Designer Brands Inc. (DBI) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the DSW Incorporated First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions] Please also note, today’s event is being recorded. I would now like to turn the conference over to Christina Cheng, Senior Director, Investor Relations. Please go ahead, ma’am.

Thank you [Rocco] (Ph). Good morning and welcome to DSW’s first quarter conference call. Earlier today, we issued a press release detailing the results of operations for the 13-week periods ended April 30, 2016. 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 various factors, including those listed in today’s press release in our public filings through the SEC. Joining us today are Roger Rawlins, Chief Executive Officer, Debbie Ferree, Vice Chairman and Chief Merchandising Officer, and Mary Meixelsperger, Chief Financial Officer. Let me now turn the call over to Roger.

Thank you, Christina, and good morning everyone. You may remember from our last call, how I mentioned the importance of this business operating with a different focus and tempo than we’ve demonstrated in the past couple of years. The first quarter results combined with my visit to stores in every region of the country over the past couple of months validate my initial assessment. While we've made progress in implementing tools and capabilities, we must continue to improve our focus and tempo on the day-to-day execution of how we plan, buy and manage our business to deliver a compelling assortment in a manner that differentiates DSW in the eyes of our customers. We have reduced our sales and earnings guidance for the year to reflect the current trend of our business. We believe this is a prudent thing to do as we work to improve how and what we buy, where we allocate goods and how we execute in the field. This decision will help us manage inventories expenses and capital investments as we continue to make progress through the back half of the year. Let me turn the floor over to Mary for a recap of our Q1 performance.

Thank you, Roger. Q1 was a challenging quarter for DSW. After a strong early start, sales weakened measurably in late March through the balance of the quarter. Total sales increased 3.9%, to $681 million with a 1.6% comparable sales decline compared to last year’s 5.1% comp increase. Comp for the DSW segment decreased 1.4%. We opened 10 new DSW stores this quarter compared to 18 new locations last year and we are encouraged that these stores met our expectations. Reported net income for the quarter totaled $30 million or $0.36 per share. This includes the $4.5 million pre-tax expenses or $0.04 per share related to transaction costs, purchase accounting impacts and the fair market value accounting for the contingent consideration of Ebuys. Excluding these amounts adjusted net income declined 31% to $32.8 million this year or $0.40 per share on 83* million shares outstanding. The rest of our comments this morning refer to adjusted results, which excludes these transaction costs and non-cash purchase accounting charges related to the acquisition of Ebuys. Transactions for the total DSW segment increased 1% in the quarter offset by a 2% decline in average dollar sale. Regionally, our cold weather regions outperformed the chain while warm weather region underperformed the chain. First quarter comparable sales at the affiliated business group declined 3.4% compared to last year’s 5% increase. ABG opened seven new locations and closed one location for a total of 385 departments in operation at the end of the quarter. Ebuys’ double-digit revenue growth contributed $15 million to our top-line and $2.3 million to gross profit. Toms shoes narrowed their operating loss while opening four new DSW Canada stores this quarter and Canadian customers continue to respond to our new DSW stores with enthusiasm. Total company gross profit for the quarter decreased 250 basis points due primarily to higher markdowns, lower IMU from category mix and sharper pricing. We focused on reactivating rewards members with compelling promotions that ran throughout the quarter. These events drove incremental sales and modestly incremental gross margin dollars, but came at a cost of higher markdowns. Occupancy distribution and fulfillment costs deleveraged by 30 basis points due to higher fulfillment costs associated with Ebuys and a higher mix of digital sales. Operating expenses as a percent of sales increased by 90 basis points due to increased marketing spend, technology investments and higher corporate expenses. As a result, operating profit margin declined by 340 basis points. We generated lower interest income this year due to lower investment balances. Last year’s pre-tax income benefitted from $3.3 million or $0.02 per share from a foreign currency related gain, which we did not repeat this year. The income tax rate was 80 basis points higher this quarter primarily from a favorable discrete item last year. Turning to the balance sheet, we ended the quarter with cash, short-term and long-term investments of $238 million compared to $456 million last year. The lower balance reflects our share repurchases last year and the initial payment of $60 million for the acquisition of Ebuys. We did not make any share repurchases this quarter and currently have $83 million available in our current authorizations. Total inventories increased 4.7% and less than 1% on a cost per square foot basis excluding inventories from Ebuys. Capital expenditures for the first quarter totaled $18 million with $11 million spent on stores and the balance spent on technology and other business projects. Turning to guidance, we are reducing our sales plan for the balance of the year based on current trends in the business. This will allow us to manage inventories to appropriate levels. We now expect comparable sales for the full-year to decline in the 1% to 2% range and full-year sales to increase by approximately 6% driven by a net 32 new stores and incremental sales from Ebuys. Our guidance assumes gross* margin will be lower than last year by 100 to 150 basis points as we adjust inventories to reflect the lower sales trend. At the same time, we’re pursuing cost savings* initiatives to reduce expenses going forward. Full-year operating expense is now expected to grow in the 7% to 8% range down from our original expectations for low teen’s growth, which better aligns with top-line expectations. Assuming a full-year tax rate of 39% and 83 million shares outstanding*, we expect full-year adjusted EPS in the range of a $1.32 to $1.42 per share. Our guidance does not include transaction costs, non-cash purchase accounting and changes in fair market value accounting related to Ebuys totaling $0.11 to $0.13 per share. We continue to expect lower earnings compared to last year in the spring season; however, we anticipate earnings to improve versus last year by the fall season. With that, let me turn the call over to Debby.

Thank you, Mary and good morning everyone. Within the DSW segment athletic significantly outperformed the chain with the mid-teens comp increase while comps for the women, men and accessories categories declined in the mid single-digit. On a unit basis, comps were flat during the quarter, but higher markdowns to activate customers lowered the AUR. Regular price comps were flat and clearance* comps were down 8% partially due to lower clearance unit on hand. The first quarter was disappointing with challenges in casual sandals, closed up dress, women’s evening and men’s casual more than offsetting the positive signs we are seeing in the balance of the business. Our product offering and marketing activities drove positive comps and traffic during the first two months of the quarter, while we experienced the broad industry slowdown that started in late March, our traffic continue to outperform the industry benchmark. Importantly, DSW gained share in adult footwear as our women’s non-athletic business continues to outperform the industry. The favorable results in our women’s fashion and athletic categories indicate that we are on the right path and we are working hard to amplify these results through greater product differentiation, expanded assortments and tactical planning and allocation. On the product side, the athletic category continues to show remarkable* momentum. Our athletic penetration is running 200 basis points higher than last year led by new offerings in fashion and performance athletic. We are extending the active trend into women’s non-athletic with an exciting new assortment of athletic inspired casual offerings. We’ve no doubt this business is on-track to achieve record levels this year, working with our branded partners or capitalizing our already strong fashion athletic assortment to transform DSW as an important destination for the at leisure customer. I’m encouraged to say that fresh fashion is beginning to drive the women’s business. The solid results in our women’s fashion categories indicate the customer’s readiness to embrace new trends. Women’s dress and casual sandals comped up in the low single-digit range with the strength in the category primarily during pre-Easter. With unusual conditions suppressing the demand for casual sandals post-Easter, we are repositioning our inventories appropriately and expect this will create margin pressure in the second quarter. Comp in the traditional women’s category declined as we navigate what could be a long-term shift toward the active comfort casual space we will measure our progress in women’s using the combined results of our athletic and non-athletic businesses. We still have much to do to ensure greater consistency and flowing our women’s assortment. I’ve been working closely with our new SVP of merchandize planning and allocation to improve processes and leverage our new localization capabilities. At the same time we’re adjusting the breadth and depth of buys to maintain target in stock levels while strategically reducing clearance. We expect both of these actions will maximize sales and profit margin long-term. Turning to Men, we were not satisfied with the men’s results. The mid single-digit comp decline accounted for close to 100 basis points of our Q1 comp decline. While we were pleased with the consistent positive results in dress, the casual trend was softer than expected and we continue to see the shift into athletic fashion. We will continue to look for new brands and products that will infuse freshness and growth into the men’s casual category. The accessory category delivered a mid-single digit comp* decline, but an increase in gross margin dollars although comping down we've made significant progress in rebuilding our handbag business toward more fashion and saw increases in other categories outside handbags. With new [indiscernible] trends and a stronger gifting strategy we expect our accessory comp trend to improve going into the fall season. Let me take a few minutes to update you on actions we’re taking to differentiate DSW’s assortment going forward. First of all, we are laser focused on offering the brands and products that are most important to our customers. We’re pleased with the progress we’re making and bringing exciting merchandize that offer fresh unique fashion* at incredible value. Our women’s assortment will showcase an increased number of brands within the contemporary better and athletic space. We continue to allocate more open to buy to closeouts which will allow us to bring more compelling deals to fuel the thrill of treasure hunt. Our closeout penetration has increased by 60 basis points this quarter to 12% and we’re encouraged with the sales results. With the market continuing to provide attractive opportunities for closeouts, we expect to strategically grow this business. Second, our merchants continue to secure a large number of exclusives for DSW. More importantly, we are increasing our access to the best performing products in the market. We’re pleased with how customers are responding to our recent products and brand introductions. Lastly, a word about private brands. Although it’s early, we are excited with the successful relaunch of one of our most important private brands. Starting this year, we have identified a new partner with strong design and sourcing capabilities that will bring our private brand business to its fullest potential. With that, I would like to turn the call back to Roger.

Thanks Debbie. We were disappointed in our first quarter performance. While these results might not indicate we’re making progress, I’m going to share a few examples of why I believe we are taking the right steps to improve both our short and long-term results. In our recent front-line review, we were excited by the progress our merchants have made in differentiating our assortment. We are increasing our percentage of vendor provided exclusives and will highlight this assortment to our 24 million rewards members. Our customers will understand what unique assortment we offer and the need to respond quickly while supplies last. We will also increase our close-out penetration and strengthen our already strong value offering. These killer deals will be another call to action for our customer and highlight our access to some of the best brands in the world with price points that can only be found at DSW. This fall you will see a higher penetration of private brands including the launch of a new men’s brand. To expand our private brands without the expense of an internal design team, our incentive to enter into an exclusive agreement with a key vendor partner to improve the consistency, quality and margins of our private brands. When visiting stores, it was apparent that we were missing important parts of our assortment across the chain. Our new leader of planning and allocation is putting process in place to ensure we are executing our targeted assortment consistently across all doors regardless of square footage, productivity or location. These disciplines within our buying, planning and allocation process will enhance sales and margins. We are intensifying our efforts to create unique brand experiences within DSW. For example, in Q1, we connected with customers through our shared love for music and fashion at [indiscernible]. We also hosted a successful athletic event with local artists that drew crowds into a number of stores. Our customer will see similar events in the future. We’ve been pleased with results we have seen in test stores and as a result we’re ready to launch kids in half of our chain. We believe this new category will drive share of wallet with existing customers while attracting new customers to the DSW brand. Our digital demand grew 23% in Q1 with healthy gains in traffic and conversions. After replatforming dsw.com last year, we will unveil a completely redesigned mobile first platform later this year. The website may be easier to navigate, it will provide much richer shopper experience. It’s no secret that customers are increasingly pre-shopping online and we expect this enhanced digital experience to drive visitor frequency and improved conversion. This new infrastructure will also lower our cost structure across the business in the long-term. We are also challenging our team to fully leverage our Omni-Channel capabilities. I have been amazed how quickly our customers have adopted capabilities like buy online pick-up and buy online ship to stores. These capabilities create and incredible opportunity for our stores to engage with what historical been an online only shopper. This is our Omni-Channel experience working at its best. And we’re very pleased with the deployment of our proprietary order fulfillment algorithm, which if you recall, helps reduce markdowns by rerouting digital orders to less productive stores. During the last nine-months, this program has improved the DSW brands’ margins by 10 basis points. We have additional opportunities to capitalize on this technology to improve profitability. I would like to share one additional action we believe is important. Over the past several years we have invested heavily in technology, new stores, marketing and support services, while we’ve seen top-line growth from these investments our expense growth has outpaced sales and we haven’t grown our bottom-line. Since I’ve transitioned into this role, we have initiated a process to streamline our organizational structure, increase transparency and establish direct accountability across the business resulting in a number of necessary organizational changes. We will continue our journey in the second quarter as we conduct a comprehensive assessment of our organizational need and processes in order to leverage our teams do more with less and focus on fewer priorities. We expect these changes to improve earnings and more importantly reinforce DSW’s competitive position in a rapidly changing environment. Finally, I would like to share some of my thoughts on our investment in Ebuys. We’re pleased to report that this quarter the team at Ebuys increased revenues in the double-digit range. We are in a process of identifying efficiencies in shared services and leveraging the combined power of DSW and Ebuys of price sourcing expertise. Venders have indirectly used Ebuys to liquidate excess inventories at the end of the current season. But with our ownership of Ebuys, we can now offer our vendors unique one-stop capabilities for liquidating all price goods within a multichannel environment. In summary, we are taking steps to improve our business and we will focus on maximizing ways to achieve sustainable, profitable growth while making the right investments to fuel our long-term success. We are going to measure ourselves by the outcomes we delivered, such as market share growth and most importantly earnings growth. We look forward to reporting our progress next quarter. With that, I will open the floor for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions] And our first question comes from Corinna Freedman of BB&T. Please go ahead.

Good morning, guys. Just a quick question on the cost savings that you are targeting. Do you have an annualized amount that we should be thinking about and the timing of that? And a follow-up question on - any comment on second quarter-to-date comp? Thank you.

Good morning, Christina. On the cost savings side, we’re undergoing that work right now and I expect that we’ll have more information for you by the end of the second quarter. And your second question was on the quarter-to-date Q2 comp and we really don’t release any kind of quarterly guidance at all beyond the remarks that we’ve made this morning.

Great, thank you.

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

Yes. Thank you, good morning. My question is about store growth. In the last few years, you have continued your store growth despite the customer shift online and what have been I guess weaker comps. Can you just talk about your thoughts about future store growth and perhaps what kind of cannibalization you are seeing from the new stores you are opening?.

Hey, David its Roger. Thanks for the question. We are viewing 2017 to be in the net 15 to 20 doors in that range. We are still working on a thought on what it looks like beyond 2017 as it relates to some of the new stores. We have actually been very happy with the results we are getting. We are achieving the ROI targets we had set for the doors we opened in 2015 and obviously so far in 2016. So we still believe in new stores, I mean I think they create an incredible place for our customer to touch and feel the product, they make our digital platform more competitive and ultimately they create brand awareness. I think we have opportunities to leverage them perhaps differently than we do today to create different and unique experiences and we’re planning on getting back to you guys with what we think that looks like sometime later this year.

And then for a follow-up, can you just talk about capital allocation? Obviously, we've seen the dividend today, but you did not buy back stock this quarter after a fairly aggressive buyback last year. So what's your appetite for continued buyback activity?

David this is Mary. We continue to look at buyback opportunistically. We have $83 million in our current authorization remaining and as we’ve done historically we’ll be looking at that from a opportunities perspective going forward. We still expect from a capital allocation, as part of the expense initiative that we’re undertaking that we will be looking hard at our capital spend as well and expect to see some reduction from a capital spend from what we provided to you in our initial guidance.

Great. Thank you, good luck.

Thank you.

Thanks David.

And our next question comes from Steven Marotta of C.L. King & Associates. Please go ahead.

Good morning everybody. A couple of very quick questions. First of all, could you explain specifically the SG&A savings? The differential between what was expected in fiscal 2016 up from low-teen now to up 7% to 8%. Where exactly did that come from?

So we’ve factored into our guidance reduction in our overall SG&A for the remainder of the year. It’s a broad based reduction and it’s our initial assessment based on the projects that we’ve kicked off, but it’s fair to say that there is a significant component of it that’s within our corporate home office SG&A.

Alright, Thank you.

Steve this is Roger. I would say I think as we’ve taken a view of the business we see that there is opportunity across our business to me more effective and efficient in everything we do. And it’s both our stores, it’s home office, it’s the private brand work we’re doing and it’s also in cost of goods and how we are more effective in driving down our cost without impacting the quality of goods of our products. So we are looking at all buckets is what I would tell you.

Okay. Reiterating, you expect EPS to increase in third and fourth quarter of this year. is that accurate?

That’s correct.

Okay. And my last question is you mentioned in the fourth quarter call that there were some marketing initiatives, digital I believe that were tested and were successful. I mean you made it that there was a little bit more or maybe similar of that in the first quarter, are they completely different, are they very similar and do you expect to continue to test and roll out additional digital marketing initiatives through the balance of this year?

Yes, I would you Steve, I think the work we did both in fourth quarter and first quarter to reactive last DSW customers, folks that hadn’t shopped our business in a while. Those were things that we wanted to test and see what kind of results. In general, I would tell you they were very, very effective at driving sales. They perhaps didn’t drive the kind of margin that we would have hoped for, but what I’m looking to do is to ultimately for us to be able to drive those customers in without happen to give them some kind of coupon or discount and leveraging the incredible compelling deals that we have planned throughout the balance of the year to say come see these incredible brands at these killer prices. And that’s why we are focusing on increasing our close-out penetration. So I think some of the work we’ve done in marketing, I think is been very effective and we will continue those using these tools and a lot of that isn’t a digital space, but it’s also about our product and screaming about the values that we have on our floor today.

Terrific. Thank you.

Our next question comes from Jessica Schmidt of KeyBanc. Please go ahead.

Thanks for taking my question. I guess how the sales trends on close-out purchases than private brands compared to the rest of the business? I guess are you seeing a big gap in performance in these areas that you are kind of looking to invest more in? and just giving from the broad weakness we've seen across retail, what do you think is driving some of the softness?

Jessica, could you just repeat the first part of our question. I couldn’t hear it very well.

Yes. So I know that you are looking to do more with the private brand and do more with close-out purchases. I guess how do sales trends in those areas compared to the broad business?

So to tell you in private brands, private brand is about 11% of our business right now. What we saw this past quarter, we saw a flat gross margin rate to [indiscernible]. We saw a 980 basis points differential between the growth margin rate and private brand against balance of assortment and we saw positive comps. So I will tell you, we’re going to be very strategic about how we do it, deliberate, how we grow it and very thoughtful how we grow it. We are a brand that sells brand, but the component of private brand to bring differentiation and great value to our assortments is critical to us. Customers have already demonstrated that our number one private brand is something that they ask us for, they search for. So that really I think what the work we’ve done in that space has really evolved it from a label into a credible brand and we look to do that with the balance of our intellectual property. As far as close-outs are concerned, we use close-outs for both passing value to the consumer and also to get increased gross margin. This past quarter and part of last year, what we did is really wanted to drive more value to the consumer and so we really did take those great deals that we bought and we passed great value to the consumer. What we saw is as an anything sometimes it works with some items, sometime it doesn’t, but what we’re doing is we’re measuring very, very carefully the philosophy of how we price the goods and when we pass it on and when we keep a little bit back for ourselves. We do expect that the close-outs will help with differentiation bringing great deals to the floor and my objective is that it will see margin upside.

And Jessica just to chime in a little bit about both of those topics one on the close-out front, as we pulled our sales plans down for the balance of the year, at the same time we were doing that we wanted to create open the buy. So the Debby and team had the ability to be in chase mode around these kind of deals. So we’re going to get much more aggressive in that space, we’re looking for opportunities to buy quantities and obviously great product at a great price that we can message across the entire chain, because rather than giving somebody a $10 coupon or some other incentive to come in, we believe and we have had this experience when we can stand behind a item or a brand and screen the value proposition they respond. So I think that’s what we’re trying to accomplish with our close- outs. In the private brand, I think again long-term has incredible opportunities to drive both our top-line and margin rate and when we look at some of the results we had in the brand that we re-launch they exceeded our expectations and we’ve got to do that work with our new partner to really grow the private brands. As far as general softness in retail and our belief what is happening. I will tell you everything we see says that traffic in general in the industry was down roughly in the 6%, 7% range for the quarter our traffic was down about 2%, so I feel like we did a lot to drive consumers into our store. I think obviously there are some folks having some success whether it’s the restaurant industry, the services, autos, those kind of folks which ultimately put pressure on our area, the discretionary spending. So you have to be more relevant and offer incredible value to the customer and that’s what we are working on for the back half of the year.

Great, thank you.

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

Yes, hi thanks, good morning. I have a question on the revision to the gross margin guidance, I’m assuming you weren’t expecting anything heroic in 1Q even in your flattish guidance. So now down one to 1.50 the comparison get easier. May be talk about why such a major revision there and specifically the 2Q are you thinking similar to 1Q?

So Scott thanks for your question. Our margin revision, guidance revision really revolves around the more promotional markdowns we had in the first quarter. We think that will continue somewhat into the second quarter as we clear through some pockets of inventory challenges that we have, that we came out of the quarter with . And I think overall what we’re seeing is some more overall pressure on shipping and then primarily with the lower sales. Taking down our comp sales guidance we’re seeing some significant deleverage and occupancy about 50 basis points of deleverage and occupancy. So that’s also a big driver of the margin revision.

Okay. That’s helpful thanks. And then one question we’ve got this morning I mean you spent $60 million potentially $100 million on Ebuys. I mean what we’re getting here 15% gross margin business I think is a lot lower than what people were expecting. So may be just to remind us what the strategic rationale is there and what the opportunity is for profitability, because right now it looks a lot lower than what may be the original expectations were?

So I'll let Roger speak to the strategic piece, but I want to be clear at the operating income line, Ebuys is not dilutive. We had talked in our first quarter call about having some impact on gross margins and some offsetting benefits on the operating expense. So overall for the first quarter for example, if you looked at the overall gross margin decline of 250 basis points about 40 basis points of that came from the shoe ShoeMetro business. So we’re seeing a decline on the gross margin line, but on the operating expense line, we’re seeing an offsetting benefit of a similar amount. So at the operating income line it’s relatively neutral. And Roger on those could you?

And Scott just to reinfo, I mean we did this deal because these guys play in 30 countries where DSW does not play today, they play in 30 channels where DSW does not play today. And they provide an incredible opportunity for us to walk into our vendor partner and offer them the ability to liquidate their excess inventory in places where they would want it to be liquidated, whether that be through the DSW brand or through other markets where we could make it go away. So that is what we are going to use Ebuys for and that’s how we think we can drive the growth and frankly we did it based on what the bottom-line opportunities look like not what it looks like between gross margin or SG&A. It’s about the bottom line.

Okay. Thanks.

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

Thanks. Good morning everyone. Just a couple on some of the strategic initiatives on the children footwear, could you just - I have been multitasking like could you just run through the plan there for this year and then maybe talk about any disruptions you might see as you roll that across I think you said half of the chain. How long does the build out take and anything on the investment piece would be nice too and then just on the small stores, the smaller stores format wondering if there was any major differential there in terms of performance in the first quarter and what the outlook might be with that format. Thanks.

Yes Patrick, I can just give you some insights on kids. So we will be in 220 stores by back-to-school this year, so roughly half of the chain. I think the execution on our side obviously when you are putting in a couple of 300 choices in a store, it takes a lot of work, we are creating that space and then doing those build-outs and that work really starts here in the next couple of weeks and will take us really through the month of June essentially. And we were really happy with the results we have seen in the 22 stores where we tested this and I’m excited to see the kind of response, because I was looking at information on our rewards filed the other day and 57% of our rewards customers have at least one child in their home. And for us to be able to stand up to those customers and tell them you are going to be able to earn your rewards points and everything else that you can get from being a rewards members off of your children’s foot ware not just yours, we think that’s an opportunity. So I’m excited to see what kind of results we get. And as it relates to the small format stores, again we’ve been pleased with our small format results, but I mentioned this last time on the call. What we want to make certainly due before we grow that more aggressively is that we get the right kind of experience that still demonstrates the kind of compelling broad assortment of designer footwear that DSW offers in a 25,000 square foot box that we can make that experience look, feel, smell the same way in a 8,000 to 10,000 square foot box. And what we’ve seen so far on those small format stores when we can get the 1200 to 1500 choices, while the margin rate might not be as good as the balance of chain, the bottom-line results are. And so we’re trying to figure out how can we get more products, how can we tell a story in a much smaller box, but I don’t want to rush to that, we want to make certainly have a strategy that can get us a lot more doors than just opening five, 10 or 20.

Great. Thank you very much.

You are welcome.

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

Good morning. Just a follow-up on private label. Maybe you can just give us a little more color on the new vendor relationship there and then also I know you mentioned some inventory challenges, just wondering maybe you can give us a little more on what type of merchandize that’s in and then how you see kind of that evolving over the course of Q2? And then also as a follow-up, how high do you plan to take the close-out penetration? Thank you.

Good morning Jeff, this is Debbie, I’ll take those questions for you. As far as private brand is concerned, talking about the new vendor, we are in the process of forging a stronger relationship with the key vendor and we won’t report that now, because it’s not finalized, but we believe that the capabilities of this resource help us in design, in sourcing and helping move our labels to actual brands. As you know when you start to do product development in order for you to avoid just selling a lot of individual products under a label and it doesn’t mean anything, if you really want it to mean something to the consumer you really have to invest that time and experience and moving it from a label to a brand, and this new partner that we’re about ready to forge a relationship with, has the capability of doing that, and we’re very excited to forge this partnership. We can’t talk about that partners now, but I think by the next call we’ll have everything all locked up and we’ll be able to make that announcement for you. As far as inventory challenges, the biggest place that I see the inventory challenge right now and if not large but there are some pockets that I'm not happy with and that would be in casual sandals. First of all, the first eight-weeks of the quarter, we had very strong comps in casual sandal as we talked to you about in the call. At the beginning of April that really fell off and that consumer would find things in other categories, but the opened up category in women’s which is opened up dress, sandalized dressed and casual sandals the combined total of those three categories comped up 1%, but I still find myself with a little bit too much inventory in the casual sandal space. You probably saw this week, we started a $29.95 sandal event that looks like its check early results or it’s checking nicely for us. So we've already started to address that and then we are working with our core vendor partners to help us get us back into inventory position where we are happy with what August BOP looks like. That’s work in progress. The other place that had a little bit too much inventory because of the shift I talked about in the call was in men’s casual. And so we are right-sizing that inventory as we saw a little bit of a larger shift than anticipated go into men’s athletic fashion. And so we have a little bit of pressure in the men’s casual category that we are addressing right now. Once again, that’s why vendor strategic partnerships are so critical, it helps you manage the uptime and the downtime so that’s what we plan on doing, a lot of work ahead of us in market.

Jeff, one thing I want to mention on the sandal event that we started last Thursday, this is an example of how we have to be more effective in execution within our business. So we had a lot of product, a lot of products in our assortment at $29.95, so what we were able to do since that was across that chain was we could actually market that. And that’s an example of when we talk about execution and things that we can control, rather than just spreading all of those $29.95 units across the entire floor, let’s put that together in a package in a compelling way and then let’s screen that at our 24 million rewards members. So those are examples of things we are wanting to do more effectively as we move forward from a marketing perspective.

Jeff, your last question, asked about close-out penetration, I’m not going to quote an exact number, but I will tell you it is increasing year-over-year, it’s higher in the women’s category than it is anywhere else. First of all, I think the product available in the market which there is a lot of good brands and good products in the market right now, I think those deals and the level of those deals would dictate how much larger that gap is, but I could imagine that close-out penetration seeing* levels of 15% to 20% over time. Like I said, we’re not there now, we are right around 11%, but that will increase because of all the things* Roger and I just shard with you on how important that is to the business and to our customer.

Okay. That’s helpful. Thanks very much and best of luck.

You are welcome, Jeff.

Thank you.

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

Good morning, everyone. Debby a question for you, I know there is a lot of focus out there on the weather it’s obviously been pretty wet and cold out here in the Northeast. I wanted to see if you are seeing the same diversions across the coast because a lot of other retailers are commenting on. And as a follow-up to that weather point, as online penetration across the entire industry grows is there a change in this traditional consumption along seasons in other words a greater focus on buy now wear now, i.e., kind instant gratification versus pre-buying the season? Thanks.

Several different questions there for me. First of all, let’s just talk about the weather. Certainly I’ve read it in all the calls and certainly we were impacted to a certain degree by it, but I’m not using that as an excuse. You see example of our casual sandals where we did have very strong business in the first eight-weeks of the season and it fell off, I don’t think that was just weather to be honest with you. I think full transparency, I think customers were buying some other things, I did see a cannibalization of that category into some other category. So I don’t want to use weather as an excuse. I think the bigger question for me is, how do we make sure that we really manage these seasonal categories to make sure that we maximize the business and don’t get ourselves into trouble in boots and then sandals. I will tell you that if I study the business, I’m starting to see the penetration, contribution if seasonal categories decrease relative to last year and I think that that’s just an explanation customers are buying other things. And I think the way that we can control that as we make sure that we are liquid and we chase, we use the pre-buy bucket the way it was intended to be used. And that we make sure that we read the data and a pattern that are coming through on the shifts between the seasonal categories and all the other categories. So this is a process it’s manageable that’s how we’re going to manage that area. We didn’t see consistency between cold and warm regions as the weather changed for Q1. So like I said I don’t use weather as an excuse and I would rather just not talk about weather overall.

Thanks for that and then Roger a quick one for you. You are about six-months into your tenure now as a CEO. Wanted to ask which financial metrics are you most focused on as you look to improve the business? And in particularly wanted to get your view on balancing market share and sales versus operating margins on the P&L?

Great question. So I would tell you right now we are spending the vast majority of our time talking about gross margin in our SG&A and historically we’ve operated at much higher gross margin rates and as we had debate and conversation here internally about what do we do with our sales due for the balance of the year. Our decision to pull down sales was really driven by the fact that we want to be much more conservative in our approach, so that we can be positioned to deliver stronger margin rates and ultimately be in a position to chase the business when it does turn and we see it. And I know our team has the ability to respond when that takes place. But I would rather to position the business so that we are planning a little more conservatively, pulling down our SG&A, driving margin improvements and ultimately as the business turns and we start to accelerate we will see more and more of this dollars flow to our bottom-line. So that is the approach that we are taking.

Understood. Thanks and best of luck.

Thank you.

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

Hi good morning. Thanks for taking my question. Roger you mentioned how people are pre-shopping online these days and my question is about other consumers behavior is changing because they pre-shop online. Is there less impulse shopping, because in the old model, people are walking into the stores, they are surprised and delighted by the assortment and they buy maybe two shoes, they buy three. If they shop online and maybe can think about things for a longer period of time, did that change how they buy and that’s something that’s a headwind to your ability to drive same store sales?

Jay what I would tell you is that I don’t see that. I see that when we are on our game and we have the right product in the right store we drive incredible performance and that’s what we are focused on. That’s what we are working on, it’s how we ensure we get the right product in the right stores. I think the incredible opportunity we have is to leverage all the tools that we have build, leverage the omni-channel experience and bring that to life in a different way in the brick and motor location. And we’re not prepared to speak to this yet, but we have some really cool capabilities we’re building in the back half of this year that will be customer facing in the store that we’re going to be rolling out. As we get closer to it and can define it in greater detail I want to share those with you. But I sort of see it the other way around that by pre-shopping that gives us an incredible opportunity to leverage a digital experience that we’re working on to improve. And ultimately to drive it into the store when you take things like buy online pick-up, buy online ship to store where you can have a 20% to 25% attachment rate when they do come in the store. Those are ways to leverage the resources and assets we have comp stores to really grow shares. So I see it sort of the other way that it creates an opportunity for us to grab share.

Okay. Interesting. Thanks very much.

You are welcome.

And our next question comes from Chris Svezia of Susquehanna Group. Please go ahead.

Good morning. Thanks for taking my question. Debbie it’s for you, just touch on the athletic penetration within DSW sort of where that is? Your expectation for the balance of the year and it seems like just switching that into more casual product and we’re taking share from casual. And then talk that and just any initial thoughts about how you think about boots for fall and how maybe to close-out and private brand sort of plays into that exposure for boots for the second half?

Okay. Good morning Chris, thanks for your question. So let’s talk about athletics first of all. Athletic comped up 16.5% and did it in both genders. It’s got a 57 two-year comps so continuing to see momentum there and don’t really see that slowing down. As far as penetration is concerned, the penetration has gone up significantly and it improved over last year by 240 basis points so traction of momentum there. Even though it’s a tougher IMU and gross margins business and the gross margin rate was down 40 bps for the quarter. We saw an increase of 19% in gross margin dollars. So I think the key is that we really need to keep that comp high and you need to manage your inventory appropriately so that we deliver the dollars not necessarily the rate. Fashion continues to drive it and performance is so chomping but fashion continues to drive that and with all the things you’ve heard from the market, vulcanizing strong and some of the key brands being very strong. The newness though that I’m excited about is the non-athletic pieces of the women’s business in casual, so we call it really for that’s where there is a lot of new exciting things that are happening. And we started to see it in the third quarter last year from a few of the bring brands. It looks like a lot of the wholesale brands are really starting to bring some exciting new products to the table and we’re seeing in that sport categories with all that we just recently got them some very strong comps there. So I think it will actually be actually be - it’s a benefit that we can extend this at leisure trend into the women’s zone. But when you add women’s casual and you add women’s athletic fashion we actually had a mid single-digit comp there. So I think it’s beneficial and I think it’s healthy for the industry and for the business. As far as boots are concerned, we’re going to play it very, very conservatively, I would rather be in a chase mode, we’re going to build those assortments as a good merchant would bottoms up. And we’re going to make sure that we have our core and we’re going to have a nice assortment of fashion, but we’re really going to be very conservative in terms of how we plan it and we’re going to chase into that. Last, this past quarter we still saw very good comps in beauties as everyone has that continues wanted to keep them fresh, I think we will be in good shape. Q1 was particularly difficult in cold weather as we lapsed some really strong comps year prior in cold weather product. But I think the big story and boots is plan it conservatively, make sure you bring all the fresh fashion that you can to the table, you don’t go back and duplicate things that are warmed over and not exciting and keep open of our liquidity and that’s how we’re going to approach in boots. Chris as far as private brands, I really don’t have anything more to add in private brand than what I talked about before. It’s an important part of our business, we will grow it with strategic partner I think you’re going to see a better looking product in terms of design and better quality product on the floor and more of deliberate focus on really making sure that we move those labels to brands. So not much more to say there close-outs but also given the benefit that Roger talked about a few minutes ago. So I think that covers it and if you have any other questions, I will be happy to take them.

No that’s it. Thank you very much and all the best.

Thanks Chris.

And our next question comes from Kelly Chen of Telsey Advisory Group. Please go ahead.

Thanks for taking my question guys. My first one is for Mary, Mary you gave the drivers of the gross margin decrease and I was wondering if you could just quantify that impact from some of the bigger drivers like markdowns, impact on the mix, deleverage and occupancy. And then for some of those bigger buckets, what’s embedded in the assumption for that down 100 to 150 if you could help us understand that? And then my second question would be for probably Roger or Debby, you guys talked about a tough retail environment and I think it was about may be two-years ago when Mike had described it department store channel as disruptive and chaotic, as you look at the landscape today do you feel like the situation is similar? I know you guys gave color on your own inventory but what you think about the inventory and the channel, are there pockets of access and is the department store channel were to become more promotional how do you think you are positioned and how do you plan to manage through that? Thank you.

Hi, Kelly. On your first question on margins for the quarter the margin deleverage of 250 points approximately 40 basis points of that deleverage came from the mix with ShoeMetro. So if you look at the deleverage without ShoeMetro the impact were primarily driven by markdowns and that’s primarily around marketing promotion that Roger mentioned where we saw nice sales mix from those, but we did see incremental gross margin dollars, but they were very modest and that would be about 90 basis points of the deleverage. And we had some modest deleverage and IMU about 50 basis points about a third of that came from the athletic mix and the balance was from sharper pricing. We saw some shipping costs deleverage about 30 basis points about 20 bips in occupancy and then about 25 bips in our DCFC deleverage and that kind of explains the full gross margin deleverage for the quarter. When you are looking at it for the full-year again the deleverage for the full-year about half of that 100 to 150 basis points is the impact of the ShoeMetro mix margins. The remainder of the margins, we’re actually expecting our merch margins to be relatively flat for the full-year with some pressure in IMU being offset by improvements in markdowns. As we turn to back half of the year, we expect to see some improvements in terms of our mark down rates and most of the deleverage coming from occupancy as I mentioned previously on that negative comp sales decline guidance we provided this morning.

And Kelly I can take your second question. I would say this to our associates and I know we have a lot of them that listen in on this call so I’ll reinforce this message to them now. But you know retail is always challenging, but right now that’s really got is focusing on ourselves because we control our own destiny and I think the experiences I’ve had in traveling our stores and the experience I have in viewing our website is we have opportunities to improve our gain. And we don’t want to look at what others are doing or how they are responding right now. It’s about us and it’s about us being focused on what we do, because I mean we are executing the way I know we can, we deliver the results, we see it in pockets in our inventory, we see it in pockets in our stores. So that’s where we are focused. I will tell you the decision we made pull down inventories and to pull down sales were to create and open to buy opportunities for us. And as those pockets pop up, our team will evaluate and make those decisions. And to address the Ebuys opportunity as a DSW Inc shareholder. Those create opportunities for us to help liquidate goods through Ebuys. So at the end of the day, we got to focus on what we do and execute better than we’re doing right now.

Great. Thanks guys and good luck.

You’re welcome. Thanks.

And our next question comes from Eddie Plank of Jefferies. Please go ahead.

Thanks guys. Thanks for taking the question. I guess just a couple of quick ones. It sounds like the initiatives like buy online, ship from store, pickup in store, et cetera are resonating pretty well. I guess maybe this is for Mary. How do we think about how you begin to manage those increased shipping costs going forward and then as a follow-up does your guidance still assume the same EPS contribution from Ebuys this year? Thanks.

So I will answer the second question first. Yes, the guidance include the same initial EPS guidance from Ebuys that we provided earlier on our fourth quarter call of $0.04 to $0.06 per share excluding the one-time cost associated with the purchase accounting, the transaction cost and the fair market value of the consideration. On the first question regarding shipping cost, you know there is a lot of things that we’re doing to better manage shipping cost earlier this. We did put in place a new provider for our ship cum store that’s driving down our shipping costs from the packages that we ship from the store. We’re going to see some savings there, but that is mitigating the fact that our overall mix of our direct to consumer business continues to increase and we don’t think that’s a bad thing. We just think it’s a assumption of how our customer want to do business with us today and is just the reality of the overall business moving forward. So I think our overall deleverage and shipping for the full-year is estimated to be in the 15 basis points level. So it’s not a significant pressure on margin and by the way that excludes ShoeMetro that’s just where our core DSW business, but that increase in direct-to-consumer is causing some increased pressure with shipping cost that are being mitigated by some of the changes that we’ve made in our providers at the store level.

Great. That’s helpful Mary. And Roger one quick one for you if I can. You talked on the last call about the focus on disruption. May be can you elaborate on that a little bit and may be some specific initiatives that you guys are taking in that regard? Thank you.

Yes, I think the one that I think is the best example is obviously our acquisition of Ebuys. I think it s an incredible opportunity for us to evolve the DSW Inc model. I will tell you there are several other investments that we have made that we’re not into position yet to disclose how we’re going to leverage them. But I think there are some great opportunities for us to create different and unique experiences in our stores and using technology to create those experiences that force you to come to at the DSW location or another banner underneath DSW Inc. but we’re not in a position yet to be able to present some of those, but we have some pretty cool things we’re working on in that space.

Okay great. That’s helpful. Best of luck guys.

Thank you.

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

So I thank everyone for joining us today and really want to reinforce our commitment to driving our top-line and improving the profitability of our business. We have significant work ahead of us as I'm uncertain you could hear from the call, but I know we are committed to creating a strong foundation that’s going to drive long-term profitable growth. So thanks everyone and we appreciate your support.

Thank you sir. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.