Designer Brands Inc. (DBI) Q2 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Designer Brands Inc. Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Ms. Malkin, please go ahead.

Good morning. Earlier today, the company issued a press release comparing results of operations for the three months ended August 3, 2019 to the three months ended August 4, 2018. Please note that remarks made about the future expectations, plans and prospects of the company constitute forward-looking statements. Results may differ materially due to various factors listed in today’s press release and the company’s public filings with the SEC. The company assumes no obligation to update any forward-looking statements. Joining us today are Roger Rawlins, Chief Executive Officer; and Jared Poff, Chief Financial Officer. Now, let me turn the call over to Roger.

Good morning. I’m proud to share an update on our second quarter performance across all of Designer Brands and the progress we are making towards the vision we outlined at our Investor Day. As I hope you recall, we shared that our vision was to take control of our own destiny by building a platform to drive growth and consolidation. I’m here to report that we’re doing just that. During the quarter, we delivered on our sales expectations reporting a slight comp sales decline of minus 0.6%. And while our comp sales decline is not healthy long term, I’m happy we came in as projected. Our comp represented an acceleration in our two-year comp sales stack to 9% in Q2 from 5% in Q1. As many of you are aware, DSW strongly benefitted from the re-launch of its VIP rewards program last year. Our ability to digest this event and still deliver two-year comps well above the industry average demonstrates the power of our model. A relentless focus on our best at and win at merchandize categories in both the U.S. and Canada delivered these results. And speaking of Canada, our ability to leverage the expertise, decades of experience and robust infrastructure already in place at DSW in the U.S. allowed our Canadian operations to leapfrog to the front of the pack in Canada paint a picture perfect M&A integration story. We are all well in our way in implementing the strategy we outlined at Investor Day. We will continue to move down this path to achieve our goal of becoming the dominant footwear retailer in North America by growing market share, adding scale through our negotiating leverage and providing even more customers with whom to engage with the brands we produce. I’m also proud of the work we are doing at our Camuto team. We’re starting to see traction with Camuto’s existing customers as well as growing relationships with new customers. Any hesitancy about Camuto’s ability to protect the business with legacy retail partners has proven to be unfounded and we are now being judged by our partners on the product the team is producing. We’re also making progress toward our vision of developing capabilities to design, source and market differentiated products. Our integration of the Camuto Group into Designer Brands is running ahead of our original timeline and during the quarter I was able to view production samples of our entire private label assortment. All I can say is wow, this Group executed exactly as their legacy said they would and the product is incredible. There truly is no product category that we produce where our brand should not eventually be the number one or number two selling brand at DSW and The Shoe Company. We are arranging for a product demonstration in our New York City showrooms to let you see and feel the elevated difference because when you see it, you will be as excited as we are, so stay tuned for details. This infrastructure gives us the ability to participate in market shared across multiple channels instead of just a single shoe store channel in which DSW competes. With a disciplined and strategic lens Designer Brands has been able to bring to the Camuto organization, we’ve been able to harness the expertise and decades of experience that reside in Camuto. This has allowed them to operate with a renewed focus to get the organization moving in a thoughtful, pragmatic direction. Camuto recently conducted an organizational restructuring to support this focus, freeing up dollars to strengthen the design and sourcing organizations. We’re excited to have these changes in place and look forward to seeing growth from our Camuto Group. Having the full spectrum of expertise and infrastructure from design and sourcing to transportation and logistics to store operations and direct-to-consumer capability provides us with more flexibility and greater control across many fronts, including costing transparency, negotiating with vendors and mitigating external factors such as tariffs and changing consumer buying trends, we are just starting to recognize the power of this truly unique model with much more to come. With that, let me turn the call over to Jared to provide some specifics about the quarter. Jared?

Thank you, Roger. Net income for the second quarter of 2019 was $27.4 million or $0.37 per diluted share which included net after tax charges of $8.3 million or $0.11 per diluted share primarily related to the integration and restructuring expenses associated with the acquired businesses. Excluding these charges, adjusted EPS was $0.48 per diluted share. Net loss for the second quarter of 2018 was $38.4 million or $0.48 per diluted share which included net after tax charges of $89.3 million or $1.11 per diluted share, primarily related to the acquisition of the Canadian retail business. Excluding these charges, adjusted EPS last year was $0.63 per diluted share. The financial results that we will reference during the remainder of today’s call exclude certain adjustments recorded under GAAP. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. Operating income for Designer Brands came in $20.1 million below last year in line with the expectations discussed last quarter. As you may recall, we were facing the sales boom last year of the VIP rewards re-launch as well as the associated benefit of just under $10 million of rewards reserve last year. Additionally, we are including Camuto this year which generated a loss in the quarter as expected. At the U.S. retail segment, comp sales declined by 1.5% versus last year’s comp growth of 9.6% delivering a two-year comp of 8.1%. I will reiterate a point Roger already made that our two-year comp actually accelerated from Q1 to Q2 and allowed us to still post one of the most respectable two-year comp stacks in retail. Under the covers, we continued to see traction in our distortion to seasonal and key items with boots comping in the double digits and sandals comping in the low single digits. Kids grew by 32% even as the entire chain comped kids was in the quarter. Athletic comped in the low single digits. Women’s in total had flat rate price comps but high single digit comp declines in clearance on much reduced clearance inventory, thus delivering a low single digit comp decline. Men’s continued to struggle with a low double digit comp decline and accessories hit a bump delivering a mid single digit comp decline. As mentioned last quarter, we have new merchant leadership at the Hellmann Mens [ph] and look for that business to begin to recover in late fall and into spring 2020. Digital demand grew 22% and continued to demonstrate the strong engagement we have with our customers across all channels. As we look at engagement, we continue to grow our VIP rewards program with 1.7 new additions to the file. Additionally, we re-launched the VIP rewards program to our Canadian DSW stores this quarter. Our new additions in Canada were 225,000 members across all programs. Growing these files is critically important as it represents new customers loyal to our retail brands and allows us to engage with our customers in a more intimate and meaningful way. Our Canadian retail segment continued to shine brightly generating an 8.1 comp sales growth on top of a 7.1% growth last year. This was fueled by much improved AURs as the inventory disciplines we installed upon the acquisition drove significantly improved regular price sales on fresh inventory. Additionally, during late Q1, Canada re-launched their digital site and operations leveraging DSW’s expertise and technology infrastructure. As a result, they saw digital demand increase by 84% versus LY but still representing a much lower penetration than we see here in our U.S. business. As such, we know there is much more upside for this channel up in Canada. For Camuto, I’m going to give you information that will help you assess the business in general but you need to remember we did not own Camuto during the second quarter of LY. So any reference to LY is for informational purposes only. At Camuto, $95.4 million sales for the quarter were higher than last year and we continued to see progress integrating Camuto produced products into our own retail distribution networks from both their existing national brands to the DSW exclusive brand products that is now wrapping up production. Wholesale sales were up to LY in the low single digits including sales to our own retail segments which totaled approximately $15.5 million. This is the first time since the acquisition where we saw year-over-year growth in this channel. First cost revenues were also up to LY and vincecamuto.com continued to gain steam leveraging the digital retailing expertise from DSW delivering nearly 100% increase in sales. And while expected, Camuto turned in a loss for the quarter. That loss shrank versus Q1 and versus LY. Finally, ABG delivered another solid quarter generating 1.6% comp sales increase. We are working to bring to life new features and functionality to our relationship with our largest partner, including testing kids shoes in tandem with their own kids apparel rollout, new footwear placements within their boxes and technical functionality like drop ship and ship from store capabilities which have proved to be highly successful at DSW. We are working to give as much support to our largest current partner as possible as they look to reposition that business while we also continue serious dialogue with potential new lease business partners about exciting very innovative tests and relationships. Our U.S. retail gross profit rate for the quarter delevered by 250 basis points. As expected, half of this decline was the result of lapping the rewards reserve release we experienced last year when we re-launched the VIP rewards program. Of the other half, about a third was expense deleverage and occupancy and warehousing generated from the negative comp and two-thirds was related to increased shipping costs as a result of our continued success leveraging our best-in-class omni-channel infrastructure. We called out at Investor Day that our acquisition diligence revealed that DSW had been paying more for goods than many other retailers and that we were going to use this information along with our newly acquired skills and infrastructure to help bring down cost. This helped IMU improve nicely during the quarter which allowed us to bring more value to our customers. These capabilities and access to true costing gives us more flexibility in navigating around issues that may arise such as tariffs and the ever-changing consumer buying trends. Sales of exclusive brands still produced primarily by a third party grew by 30% for the quarter and represented approximately 12% of sales. As mentioned previously, we are very excited about the new lines our Camuto organization has designed and produced to take over DSW’s exclusive brand business starting in 2020 and I can’t wait to show it to you. At our Canadian retail segment, gross margin improved by 960 basis points continued to be driven by the experienced inventory management disciplines installed thereupon the acquisition last year. This inventory discipline covered with increased demand from a new digital platform in VIP rewards re-launch drove a substantial increase in rate price sales to LY while clearance sales were down meaningfully. And at Camuto, gross profit came in at 20.2% which is slightly below Q1 due to proportionally more low-margin sales to liquidate end of summer product. This reduction was in line with our expectations. As we wrap up our discussion of the sales and margin of what is now Designer Brands, I want to take a moment to walk you through a demonstration of the power of the model we have built. We have a retail network that drives hundreds of millions of visitors to our physical warehouses and digital platforms where shoppers can find one of the largest, most compelling assortments in footwear and accessories anywhere in North America. Additionally, we leveraged the physical plant in these warehouses to optimize digital demand fulfillment and engage with customers in ways, including our test of high-end nail services, a full complement of shoe repair services and custom-made orthotics. We also now operate one of the premier design and production organizations in footwear producing internationally recognized brand name footwear and handbags as well as customized private brands. But unlike any other model out there, we have tremendous synergies between these two business segments. The products we design and produce are squarely in the wheelhouse of our current and target customers of our retail networks. This allows us to highly leverage the segments off of each other. You are seeing that now even in this early stage. Just in the second quarter alone, we saw a large amount of close-out inventory that would have normally gone to and was planned to go to and historically had gone to third party discounters instead get diverted to DSW. This product will drive great excitement in our retail channel while it will also generate tremendously higher net cash returns to Camuto versus liquidating it externally. It is a large reason we had higher than originally anticipated intercompany eliminations coming out of the second quarter. Our consolidated numbers have been net out over $16 million in sales and $2 million in pre-tax income related to transactions such as this and other business transactions between DSW and Camuto. But once DSW sells this product to the end customer, Designer Brands as a whole will benefit much greater had we liquidated the product externally. Additionally, you are seeing the power of the model as we open up the Camuto brands onto dsw.com as a full price drop shipper, exposing the brands to many more potential customers than before or than they could drive on their own without the incremental marketing costs generally associated with driving that level of traffic. Finally, we’re taking a best-in-class design and sourcing engine at Camuto and creating exclusive brands for our retail segments that have product that is unlike anything our shoppers have seen to date and on par with any national brand. In fact, had the exclusive brand product that we’ve sold thus far in 2019 than produced by Camuto instead of the third party we currently use, we would have generated an additional $0.12 to $0.15 in EPS just over these last two quarters, and that’s assuming we didn’t sell any more private label product than we actually did and I firmly believe we would have because the product is that strong. This shift to Camuto is on schedule and will be installed for spring of 2020. And as we laid out at Investor Day, we are aggressively growing exclusive brand penetration over the next few years to roughly reach 25% to 30%. This is the power of the model and we are seeing it happen already exactly as planned. Turning to Designer Brands total operating expenses with Canada now in our LY numbers, aggregate SG&A for all of the businesses, excluding Camuto, shrank by 2.9% and delivered the same rate as a percentage of sales as they delivered last year. Camuto added $35.4 million to Designer Brands consolidated P&L which was about 12% lower than their operating expenses last year on higher sales. We are working diligently to bring the right cost discipline for that business while also funding critical areas needed for growth. Turning to the balance sheet, we ended the quarter with $77.3 million in cash and investments and $235 million drawn on our revolver compared to $289.1 million in cash and investments and no borrowings on the revolver last year. The primary driver of the change was the acquisition activity last year and $172.5 million of share repurchases including $50 million during the second quarter of 2019 acquiring 2.7 million shares. Inventory for square foot across all of our retail segments ended flat to LY. Remember, as of Q2 this now includes our Canadian retail segment. We saw some inventory investments in our GWP merchandize as we pivot marketing resources towards GWPs in a way from other less productive items and we also saw investment in kids product ahead of back to school. New to Q2 this year was inventory at Camuto which totaled $110.7 million. During the quarter we opened no DSW stores in the U.S. and closed two ending the quarter with 518. We expect to open four to six additional stores and close up to two stores during the balance of the year. In Canada, we opened no Shoe Company stores and closed one store ending the quarter with 112 Shoe Company stores and 27 DSW stores. For the balance of the year, we expect to open an additional six to eight Shoe Company stores and close one additional Shoe Company store. Our tax rate was 26.5% versus 27.1% last year and total weighted average diluted shares outstanding during the quarter were 74 million compared to 81 million last year. Let me wrap up my comments looking at the back half of the year. We are reaffirming our guidance which includes EPS guidance of $1.87 to $1.97 per share for the full year. While we were able to repurchase 2.7 million shares during the quarter, we are holding our EPS guidance for a couple of reasons. First, we are trying to keep the model as clean and simple for you as possible and one area where I feel your models have not fully evolved with our business is in the area of intercompany eliminations. As I’ve said many times in the past when our retail segments purchase products or services from our Camuto segment, those sales show up as sales and margin or first-cost commissions generated by the Camuto segment just as if they had produced and sold those goods and services to a third party. But since we are consolidated companies, we must eliminate those sales, margins and commissions. Then, when the inventory is ultimately sold to the end consumer, the sales show up as sales for that respective retail segment and the Camuto generated margin that was previously eliminated finally gets recognized in our consolidated P&L. When we initially planned the year, we expected FY '19 to see approximately $0.03 of total EPS get eliminated out. As the integration has taken hold ahead of schedule and we have found additional ways for Camuto products to find their way into our retail segments, we are now expecting closer to $0.07 to $0.10 of total EPS being eliminated in FY '19 which will be recognized in the future. This is very, very good news for Designer Brands long term as we retain both the wholesale margin and the retail margin in house. Thus, by not rolling the impact of the share repurchase into our EPS guidance we are able to strip out all of the elimination’s noise and still guide for a full year EPS of $1.87 to $1.97 even while digesting a much higher elimination’s impact than previously projected. We figured this would be easier than guidance without the impact of eliminations and asking you to do the math on your own. I actually have asked our accounting team to put together a simple illustration of how this works and I’m happy to share that with any of you who want to see it. Just let me know in our one-on-one discussions. Next, with all the swirl regarding tariffs and the potential impact it may have on producers, retailers and consumers, we did not want to be aggressive in our guidance and ignore what is a very large uncertainty. However, we feel we have many avenues to help Designer Brands mitigate the impacts of tariffs. First, we are negotiating hard with our factory partners. With the weakening yuan versus the USD and the euro, our factory partners have been able to recognize an immediate 4% to 6% benefit that we expect to translate into tariff litigation. Additionally, as Camuto’s business gets back into growth mode, the number of units we produce is expected to increase by 70% to 100% over the next few years. Thus, our ability to find scale savings with our top factories across the 11 countries in which we produce today as well as new factory partners is something we expect and which could be significant. At our retail segments, powered by the scale of DSW, we are pushing back hard on the vendor community against any proposed price increases. We are one of the largest accounts in nearly all of our vendors and we are certainly one of if not the largest account generating growth for our vendors. As such, we intend to hold firm on pricing and find ways to utilize our own brands to help mitigate the tariff impact. Therefore, we believe we have the ability to mitigate much of the impact of the currently imposed tariffs especially for the remainder of 2019. Longer term, our growing scale with our factories, our current and growing scale in our retail segments and our ability to flex our assortment between vendors and exploit our own brands gives us tremendously more flexibility in maneuvering around the tariff landscape than many of our peers. The last point I’d like to leave you with on guidance pertains simply to the calendarization of fall. While Q3 represents the strongest pure op income dollar contribution across all of our businesses, it does not represent the strongest year-over-year op income growth which currently is planned to be Q4. This is for a couple of reasons. One, while we expect Camuto to turn positive in Q3 as they deliver their strongest sales of the year, their overall contribution towards operating income is still relatively modest while in Q4 their flattish contribution is materially better than the $14 million negative contribution they delivered last year. And two, at DSW, we are expecting accelerating comps through the fall with the most challenging compares coming in the first couple of months of the season as we continue to lap elevated digital marketing, some VIP re-launch hangover and unseasonably cool weather in the early fall last year fueling a very strong early boot season. Thus, DSW’s contribution to operating income growth versus last year will be relatively muted in Q3 with much stronger contributions towards growth in Q4. Again, we are not looking to get into the habit of quarterly guidance but as we layer in on new businesses with little to no historical context, I want to make sure you have enough data to help properly assess the overall Designer Brands model and expectations. With that, let me turn the call back over to Roger.

Thank you, Jared. I’m proud of the work our teams have done to drive sales in a very challenging and ever changing environment, but guess what? Welcome to serving today’s customer. The success we have had integrating our latest and largest acquisitions, generating tremendous growth and setting Designer Brands up for long-term success demonstrates the type of talent we have developed and acquired. The challenge all of us faced to provide amazing products and experiences for our customers will continue to evolve every day. The fact that we have proven to be an innovative business that can manage to operate its core business DSW while entering new markets and acquiring new businesses gives me the confidence we can address whatever challenges we face. We shared our plan with our Board a few years ago and I’m happy to say it was the right plan and we will continue to focus our efforts on executing to the goals we outlined for all of you at Investor Day. While there is so much noise out there about things that are not in our control, I’m excited that we have been able to build a model that gives us tremendous advantages and flexibility. We now have greater control of our own destiny helping us navigate our way through these external factors better than nearly any other model competing in our space. I’m excited for our future and I look forward to continuing to share our progress. Thank you. I will now turn the call over to our operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question today comes from Tom Nikic with Wells Fargo. Please go ahead.

Hi. Good morning. Thanks for taking my question and thanks very much for all the color. It’s very helpful. Just a quick one for Jared. You talked about accelerating comps in Q3 and Q4. I think at the start of this year, you were targeting something like a low single digit comp for the full year. Is that sort of how we should still think about the full year shaping up?

Absolutely, Tom. We’re reaffirming our guidance and sticking with that as well as EPS.

Got it, okay. And then just a higher level question, maybe Roger you can help us out here. Just overall health of the consumer I know this earnings season in general has been somewhat volatile for retail and you’ve seen sort of a wide range of results from companies out there. Can you just give us a sense of what you’re seeing from the consumer in general, like what the outlook is there because it does seem from our seat that maybe the consumer isn’t feeling as great as they were 12 months ago or something like that? So any insight you could give would me tremendously helpful? Thanks.

Thanks, Tom. As I look at our businesses that we’re operating within the DSW banner, we delivered as we had expected. And as we had mentioned and as you guys are aware, last year we had a phenomenal year and we were lapping that and we told you we thought our two-year comp in Q2 would mirror Q1. Well, we beat that. So that was good news. The other thing that the way I look at it in our business, it’s about a rewards program. We signed up – I think we had like a 4% increase in sign ups in our loyalty program. So I think there’s real help there on that side. I think also on the Camuto side, on the wholesale front, we grew our wholesale sales in second quarter and many people and actually maybe one or two on this call doubted our ability to do that and I’m proud of our team. So I think – yes, there is always going to be I think the concern of how the consumer is responding to this stuff, but I think what we’re seeing as it relates to our business is very positive.

All right. Thanks for the color and best of luck in the back half.

Thanks, Tom.

Thank you.

The next question comes from Rick Patel with Needham & Company. Please go ahead.

Good morning, guys, and congrats on the progress.

Thank you.

Thanks, Rick.

A question on Camuto. So can you put into context how much of your private label assortment will be made by Camuto this fall and what the ramp up will look like as we look out to spring 2020? And can you also touch on the feedback you might be hearing from department stores and other wholesale partners on the new assortment that you plan to be rolling out?

Thanks, Rick, for the question. As we are looking to grow private brand I think the opportunity, and I’m going to speak just to the DSW brand first, we’re right around 12% penetration. That was about 9% last year, so we grew by about 30%. We’re looking to grow that about 30% a year. So just think of a 30% CAGR over the next three years. At the ultimate rate, it’s probably in the high 20s, low 30% rate as a percent of each of those departments taking athletic out of the equation. So in general that’s the direction we’re headed. I think the good news is as we progress throughout this season, the new product that we are getting and we’ve just got some of those goods showing up on the floor that are being manufactured by Camuto, we’ve got some good results coming out of the gate. I think the other good news is when you look at our private brand for the second quarter, our margin rate – this is margin rate and we are a footwear retailer, Rick, so I think you’ll get this was 59.9% on private brand. That’s up 180 basis points roughly to where we were last year. So that’s the kind of momentum and the expectation we have set go-forward in the business. Again, we’re going to offer you guys the opportunity to come take a look at the assortment. And then on the wholesale front, we can’t get into the details but I would tell you I feel really good about the fact that I think at Camuto we were able to eliminate a lot of distractions. I think as we had shared, they were in some challenging situations with the factories as well as with our vendor partners or retail partners. And I think by us being able to come in and eliminate some of that noise, meaning we could pay people on time and we’ve been able to win back some open to buy which is a very healthy thing for us. So again, just to reinforce what I said with the first question, we feel really good about where our business is positioned.

And the only thing I would add, Rick, specifically to your question is starting in 2020, the vast majority will be produced by Camuto. There will still be a few brands where we’re using a third party but our big, big core private brand, that is what Roger was talking about earlier as far as the review that we’re looking at and we’re going to bring you in to see and that is what hits the floor for spring of 2020.

That’s right.

Great. And nice to see the momentum in Canada. How confident are you about the sustainability of positive trends? I’m curious how much of it has to do with drivers specific to 2Q versus those that you expect to have a longer tail?

It’s a great question, Rick. I’m really proud of Mary and the team, so we’ll talk about a two-year comp there. We’re in a 15% two-year comp in Canada and frankly we as Designer Brands have been engaged in that now really for close to two years. So I think what the team has done there is amazing. The key callouts, the core competencies that we have had at DSW for 25 years taking those inventory disciplines and implementing those up in Canada, making certain that we get after the digital experience in a meaningful way. So within the quarter we put dsw.ca on the same platform we operate here in the United States. And as Jared had mentioned on the script, we had an 84% comp in the quarter. We’ve also implemented our rewards program for DSW up in the market which we added a significant number of reward sign ups up in Canada. So I think all of the things that we had learned here in the U.S. we are taking those up to Canada and applying them. And on an operating income standpoint, we made roughly $5.5 million op income and last year we made about $300,000 of operating income. So that’s a nice lift on what is today a small portion of our business, but we anticipate to be much bigger. And then the other big thing about Canada that we keep talking about is we are learning how to operate a small door concept. Remember, those Shoe Company locations are 3,000 to 6,000 square feet. That is a tool that we want to have in our toolkit as we think about growth potential in North America. So as we’re having the success, it’s allowing us to see how does a small market concept work in concert with the much larger concept of DSW. So great learnings that we’re getting from this acquisition.

Thank you and all the best in the back half.

Thanks, Rick.

Thank you.

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

Good morning, everyone. Thank you for taking my questions and thanks for all the color on all the moving pieces here in the integration. I guess the first question I have is first just on Camuto, when you talk about the organizational restructuring, changes in design, sourcing operations, it seems like profitability came a little bit better than what you expected in the second quarter. How do we step back and think about Camuto profitability for this year? I think previously you were expecting losses as a stand-alone entity, call it $10 million range if I remember correctly. Just where does that stand now? And then secondarily when you think about comp, you referenced for the season for DSW, you would expect it to be accelerating towards the backend by little more of a headwind in the beginning of the season. Are you still expecting positive comp for the third quarter for the DSW?

Yes, Chris, I will take those. First with Camuto, you are correct. We certainly had projected a loss for the year and that was indicated to be around $10 million operating loss. I would say that’s still probably a good number. Maybe there’s some optimism there. Maybe it will come in a little bit better than that. We have made some very important changes there. And we mentioned on the call we were able to redeploy a lot of those dollars from the reorg into beefing up design and sourcing and able to support the large increase that we are putting on that organization to take on our private label product. But overall, we’re very, very happy with the traction we’re seeing there across the entire business; the wholesale, the first cost, the sourcing. So I have a little bit of optimism, feeling a little better than we did even at the beginning of the year. We do expect Q3 for that to be a positive quarter for them, so we’re excited to see that and that’s always been the case. And then as I mentioned in my script, Q4 from an operating income growth contribution that is going to be by far the biggest because we recognize the $14 million loss last year and we’re expecting that to be closer to flattish. So that’s with Camuto. On the DSW front, we are looking at the fall and seeing a harder beginning and we’re leaving a little bit towards the end of the fall from a comp standpoint. I would say we don’t want to get into quarterly guidance on that comp front. That’s not something with a nice old company like DSW, it’s not one that you don’t have a lot of historical context on. But overall, we’re still very comfortable with the low single digits for the year.

Okay. And just one follow up just on the share count. What’s the share count we should be using for the total company? I think previously it was 77 million --

Yes, let me – I’m seeing if I’ve got that sheet really available for me. I’ll get you that in a one-on-one, Chris.

Okay.

We gave you the amount that we bought back, but the math for the full year I just don’t have right in front of me. I’ll grab that for you.

Thank you. I appreciate it. All the best, guys.

Thank you.

Thanks.

The next question comes from Steve Marotta with C.L. King & Associates. Please go ahead.

Good morning, Roger and Jared. You commented on the last call that Camuto had been accelerating some private label receipts for the DSW stores for delivery in the fourth quarter. Can you update us a little bit on that? And a larger question is the gross margin opportunities for both merchandize margin and buying at occupancy leverage in the second half, can you talk directionally about both of those? Thanks.

Yes. On the piece on the Camuto private label, we are still seeing that. Again, it was really just for replenishment orders, so it was really none of their design stuff because given the lead times in that product, we’re not going to see that until spring. But it is going to be there day one of spring. So we feel very good about that. But we are still able to leverage the Camuto infrastructure for some replenishment items with some of our fast-turning private label stuff that’s currently being produced by a third party. It’s not huge numbers but it’s more a really good indicator of what we’re expecting to see.

Steve, I think the thing I’m excited most about is there were some styles that the Camuto organization were able to, as Simon and team calls it, crash into our assortment. So as their out seeing what’s happening in the market, we’ve had a couple of those items that are not just replenishment styles but items that we’re getting after in a very short period of time and there’s a lot of people that talk a lot about how slow the footwear industry is and some of these items we’re talking six to eight-week turnarounds that we see something, the team is crashing it and they’re getting it in our stores so that we can get leads to help inform decisions, whether it be for spring of next year or for items we should get after in a bigger way this fall. So I’d say it’s a muscle we’re learning how to use is how I would describe it, but out of the gate I’m really, really happy with how both sides of the team are working, whether that be the DSW merchant team working with Camuto on that and then Camuto’s ability to turn product really, really quickly which is fantastic.

Steve on your second question, when we look at gross profit for the fall, I’m seeing probably a little bit of leverage from a rate standpoint for DBI in total, I would say flattish to slight leverage across the fall. We will see a little bit of a challenge from a leverage – fixed cost leverage standpoint in occupancy just given that Q3 is going to be our most challenging comp quarter. But overall, for the fall, we’re still seeing flat to slightly better gross margin rates.

That’s very helpful. Thank you very much.

The next question comes from Dylan Carden with William Blair. Please go ahead.

Hi. Thank you. Just curious, I appreciate there is some noise in the model just given the lapping of the VIP refresh and incremental kids product. Is there anything you can share from a metric standpoint on what you’re seeing from sort of the growth and conversion or behavior of the VIP program, kids product? I appreciate 32% probably isn’t a comp number. And then kind of getting to some of the services that you’ve layered into the model, any sort of incremental benefit you’re seeing from that?

Dylan, thanks. That’s a great question. As we shared with you this has been three, four years ago the reason why we got into kids; one, it’s to grow kids but it’s also to engage with the parent. So the kids side of our business we were really excited about as Jared had mentioned it was over a 30% comp. But I think more importantly it’s about retaining our adult customers. So the fact that we grew our file for our rewards program when it’s already over 90% of our sales I think is a very, very positive sign and we’re really excited about it. I think what we have learned from our Canadian business is that we’ve got lots of headroom on kids here in the United States, because we see the kind of volume that can be done during these peak back-to-school periods and we’ve learned as we’ve gone here in the U.S. but we think there is significant upside to continue to get after that. And we’re working in different situations where we’re moving it to the front of the store. We’re testing different ways in which we can communicate it this fall. There will be some new kids items we’re going to have in our assortment. There’s just some really cool things I think we can do with that category. And then as it relates to the services, again, we continue to be very excited about the progress we’ve made with our W Nail Bar partner in particular and just directionally just think of it in a box doing $1 million of nail services in roughly 1,200 square feet and without cannibalizing your footwear business. So we’re happy with what we’ve seen so far. This fall, we are opening up the DC market with several locations and we’re opening up Austin, Texas. And as I shared earlier, our process that we have been following for the last three years as we do tests, we pilot and then we roll. So we have tested and it has worked in Columbus, Ohio. However, I’m in Columbus, Jared’s in Columbus, Bill Jordan who runs DSW is in Columbus and we go to those locations on a regular basis. And by the way, our W Nail Bar partners are based in Columbus. So our pilot is to take it to other markets to see how we as a team can work to make it happen in those other markets. So that’s really what’s going to happen over the next six months or so. And then based on the success we have there, we have a game plan to roll it in a much larger way. But test, pilot, roll is the approach we have been taking on everything we’ve been doing whether it was the rewards program, expanding other things in digital space or the services.

And I would add to that, Dylan. All four of the tranches – so we rolled out kids in four different ways if you recall. All four of them are comping in at least double digits. And some of those have three, four or five handles on them. So we’re really happy with the performance we’re seeing across kids and think that there’s so much more there to go.

Great. And then lastly just on -- $0.12 to $0.15 of incremental upside to EPS assuming that Camuto had produced all the private label that you’re selling in the first half, is there any sort of metrics or sort of what you – can you share the math behind that? Is that simply just product margin of 1,000 or so basis points ahead of your typical product? And then I guess is it simple enough at 12% to 30%, can you just double that number to kind of think about the incremental EPS upside?

Yes. If you kind of looked at our – if you look at our Investor Day presentation, we had said that when we have our regular private label product that we had said before when it was produced by a third party, that’s was roughly 1,000 basis points better than balance of assortment. When it’s a Camuto produced product, we said it was a total of 15 to 20 full percentage points of better margin. So this is just basically taking the amount of private label sales that we’ve had over the last two quarters, the last six months and applying that additional 5% to 10% across that is where that came from. By all means you should be able to double that and say, hey, there’s my year. But to Roger’s point, we are growing this so far this year 30% every single quarter. That’s not planned to slow down and we’re looking to do that over the next few years eventually getting to that $725 million from Camuto produced brands number that we showed you at Investor Day. So that’s kind of how the math works. I just want to give you a concrete tangible example of what’s happening even this year and how that would play out had it been Camuto.

Dylan, just think of it as the profitability that third parties that have provided this footwear for us in the past. We now at Designer Brands, since we own Camuto, we will get to extract that profit. That’s a big chunk of it. That’s the equation.

Awesome. Thank you very much, guys.

Thanks, Dylan.

The next question comes from Sam Poser with Susquehanna. Please go ahead.

Hi, guys. Thanks for taking my question. This is Will on for Sam. So I just wanted to dig in on tariffs a little bit more. So what percent of purchases are impacted by the tariffs? And what is the breakdown by percentage of items impacted by List 4A that goes into effect September 1 and List 4B December 15?

Thanks. I’m actually surprised that it took us this long to get this question, so I’ve got a bit of longwinded answer for you, so please bear with me here. But here’s what I would say about tariffs and the approach that we’re taking. So to me this isn’t a tariff conversion. This is really about us finding ways to diversify our portfolio. Because I think when you look at the level of product that DSW and Camuto over the many years that all of us have existed that was produced in China, that’s where everyone has relied. So I think what we’re really working on is how do we diversify our portfolio? And I’ll give you some examples. So in October when we became Designer Brands, about 10% of the footwear that we were engaged with was manufactured outside of China, 10%. Since October that percentage is now north of 20%. So we got after this immediately because we could see there was a need to diversify our portfolio. And as we head through the next 12 to 18 months, our expectation is that’s going to be closer to 40% of the footwear we make will be produced outside of China. I’ll give you an example in handbags. In October when we acquired or build our business – combined our businesses, about 30% of our handbags were manufactured outside of China. As we sit here today, that’s north of 60%, so great progress. And I think by the time we get to the end of 2020, that number should be closer to 90%. So I think there’s real progress that our team has made and I think the reality is we’ve got to build this kind of flexibility in our supply chain. And I think the best example of that is I had the opportunity to go to China several weeks ago and meet with some of our largest factories. And we’re sitting in the meeting, we’re having this conversation about how do we change out or create this flexibility within the model and a tweet comes out that says that China isn’t the challenge that actually Vietnam might be one of the bigger challenges. So we have to have flexibility regardless of whether it’s the global economy, whether it’s the political landscape, whatever it is, we’ve got a find a way to diversify our portfolio. So I think this tariff increase frankly was a bit of a way to help us accelerate something that we knew we had to do. So, again, I’m very proud of how the team has responded. But I want to share with you and we talked a little bit about this in Q1. One of the biggest benefits we have of acquiring Camuto was we now control our own destiny. And with these tariffs we are able to maneuver. And had we not had Camuto at play, I think that we would have had to rely on others to solve many of these problems for us. So I’m just going to revisit the things we talked about in Q1 and add a couple of things, the actions we’ve taken. But as Jared said today, we’ve moved production. We’re now in 11 different countries. I think that’s going to be closer to 14 here soon. That’s big. We’re leveraging the growth of Camuto, as Jared had said in the script. We’re going to go from 23 million pair to 41 million pair produced by Camuto and that gives us an ability to lock down production in factories that others are not out there talking about growing their business that way and also gives you the ability to improving pricing. As you know, with the scale comes price reduction, so that’s good. As Jared mentioned, we’re pushing back cost on our vendor partners. At Investor Day we shared this and several people questioned why we were thinking this way, but we now have visibility to what it cost to make a shoe. We never knew that kind of detail. And so we’re in a position now I think to pushback. And we – at DSW, we should allow our vendor partners to make a little bit more on us than perhaps they do on other retail accounts. But you know what? It should not be well above market. And frankly I think that’s been the case for too many years. So I think we’ve made great progress there with Jim and Debbie and the team and the work they’ve done. We’re going to continue to accelerate this private brand rollout which helps us mitigate in a meaningful way. And again, 59.9% gross margin on private brand goods versus 58 last year, a huge progress. We’re going to cut back on receipts. We’re going to play closer to need. And when I say cut back receipts, it’s a small portion. But just like we’ve demonstrated last year, we can chase this business. You can’t do a 10% comp like we did last year in Q2 and not have the ability to have partners that can help you get goods. So we’re going to continue to go after that. We’re going to pass on some portion to consumers. There are key items from major brands that as price goes up, we’re going to match that. We’re taking positions on raw materials. Again, we are uniquely positioned because of our balance sheet to do some things that we think others in our space cannot do. I also think there’s tremendous growth opportunities that we have in athletic where we significantly under penetrate and I think as everybody on this call knows athletic doesn’t penetrate as heavily to China as the balance of our assortment. So continuing to aggressively go after athletic, athleisure product. Also, we now have weapon called Shoe Company and DSW in Canada and at least as we sit here today there are no tariffs supplied there. So as Mary and I have talked about, we’ve got to grow even faster in Canada because that’s another revenue and bottom line stream for us. As we just talked about a bit ago, we’re growing these services. So getting the nail bars out there to help us grow top line and bottom line. And Jared had mentioned this a little bit in the script, but because we are now uniquely positioned to run your footwear department and make shoes for you, we are having more conversations than we’ve had in my history here at Designer Brands or even at before DSW of people wanting to talk to us about us operating their footwear department. When you think about footwear, we are in general one of the slowest turning departments and lowest margin departments. So as these kinds of pressures come about, it creates new conversations for us in our Affiliated Business Group, so I’m excited for that. And then finally the SG&A reductions, as Jared had mentioned, we took some actions there in Q2. At Camuto, we invested those dollars back in the company. But if things were to get significantly worse, we are prepared to make those kind of calls. But these are all the actions we are taking to diversify our portfolio and to mitigate the cost. And I’m really proud. I don’t think there are a lot of businesses out there that have built these abilities to take the actions that I just outlined. And disruption is going to continue in our industry. We have a plan and we are positioned to take advantage of that disruption as it occurs.

I appreciate all the color there. And I guess just switching gears a little bit, you guys hit on it a little bit but can you just give us some detail on how you guys are going to overcome the difficult comps in the second half? And what makes you feel comfortable that you’re going to be able to hit that low single digit comp number for the year?

I think the biggest opportunities we have are around our best at/win at category. So just as we did with the sandal and boot categories in the first half where we got after that in a bigger way, that same plan is out there for the back half of the year. And I have all the confidence in the world of our seasonal team and the progress they’re making again continued with athletic. And then kids, obviously that is truly incremental to our business. We’re not seeing that – moms not spending money with us because she’s buying her kids shoes with us. So those are what I would say within the DSW brand the big opportunities. As it relates to our other business, Canada continued upside, same thing with seasonal but also all of the digital upside. Again, the plus 84% comp in Q2 in digital we think there’s continued upside that we’re going to experience up in Canada as we move forward. So within the retail businesses we operate I would say those are the big drivers. And then also within Camuto, our direct-to-consumer business there for the Vince Camuto brand in particular, it was close to 100% comp in second quarter and we’ve got those kind of plans as we head throughout the back half of the year. So those were all the things I would say at a high level that we’re doing to drive top line.

Great. Thank you.

You’re welcome.

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

Thanks everybody for taking the time today. And for all of our associates, thank you for continuing to stay the course, stick to our plan and let’s have a great fall season. Have a great day, everybody.

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