Designer Brands Inc. (DBI) Q4 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to DSW's fourth-quarter and full year 2016 earnings conference call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions, [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Christina Cheng. Please go ahead.

Thank you, Steve. Good morning and welcome to DSW's fourth-quarter conference call. Earlier today, we issued a press release detailing the results of operations for the 13-week and 52-week period ended January 28th, 2017. Please note that various remarks made about the future expectations, plans and prospects of the Company constitute forward-looking statements. Results may differ materially from those indicated by these forward-looking statements due to various factors, including those listed in today's press release and our public filings with the SEC. We assume no obligation to update or revise these forward-looking statements. Joining us today are Roger Rawlins, Chief Executive Officer; Debbie Ferree, Vice Chairman and Chief Merchandising Officer; and Jared Poff, Chief Financial Officer. Let me turn the call over to Roger.

Thanks Christina and good morning. I thought I would start our call today by sharing some of our accomplishments over the past 12 months. Our total company revenue set a new high of $2.7 billion, we opened our 500th warehouse in the United States and expanded our footprint across North America. We continue to see growth in digital demand that outpaced the industry. We entered into digital market places with our Ebuys acquisition. We successfully launched DSW Kids in almost half of our warehouses. We heightened our focus on talent and rebuilt strength across all levels of the organization working to form a top caliber team who's passionate about the business, but even more passionate about winning. We right sized our cost structure to make us more efficient while supporting our key investment priorities and we continue transforming our brick and mortar locations into a powerful digitally enabled warehouse network. I'm also proud of the dramatic change in our financial performance with adjusted earnings per share improving from a decline of 21% in Spring to an increase of 22% this Fall. These results were driven by changes to strengthen our organization, our renewed focus on inventory discipline and executing with greater focus and tempo. We'll spend some time this morning reviewing the steps we took to strengthen the foundation in 2016 and discuss how we transition the business to our next stage of growth. For now let me turn the floor over to Jared to discuss details of our financial results. Jared?

Thanks Roger, and good morning everyone. Stronger execution contributed to a significant sequential improvement in our back-half performance. Fourth quarter revenue of 674.6 million was a slight increase to last year with sales from our acquisition and new store openings offsetting lower plant comps at the DSW segment which we anticipated. The combined improvement in gross margin rate and lower expenses resulted in adjusted earnings per share increasing by 43% to $0.20 per share. Our discussion today will reference adjusted numbers that exclude items related to the acquisition of Ebuys and restructuring costs which we will discuss later. Let me provide color on our organic business. First the DSW segment, as part of our commitment to move away from excessive promotions we positioned the back half of the year for a mid-single digit comp decline factoring in a 350 basis point headwind in the fourth quarter from last year's events. Despite the choppiness from weather and external geopolitical factors we were pleased to achieve our comp guidance for the back half of the year. Our disciplined execution enabled us to sell a higher mix of regular price merchandize in the fourth quarter. Our brand focused campaign and amplified value messaging for product sell though rates during the holiday period. In addition our effective digital marketing strategy drove even stronger traffic online and email conversion this quarter. This holiday season also demonstrated how recent technology investments are paying off. These investments significantly improve search conversion, reduce cost and support and ultimately drove a robust growth in online demand that outpaced the market. In the last three years alone we have doubled the level of digitally impacted sales. We continue to increase operational efficiencies with our proprietary order-routing algorithm optimizing fulfillment. As our brick and mortar locations fulfill as much as 40% of digital orders we have started to shift inventory out of our fulfillment center to better serve the customer while improving inventory turns and increasing profitability. With our fourth quarter performance we increased gross margin dollars by 5% on a 3% in sales this fall, a notable change from the spring season when gross margin dollars 3% despite a 4% sales increase. Segment gross margin increased by a 160 basis points this quarter with close to 300 basis point improvement in merchandized margin, partly offset by occupancy deleverage again which we anticipated. Although Q4 gross margin performance was comparable to the third quarter, Q4 merchandize margin improvement up 270 basis points was even greater than the third quarter's 170 basis point increase, due to significantly lower clearance levels and favorable sourcing cost. We continue to identify new opportunities to enhance segment profitability long term. Turning to the AVG business, fourth quarter revenues declined 2% with a 6% decline in comps, though with better sourcing and lower markdowns, gross margin at the AVG division improved by 310 basis points. For the full year sales were flattish with a 4% comp decline partially offset by new store openings. Yesterday Gordmans, one of our affiliated business partners filed for Chapter 11 protection and announced his plans to liquidate its assets. As a result of this action we have begun our efforts to clear inventory at a 106 locations that will remain open through the proposed liquidation event. We have been managing our inventory exposure proactively and we are working hard to mitigate the impact of the transition out of Gordmans. Let me say a few words about our acquisition, Ebuys contributed $84 million of sales during its first year, the fourth quarter was its largest quarter contributing 28 million to the top-line. We continued to make progress integrating Ebuys operations this quarter with recent adjustments to better align our inventory disciplines as we head into 2017. Given the structure of our purchase agreement which provides us an ongoing opportunity to reassess risk and forward expectations we recalibrated our long-term outlook against this year's results and consequently we reduced the accrual for our future contingent consideration by $25 million. We continue to believe that Ebuys has a long runway of growth ahead. Now let me turn to operating expenses. After three consecutive quarterly increases, operating expenses for the company declined by 3% even after including the expenses for Ebuys. This resulted in our Q4 SG&A rate leveraging by 70 basis points due to lower store expenses and corporate overhead, following two consecutive years of high single digit increases, expense grew slowed to a 5% increase for the year. Due to the combination of improved gross margin and better expense leverage, fourth quarter's operating income increased by nearly 50% leads us to a 15% growth for the fall, a strong recovery after the 25% decline experienced during the Spring season. Onto our Canadian operations, Town Shoes contributed a loss of $496,000 this quarter for a full year total of $741,000 of investment income which is less than a penny to the bottom line. We looked forward to increasing our collaboration with our partner as we move towards Town's eventual full integration. Finally, our fourth quarter income tax rate decreased by 70 basis points to 35.3%. On a GAAP basis fourth quarter earnings increased to $0.38 per share from last year's $0.14 per share. This includes a net favorable adjustment from the reduction of Ebuys contingent consideration, the amortization of intangibles, inventory step up costs and restructuring expenses totaling $0.18 per share. For the full year reported earnings were $1.52 per share including a net favorable adjustment of $0.06 per share related to Ebuys and restructuring expenses. On the balance sheet excluding Ebuys' inventory of $31 million, we ended the quarter with inventories lower by 8% on a per square foot basis despite additional inventory related to the launch of Kids, strategic buys in athletic and key items. Pre-buy levels were comparable to last year. Moving on to capital allocation we ended the quarter with cash and investments of $287 million and generated a 125 million in free cash flow this year. Capital spending of $14 million this quarter brings our full year CapEx to $79 million, 17% below our original expectation at the start of the year. We repurchased 351,000 shares this quarter for $7 million which brings our total share repurchase activity for the year to $50 million for 2.4 million shares, representing close to 3% of our share count at the end of 2015. Since initiating our first share repurchase program in 2013, we've bought back 12.6 million shares for $316.5 million representing 14% of our shares outstanding. For 2017, we are budgeting 66 million in capital expenditures with lower store related spending and fewer business ITE and supply chain projects. Turning to our outlook, after undertaking significant changes in 2016, we are intent on driving sustainable and profitable growth. As we target 3% to 5% revenue growth for the total company, we are prioritizing driving comp growth by accelerating digital demand with a comparable sale projected to range between flat to a low single-digit decline for the full year. We are slowing the pace of new store expansion with net 12 to 15 new locations this year. I know many of you ask, what gives us the confidence for our continued recovery? For starters, we intent to drive even stronger momentum out of our fastest growing businesses as a leader in Kids. Additionally, we continued signs of increased customer appetite for women’s fashion we are fueling the growth of this category with a greater inventory distortion this Spring. We are intensifying our focus on our largest and highest contributing stores which Roger will discuss later in the call and we are increasing the depth of key items across all stores which will help to improve conversion and drive more regular price selling. Finally, in anticipation of ongoing shifts in the current macroenvironment, we will strategically manage inventory with a goal to increase in turns, the supply chain agility and return on investment. Our outlook assumes flattish gross margin for the full year with improved sourcing cost and new ways to optimize clearance markdowns offsetting the cost related to the Gordmans liquidation. Furthermore, in order to support Ebuys growth, we are transition their existing fulfillment centers into a single larger facility and Nashville, Tennessee that will double Ebuys supply chain capabilities. We have budgeted a temporary increase in distribution and labor costs during this transition. Operating expenses are expected to grow modestly in the mid-single digit range with higher IP selling expenses and incentive compensation cost, partially offsetting savings from our cost initiatives. This is the first time in three years where operating expense growth is more closely aligned with our topline expectations. We continue to take new actions to secure previously identified cost savings while we continue to proactively manage our variable expenses. Adjusted earnings per share are expected to range between $1.45 to $1.55 per share assuming a cash rate of approximately 39% and 81 million shares outstanding. Our guidance does not assume full ownership of Town Shoes this year and that we will only receive nominal investment income for a minority stake. Furthermore, our guidance includes the impact of up to $0.10 per share from the discontinuation of our affiliate business with Gordmans which includes operating earnings in the cost of liquidating inventory. We also project that quarterly earnings will be back half loaded this year like many retailers we expect the extra week this year to benefit sales and earnings growth during the fourth quarter. on the other hand, we expect the impact of delayed tax refunds and the timing of several initiatives such as our site redesign and Ebuys' FC transition to create headwinds that will weigh on earnings during the first half of the year. As such we anticipate the back half to account for a greater portion of earnings than it has historically. With that, let me turn the call over to Debbie.

Thanks Jared and good morning everyone. As I assess our 2016 performance, we are pleased with the discipline and agility we demonstrated this Fall season. Nowhere was this more evident than in our results within boots which at 30% of the mix is the largest category during the quarter. At the start of the Fall season, we positioned the category for lower comps and accounted for shift between tall and short boots. This conservative positioned protected our business during a choppy environment. The warm weather at the beginning of the quarter stimulate sales of fashion boots, athletic and casual footwear. With the onset of cold weather in December our merchandizing and marketing strategy created a stronger than expected demand in boots which allow our team to deploy some pre-buys we'd allocated for next year. With the strong results from our cold weather business coupled with our decision to chase a number of fashion styles early in the third quarter we beat our bid forecast for the season. This Spring we've positioned inventories appropriately, with transitional merchandize and a sandal assortments that we will carry in our warm doors all year round. I was encouraged to see greater interest in women's fashion, particularly when the weather warmed up last quarter. Our plan to proactively right size the assortment and other parts of the business resulted in lower but more profitable sales this quarter. We continue to take steps to strengthen the depth and breadth of our women's assortment with a significantly higher level of exclusive emerging fashion and both new and expanded vendor partnership as we drive sequential improvements in this important category. Turning to athletics we are proud of the results of our at-leisure business which has reached new highs for the third year in a row. Strong full price selling and better sourcing decisions improved the profitability of the business. With our growing partnership we've put together an exciting assortment in retro and fashion athletic merchandize to fuel the athletic momentum. I'm pleased particularly -- I am particularly excited to announce our brand partnership with Under Armor this year. The influence of athletic also carried to our men's business, but overall results have been below planned. We are aggressively managing our assortment of core items while increasing the freshness within men's dress and casual with relevant sport influenced fashion. After a successful launch last year we now support our Digital Kids business with DSW Kidshop at nearly 60% of the total chain. We continue to apply our learnings to enhance the assortment for our Phase 1 stores, or adding new fixtures and layout adjustments to better accommodate the new Kids shop. DSW is on track to capture meaningful share in the Kids category. This year we will bring several compelling offerings from a number of exciting brands within the women's and men's designer and temperate space. We supplemented our buys with our fast-growing Drop Ship program which surpassed our expectations during its first year. Furthermore, we are complementing this branded assortment with the relaunch of our private brands under new partnership and a marketing campaign that highlights some of the incredible values we have to offer in this space. As we transform our private brand business we will make the program even more important to the bottom-line. To further support our product initiatives, we're focusing on the depth of key item, which will provide the critical must have styles to customers across the fleet, generate more regular price sales and reduce markdowns over the product life cycle. In addition we are deliberating increasing our off-store buys which will give us a flat point to market our key merchandize ideas in a more colorful way. Lastly, we've kicked off a new power store initiative this year with exciting brand and merchandize changes that will appeal to the diverse needs in these locations. In conclusion, we're encouraged with the work we've done in merchandizing and we look forward to continued progress as we focus on delivering top-line growth for the business. With that let me turn the call over to Roger to discuss our 2017 priority.

Thanks, Debbie. After making fundamental changes to strengthen our core business last year, we're now laser focused on driving profitable top-line growth. In addition to the merchandizing initiatives Debbie discussed, we are intensifying our focus on some of our largest markets because their warehouse turn much faster than average we are closely managing choice counts, brand mix, pricing peers and depth of key items. We’ve created a localized marketing plan specifically targeted at driving traffic in these markets and we have put in place the best, most talented teams who can meet the challenge of driving higher levels of conversion, efficiency and profitability in our top locations. Under this important initiative, we expect our power warehouses to generate more meaningful sales and profit contribution this year as they return to their legacy position within our brand. We were also excited about the record level of digital growth we have achieved this year. We will dramatically elevate our digital experience with the much-anticipated site redesign of dsw.com in the next couple of weeks. Customers will find a modernized, digital experience that seamlessly integrate their rewards information and preferences into this new mobile oriented and responsive site. As we continue to evolve our customer experience, we’re bringing our immersive digital environment to life in our customer facing warehouses. We’ve partnered with this for to develop our proprietary technology that will give our associates all the data they need at their fingertips to run our stores and serve our customers. We look forward to introducing this new platform soon. A few weeks ago, the company hosted our first all hands meeting in Columbus with associates across all of our retail brands including representatives from Town Shoes, our ABG partners and the Ebuys. It was exciting to see the multiple pieces of DSW Inc start to take shape, each fitting together to fill a distinct role in helping DSW Inc. grow market share. From brands like the Shoe Company and Shoe Warehouse serving customers within a traditional family footwear small store format. To the Town Shoes, affordable luxury and full service experience to ABG providing footwear expertise and scale to department store customers and Ebuys, reaching customers across the globe through digital marketplaces. Our retail portfolio now provides us with several brands to serve different customers. We will also extend the investments we’ve made in the DSW brand to support share needs in finance, real estate, IT and supply chain expertise. In summary, we continue to make progress in strengthening our core business as evidenced by the turnaround in our financial performance this past fall season. We will continue to elevate execution and intensify our focus and tempo as we drive greater return to shareholders going forward. With that, let me turn the call over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Scott Krasik with Buckingham Research. Please go ahead.

So just the first quarter on how you’re planning inventory, obviously with inventory ending the year down high single digits, it sounds like maybe you’re planning for similar comps as you saw in the fourth quarter, but just wondering what level of inventory you need to achieve flat to down low single-digits for the year? Thanks.

So I would say that at the end of fourth quarter we managed our inventory, we told you before Scott, we wanted to make sure that we managed inventory that would really match the sales comps. But going into the Spring season, we are going to manage inventory to a flattish kind of a comp. We plan conservatively as you know. So I would not use the down 8% comp as an indicator of what future inventory looks like for Spring.

Scott this is Roger, I think one of the things that consistently drives me nuts is when we have these conversations about points in time on inventory and are good available for sale for the Spring season, you know, we're planning in the low single digit range, decline. And it just so happens, depending on timing of when Chinese New Year and other things, so I don’t think you can look at the minus 8 and say holy cow that's how they're going to plan their inventory. No, that is just a point in time.

That's helpful Roger. Thanks, and then Debbie maybe can you characterize how big of a launch Under Armor is going to be for you, is this similar product to what Coles is getting, are they carving out different product than the athletic specialty of sporting goods channel and what else are you doing in athletic in 2017 that's worth calling out, thanks.

Sure, so let me just Scott with saying that we're very pleased with the athletic performance and the kind of performance that we've been showing consistently through this year, in both the comp and the margins area, I don’t think it’s going to stop, there is every indication because of the strength of the brand that are strong right now in athletic that those brands will continue. There are brands that weren't so strong last year that have emerged with new exciting products that are going to be even stronger for this year. So I look at consistency in the athletic performance and then also coupled with adding in at-leisure which as you know is the non-athletic piece of men's and women's and the sport and fashion piece. So you have strong momentum in athletic, you have very strong momentum in the at-leisure piece, so I don't see this stopping any time soon and the casualization of America with everything going so casual just continues to support this momentum. We're very pleased to announce our new partnership with Under Armor and we are developing, it's a collaboration where we are developing unique product and it will be unique product for DSW with their design team. And will be a launch towards the back half, around back to school, so that's what I can tell you about that. We're very happy with that partnership.

Okay, then if I get to sneak one last one in on share buybacks, you weren't that active, is that just in preparation for something to do on Town Shoes and expect share buyback to be minimal until that’s done? Thanks.

Hey Scott it’s Jared, you know we run an opportunistic program and obviously we've been active throughout the year and throughout the last couple of years, but we do look at everything opportunistically, I think you called out a couple of good points. We've got some large expenditures on the horizon as well as having completed our Ebuys acquisition last year and making sure that we have everything right sized from a working capital standpoint for that, we've got the integration of Town coming up sometime over the next year or two and so I won't say that, we won't jump back into the market when we grow opportunistically or that we will, but we just treat it opportunistically.

Okay, thanks.

The next question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

I wondered if you could speak a little bit more about how we should think about SG&A going forward and then maybe you can talk about areas where you can tighten or just reduce more and if you could touch on real estate as well given that you’re still opening stores. Just wondering how you think about the fleet overall at this point, what you think is a right number. So given the growth of Digital and the migration there, and if finally if you could also just touch on the men's business and what are you thinking is needed to turn that around? Thank you.

Sure. This is probably one of all three of us. I will start with the SG&A piece of it. This is Jared. You know as we mentioned, we anticipate that SG&A will align more closely with our sales expectation this year first time in the last three years that that’s been the case. We have obviously several dollars that we continue to find from our expense savings initiative get activated and we’re excited about that. On the flipside, we are also seeing an increase in some IT spend as we ready the business with some investments in that space as well as increased depreciation on the IT front as we have launched some of the investments we’ve made over the last couple of years across the business. And then new stores obviously bring on some new expenses growth as well. But overall that expense growth will be much more tied to our sales growth than it has been in the past. From the real estate standpoint --.

Yes, I can take the real estate question. So Jeff one of the things that we continually talk about is, we are looking at our business as a digital business and with the digital business you have to place warehouses close to your consumer and with our 500 warehouses we have today, we’re within 20 minutes of 70% of the U.S. population. So when we’re looking to build out a new warehouse we’re trying to figure out, how can we get closer to that customer, so that someday we can meet that demand of the customer of delivery within whatever short period of time we want to deliver upon. So I will tell you that’s the lens we are using in making these decisions. We also are testing a lot of new fixturing that we think dramatically changes the interior of our warehouses and the customer experience we can create, but also how many units we could place in a warehouse that is closer to the consumers. So I think there is some really cool things and the opportunities we have in our warehouse network that’s I wouldn’t give our the full number right now because frankly it might be more with our smaller boxes and those are things we’re working through, but we are approaching it with a digital lens first, that’s how I will describe it.

And I’ll speak to the men's turnaround. So what I will tell you is the shift out address into casual, that distortion, we planned for that, but it's happening even faster than we anticipated. So actively moving dollars into the casual area to continue to capitalize on the piece of the business that is comping nicely. How we’re going to support that with products, we’ve been actively engaged in the market to seek out new brands and new product that will give a fresh new face to the men's business. In addition to that, we are supporting key times, core items and outdoor shoes that will actually increase sales, increase margin, reduce markdown and actually ensure that in a men's business that part of it tends to be very basic that we are in stock on the key items. So I will tell you that the combination of these efforts right now is offering sequential improvement and I see that every day and I believe we're well on our way to turning this business around.

Okay good to hear, thanks for taking my questions and best of luck.

The next question comes from Alex Pham with Mizuho Securities, please go ahead.

I was wondering if you could provide a little update on the rollout of the Kids business, what have been the biggest opportunities or challenges so far and any early reads you can share with us in terms of potential stores sales lift, or what do you guys think in terms of the long-term opportunity there?

So we're not going to -- we're very early in the game here in the Kids area we're in roughly half of our stores, a little bit over half of our stores. Last fall we launched Phase 1 of Kids, we were very pleased with the results, launched week three so in the month of March right now we're launching Phase 2, we're not going to, for obvious reasons, we're not going to quote a lot of the metrics that we're experiencing in kids right now, other than to tell you we've been very pleased with our performance. We are achieving our goals and as we look forward to Phase 3, some of the learnings that came out of Phase 1 and 2 we're looking at, so that that Phase 3 launch is even better than the first and the second phase. As we talked about it a little bit earlier as you get into Phase 3 you start to have a little bit more challenge with space in the stores, because remember the first Phase, we put it in the stores that it was the easiest to do, they have the space and it was a natural thing for us to do and there are a few more challenges we're facing for Phase 3 that we're working through now, we're very confident that after this Phase we'll take significant market share in the kids space.

Alex I think it's a big thing that we are trying to accomplish with kids and we talked about this before, is we have to create unique experiences that create and inspire an emotional loyalty with our customers, and Kids product is one way in which we can do that, and the kind of environments that we can create, the tools that we're building, I mentioned the in forward capability that we're working on, how do we bring all of those things to life to creating unique customer experience and we think Kids plays an important part of that relationship with our customer throughout their entire lifetime.

Got it, thank you very much, and Jared in terms of 2017, when we're talking about the SG&A, I think you mentioned in line with sales growth, does that include the cost savings program that you guys announced last year, I think 15 million or so was supposed to fall into 2017?

It does yes, it does.

Okay, great, thank you very much.

The next question comes from Chris Svezia with Wedbush, please go ahead.

First Debbie just for you on product, I am curious, so you called out athletic, I would assume the fashion athletic business is that something along the lines. Is that something along the lines of -- do you consider like canvas part of that fashion athletic business and does that also include something along the lines of fashion athletic, and it's something what Steve Madden is putting into the market? And what else are you seeing going on outside of athletic gives you sort of confidence to this kind of flattish kind of comp as the year unfolds.

So I will tell you within the athletic space, fashion is the fastest, continues to be the fastest comp growth that we have and there are all sorts of, as I said earlier, all sorts of new things coming from some of the performance, the athletic vendors that are continuing to fuel this growth. So fashion is the biggest piece, its comping about four times higher that performances, but both are comping very, very nicely. When I speak about at-leisure, I really look at the blend in athletic and the non-athletic brands which we typically don’t call out are brands as you mentioned Steve Madden and he is really the leader in this space, so all of the sports bottoms, the sport shoes, sneakers and things like that that are coming out of the women's contemporary space, Madden being the leader of course are comping significantly higher than the casual category. This gives me confidence that there is -- and there is newness coming every single day. I mean I think if you look at our stores, you can see new styles and new products, not only key items that we’ve identified that can be big items for us, but also new versions of sneakers. And I think we have a -- that’s got a long runway, I think we have a long way to go on that. So the product itself gives me great confidence, the way we’re comping right now gives me great confidence and the brands that are existing and also some new brands that we’re introducing that will bring exclusive product store customer gives me great confidence. So I hope that answers your question.

And then just outside of athletic and fashion products, the dress category, is just anything going on? You mentioned about sandals year-round and warmer markets, just anything else you can talk to there?

Sure, just overall under us, the same way you’re seeing a shift out of dress, the casual and men's and you will continue to see that in women's and we’re right sizing those inventories everyday to adjust for that shift in those distortions. There are some interesting positive things that are happening in the dress category. It started early in Q3, extended into Q4 and are now extending into the spring season and that’s anything that opened up in embellished, novelty, all of these new styles that you see that didn’t exist before. So that’s giving a bit of a shot in the arm to some excitement in the dress category, but I think what we really have to understand is that casual has really got the real tractions and the things that are happening in casual which is Sport or Mocks were some of these reenergized, retooled casual flats that are offering some excitement in the assortment, that’s what really fueling the casual comp. So dress is important, we’re going to right size it, we’re going to make sure that we continue to fuel the trends that we saw early on Q3. We’ll continue to bring freshness to the floor, that focus has really got to be in cash flow.

Okay, thank you. And then Jared for you, just on the gross margin, I guess you are sort of I guess you’re kind of looking at flattish here. Could you talk about some of the puts and takes and how do you think about product margin, how much occupancy cost do you leverage and it gets mixed maybe more athletic plays into that product margin dynamic? Just wanted to talk about the puts and takes, how do you think about that?

Sure. We do have some mix going in there, so as Debbie mentioned at-leisure and Kids continues to be some or fastest growing business, that tends to be a little margin dilutive and that’s because Kansas is oriented towards athletic and athletic as we have talked about many times tends to be a little margin dilutive. However, we are expecting to see some offsets to that through markdown optimization and our continuation of looking at how we utilize clearance and rate price turn. So if you look throughout the year, you'll see that in the quarters where we typically have our highest clearance penetration, we're seeing some of our best marketing improvements during those years coming from some improvement in the markdown rates. You know occupancy is expected to generally stay relative as far the deleverage, stay relatively flattish, not really be a big drain maybe plus or minus 3 basis points.

Okay, thank you, and just finally really quick here, just on the Ebuys profitability and Town Shoe profitability, can you just talk to what you're doing to either improve the trend line there or just sort of your thoughts or what you're factoring into this year and around those businesses which seem to be you know call it diluted for the overall core, just trying to figure out what's going on there.

Hey Chris, this is Roger, I think for us, both of these are longer term plays and this was our first year with Ebuys, I think we've learnt a lot in the process, I think what I'm excited about is the future of how we can leverage this and I talked about all of the brands that we now have at our disposal but think of the number of clearance units that we liquidate annually, between all of Shoe Company, Shoe Warehouse, Town Shoes, DSW, Steinmark, Gordmans and Frugal Fanny's making those goods available digitally to be liquidated through an Ebuys that's the kind of opportunity we see long term. So from a profitability standpoint, yes, we want to drive profitability in the business in the short term, but it's long term how do we integrate that into our business. So that's where we're focused there. On the town front I think we're making really good progress there and I'm excited about sort of the role that we have taken there, obviously we still are minority shareholder, but we've taken I would say a more active role in the day to day management as we prep for the transition to bring that on board and what we're excited about is that creates additional opportunities for us to grow footwear both in Canada as well as domestically, and you know Shoe Warehouse concept, you guys have asked it a lot of times what's the small door strategy, there's some pretty compelling business cases that we're working on based on the success that they've had in Canada with those brands, how could we bring those to life somewhere else. And again it's the longer-term play, but how we can fit all of these brands together, for DSW Inc. is really what we're driving towards. So on short term basis obviously we're managing profitability expenses, markdowns, all of those things the way we do, but we're really in these for the longer-term play.

Okay. Thank you, and all the best.

The next question comes from Pallavi Bakshi with Credit Suisse, please go ahead.

Yes, this is Christian Buss, and I have a question, I'm trying to reconcile the revenue growth guidance with the comparable store guidance down low single-digits to flat in short footage you're at the 2% to 3%, can you help me understand how much Gordmans liquidation is going to negatively impact revenues on a go forward basis and what gets you that bridge to 3% to 5% revenue growth when comps are expected to be down, and square footage growth is about 3%.

This is Jared, so we won't go into details specifically around Gordmans other than to say if you look at the number of stores that they had, vis-à-vis everyone else in the AVG segment, they represented about 25% of the stores in the ABG segment and we disclosed what the ABG segments does in total in our 10-Ks. So I would look at that for directional guidance. From a comp and net store growth standpoint, one of the factors you also have to take into to consideration there is a planned increase in Ebuys which also is not in our comp base and won’t be until next year. So that’s where we see some additional growth outside of the comp that we’re talking about and the new store openings.

That’s very helpful. And could you tell us a little bit more about the commentary around increasing appetites for women's fashion. Did you see that business hard to trend positively in the fourth quarter is that something you started to see since the end of the quarter?

Yeah, where I really started to see the shift was probably at the end of third quarter beginning of fourth, but as I said before, that whole opened up categories, anything that was opened up, it almost looked like weather resistant. So anything that was opened up sold well, open toes, open uppers, anything that was opened up. The other thing that kind of got a new renewed life to it was in the evening category which really speaks to the customer’s appetite for embellishment, embroidering and excitement. So those trends started to show themselves I would probably at the end of Q3 continued strong into Q4 and actually are resonating as we’ve crossed the season. So I am very pleased with what I saw. The biggest excitement as I said before is really in the casual space that really speaks to customers continuing to a very casual lifestyle. And it doesn’t just have to be sneakers in athletics, it’s actually showing up in other ways with new products. Mules, backless mules and new Mocks, and new colors. So there is a lot of excitement in the whole casual category, the sports sneakers as we talked a little bit about before is an extension of athletic, but done in a more contemporary and fun way, seeing a lot of traction there. So I am encouraged by what I saw coming out of Q4 starting to see that resonate, continue to resonate in Q1. So I think there are some things that customers don’t have in their closet which will cause purchase.

That’s really helpful, and can I ask a final question? Boots speak to plan, athletic has continued strong, fashion is good, but comps are down 7%, what’s not working? What’s the drag that's leading to deteriorating comp stores sales results, if they are treating categories and doing well?

Sure, so if you remember our strategy for fourth quarter was to make sure that we plan conservative comps, we were up against some pretty extreme promotional activity from the year before and so I’ll speak for boots for a minute. You know boots, we were pleased with our performance, we hit expectations that did comp down because we planned it to comp down and once again that was deliberate. To plan the comp down, but to be more profitable and that’s actually in fact what has happened across these categories. So I will tell you the things that aren’t working. Dress, there are some things that are exciting that are going on in the dress and casual space. Dress continues to be decelerating as the customer continues to vote for casual. In the casual space, there are parts of the business that aren’t comping well and giving way to things that are doing well. So I don't want you to mistake my sharing with you, the question was what are you seeing, what new trends are you seeing, we're seeing some nice new trends, but some of those are being offset by other categories, that aren't doing well, but the plan for fourth quarter was, to plan conservatively, to plan down because of the headwind with promotional activity the year prior but to be more profitable and we accomplished that.

Great, thank you so much and best of luck.

The next question comes from Steve Marotta with CLK & Associates, please go ahead.

Good morning everybody, Roger you touched on this earlier I'm just hoping you can expand on it, I've several questions, they're all related to one another. How many stores are currently considered small format small or footprint stores? Can you comment on their performance and are any of the 12 to 15 new stores planned this year in that format?

Yes Steve, we -- it’s a dozen-ish kind of number that is in what we would define as a small format and there aren't any significant ones that I would say in the ones that we have planned for 2017.

And could you just comment a little bit on how, or I guess if they're not in the plan they're still tweaks to be worked out?

That's right.

Okay, and how many stores are -- if we said just forgive me, how many stores are expected to close? You said net 12 to 15 new, but what's the gross on that number there please.

It gross is somewhere between 15 and 17 openings and somewhere between 2 and 4 closings.

Thank you, 2 to 4, thank you, and that's all I have, thank you.

Alright, thanks Steve.

The next question comes from Patrick McKeever with MKM Partners, please go ahead.

I don't know if you -- I was multitasking, so I apologize if this came up already, but did you give any color on transactions versus average transaction value during the quarter? I know you started to kind of blend everything together with online and in the stores, but that's my first question. And then second question is, on all of the store closings that are either underway or said to take place across the department store space, I'm just wondering if that -- if you have any of any negative impact planned into your same store sales guidance for the year from the liquidation sales, would you expect that to hurt your business in the first half of the year?

Patrick it's Jared, I'll take the first question. Transactions were down in the mid-single digits, again not overly surprised by that given what we had planned for the fourth quarter and the lower promotional activities there. Our average transaction or AVS always was down, again not overly surprised given the fact although that we were less promotional we also had planned boots as Debbie said down considerably and that tends to be a high-ticket category. So both of those pretty much came out as we had planned.

And Patrick I'll take the question on the impact of the liquidations, so we've looked at sort of where things overlay with our existing boxes of where we're at. There isn’t a significant amount of overlap, so we haven't built anything in from a negative perspective for any kind of closing, just anything long term that should create opportunities for us as people walk away from those markets and we can after it digitally if we do not have a physical presence in that market place.

Got it. And then just a quick on the later tax refund call out. I mean I was a little surprised to hear that, I wouldn’t think it would have much impact on your business, just given your customer demographic being a little better off and probably not as sensitive to the timing and flow of tax refund at this time of the year. But what are you seeing that suggests that, that is having an impact on the business?

Yeah, obviously Patrick we’re not going to give any sort of color around the current business, but we did mention it, that's something that we factored into our guidance. You know when we look at our stratification of our customer base, there is a decent core, or I should say decent size segment in there that is more moderate to average income. So, I think you are correct in general and on average our demographics SKUs a little on the higher income side, but we do have a core that is exposed to that and in certainly light when you’re looking at discretionary spend, shoes is something that they could probably do without and so they have that dollar back in their wallet.

Okay, got it makes sense. Thank you very much.

The next question comes from David Mann with Johnson Rice. Please go ahead.

I was cut-off, sorry if this question had been asked. On the large market stores that you’ve talked about where you’re going, can you give us a sense on what percentage of sales they represent and what you think the opportunity is there in terms of potential increase?

Yeah, David this is Roger. I don’t want to get into that kind of detail, but what I would tell you is these stores or these markets have underperformed the balance of the company by 4 to 5 comp points for the past couple of years and that’s not acceptable. And they are our biggest markets, they are our most fashion forward markets, they are markets in where we should dominate. And so our organization, I am always talking about focus and tempo. If we're going to get the DSW core business back on track you got to start there. So we are violently executing toward those -- that group of stores to get our top line to not just be equal to how balance of company has performed but to exceed that. And it starts with the assortments and we’ve taken action and I think I know you’re in our stores, but when you get into the first quarter start the second quarter, you’re going to see a different assortment that’s going to pop in those doors. You’re going to see, I believe, a different level of talent and experience in those stores and we’ve got to start there to really drive comps for this enterprise. So if we can make those things happen, we’re going to have a great year. So that’s where we’re starting our efforts.

So it sounds like you believe your issue there is mostly internal execution and assortment driven, is that correct?

I believe it is. This is about us, this isn’t about competition, this is about us. We see it.

And in terms of the changes in the assortment, how much should we expect to represent the assortment do you think you’ll need to change in those stores and will that -- will those stores be totally unique versus what you’re doing in other source in the chain?

David, good morning this is Deborah, I’ll take that question. So first of all there are unique characteristics that define these power 35 focused stores. So what we did is we studied brand architecture, price point architecture, assortment and then couple that with some of the historical facts we know on how does a market in those particular stores behave, and we did find gaps. For example, there may be a pre-disposed to selling higher price point goods it could be different kinds of brands that are more important to them than other stores. So we took all of this data, some was fact, some was store manager feedback and what we knew about these markets and we put in a sort of strategy together that will actually define the needs, the demands of what the customers want in those locations.

Indeed I think what's important is, this isn't a dramatic shift in what we are buying, this is a change in mindset to think about all of the brands all the products that we have across our network of warehouses and fulfillment centers. Across our entire enterprise there was the right inventory in our buildings, they might not have been placed in the right locations. So if we approach it differently with a digital mindset and say okay, we've got to these brands, these price points, there's kind of architecture closer to the consumer in those markets. You would take that product out of the fulfillment center in Columbus, Ohio and put it into a store that's closer to that consumer in New York City, or LA or wherever it might be. So again it’s not a dramatic shift in how we're buying or what we're buying, it's putting it in the right places is how I would describe it. That fair.

That's very helpful. If I could ask one other question on what you're doing with Aldo. Can you talk a little bit about how you think that performed last year, where your private brand penetration ended in '16 and where you think it's going in 2017?

Sure, I will tell you we're extremely pleased with our relationship with that group. What we're seeing from that is a real focus on converting our labels into brands and really bringing these brands to life with a better designed product, higher margin product. So we're really pleased with our first years' experience with that group, as far as private brand is concerned we are seeing an improved margin rate, significant improved margin rate that’s over last year and the penetration has increased slightly from last year on the year, so it looks like our strategy is working there and we'll continue to evolve that as time goes on.

Thank you. Good luck in 2017.

The next question comes from Camilo Lyon with Canaccord Genuity, please go ahead.

Roger, it was clear that in this quarter a key focal point of yours was to promote more of a full-price selling strategy, and that was borne out in the gross margin, for sure. I'm curious, as the quarter unfolded there were times when you still ran your promotional email fliers. I'm curious to know from you, when did you see your traffic fluctuate, either up or down, in response to some of those marketing promotional fliers? When did you see the most amount of response by your consumer to that? And then, secondarily, if we can think about a longer-term view of the EBIT margins of this business. There's a lot you're working on, there's a lot of opportunity that you speak to from running this warehouse strategy. How do you think about the long-term opportunities for EBIT margins to potentially expand and certainly get back up to levels of prior years?

Well I think on the first one, what I would ask you -- it's tough to look at how things are being communicated to get an indication, are we being more promotional or not. I think what we are doing a very good job at is figuring how we can be more effective communicating what was already the markdowns we were taking. So I’ll give you an example, we do a rotation, one to two times in a quarter -- within a quarter and in general we would just tell people that hey there is a price move. And if you can package that differently and tell a different story, you’re not taking more markdowns and actually what we have found is we can take less markdowns by perhaps jumping a little earlier than what we might have historically done and packaging that to be in events around boots. But the reality is all you’re doing is doing it a week in advance of when you would have normally taken something to 30%, 40% or 50% off as part of the unit letter we would take. So it's our team, our marketing team, our merchant team, our planning team I think again focus, very very focused on how can we extract more margin knowing that we were taking significant amounts of markdowns without ever really telling our customer about it. So I think if you’re just looking at how we’re messaging it, it could come off as misleading. When we went through the holidays, I would tell you I know we have a lot of associates who listen to this call, our Board and others. The patience this organization showed knowing that every day we were opening a daily sales theme, the negative comps we were seeing, but knowing we were making more money. I am so proud that we did not respond to what we were seeing in the marketplace. We had a strategy and we followed our strategy and we delivered the expectations. So I think that’s the way we have to manage our business and I am real proud of that. As far as how do we grow the warehouse strategy, expand margins go forward. Again I think the integration of Ebuys into what we’re doing I think leveraging digital to drive a different experience for DSW, can create opportunities. I think we have a lot of things that we can go after in the next couple of years that we think can grow our bottom line in a meaningful way.

Thank you. Then just a question for Debbie. You mentioned that you were able to use some of your opportunistic buys in goods that will put us forward to see some demand in season. How does your inventory and opportunistic buys stand for 2017? How do you feel about that and could you talk about the availability of product as I think more brands which are trying to become a little bit more surgical with inventory that they put into the market, so that there is a limited impact on their own pricing architectures? Thank you.

So, good morning. what I would tell you is that the way we use pre-buys really do help us manage inventory needs, whether we need more or whether we need less. We were very pleased with the pre-buys that we had from last year and we won’t name any names, but they actually ended up being high quality brand, high value product and we used those to our benefit last Fall to actually leverage sales opportunities within the season. So I think that answers the question on opportunity buys. Could your repeat the second part of your question? I apologize.

Yeah, just how does your inventory amounts segment look given that you pulled forward some of that inventory for currencies and sales, is the availability of opportunistic, buys still as robust as it was a year and two years ago?

So I would tell you every day we see less opportunity buys specifically in the boot category, because the boot category is changing so dramatically and really shifting more out of a casual into what we saw some traction in some dressier product. Think you have to be really careful about the opportunity buys that are out there. Some are going to be the right product and some are not going to be the right product. I think the answer to that is as the buys come in we're evaluating them and we're taking advantage of the opportunity of what we think is right for the assortment.

So, does that mean that the mix in total should continue to increase, as opportunistic?

I would say opportunity or the pre-buy bucket would stay flat to maybe a little bit up for next year, but there's other ways to pass value other than just opportunity buys and I'm having these strong negotiations with our brands and using some cost leverage to continue to pass value. Also in the SMEs, the special make-up piece of the business and entry and opportunities.

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

Just on behalf of Jared, Debbie and the rest of our leadership team I just want to say thank you to all of you for your interest and your investments in DSW and we're looking forward to having a really solid 2017, thanks you.

Conference is now concluded, [Multiple Speakers] you may now disconnect.