to all of our customers regardless to how and where they are shopping. And so to have store only product is really contrary to that. So we’ve been gradually fixing that throughout the course of the year and it’s generated positive sales. The other evidence of that commitment having all of our assortment available to our customers is the expansion of our accessories, our fashion accessories online which we did a few weeks ago.

Our next question comes from Mark Montagna of Avondale Partners. Please go ahead.

Hi. Question about omni-channel. Wondering if you’ve seen a rise in the percentage of people coming into the store to pickup the merchandise, if you have seen a good attachment rate and how you may be incentivizing people to do that? And then next question would be, it sounds like you are anticipating that you are buying in anticipation of a more promotional Q4 in the industry. And I just wanted to verify whether that’s your outlook? Thanks.

Okay. In terms of the business, the people coming into the store and they hold omni-channel sales volumes. We’re operating at an annualized volume of around $85 million worth of what we call omni sales. That’s demand in -- that's originated on dot.com but fulfillment store, demand that’s originated in store but fulfilled through our performance center and demand in one store that is fulfilled from another store. And I think what we’ve seen all year along that customers are doing a lot of pre-shopping online and there that’s one of the reasons, our conversion is up in stores because not just that we are able to get them the wanted products but they’ve done a lot of home work ahead of time. And hopefully that answers your question, but if not let me know. And in terms of buying your advance of promotional Q4, the pre buys that we mentioned are all for 2015. So that’s not at all what’s going on here. What’s going on here is that we have recognized that we need to bolster that part of our business. We’d let it drop by 1% or 2% over the last year. And we are committed to making map an important part of our business not huge but not single digit. It’s got to be double digit per penetration to our total business. That’s why we added the closeout buyer that Debbie mentioned and that’s why we’ve got more pre-buys now versus before. I think we said on our prior call that few years ago we had a closeout buyer that buyer retired. And when that happened and you disperse the responsibility for closeout buying, sometimes you're not as effective as you might otherwise be. And so we are excited about the new merchant we have onboard to take advantage of that opportunity, but that does not have anything to do with our outlook for Q4.

And Mike, I would just add that Mark just on your omni question, Mike mentioned his remarks that we are introducing buy online, pick up in store in 2015. So in terms of driving more store traffic for customers to pick the product up in the store, we are excited about that omni opportunity that we’ll be rolling out in early ’15.

Our next question comes from Camilo Lyon of Canaccord Genuity. Please go ahead.

Thanks. Good morning, everyone. Just with respect to the pre-bought inventory, that opportunistic inventory, could you maybe tell us how much of that inventory sold in Q3 or give us just some rough estimates on how that inventory sold in the quarter? What I am trying to understand is what is the risk of that inventory going into 2015 and how that could impact margins?

I’ll try a part of it and maybe Debbie will chime in. I think our penetration of closeouts in Q3 was about 10%. And we have looked that penetration drop down to I think at one point it may have even gotten down to 6%. So it’s a fairly big move for us to get it back up to the 10%, 11%, 12% that we’ve enjoyed historically and that’s what we are trying to do. I don’t know if there is anything else you want to add Debbie. Debbie Ferrée: No, that’s all.

And then just the margin impact of how we should be thinking about that opportunistic inventory for next year? Debbie Ferrée: So typically on closeouts, they typically carry a slightly lower IMU and lower margin rate. But what we found in the opportunity buys that we bought for third quarter is we actually got a better sell-through than anticipated. So I would expect over time that the reduction in the markdown rate, we would see a reduction in the markdown rate that could offset or partially offset the IMU reduction.

Okay, great. And this is my follow-up, just a clarification question for Mary. When you talk about SG&A dollar growth for the fall been at mid-teens, just want to be clear that you are assuming -- you are telling us that’s a back half second half increase for SG&A not just in Q3?

That’s correct. When we speak of fall, we are speaking of the back half.

Got it. Thanks so much. Good luck with holiday

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

Good morning. And let me add my congratulations. Great to hear that you added a closeout buyer and I guess at this point, I am just wondering whether we can sit and say that your merchants are pretty much proven at this point. And then also just are there -- do you feel like there are more gains to be had with the new merchants over the next couple of quarters as they continue to make refinement? And then anything else you could add in terms of planned promotional or markdown levels for holiday this year versus last year? And then I will follow up.

Sure. So as far as the merchants are concerned, the merchants, we actually changed two merchants, one was the DMM over women’s and this individual has a proven track record in DSW as she came in many years ago as the head of planning, moved over and led dotcom as the GMM, my counter part in dot-com, and we brought her back into the business as we look at the world of omni in the future one customer and one set of inventories, one view of the customer and one view of the inventory. So she’s actually had experienced both in brick and mortar and in dot-com and actually makes it -- is the perfect fit for that role, so with the company for a long time. The women’s DMM that we put in actually ran the women’s area before as DMM. We moved her if you recall over to the men’s and athletic area as a DMM, and she created quite great traction in sales and growth and market share growth in that area. And so it was a natural thing that we would move her back into women’s, like we did. So these two merchants are proven, they have proven track record and are actually sterling performance, and as you can see have made a big impact in the business. In terms of -- I think your second question was promotional activity for the fourth quarter, for the holiday so we are not planning on doing anything largely outside of the norm. What we do plan to do is we are going to post those value messages to our customers consistently, so that they know that they could be deliver a great product and good value to them throughout the season. We have been able to buy some opportunity buys that we delivered for at once delivery that have come into the business that you can start to see some of those results in our Q3 performance, but we are not going to be planning to do big POS events and discounted events. We plan to talk about the great values that we have bought for assortment.

Okay, great. And then maybe you could just touch on the marketing spend picture, obviously that seems to be helping your business. You’ve sort of adjusted that. And then, I guess my question would be, when do we start to see sort of the advertising marketing spend level out?

I think it will probably level out after first half of next year. We added, as Mary mentioned, a pretty significant increase in Q3. We are using new outside agencies to help us with our message and our mix. And they are on incentives that reward them for better performance that they help to create. So we think that’s a winning formula, but it should level out after first half of next year.

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

Great. Thank you very much. Question on the fashion jewelry, just going in for the holiday, I mean, you had jewelry in some stores this time a year ago, but didn’t really roll that out across the chain until early 2014 if I am not mistaken. So the question is, how are you marketing jewelry over the holiday and what kind of a contribution might we expect in the third quarter?

Sure. So this is a relatively new venture for us as you called out and just this year we rolled it to the entire chain. To be honest with you, we are still learning about what selling in that area. We are going to do some nice business this year. I want to quote the numbers, but we are going to do some nice business this year. But we found some things that we bought did well and there are some things that we bought that didn’t do so well. So I would just tell you that I am calling this a period of adjustment in terms of us getting the assortments right. And we have some work ahead of us on that to be very honest with you. What are we doing that’s out of the norm to promote jewelry? We are not -- items that are slow seller, we’re taking those markdowns. And if you go into our stores, you can see back in our clearance area we have a complement of jewelry of those, those are the things that customer didn’t like. So we like that we have in the front of the store at regular price right now. Those items are doing well for us, but we still have a lot to learn. And I think you will see from significant shift in our assortment as we approach spring of 2015.

Okay. And then a quick one on the children’s footwear test. You said you’re encouraged by just the early results there. I just wonder if you could elaborate a little bit and give us some parameters maybe, the amount of square footage you’re devoting to kid’s shoes and the pet stores. What the assortment looks like, the price points, that sort of thing? And, I mean, are you seeing it as -- is it an incremental sale? Maybe you don’t have enough information to comment on at this point in time. But I think you previously said you might have it across the chain next year, I was wondering if you are still thinking that?

Okay. I will try that. We had 20 stores where we put kid’s footwear in and I believe 10 of those stores just had youth sizes and the other 10 had both the youth and toddler. And when we talk about learning, we are learning the relative performance of those two different approaches. We are learning the appropriate mix by gender and we are learning the appropriate penetration for athlete and non-athletic. So that’s a lot of the learning. In terms of the inventory investment, I think it’s like 3% of the total inventory in the store. It’s devoted to kid’s and don’t ask me, how much it is in the youth and toddlers stores versus the youth. I think overall, it’s about 3%. So it’s not huge. To your point on incrementality, our analysis indicates it is definitely an incremental sale that we wouldn’t have otherwise gotten and we look at that based on UPT and the attachment rate. So we feel like it’s a good business. We feel like it’s a business to customer probably expects us to be in. It’s a business that we tested several years ago, but we weren’t successful primarily because we didn’t have the systems in place to track it effectively. It’s a very -- I mean size profile is very important as you know in that business. So we think we now have the wherewithal to do -- execute the business well, but we are still learning. And if and when we do get to the point where we roll it out to all the stores, it’s a big project. We have to plan this space and execute this space and make room for the assortment. And so that’s a big commitment. And with all the other things we’ve got going on right now, it’s just not the highest priority, particularly given that we are still in our learning phase.

Our next question comes from Jay Sole of Morgan Stanley. Please go ahead.

Hi. Good morning. Thanks for taking my questions. On the sharpened price points, can you talk about if you have been able to extend the difference between your prices and the competition?

Could you say it again, extend the difference?

Sure. I mean, do you see it, the value that you bring to consumer versus the competition? Do you feel like there is a difference in price between what you’re doing, what other people are doing is where you want it to be and if you increase that difference?

So the one thing I would tell you is in our women’s business, better than 60% of what we do in terms of specific styling actually matches our consumer, 60% of what we do is actually different from our competition. So we work with the brands, their design teams, and product development to put great products out with the brand names, but it doesn’t match up identically. So on items that are identical match, we want to be at or lower than our competition. So overall, I would tell you that we feel when we price the goods, we feel that we look at every single item and we try to understand what the customer really wants to pay for it. But we want to make sure that we are competitively priced on identical items. And then on the balance of the assortment, we make those decisions based on what we think the customer will bear.

We are also systematically comparing our prices on those comparable items against the relevant competitors to make sure that we’re sharp.

Got it. Okay. And if can get one more in. You mentioned, when you see the marketing spend leveling out, can you talk about when you see the SG&A spend on technology this year, there will be rest of $10 million leveling out or is there more of one-time charge?

Are you talking about our omni expense?

Yes.

Yeah. That wasn’t just technology. That was a separate step we put in place to manage and really aggressively implement a lot of the business and system changes we’re making to become omni-channel. It was -- so it’s payroll, it was professional services for consultants and it was business projects that were executed by IT. So it’s all those things. What we’re try to say on the last call is that it’s increasingly difficult. Frankly, it’s impossible to accurately isolate the impact of omni because it’s a fundamental business change that we’re implementing and it is interwoven into the fabric of how we do everything we do. And so maybe we’re a little naïve when we went in and we said hey, it’s going to cost us $10 million of extra expense this year to embark on omni. Now, it’s hard to separate that out. And we don’t intend to separate it out any more, just because it’s a waste of time. It’s going to be how we run the business. In terms of overall SG&A guidance, we’ll gives you SG&A guidance after the next quarter call as we give you overall earnings guidance for 2015.

Got it. Okay, Mike. Thank you. That’s really insightful. I appreciate the help.

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

Hi, everyone. Thanks. So there are two questions on margin and then one on Canada. First, what’s the merchandise margin assumption embedded in your full year guidance at this point? My rudimentary math says that margins were down, call it 170 bps year-to-date. And then what's the real new piece that you will be doing when you implement assortment planning because I assume a lot of the functionality is already being done in some form manually. So what’s the potential there? Thanks, and I have a question again.

Yeah. I think, we said that our full year guidance in terms of margins that we’re expecting for the full year to be down 100 to 250 basis points in terms of overall margins. In terms of merchandised margins, in terms of where we’re year-to-date -- year-to-date, we are down 156 basis points and that’s primarily driven by the typical spring we had. We actually saw some improvements and expect to see more improvements in terms of the back half of this year.

And Scott, relative to AP, assortment planning, I would say that for the most part, we don’t have those technologies in place right now or those practices in place. I mean, we’re going from planning at an item level for about -- I don’t know, 15%, 20% of our assortments, essentially planning 100% of our assortment on an item basis. And we’re doing that through the assortment planning system and a lot of the mixing of the product by location is based on science and not arts. So, I think, it is going to be new and different and potentially breakthrough. It's really not going to start meaningfully affecting us until we get to 2016. I think the first season that we’re planning is the fall of 2015 but I don’t expect a big impact there. I think, once our merchants get their sea legs on this new system, they'll begin to really reap the benefits of it. And let’s talk about what the impact is when we get closer.

Okay. That’s helpful. Thanks. And then just on Canada. You said that you are going to invest in Town Canada and learn about the region. I think you’ve opened the store two, DSW stores in Canada. How are you just thinking about what you see it now and what the opportunity is in Canada for DSW as well?

Good. I probably should have mentioned that. We do have two stores opened in Canada. We don't, Town Shoes does as our agent and we work with them pretty closely on the two stores that we opened are both in Greater Toronto Area and they’re both doing exceptionally well, immediate receptivity by the Toronto customer and high degree of familiarity with DSW and what we stand for. And what I’d say is that two sets of exit interview done, one immediately after opening and another about two weeks ago. And the scores in terms of the customer appreciation and what they think about the stores are off the charts good. So we are excited about the opportunity. We’ll be opening up more stores through Town next year. Obviously, Scott, we still only own 49.2% of that business and that will probably stay that way for another three years, I would say, but ultimately all will be ours. So we’re exceptionally pleased with the early results and we are moving ahead. And how big it could be? I think the best way to estimates that is Canada is about 10% of the U.S. So think about it in those terms.

And our last question comes from Seth Sigman of Crédit Suisse. Please go ahead.

Okay. Thanks very much. I was wondering if you guys could talk a little bit more about the small store test and it sounds like it’s been productive, you’re learning a lot? Can you share a little bit more about what’s working and what’s not working? And how do you think about this concept? Where does that fit within your growth plans?

Yeah. I’ll try that. Look, we’ve got seven stores open. Three of whom are not going to cover off the ball, three of them are falling short and one of them is make it, okay. So it’s half and half, really. We -- and I don’t want to tell you, what we’re learning, because I consider that proprietary information. But it’s becoming clear, where that strategy is going to work and where it’s not going to work, and the other thing that is really important is that in a small format store and we’ve got one that that’s less than 9,000 square feet. It has a significantly smaller assortment. So we have to be extra precise about what we put in that store and then we have to do an outstanding job of servicing that customer and we need technology to help us do that, so that they have true access to our full assortment. And we’re going to be kicking off a test in a number of stores in January and two of those stores that we are going to be testing both a higher service level and new technology are in small format stores. So, I think, we’re going to learn lot from that too. And look, we think this is going to be a successful strategy, we know that. The locations, we have got to figure that out a little bit, but I think that all the boats could rise with the new service level and new technology. And I’m not ready to declare what the total number of additional stores could be other than to say it significant and its on top of 550 stores that we have identified as a build-out potential for the large format stores.

Okay. Thank you for that color. That’s very helpful. On the same topic, any other early thoughts on, number of store openings for next year, any new opportunities you are seeing as a results of other retailers maybe closing stores, any more color there would be helpful? Thanks.

Yeah. If you don’t mind, we prefer to give that guidance with the fourth quarter call at the outset and at the same time we give EPS guidance for the new fiscal year. So, I would like to hold on that question.

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

Thanks very much and thanks to all of you for listening in today. We appreciate your interest and your support. We hope you have a great day and Happy Thanksgiving. Thanks very much.

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