Designer Brands Inc. (DBI) Q3 2017 Earnings Report, Transcript and Summary

Hello and welcome to DSW’s third quarter, 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I now will turn the conference over to Christina Cheng. Ms. Cheng, please go ahead.

Thank you. Good morning and welcome to DSW’s third quarter conference call. Earlier today, we issued a press release detailing the results of operations for the 13-week period ended October 28, 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; and Jared Poff, Chief Financial Officer. Let me now turn the call over to Roger.

Thanks, Christina and good morning. I am encouraged by our progress on the initiatives we are pursuing to differentiate and grow the DSW brands. Our third quarter results give us confidence we are on the right track. Let me share a few highlights. Our DSW merchandising team drove a low single-digit comparable sales increase in footwear despite challenging weather conditions across the entire country. Our power stores are significantly outpacing the balance of our chain. Our DSW kit sales exceeded our expectations. Our lab store in Columbus continues to post robust results to validate our new store design and we started testing new services as part of the re-launch of DSW’s loyalty programs. At Ebuys, we completed the consolidation of the new fulfillment center and continue to clear out a sizable amount of slow moving inventory. This has pressured their performance during the quarter and based on our results to-date, we have tempered our long-term expectations for Ebuys. As such, we have reduced the carrying value of goodwill and intangible assets as well as the remaining earn-out liability. Let me turn the floor over to Jared to discuss our third quarter performance and our outlook for the remainder of the year.

Thanks, Roger and good morning. Third quarter revenues increased by 2% to $708 million driven by flat comparable sales at the DSW segment. Our third quarter performance brings our year-to-date top line to $2.1 billion, a 2% increase with modest store expansion and acquisition revenue partially offsetting a 1% comp decline and lower ABG revenues from our planned exit at Gordmans. Third quarter reported earnings of $0.05 per share includes net non-cash charges totaling $0.40 primarily related to the impairment of goodwill and intangibles associated with Ebuys. Excluding these GAAP items, adjusted earnings were $0.45 per share compared to $0.51 per share last year. Year-to-date, adjusted earnings were $1.14 per share compared to last year’s of $1.26 per share. The rest of our comments will refer to adjusted results. Let’s start with the Designer Shoe Warehouse segment, where sales increased by 2% on flattish comps. Comps exclude our two locations in Puerto Rico, which remain closed due to Hurricane Maria. We opened 6 new warehouses and closed two locations for a total of 514 warehouses at the end of the quarter. Footwear comps increased in the low single-digit range. Accessories declined in the low-teens. Mostly comps were consistent with softness during the middle of the quarter as temperatures turned unseasonably warm during our important September and October boots selling period. With the onset of more seasonal conditions, sales have improved starting with the back half of October. While we were disappointed with this slowdown our conservative boot position and inventory liquidity gave us flexibility to manage receipts and end the quarter at 3% per square foot below last year. Success of hurricanes negatively impacted comps by approximately 50 to 60 basis points. Outside of Puerto Rico, we fortunately incurred minimal property damage and our emergency readiness program enabled our field leadership team to account for all of our associates within the first 24 hours of the various storms. We estimate the net impact of weather-related disruptions amounted to $0.05 per share for the quarter. While weather posed some challenges during the quarter, we were encouraged with the progress in several of our key growth initiatives. For the second quarter in a row, we achieved our target for the women’s business with demand better balanced between our women’s athletic and non-athletic assortments. We have started to chase receipts in women’s footwear and are pleased with the results of our seasonal transition strategy. Our digital demand continued to accelerate with a 26% growth rate. Our recent site redesign, growth in drop-ship and enhancements to inventory mobility drove a significant increase in online conversion and set new records for digital demand this quarter. In addition, demand on our mobile sites grew at a very strong rate with the number of active monthly app users tripled to last year. After closing the gap with the balance of the chain, performance in our Power 35 group exceeded the balance of the chain this quarter. Given the disproportionate importance of our Power 35 group, we are excited with these results and will remain keenly focused on driving this momentum. Our kids business exceeded plan and delivered strong positive comps even as we anniversaried our Phase 1 rollout this year. Demand across all categories was strong from both new and existing customers. Currently, 60% of our warehouses have DSW kids and we plan to roll this to the balance of the chain by back-to-school 2018. Turning to the ABG Group, comps increased by 1% against last year’s 5% decline. Revenues declined by 14% in Q3 and 7% year-to-date driven by the planned exit at Gordmans. We opened 4 new locations and closed 3 locations for a total of 351 stores this quarter. Hurricane activity impacted ABG group sales by 80 basis points even while adding incremental markdowns to keep inventories clean and recapture lost sales, we are encouraged with the gross profit performance this quarter. We will continue to operate the remaining 58 Gordmans locations that were acquired by Stage Stores through the end of the year and expect to wind down operations at the end of the year. Turning to inorganic growth, let me begin with a discussion around Ebuys, revenue from Ebuys increased by 6% this quarter and 17% year-to-date. Gross profit however was negative for the quarter as we took substantial markdowns to move through sizable amounts of slow moving inventories. During the last 18 months, we have encountered challenges and sustainably sourcing goods at the right cost that support the economics of its legacy business model. As such, we have revised our growth expectations assumed at the time of acquisition and have moderated our go forward expectations for the business. This resulted in net non-cash impairment of $53 million which impairs almost all of the remaining goodwill intangible assets and contingent consideration liability. We still believe Ebuys experience and expertise operating on multiple marketplaces simultaneously and serving customers across the globe as valuable and unique. To that end, we have installed new leadership at Ebuys and are deeply evaluating this model go forward and how it best fits within DSW’s growth strategy, while simultaneously aiming to shore up the operating losses of this business. Finally, we recorded $1.6 million of income from equity investments in Town Shoes this quarter. We have a total of 24 DSW Canada warehouses in addition to 157 locations that operate under the Town Shoes Shoe Company and Shoe Warehouse banners. Let me share more details about our Q3 financial performance for the total company. Total company gross margin came in generally as expected 130 basis points lower than last year, with Ebuys accounting for 45 basis points of this decline. Our gross margin performance was driven largely by higher marketing promotions this fall, most of which was planned and to a lesser extent shipping expenses from greater omni-channel fulfillment and drop-ship. We invested in more marketing events this quarter to capture market share and makeup lost ground due to weather disruptions during the quarter. This positioned contracts to our strategy last year, which focused on maximizing profitability with a significant pullback in promotional activities ultimately driving 145 basis point increase in gross margin at our core business. Our Q3 marketing campaign activated more new existing and last members and drove a mid single-digit increase in transactions compared to the low single-digit growth this past spring. We leveraged occupancy expenses by 10 basis points, while DCFC expenses remained flat to last year. On a year-to-date basis, gross margin was lower by 85 basis points due to the incremental clearance rotation during the first quarter, our elevated marketing this fall shipping costs and the ongoing integration of EBuys. Operating expenses increased 4% due to selling, technology expenses and the planned investment in marketing. As a percentage of sales, our SG&A rate de-levered by 50 basis points. Year-to-date our operating expenses increased by 3% driven by an increase in marketing and IT expenses partially offset by benefits from our cost savings initiatives. I would like to spend a few minutes on our balance sheet. Our inventory positioning gave us the cushion to absorb the choppiness from weather this season. Our open-to-buy capacity remains liquid, which will position us to better react to buy now, wear now demand and chase goods with less markdown risk. Our experience tells us we are entering a new fashion cycle and we are distorting our inventories to the appropriate market opportunities go forward. Cash and cash equivalents increased to $330 million. CapEx spending of $13 million includes $5 million for new warehouses and the balance for IT, supply chain and other business projects. We are on track to spend approximately $75 million in capital expenditures this year which brings us back to 2011 levels. We bought back 500,000 shares for $9 million this quarter and have $524 million remaining on our share repurchase authorization. Since 2013, we have returned over $600 million to shareholders in the form of dividends and share repurchases. Finally, let me share our perspective on our 2017 outlook. While we experienced approximately $0.05 cents of EPS impact related to weather disruptions, the recent traction we have seen in boots with the advent of more seasonal weather and our chased opportunity in women’s gives us confidence we can earn back much of that miss. On the other hand, our revised projection for Ebuys represents an incremental $0.05 drag on earnings that we don’t believe we can recover during the fourth quarter. As such, we have revised our full year guidance by $$0.05 to $1.40 to $1.45 per share excluding nonrecurring items. Our guidance assumes full year revenue growth in the 3% to 4% range with flat comps. This is unchanged from previous guidance with fourth quarter comps in the flat to up low single-digits. We expect 9 to 11 net openings this year. Full year gross margin rate is expected to be lower than last year. This is also unchanged from our previous guidance. We have added marketing events in the fourth quarter to support our top line expectations during the holiday selling season and we expect favorable occupancy leverage from the 53rd week to result in flattish fourth quarter gross margin and a 60 basis point lower for the full year. Long-term, we continue to optimize markdowns and shipping expenses leverage our buying power and maximize profitability as we drive faster inventory turns. Full year operating expenses are projected to increase in the low single-digit range with fourth quarter SG&A in the mid-single-digit range. We anticipate a tax rate of approximately 39% and shares outstanding of 81 million shares for the full year. As always, our guidance does not assume any share repurchase activity. With that, let me turn the floor back to Roger.

Thanks, Jared. Last quarter, we shared DSW’s new mission to inspire self expression with external audiences such as the Street, our vendor partners and the retail industry. Our comprehensive end-to-end distribution capabilities across all 5 of our brands like DSW, one of the few growth platforms in a tough retail environment. We have begun to showcase the full scope of our integrated enterprise to our vendor community and are actively working to identify ways we can elevate their brand and reach a broader market through our retail portfolio. Today, I would like to provide an update on progress we have made on three strategies that support our missions. First, as we mentioned last quarter, we are launching a new loyalty program called DSW’s rewards VIP, which will offer new services and perks products to over 25 million rewards members. Apart from normal purchase activity, members can earn points by downloading our app, writing reviews or even making a shoe donation. Premier members will be provided early access to new trends and product releases ahead of other customers. We are also excited to be introducing new services as part of a differentiated experience. These include elevated mail services, custom-made installs that provide comfort and cushioning at accessible prices, repair and refurbishing of shoes and handbags, shoe storage and rental. With these offerings, we will create an elevated value proposition that fulfils our customers’ complementary needs. Our voice of the consumer research has uncovered a very strong interest in these services and we believe this new offering can give consumers a new reason to visit DSW, drive traffic and aid new customer acquisitions. We are gaining important insights in learnings while these services are under development and we will keep you posted on our progress. Second, we continue to be pleased with our new store design, which brings various elements of DSW’s warehouse heritage to life in the digital age. Our lab store in Columbus continues to outperform expectations and remains one of our top performing warehouses throughout the chain. We will pilot our new store design and fixture package at 4 additional locations early next year. We believe this new store design has the potential to unlock significant productivity and drive sales out of the existing box with an expanded assortment, trends and sized distortions and new service offerings that will make DSW our customers’ top of mind footwear destination. Finally, we continue to develop our future point-of-sale technology, which will improve associate productivity in-store while reducing the demands of day-to-day tasking and creating more capacity for proactive customer engagement. This will allow DSW to operate our physical network more efficiently as both the warehouse fulfillment center and the unique and differentiated selling floor. We believe all three of these strategies are critical to our long-term success. Now, turning to Town Shoes, we ked off the strategic planning process with senior management and believe Town has significant opportunities to expand the DSW brand in Canada to grow the brick-and-mortar warehouses and digital growth. We started to leverage shared services and have identified digital and supply chain synergies we can unlock with DSW’s existing capabilities. In addition, we are at the early stage of exploring how we tap into Town’s expertise in serving family footwear consumers in smaller U.S. markets. We will share more details after we closed the acquisition next year. Before we open it up for Q&A, I am going to thank our teams and customers for their generous support provided to communities affected by the recent natural disasters. Together, our associates and rewards members raised funds that enable DSW to contribute $0.25 million to the Red Cross in the industries 210 Foundation for Hurricane Relief. We are proud of this spirit of generosity and the hard work that went into keeping our associates safe and delivering a solid performance this quarter. In closing, we have made tremendous progress in repositioning our business for long-term growth. As the retail climate grows ever more challenging, we must remain focused on executing our vision. The success we are having in our long-term growth initiatives gives us confidence we are on the right track and I look forward to reporting on our progress after the holiday season. With that, let me turn the floor 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 Steve Marotta with C.L. King & Associates.

Good morning, everybody.

Good morning.

Good morning.

Just a couple of questions first. First of all, you mentioned a new fashion cycle in the middle of the call, can you go through that a little bit and what you are seeing obviously without disclosing anything that would be competitively disadvantageous?

Sure, Steve. This is Jared. I think you can see this across much of the apparel landscape right now where you are seeing a lot of resurgence back towards non-athletic denim resurgence by far and kind of a little bit more dressed up type of look than what we had seen, which was very heavy yoga pants and very casual lifestyle. So, when you see the comps that we are seeing at Abercrombie and even some of the comments from Gap and things like that, that’s what point to at that point.

I understand. And you also mentioned that the test store rollout, there would be four additional earlier in 2018, can you talk about how quickly you might be able to roll that out assuming that these forego as anticipated?

Yes, I think, Steve, this is Roger. I think the first half of next year is our goal for the four and then we have got to take some time to read it. We have had great results here in our lab store, but honestly, we are all in there every single day. So, we want to make certain this is something we can take two markets where we are not all engaged in at everyday and we see the same kind of results and then we have the ability to move pretty quickly one, because we have the capital, but also operationally, we have been over time that we know how to remodel and open stores quickly when we need to.

Okay. Lastly, can you please quantify exactly how much the 53rd week is in sales and EPS if you did that, my apologies I didn’t get it?

Yes. Steve, we typically haven’t given that specificity. What we have said is that if you take the fourth quarter and generally divide that by 13, you can assume it’s relatively average there and a pretty similar flow through rate other than we will see some benefit on some of our fixed cost leverage that comes through there.

Okay, great. I will jump back into queue. Thank you.

Thank you. And the next question comes from Jeff Van Sinderen with B. Riley FBR.

Good morning. Maybe you can just give us a sense of the penetration in athletic and athleisure this year versus the same time last year and given the strength of that category although it sounds like it’s shifting a little bit with the fashion cycle. I am just wondering how you are planning that for spring?

I think Jeff we have continued to see growth there and I don’t think we have disclosed the exact penetration percentage here. Do we?

Yes, we said it was around a third and that’s we are there again for the third quarter. That’s a few ticks higher, a few percentage points higher than where we were last year, but we are about a third of the penetration?

But as we head into next year, we think there is continued growth here one, because we are way under-penetrated to market share compared to the balance of our assortment. So, we believe there is still – there is still headroom there for us.

Okay, great. And then eventually kids business staying really strong, just wondering if there is anything more you can share on I guess the penetration of that business, where that is now and then as you are growing that next year, how do you think about that longer term has sort of how big that could become as a part of your overall business?

We think so highly that we are accelerating the next phase. So, our goal is maybe with the exception of one or two doors to have this in the chain for back-to-school. And that was not our roadmap when we have started this journey. So, we feel really good about the direction, but as far as penetration, I think it provides an incredible opportunity for us to build a relationship with our consumer in a different way than we have in the past. And we shared this before, but when we see a customer start their journey with DSW, when they are 18 to 20 years old and over their lifetime, we see a significant dip in adult footwear purchases in that window of time when they bring children into this world. And so yes, this is about growing kids, but it’s also about keeping that consumer throughout their entire lifetime and that’s the work that we are seeing kids paying off for us.

I would add to that we are seeing the hypothesis play out and we shared this last quarter, where we have stores that have kids and we have not removed adult footwear to fund that space. We are seeing an overall lift to the store, because what Roger said they are continuing to buy just the kids product, but the adult product and that’s the basis that we are using for the rollout. I will also mention we were very excited to see with the anniversary of our Phase 1 rollout, those same stores and kids products were comping in the high-teens with that kids category. So, we think there is a maturity curve similar to new stores and there is more upside even for the stores that are laughing.

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

Thank you.

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

Yes. Hi, how are you? Can you just speak to the weakness in accessories and remind me whether or not that category is subject to certain same inventory management and merchandising strategy for same prices in footwear?

Yes. Our real challenge in accessories of late has been around the handbag small leather good categories and the hosiery stock kind of area, we are actually very pleased with kind of results we are getting. So, there is some work that we have to do as we mentioned on the last call we have made some organizational changes there. We do not see this turning around until the first half of next year. So, there is some work that we are doing to improve the direction, but a lot of it is, it’s in that handbag areas where we are really experiencing the softness.

Okay, great. And then just unpacking sort of the weakness at Ebuys in the foreign outlets being sort of questions on scalability as it sounds like, is another capacity there to sort of fund that or sort of fuel that business with DSW product. Is that something that you are kind of taking a more viewing?

That’s exactly what we are doing. So, trying to figure out ways that we can take goods that today we are selling not just the DSW, but at Town Shoe Company, Shoe Warehouse all of our other brands that we engage with day in and day out and how do we liquidate that excess inventory or inventory growth that’s at the end of its lifecycle through the marketplaces. And so we are trying to focus our efforts there rather than going out and taking large inventory risks the way that we had in the first half.

Yes, Dylan. And I would add I am glad you brought up those two subjects, when I look at the quarter and kind of assess what was working and what we had challenges with. And I can point to the fact as Roger mentioned, our footwear comps positive, they get obviously core piece of what we do comp positive of the strategic initiatives that we are counting on for our future strategic growth as Roger mentioned in his comments, all performed at or better than our expectations. We have got two areas that our biggest challenge is right now and that’s accessories and the EBuys and with the accessories as you know we have a new GMM that started a few months ago and she is tackling that head on and with Ebuys as we mentioned we have taken some medicine on the balance sheet and we are trying to right-size that business and get it back to how it fits into the overall DSW Inc., portfolio. So kind of a tale of two cities, but I am pretty excited for what’s going on in the core business, which is the footwear side.

Great. Thank you very much.

Thank you. And the next question comes from Paul Trussell with Deutsche Bank.

Hi, this is [indiscernible] on for Paul. So you spoke always about the cold weather with the boot business. Could you just speak to improvement you have seen moving into 4Q and do you see the kind of more temperate weather, colder weather improving in that business and besides that what other businesses do you see for growth prospects for 4Q and moving into the next year?

That’s great question. So, for us in our business that October time period that is really our holiday. I mean, that’s when we really make – make progress. And in the early part of August and the late part of October when weather was more seasonable that became something that was really driving our business. So, we actually had positive comps and we saw real strong performance with the boot category and that’s where we have opportunity as the weather continues to remain the way that it is right now that creates upside for us in fourth quarter compared to how we performed in third quarter. When we had the very warm weather that hits in that September – late September, early October time period, we were running significant negative comps and it was sort of the tale of two cities. Throughout the quarter, the each month was relatively flat, but embedded within those months, there was real volatility that we could see clearly day-in and day-out that was driven by the weather.

Thank you.

You are welcome.

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

Thanks. Good morning, everyone. Just a question on the all the competitor store closings both in the department store space but also in some in specialty footwear, I am wondering if you think that had much of an impact one way or the other on sales in the third quarter either on the negative side with some of the liquidation sales or perhaps on the positive side with some of the store closures. And just where do you think we are in the cycle there and how are you thinking about the market share opportunity as fewer stores – as there are fewer stores out there? And then my second question is it is also on the boot business and just how much of the business right now would you say is sensitive to the weather and how much is more fashion-driven and on the fashion side, what are some of the call-outs in terms of trends? Thanks.

Yes, Patrick, I will start with the competitive landscape. I think we have been very I think transparent in our view and we give you some of the analogy of ice melting. That ice we think the temperature continues to get churned up and people are being pressured in and are taking actions that I do think impacts all of retail, but we continue to see that we are grabbing market share and the footwear category at least the data that we have – that we have seen has been challenged and has not been growing over the last, I would say rolling 12 months, but yet we have. And so we feel pretty good about our direction, I will tell you though for us it comes back to our mission, vision and strategy and how do we leverage the warehouse capabilities that our brand offers that others do not have the capability to deliver on, how do we leverage our rewards program with our re-launch that I mentioned in our opening comments, and then how do we take customer-facing kind of technology that allows us to engage differently with the consumers. We are doing those things. We believe in the direction we are headed with DSW, the brand regardless of what’s happening in the competitive landscape. And our results I think demonstrate that for the core DSW brand. So, I think we feel pretty good about the direction we are headed with DSW. From a boot perspective, boots is our largest category when you are in the fall season, it is also our highest margin category and we have got it figured out and that’s the challenge we have given to our merchant team that despite the weather they still got to figure out how we get sales and I think you are going to see us perhaps think differently about how we weatherproof can’t say that you can completely weatherproof the business, but how do we engage differently during these periods both in spring and fall both on sandals and all boots in the fall season.

Thanks.

Thank you. And the next question comes from Scott Krasik with Buckingham Research Group.

Hi, guys. This is Mike only on for Scott. So, core merchandise margins were down roughly 100 basis points so now how that compared to your original expectations for the quarter and the drivers and then I guess what you expect for merch margins in 4Q?

Yes. So, Matt gross margin was down as I mentioned and I would say that was mostly in line with expectations. We did have a little bit of reactionary add-back of some marketing promotions when we saw the slowdown in that very important boot category. So, that came at somewhat of an incremental hit, but overall it was relatively in line with what we were expecting. For fourth quarter, we are expecting merch margins to be down again a little bit to last year about probably half the decline that we saw in third quarter, but we also are expecting some occupancy leverage as we have a 53rd week and so net-net we are actually expecting flattish to slightly up gross margins for the fourth quarter.

Yes, I will also share I think the margin challenge to LY that we faced in Q3 we had planned that, because we wanted to get much more aggressive than communicating to consumers who had not shopped us in a while. So going out there with different campaigns either direct mail or e-mail that would drive in active customers back into the DSW brand, I am real happy with the result that we get out of that. Now, we took some margin hit for that, but in Q3, we had our transactions actually increased in the mid single-digit range, so that was progress compared to where we were in Q2 or Q1. So, the investment we made in marketing is really what drove the challenge that we had in margins, but again two customers that had not been shopping us.

Okay, great. And then another one I guess you guys have kind of spoken to a more constructive Ebuys business going forward, would you be able to comment on your long-term sales and margin expectations for the business?

Right now, we are still kind of assuming that, that things don’t change dramatically for the fourth quarter. So, we have got it projected at relatively flattish sales for fourth quarter and basically flat gross – no gross margin and so therefore again a slight operating loss. I think longer term as Roger said, we are really trying to assess what the best way to fit them into the overall DSW Inc. infrastructure and you know that, that can be something that looks different, feels different than what we are operating at right now. So I feel a little uneasy trying to get really long-term views, but we have moderated what we had as originally assumed obviously, which is why we took the actions we did on the balance sheet.

Okay. And if I could just squeeze in one more, you guys spoken to the boot category a little bit here, just wondering when the business wasn’t performing as well in the beginning of October, late September. Did you guys start to delay or cancel orders for 4Q and then kind of aside from these past few weeks that’s at seventh, they have been doing good, what are your expectations for the back half of the quarter?

Matt, I think our team has reacted to the business appropriately. Our inventory is positioned based on sort of our outlook for Q4 and as we head into Q1, I think in a very good place not just in boots, but across the business, which is why our inventory was down roughly 2.5% per square foot. So, I think our inventories are actually pretty clean and even in the boot category despite some of the challenges we had kept open to buy. So, I think our team has done a really good job of managing through the inventory and we are more in chase mode now is how I would describe it and I would prefer us in that mode than the other way around as we sit here today.

Okay, great. Thanks guys. Good luck for the year.

Thank you. And the next question comes from Chris Svezia with Wedbush.

Hey, good morning, everyone. Thanks for taking my questions. Just a follow-up on that prior question, when you talk Roger about being able to chase or in chase mode, can you maybe talk to what categories or classifications we are chasing into and is that still in compass boots, you still have that given the churn in the weather and some favorability, you saw that capability to chase into that category for Q4 to build on maybe some comp and margin or not might be just a little more color about where you are chasing and how that’s thought as it pertains to your fourth quarter outlook?

I would say there are two areas right now, where we are trying to be more aggressive in how we chase and one would be boots or as we head into spring obviously, sandals, because boots seasonal categories, they are so critical to the success of our business and we are for the most part one of the top two or three retailers for just about every major brand that plays in the boot category. So, when we can have a conversation with one of our vendor partners and say look, we have an opportunity to put more product in our warehouses get us product, they find ways to get us product. So, I like the fact that our merchant team is positioned to be able to chase. So, I would say boots is one. And then the other one is kids. I know we have left sales on the table in the kids category because it’s outperformed our expectations. I think also I have a little one at home and we have been challenged to find its size. So, we have had lots of conversations with our merchants to make certain that we are buying in the kind of depth that ensures that we are able to keep that product there for our consumer and looking for closed outs in both of those categories I think is an important part of what we are doing.

Okay. And as just to clarify is some of that thought process around chase factored into the flat to low single-digit comp for the fourth quarter?

Yes. And when you think about the core women’s business has delivered positive comps now for two consecutive quarters. So I am going to say it’s not just the boot category, it’s everything that we are doing in women’s. We have had success with like we haven’t had in the last 3 years. So, all of those are going to be things that we are going to be able to pursue as we go through fourth to really drive comps.

Okay. Final question is just on Power 35, what’s the – I guess what’s the spread or the delta between I guess the overall DSW base and how those stores are performing and that thought around Q4 if you can add some color about that?

Yes. So, if you replay back to where we were this time one year ago, those power doors were performing 4 to 5 points worse than the balance of chain. And we really got after those stores and I would say it was really in two areas. The first was around product. We could see when we visited those locations that we did not have the kind of product that the customer in those markets, were looking on a regular basis. And our merchant team went out and did one heck of a job and we have seen significant improvement in average unit retail there. That got us to the point where I would say at this time and it was in second quarter we started to see where they were about equal and while all of that was going on, our field organization was also looking at the talent there and really upgrading talent within each of those locations whether it was the manager or the entire teams that were in those locations. And we took talent that was in non-power doors and transferred them in to the power doors to really get the best foot forward with the consumer. And as we have headed through into – through third quarter and into fourth quarter those locations are now performing 4 to 5 points better than the balance. So, it’s essentially about a 10 point swing in a 12-month period of time. It’s exactly the challenge that we gave the team a year ago and they delivered. And so when we talk about why are we feeling good about our core DSW business, it’s because what we have learned with those Power 35 as we head into 2018, we are going to take that to the balance of our organization and so that’s the approach we are going to be taking and turn on some additional marketing, which we also think will help us drive.

Okay. Thank you very much and happy Thanksgiving to all.

Thank you.

Thank you. And the last question comes from Camilo Lyon with Canaccord Genuity.

Thanks. Good morning, everyone.

Good morning.

A few questions here. Just finishing up on the boot and the chase topic, I think boots in general was planned down across the industry. Clearly, that started off slowly. Are you finding many partners that can fulfill that chase or you kind of sticking to the key supplies that have that ability to turn product quicker than most?

We have – we found that there are vendors out there that have product that is available and again, because we hold a pretty strong position in the vendor community, we can make those phone calls and get product that might have been intended for someone that is much smaller that vendor will make the right decision and support us. I mean, that’s the strength of being number one or two player with those brands and that’s our expectation when we are working with our vendor partners.

Okay, great. And then just going back to the fashion ship comment, I thought that was an interesting comment. Could you parse out where across your store base you are seeing that fashion shift unfold first? Is this in that from a geographic perspective, is this more happening on the coasts and then starting to filter through to the middle of the country or are you seeing that from a broad-based perspective and I guess what types of areas within your full assortment are you impacting the most now?

I really don’t want to get into the geographic where it’s located. We are not going to say we are really seeing an impact within our power doors and again having a significant increase in our average unit retail there is one indication, but it’s really across the non-athletic women’s categories is where we are seeing strong results and we are more excited about that, because frankly that’s not the result we have seen in the last 3 years and again we are going to chase after that. And by the way, margins turn to be a little bit better on the non-athletics, we like that as well.

Right, perfect. And then I think your services initiative is a very interesting, I know it’s very early days and I think you've only got them testing in your lab store, but from what you can tell now, from what you like to share, can you talk about how you view any sort of incremental margins that you might see in the services fulfilled store and as we think about the longer term potential of incorporating new services into your base, I am assuming that you can’t do everything to every store. So, is there a thought around as to how many of these services can really expand to the base and what kind of timeframe you would like to do this?

Well, it’s a great question. So, I want to start first with how we landed here and Camilo I have really started with the voice of our customers. So, we went out to our rewards member base and said what are the additional services you would be looking for from a brand like DSW and that’s where we landed on rental repairs, storage, orthotics and actually Sunday evening we attended an event at our last store, where we opened or I should say getting ready to open our W Nail Bar. So, we will have mani and pedi stations setup there that, that we will be opening here in the next week or so. And that is an exciting opportunity for us to see how does our consumer react and when you merge that into our rewards program so that your footwear purchases earns you essentially discounts or rewards points toward other services we think that has an incredible upside to us. And I think if you are familiar with that industry, it operates at different margin rates in a very favorable way to what you do in footwear is what I would share with you. On the others, I think it’s too early to highlight exactly what the financials look like. Right now, we are trying to operationally figure out how we can execute it and we have started with our associate base first and then in early December, we will actually take it more to the public facing consumer rather than just internally, but that we think all of those services can provide a different reason for you to shop DSW the brand than you historically thought of DSW.

Fantastic. Good luck with that and happy Thanksgiving.

Thank you.

Thank you.

Thank you. And the next question comes from Sam Poser with Susquehanna.

Good morning. Thank you for taking my questions. I guess my first question is about Ebuys just I guess, beat this one a little bit more. I mean, you talk about your core business being really good -- starting to improve here. At what point, do you decide it may have been a mistake, it isn’t a core competency kind of thing you want to move on or in bigger picture is everything on the table right now in the decision-making big picture?

Yes, Sam I will say I think we went into this with a thought process that we could grow it aggressively and when I say aggressively in the 30%, 40%, 50% kind of range that was in our head, because bringing to bear the DSW product mix in those marketplaces again end of life product mix that we think that, that could really drive the business. And we have seen that, that works, that the product that we carry within our brands that at the end of lifecycle we can liquidate those goods and make more profit for DSW Inc., and that’s where I would say you are going to see more of our focus as we move forward.

Okay, thank you. And then you talked about how the boot this October time period and how the boot business doesn't really match your back-to-school or holiday business. Can you talk to me about like when you look at the planning of it, is this just that the consumers switching to more buy now wear now, so basically you don’t need to bring your boots in until it’s a mid-October and you need to have more sneakers earlier than that or more sandals earlier than that. And then when you think about sandals with the exception of stores in the south, you really don’t need to get into that business until late March and rather than trying to convert in February?

Yes, Sam, I think its great question. I think as we headed into the fall season, we actually had boots planned significantly down throughout August and even early September. And I think frankly I think that was a bit of a mistake. I think we were too deep in the edits that we have made, but there is opportunity to sell in those windows, but it is what you just described, how do you hit we call it smile line for the sandal area and the front line for the boots, how do you get those earlier into the season without taking it to full chain and that’s work that’s our planning and allocation team is doing. So, I think yes there is a more buy now, wear now, but I think it’s our responsibility as retailer to make it certain we are getting that out there in the right markets and putting in front of the consumer and using digital to help drive some demand there.

Thank you. And then lastly, your inventory on a forward basis is quite clean, but can you give us some idea of how that breaks out as you look to your accessory business has been challenged and you are doing a lot of these other new things, be it with a new testing due to the lab stores and the new services. Is this a situation where you just need to optimize your footwear business across categories and have accessories the exception and then improve the experience within again core competency footwear?

I think you – no, you just answered your question, yes, that’s exactly the conversation that we have been having. Sam, we have talked about this, but I use the words focus and tempo a lot. We have got our merchants very, very focused on the footwear and the accessory thing we will get that righted, but right now it’s about continuing the momentum we have within footwear.

So, I guess the question is righted mean that your accessory business is half the size of what it is today and your footwear business eats up some of that real estate as well as services and so on?

Yes, I think…

What is right, it mean I guess?

I don’t – I don’t see this being half, but I do think we are doing some work to say how do we reduce the choice count we had in some of the accessory handbag area in particular. And how do we create space and remember we only utilized about 20% of the cubic capacity of our warehouses. And that’s why we are so excited about the lab store. That location now has over 60,000 units embedded in one warehouse and it’s also got embedded in their services and it’s loaded with kids. And I still see just being there Sunday evening there is still opportunities, When we look, we didn’t have enough kids product in there. So yes, we are trying to find what’s the right balance between accessory handbags versus our core competency, which is footwear.

Can you give us some idea of where those 4 stores are going to be in the spring?

We haven’t announced that yet Sam, but you will be the first person I’ll tell.

Thank you so much. Have a very happy Thanks giving.

Thank you.

Thank you. And as that was last question, I would like to return the call to management for any closing comments.

Just I know we have lot of associates on the call. Thank you for everything you have done in third quarter and it’s going to be a great week this week and everyone have a happy Thanks giving.

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