Christina Cheng - Senior Director-Investor Relations Michael R. MacDonald - President, CEO & Inside Director Mary Meixelsperger - Senior Vice President & Chief Financial Officer Deborah L. Ferrée - Vice Chairman & Chief Merchandising Officer.

Kelly L. Halsor - The Buckingham Research Group, Inc. Jessica L. Schmidt - KeyBanc Capital Markets, Inc. Pallav Saini - Canaccord Genuity, Inc. Jeff Van Sinderen - B. Riley & Co. LLC Edward Felice Plank - Jefferies LLC David M. Mann - Johnson Rice & Co. LLC Chris Svezia - Susquehanna Financial Group LLLP Sam Poser - Sterne Agee CRT Steven L. Marotta - C.L.

King & Associates, Inc. Kelly Chen - Telsey Advisory Group LLC Patrick G. McKeever - MKM Partners LLC Taposh Bari - Goldman Sachs & Co..

Good morning and welcome to the DSW, Inc. Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Christina Cheng, Senior Director-Investor Relations.

Please go ahead..

Thank you. Good morning and welcome to DSW's second quarter conference call. Earlier today, we issued a press release detailing the results of operations for the 13-week period ended August 1, 2015. Please note that various remarks made about the future expectations, plans and prospects of the company constitute forward-looking statements.

Actual results may differ materially from those indicated by these forward-looking statements due to various factors including those listed in today's press release and our public filings with the SEC.

Joining us today are Mike MacDonald, President and CEO; Debbie Ferrée, Vice Chairman and Chief Merchandising Officer; and Mary Meixelsperger, Chief Financial Officer. Mike will start with an update of our strategic initiatives and review our second quarter performance. Mary will then discuss our second quarter results in greater detail.

After our prepared remarks, we will open the floor for Q&A. With that, I turn the call over to Mike..

stores and dotcom that operated differently, both internally and in terms of our face to the customer.

The DSW senior management team, with the help of two consulting firms, developed a multi-year strategy to morph our organization, our processes and our systems to enable us to operate seamlessly across channels so that we could meet the customer demand of any shoe, anywhere, anytime.

In 2014, we established a new interdisciplinary team of talented associates to translate that strategy into specific prioritized actions that would gradually elevate DSW to full customer-centric status.

We believe to compete most effectively, retailers must present one face to the customer in order to deliver a consistent experience regardless of how the customer is shopping. So early this year, we reorganized our company to put all customer touch points under one executive.

In a third organizational move, we consolidated the planning and buying functions for both stores and dotcom. This has given our merchant the ability to take a holistic view of the customer when it comes to planning, allocating and pricing products.

In conjunction with or as a result of these three organizational changes, we've developed and delivered several new customer-facing capabilities. Let me name a few of them.

We upgraded our website to improve site and CEO (sic) [SEO] search and navigation capabilities, we launched a mobile app, we launched PayPal on DSW.com, we implemented a labor management system that better matches store staffing to customer traffic patterns, we increased our marketing reach in both traditional and digital channels, we enhanced the value of our loyalty program, we made it easier for customers to take advantage of our generous free shipping offer, we extended our assortment through a new Drop Ship program through our key suppliers, we made virtually all of our assortment available online, we implemented a new assortment planning system, we beefed up our opportunistic buys and sharpened prices on several key items, we turned all of our 449 stores into mini-distribution centers capable of fulfilling demand that's originated elsewhere, we implemented a new algorithm that more intelligently routes digital orders for fulfillment based on weeks of supply and profitability, and we have initiated a 10-store test of technology-enabled self-service model that we call endless aisle.

All of these new capabilities either improve our ability to satisfy our customers or improve profitability or both, and they're beginning to pay dividends. Omni-channel sales, which are demanded from one place but fulfilled from another, are trending to well over $100 million this year.

Our omni-channel customers spend two to three times more than our single channel customers, with our mobile app playing an important role in converting single channel customers. Mobile traffic has grown rapidly over the last two years and now accounts for over 40% of online traffic.

Our customer conversion rate in store is up 10% over the past two years. Our online conversion rate has accelerated since we upgraded our DSW.com platform earlier this year. And we've meaningfully increased our assortment choices with much more to come. We've already done a lot and we still have much ahead of us.

We're confident that our plan was a good one that will leverage our strengths, enhance our offer to the customer and create meaningful differentiation from our competitors. So thanks for letting me recap those important steps. Now, let me comment on our second quarter performance.

The big news for the quarter was that there was a significant year-over-year shift in our mix of reg price and clearance price selling. As we expected, the mix shifted strongly in favor of reg price selling. For the quarter, regular priced comp sales increased by mid-single digits while clearance comps declined by mid-single digits.

The advance in reg price selling was similar to the increase we recorded in Q1; however, the decline in clearance selling represented a 10 percentage point turnaround from the mid-single digit increase we recorded in Q1. And it was that turnaround that accounted for almost the entire slowing in overall comps from Q1 to Q2.

The good news is that because of the favorable mix change between reg price and clearance, we saw a significant margin expansion in the quarter, which Mary will go into shortly. In terms of sales performance by category, athletic posted the strongest comps at plus 12%.

This was driven by strong selling across fashion and performance and across both genders. For the second quarter, our athletic category represented 16% of our total business, the highest penetration level we've ever achieved. We continue to create opportunities to capture demand from strong athletic momentum.

Men's footwear posted a 3% comp increase with positive comps in dress, casual and seasonal categories. The women's category posted a flat comp. Increased regular priced sales, with particular strength in sandals, were partially offset by lower clearance merchandise sales.

The merchandise margin for the women's category was meaningfully higher than last year due to lower markdowns and clearance activity. Our accessories category recorded a 4% comp sales decline. This was driven by handbags which comped down in the low-double digits.

Given the softness in industry trends for handbags, we are reallocating dollars from handbags to more productive categories within accessories for the fall season.

In terms of geographic performance, low single-digit comp sales increases were recorded in the Mid-Atlantic, the Midwest and the Northeast, while the South was flat and the West was marginally negative. We opened one store and closed one store for a total of 449 stores at the end of the quarter.

As a group, the new stores opened during first half of the year are meeting our sales expectations. In terms of small-format stores, we currently have 13 locations open. Another three are scheduled to open this fall. Some of these stores are doing better than others, but all of these stores are profitable and cash flow positive.

We've applied new insights, improved the assortment process, and turned on the ship-from-store program to all locations and as a result, the small-format stores we opened this year got off to a faster start.

We still have a lot of room to improve, but we're confident that small-format stores will benefit disproportionately from our assortment and omni-channel initiatives. Spring 2015 saw the launch of a refreshed brand image for DSW, which featured real shoe lovers and introduced DSW to a broader and more diverse customer base.

We've received a strong favorable response to our campaign and will build on this momentum in the fall season. Over time, we expect this more inclusive and authentic approach to create greater brand awareness, acquire new customers, and increase DSW's share of wallet.

Digital marketing specifically drove sales benefits, as we used advanced analytics to deliver targeted messages throughout the customer journey. Wins from on-site search technology, email strategy, and digital media targeting all drove increased customer engagement and incremental sales.

We're excited to launch Buy Online, Pick-up In-Store and Buy Online, Ship To Store this quarter, which will enable expedited in-store pickup for online purchases. Research shows that these capabilities influence where customers are likely to shop.

We're planning to roll out these functionalities in stages and expect their full implementation to contribute incremental sales volume this fall season. We turned on order routing fulfillment optimization for all categories this month. This proprietary technology is designed to reduce markdowns by fulfilling orders from slowest turning locations.

We believe the potential benefit from this enhancement will build as we fine-tune the fulfillment algorithm. In summary, we're pleased with our first half results and the progress we're making with our strategy towards becoming a more customer-centric organization. And with that, I'll turn the call over to Mary..

Thank you, Mike, and good morning, everyone. Second quarter sales for DSW, Inc. increased 6.8% to $627.2 million, with comparable sales increasing by 1.9% for the DSW segment. As Mike noted, regular priced merchandise posted a mid single-digit increase in comp, partially offset by a mid single-digit decrease in clearance sales.

We deliberately reduced in-store clearance inventory by 12% from the elevated clearance levels of the prior year. Average unit retail increased in the low-single digits, both at regular priced and clearance, leading to a low single-digit increase in average dollar sale.

Store traffic declined 1%, but continued to outpace industry trends, while digital traffic increased in the high-single digits. Transactions for the DSW segment were flat. Omni-channel sales continue to grow at a double-digit rate. In our Affiliated Business Group, second quarter comps increased by 0.7% and total sales grew by 4%.

We closed one location this quarter and ended the quarter with 374 locations in total. Total company gross profit improved 120 basis points, primarily due to lower markdown activity. The double-digit reduction of clearance inventories drove our markdown rate in line with our historical levels.

As a result of our lower clearance and mix of full price sales, we achieved our targeted merchandise margin rate improvement. Occupancy, distribution, and fulfillment costs leveraged by 15 basis points. Operating expense rates delevered by 80 basis points in the second quarter, driven by higher stock and incentive compensation.

Combined, operating profit margin improved by 40 basis points. The income tax rate was 120 basis points favorable to last year, but we expect the full year tax rate to stay at roughly 39%. Town Shoes of Canada contributed a small net loss this quarter. Town's six DSW Canada stores continue to exceed our expectations.

However, sales trends at the Town Shoes banner were softer and necessitated higher markdown activity during the quarter. We did not open any new DSW Canada stores this quarter, but will open seven new locations during the third quarter. Our net income from continuing operations increased by 10.7% to $37.6 million.

Shares outstanding were 89.7 million shares compared to 91.1 million shares last year. As a result, earnings per share from continuing operations increased by 13.5% to $0.42 per share compared to last year's $0.37 per share. Turning to the balance sheet, we ended the quarter with cash, short-term and long-term investments of $471 million.

Inventory at the end of the quarter increased by 14.2% on a cost per square foot basis. We continued to increase our strategic investments in opportunistic buys and secured a sizable position in seasonal sandals for the spring of 2016 season. Excluding opportunistic buys, inventory on a cost per square foot basis increased by 6.3%.

We expect inventory growth to moderate towards the end of the fall season as we release opportunistic buys for allocation. Capital expenditures for the second quarter were $26 million, of which $11 million was spent on new stores and store remodels, and the balance was spent on technology, distribution center, and facility projects.

Currently, we have $63 million remaining under our share repurchase authorization. We will continue to evaluate our share repurchase program opportunistically. With our second quarter coming in line with our EPS target, our expectations for full year EPS remain unchanged at $1.80 to $1.90 per share.

With that, I will turn the call over to the operator for your questions..

We will now begin the question-and-answer session. At this time we will pause momentarily to assemble our roster. And as a reminder, please limit your questions to one question and one follow-up. The first question is comes from Scott Krasik of Buckingham Research. Please go ahead..

Hi, this is Kelly on for Scott. Thank you for taking my question.

Could you just dig in a little further into your explanation around the penetration of clearance inventory from 1Q versus 2Q and how that affected the comps overall? I think what you were saying is that clearance comps at least, were up mid-single digits in 1Q and now they are down mid-single digits in 2Q, is that correct?.

Okay, so reg price comps were up 5% in Q1 and they were up a little more than 4% in Q2, so pretty consistent. What was different is the clearance comps, which were up 5% in Q1 and down almost 6% in Q2. So, there was like a 10-or so point swing in our clearance comps between Q1 and Q2..

Okay.

And then, as we look to the back half of the year, and I think just broadly speaking, how trends are looking there, and then just how that dynamic plays out, given we're going against more normalized comp comparisons and – how are you planning that clearance inventory in the back half of the year?.

Yeah. Well, what you should think is that our Q2 mix of reg and clearance was more normalized, and that should continue into the fall season based on our inventories which we're comfortable with, both in total and in terms of the mix between reg and clearance. And in terms of commenting on how the fall is starting out, we don't really do that. So....

Okay. Thank you very much..

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

Hi, thanks for taking my question.

Can you talk about the impact from the later (19:10) tax-free holiday in select states and I guess, what that really had on your comp trends? And then I guess, how comfortable do you think you are in, I guess recovering that as you do start to enter these tax-free holidays? I just think that just given some of the price points, particularly around the boots business, that was probably impactful..

Yes, so I think there were nine states where there was a change in the timing of the tax-free holiday. And it moved out by a week, but that in Q2 this year, we had two days of the three days, typically in the quarter, and the Sunday fell into the first day of Q3, and in this year, all three days fell into quarter three.

So there were two days of the three sales tax-free days that were non-comparable. And, we've done some analytical work on that. We think it was worth less than a $1 million swing between quarters, so not really significant..

Okay. Thank you. And just as a follow-up, can you talk a bit about the off-price channel, and I guess, some of the inventories you're seeing there? I know some other value retailers have discussed high levels of supply that may be coming from mid and lower-tiered department stores.

But, I guess, what are you seeing and how do you think about the back half of the year in terms of inventory availability and your value positioning, I guess, if some of these department stores do get more promotional?.

This is Debbie. I'll take that question. So, first of all, in terms of how we see availability of inventory for the back half, remember that our closeout penetration or those opportunistic buys that we actually access from the market range somewhere between 10% and 15%.

So, most of our receipts are pre-planned, both in-line SMUs, so they're more predictable. So, I don't rely as much on the off-price inventory to drive my business, although it is important in terms of offering – delivering even more value to the consumer.

As far as how we're positioned from offering value to the customer, we have spent a lot of time and effort on making sure that we continue to deliver that great value to the consumer. And, as you know, our value proposition is, we deliver great value every single day.

That doesn't change, and there's more of an intense focus on that today than there ever has been before. And so, that's how I'd look at the competitive landscape..

Great. Thank you..

You're welcome..

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

Hi, this is Pallav Saini on for Camilo. Thanks for taking our question. First of all, going back to the comps, was any of it related to the shipment delays related to the West Coast port? And if you can give us some color on the trends and category performance during the quarter, that will be helpful..

So, relative to shipment delays, I think what you should interpret about the swings year-over-year in comps between reg and clearance is really the abnormality that existed in the prior year, as versus any abnormality in the current year.

We felt like we managed through the port delays quite well through the release of some of our pre-buy merchandise. So, the aberration year-over-year is really more a function of the unusual nature of last year, not so much this year.

And then, what was your question on category performance?.

Right. So, in terms of categories, was there anything that you would want to call out on dress or fashion that it seems to be – continue to perform well? If you can give some more color on some of the other categories, that would be helpful..

Sure. So, the things that stood out particularly strong in Q2 would be in the athletic zone – as you know, these fashion athletic casuals have done exceptionally well and specifically around the younger product. So, we're really pleased with our performance there.

That trend has been strong all year, and when I look at the back half of the year, it doesn't look like that's going to let up at all. So, I'm particularly pleased with the product we've been able to access, to drive, what Mike had mentioned to you, was our highest penetration in the history of DSW in the athletic category.

So, I feel very strongly about that. The next thing is, is the consistency in the Men's business – was quite pleased there, as we continue to see Men's comp at a low-to-mid single-digit comp range, and the trends that are going on there, whether it's boots or comfort or street, all of those categories are comping very, very strongly.

And I don't really see that changing either. So there's a nice consistent performance in Men's, improvements in comps, and also in margin, which I'm really pleased with. So those would probably be the two highlights.

I'll just mention briefly in the accessory area, Mike mentioned a little bit earlier that we were repurposing some of our inventory dollars out of the handbag area into the accessory area.

These areas are comping very, very strong, and so by moving dollars over to support those sales, it also helps give us some margin boost because those categories typically margin a little bit higher than our average. So those will be the three areas that I would call out that really did especially well this quarter..

Great. Thank you so much..

You're welcome..

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

Good morning.

Maybe you can just touch as a follow-up to the different categories, on Women's, I'm just wondering if there are things that you see either in boots or other parts of Women's outside of athletic that could be drivers in Q3 or in second half overall? And then, as a follow-up to that, maybe you can just touch on the Kids' business because I know that's an evolving one.

Thanks..

Sure. So in the Women's area, as we mentioned, that was – the Women's area comped down by a point (sic) [comped flat]. The weakness there really came out of the dress and casual. And let me just be more specific around that.

What we're seeing in the casual zone is a shift moving out of some of the Women's casual into some of the fashion athletic casual, but when you combine casuals, Women's casuals in general, we're seeing significant double-digit comps. So I think it's really just a tradeoff of what customers are voting for.

So in that casual zone overall, Women's black and brown and athletic casual, I'm actually very pleased. And what I'm happy about is that the athletic casual momentum that we've seen for spring seems to be carrying through. Early indicators in the month of July for back-to-school signaled that it was still trending very, very strongly.

I don't see a reason why that would slow down. There's big key items there, there's some freshness there, so I'm really excited about that. Two other call-outs from a category perspective in Women's, boots comped in the mid single-digit comp for Q2.

And what we're seeing there, I think is indicative of what we're going to see in the back half, and that is a strong acceptance by the consumer in the bootie zone, and as we mentioned to you before, we have moved money out of tall boots and put them into booties, and that seems to be paying off very nicely for us.

As far as sandals are concerned, we had a nice 6% comp increase in dress sandals – dress and casual sandals for Q2. So I was pleased there. In the casual piece, it was 3% and in the dress piece, we comped up 15%. So I was pleased there.

That trend will fall off a little bit as we get into the fall, but as you know, we also have a third quarter strategy in sandals that supports our warm doors, so we'll get a lot of learning from that, so that we're positioned well for spring of 2016..

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

Hey, good morning, guys. I guess, Debbie, just to expand on what you're seeing in athletic, I guess it would appear to be stealing a little bit from the bigger core women's business.

How do you kind of continue to position yourself to capitalize on athletic without kind of disrupting what you're known for, the typical balance of the assortment? I mean, how high can it go as a percent of the total?.

Gosh, you know something? As far as penetration in athletic, I don't know. We went from 14% penetration Q2 last year to 16% this year, so I was very, very pleased with that shift. I would tell you, I really look at what do we really need to focus on to maximize this whole athletic athleisure trend.

And I think we're well-positioned in our fashion merchandise, we're well-positioned with the key brands, which we won't mention brand names on the call this morning, but we know who they are, the brands that are really doing well in athletic, and I think there are some trends that continue to happen, whether it's vulcanized or fashion performance that I think are just at the pre-peak in terms of their sales curve.

So, we believe that we have the brands and we've got the products that will allow us to capitalize and maximize that trend going forward. And I think it's a lifestyle shift and I don't think it's slowing up at all..

Great. That's helpful. If I could ask a follow-up, Mary, can you just walk us a little bit through how to think about the merchandise margin over the balance of the year? I think you're still up against some declines. I guess just a little bit more on what the puts and takes are over the back half. Thank you..

We typically don't provide a lot of color in terms of quarterly guidance, but I would tell you that my expectation is, on the merch margin lines, that we certainly will have stabilized our markdown rates relative to the big improvement we saw in the first half of the year, where we were up against such higher markdowns in the spring of 2014.

So, my expectation is that we should stabilize in the markdown rate. We should stabilize overall in IMU. We took key pricing changes last year, and we are lapping those now. And I expect that our IMU rates will stabilize.

We see some very modest headwinds on shipping, as more of our overall sales penetration is being shipped to – our sales are being fulfilled via shipping to our customer. But overall, I would tell you that our expectations for fall is, we should see modest improvements in merchandise margin relative to last year..

Great. Thanks for the color. Best of luck going forward..

Thank you..

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

Hi. Yes, thank you. Good morning. On the previous call and press release, you guys gave some revenue and comp guidance for the full year that wasn't included in this release or call.

Can you just elaborate or update us on how we should think about that?.

Yeah, I think our current guidance is consistent with prior guidance, and that's why we didn't comment on it specifically..

Okay. Great. Just wanted to confirm that.

And then, secondly, just going back to the accessories situation, can you just elaborate on the categories where you do expect to – or subcategories where you expect to reallocate inventory? And how quickly should the accessories business stabilize, given what you're going to do there?.

Good morning, David..

Good morning, Debbie..

Just -so, let me comment on just the accessory piece first, and then we'll talk about handbags. There are many exciting opportunities in accessories right now, which we've already started to realize the sales and margin benefit of, in the spring season. And things that I think will continue through the fall season.

So, for example, the jewelry business is actually – is good. I think that will continue to stay good, and we actually see a bit of an upside there.

Some of the new categories, the wraps and the shawls and – which kind of encroaches a little bit in the ready-to-wear space, we've always had a strong business here and we see quite a solid, strong opportunity on the back half there.

As we continue to expand that assortment, enhance the quality, increase some of the AURs because the product – the perceived value of the product is showing that we can get more for that product. So, that's also very strong. Hair goods is also very strong for us.

So, there are pockets all throughout the accessory area that we've experienced strong comps on. It's been consistent, and we plan to explode and maximize those for the back half. As far as handbags are concerned, we've all been reading all the articles and have all experienced a bit of a weakness in the handbag area.

It's everything from premium all the way down to moderate.

What we did is we said, let's – until that market starts to moderate a little bit and find its way, all the way from premium down to the moderate area, let's take money out of there, move it into the accessory area where we know we're trending, we know we have some upside on the back half, and we know that those margins are very healthy.

Let's do that and take the pressure off the handbag area. What are we doing in hand bags? We've gone back and we have really right-sized the assortments. We've looked at things that we feel strongly about in terms of key items. We've gone back and we've backed that up. And we've placed more inventory there.

So, I think we're focusing on that which is strong in handbags right now, making sure we maximize those opportunities, and I believe it's probably going to be – I'm going to say another season, six months to eight months before I really see things start to turn in the whole handbag area.

But, we're making the right adjustments right now to manage our inventory and maximize sales..

Thank you..

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

Good morning, everyone. I have three questions. I'll just ask them quick here. I guess first, just seems that the gross margin improvement in the second quarter, maybe not as strong as maybe some would have liked.

Number one, I'm curious, does athletic mix put pressure on that? And, number two, given the comparison two years ago, coming off a very high watermark, does that just, maybe, create some pressure to make some of that back? Second question, I'm just curious, do you expect regular priced to accelerate in the second half from a comp perspective, given clearance was still up in the second half? And, lastly, Debbie, any comments on dress? I think you said it was down.

Can we just talk a little about the Women's dress business? Thanks..

I'll take your question, Chris, on the gross margin improvement in Q2 and the impact of the athletic mix. Athletic mix does, in fact sell at a margin rate that's slightly below the overall average for the business. So, in fact, we did see some impact of the mix shift on our overall margins in Q2.

So, in terms of order of magnitude of that, as that mix shift, I would tell you, it's certainly – it's probably in the 20-basis point to 60-basis (sic) [less than 20 bps] point range in the overall impact of the shift mix from moving more into athletic.

On the reg price comps question, your second question about reg price comps for the back half, we really don't provide specific guidance around the back half, but we still are standing by our guidance of our comp sales for the year, in the low to mid-single digits, and feel good about that guidance that we've provided earlier.

And Debbie, you want to address the women's dress question?.

Sure. Good morning, Chris. So, about 50% of the Women's business, I would say, is positioned in categories that are trending very, very strong. So pumps and sandals, what you would see there, Chris, is a mid double-digit comp increase there with nice margins. So, I'm really pleased that – in those two categories, that those continue to do well for us.

They have been doing well and we don't really see that stopping. The parts of the business that have softened a little bit, evening has softened a little bit.

I think, as customers are making some other decisions on not really buying a more traditional evening shoe and they're going more toward other things, whether it's a strictly sandal or whatever as their option for going out for social occasions. So, half of the business, I see, is very strong.

The other part of the business, we're waiting on some new receipts and details that I think are going to probably do very well for us. We don't have the first sale on that yet, but I believe very strongly that some of the new receipts are going to do well for us.

What I get more excited about is just having come out of the trade shows in the month of August, both FFANY and MAGIC. I was pleasantly surprised in the dress shoe area.

There's a lot of newness there that we're starting to bring in, in fourth quarter, that I think offer customers freshness, whether it's block heels or Gillies, material mixing, city sandals with blockier heels, with a – seems to be a lot of excitement in the dress category for what Q4 going forward could look like. So, I get excited about that.

And I just have to make sure that we manage the dress inventories appropriately until the freshness does get in, so we make sure we don't incur any inventory issues in the back half..

Okay. Thank you very much. All the best..

The next question comes from Sam Poser of Sterne Agee CRT. Please go ahead..

Thank you for – thank you – can you hear me?.

Yes..

Yes..

Okay. Thank you for taking my question. A couple of things.

Debbie, do you expect the athletic penetration to continue to improve throughout the year, just given the trends? And then, can you talk more about – Mike or Mary, the – how you're thinking about use of your cash and how the evolution of systems improvements will help you going forward?.

Sure, Sam. So, I'll start with athletic. So as you know, the split between spring and fall is typically skewed more spring than fall in terms of penetration. So our penetration, as we mentioned, was 16% versus 14% last year for Q1.

So I don't know that I really can expect that trend – that penetration to go up significantly higher than what we're seeing it right now.

I do see opportunities in the back half in some of the younger, vulcanized categories of merchandise that we've done so well with this year that I don't really see stopping, but I don't really expect that the penetration would go much higher in the fall season because of the split between the two seasons..

Thanks..

And Sam, with regard to your questions on how we are thinking about use of our cash, we really are looking at driving our organic growth through the – both systems efforts and the changes that we're making from an omni-channel technology investment, as well as through the new store growth plans that we have.

We'll have a total of a net – a total of net new – 39 stores this year, which is about a 9% unit increase and just under a 7% square footage increase.

And in addition to that, we continue to look at inorganic opportunities – specifically, we looked at taking advantage of exchange rates to pre-fund the Canadian dollar investments we'll need to acquire the remaining 50% interest in Town Shoes out in a couple of years, and then we've also – we'll continue to look at the share repurchase program opportunistically.

We continue to have a $63 million share repurchase authorization out there, and we'll continue to actively look at that share repurchase program opportunistically. In relationship to your question on the evolution of system improvements, I'll hand it over to Mike to answer..

Sure.

Well, the things that we have going for us, Sam, our assortment planning, which I think we've said we expect to start to see benefits from next year; order routing optimization, which will probably begin to help us maybe yet this year; obviously, BOPUS, our buy online, pick up in store is going to be a plus on the sales line and buy online, ship to store will also be a partial incremental sales benefit.

So all of the systems initiatives that we have underway, or most of them, are really designed to get the right shoe in the right place at the right time, which is going to increase our percentage of reg price selling as versus clearance selling.

So they are designed to both be effective for the customer in terms of the not disappointing her and getting the shoe she wants, but also helping us from a margin point of view. So we see those – we see there being a lot more upside opportunity in our margin performance going forward than downside risk..

If I could ask one more question real quick on – you mentioned the shift of the tax-free holidays being about $1 million, but do you think that the shift of the one-week-later Labor Day may have impacted sales in July more than you initially anticipated?.

I do think that is the bigger of the two issues. To your point, I think it's a mentality. When you start to see football games and the fall gets crisper, I think it changes mentality about how customers feel about buying fall footwear, whether it's boots or it's booties. So yeah, I think that's the bigger of the two impacts, Sam..

And Q2, can we say that Q2 probably came in a little bit lighter than you would have initially anticipated, and you expect to make, given that you're sustaining the full year comp guidance, do you expect to make that back, I would assume mostly in the third quarter because of that?.

Well, I mean think our full year comp guidance is sufficiently broad that it would absorb any shortfall or overachievement that might have happened at the end of Q2..

Thank you. Good luck..

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

Good morning, everybody. If you could please comment, I just have one question regarding the issues in Asia.

Do you see that causing any slack in manufacturing capacity and combine that with lowering oil pricing benefiting your private label sourcing costs, and even beyond that your vendor and branded sourcing costs as well and that potentially benefiting margin over the next 12 to 24 months?.

So I would expect that we should see some sort of cost benefit. We'll be having those discussions with our key brands very shortly. What I don't know is whether that's going to get passed through or not. But I would expect that there should be some sort of a benefit there. Whether we realize that or not, it's too early for me to speak about that..

And of course, you'd expect that directly on your private label and then by extension potentially with your vendor brand as well, is that accurate?.

That's correct..

Great. Thank you. That helps..

Steve, I'll just add to that. We're definitely seeing favorability in our transportation costs associated with the lower fuel prices coming from the lower oil costs, so we expect that we will see benefits from that flowing through in the back half of the year..

That's very helpful. Thank you..

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

Hey, guys. Thanks for taking my questions. Just two really quick ones to start off with.

Could you clarify the comp slowdown that you saw this quarter due to the slowdown in the clearance – I think you mentioned in the back half the mix of regular and clearance is going to be more normalized, but does that mean you expect no impact from that or less of an impact in the second half?.

I think our comps between reg and clearance last fall were pretty close to normal. So I would expect sort of an even performance between reg and clearance in the fall season. That's my general belief right now. I don't have in front of me the exact statistics on how we're planning reg versus clearance, quite honestly..

Got it, sir. And then on gross margin this quarter, did you guys have any sort of impact from the Rewards program and also sharper pricing? I think this is about the time when you started to lap the initiatives that you guys put in place, though. I'm just wondering if you could speak to that on the margin side.

And then my last question would just be on some of the omni-channel efforts. Mike, I know it's early with endless aisle, but if you could talk about some metrics that you're seeing in stores that you've tried this capability in.

As you gain more traction, do you think it enables you to open up more small-format stores? Could it eventually offer you an opportunity to relocate stores to a smaller footprint? Just some color on that would be great. Thank you..

So on the margin question, Kelly, we did have some very, very modest deleveraging related to the Rewards program. If you recall, we did implement full points on clearance at the beginning of this year and our customer has responded favorably to that.

We did expect it to have an unfavorable impact on rewards as customers earn and use their Rewards certificate. For the quarter, that impact was less than 5 basis points on margin. We were up against some good news from last year for the quarter related to the shortening of the Rewards certificate expiration date from six months to three months.

So the net shift last year, we had about 24 basis points of good news from that shortening versus the less than 5 bps impact on the Rewards. So very, very modest impact.

On the sharper pricing point of view in terms of our initial markups, we had a less than 10 basis point impact this quarter and that has really stabilized from the pricing changes that we made last year..

And as for your endless aisle question, just to remind you, Kelly, it's in 10 stores. So, it's limited.

But what I will tell you is that we have seen a lift in total demand conversion in the 10 stores where we have implemented endless aisle, which is to say if we just look at sales that are rung in that store and sales that are demanded in that store as a percentage – those transactions as a percentage of total customer traffic, we've seen a lift since we implemented endless aisle.

So, it's moving in the right direction. We did say at the outset we were going to test endless aisle for a good period of time and that's still our intention, but I see nothing in the results to-date that would indicate that that is not the way to go. I think it's definitely the way to go.

And to your point, I think it has the potential for having a bigger impact in our small-format stores than even in our large stores because, of course, the assortment – the physical assortment in those small-format stores is about half what it is in an average store. So, so far so good.

I think one of the things I'm concluding from a lot of these tests that we're doing is that the period of time – so many times we put in system changes or process changes or customer interaction changes and we expect to see overnight success. And I think it takes longer for our customer to adjust to our new capabilities than I would have expected.

That isn't to say that the ultimate benefit isn't there; I think it is. And I think I feel even more strongly about endless aisle today than I did six months ago before we were initiating the test. But I do think the ramp-up time is a little bit longer than I would have thought. So, hopefully that gives you some flavor..

Great. Thank you..

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

Good morning. Thanks very much. Mike, earlier you were saying that just thinking about the inventory position, you're comfortable going into the back half of the year, but then I know it seem a little high in total, certainly.

So just wondering if you could give us a little more – maybe a few more thoughts there, the inventory position, just particularly when considering some of the weakness in the department store space in the second quarter and the potential for a more promotional back half..

Sure. Well, you know what? I wouldn't read too much into the inventory position at the end of the quarter. It's a point-in-time number. So, by its definition, it's subject to fluctuations in timing of receipts and I've probably seen more ups and downs, and early and late receipts in this spring season than in any other in my time here at DSW.

So, I wouldn't read anything into our inventory position at the end of the second quarter. We feel comfortable about it. We're always looking ahead. So, we talk about our open-to-buy not in the rearview mirror, but through the windshield.

We're looking at open-to-buy 30 days, 60 days, 90 days out and that's how we're managing the inventory and the flow of receipts. And we are intent on maintaining inventories lean to take advantage of opportunistic buys and to chase the business. Whenever we do that, we have strong margin performance.

And so that's how we're going to manage the inventories this fall. So, we feel really good about our inventory position and I hope you do too..

And then on the children's tests – the test, the children's test that you started I think about this time a year ago, any update there? Is that something that you plan to roll out in – I think it's what, 20 stores? Will you expand that test going into the fall?.

We're not going to – we are in 20 stores plus on dotcom and we may have neglected that question earlier in the call. So I'll just say we were very pleased with the performance of our kids business in spring. It beat our plans and was significantly ahead of the prior year. It's still in 20 stores.

We haven't yet declared it a rollout strategy, but I think we'll be there in the not too distant future, but we won't do that for fall, that's for sure..

Got it. Okay. Thanks very much..

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

Hey. Good morning. Just a quick clarification on the accessories business.

I know that the handbag category is weak at large, but this past quarter marked an actual inflection in your business for handbags, or has that business been weak for quite some time? And can you remind us how big the handbag piece is as a percentage of accessories?.

So the handbag business as a percent to our total is only 3% of the business. So that's the good news and bad news. We want to grow that area of the business, but it is not material in terms of its impact to our total performance.

To answer your question about when do we start to see the weakness, we generated fairly nice comps up until this past quarter. So what we saw in this past quarter was a slowdown in the higher-end goods, which is consistent with what has happened in the industry – a lack of freshness in the industry, a lack of freshness in our assortment.

So we're kind of consistent with everything else you're reading about in that category. The things that I'm excited about that we're doing is you can keep the sales plans the way they are and continue to hope, and hope is not a strategy.

So we said actually until the handbag zone actually comes out of this kind of fatigue that it's in right now, let's move the money and put it in places where we can generate some strong sales and strong margin dollars. And so that was the reason for the move into the accessory area.

We're doing all the right things in handbags right now and capitalizing on those things that are working, and there are things that are working. In the moderate zone, the opening price fashion area, we've got some nice turnaround stories to start talking about. They're small. We're just at the beginning of that journey.

But I think it's going to take a while for the handbag area to get out of the doldrums that it's in right now..

Great.

And then quickly for Mary on the opportunistic buys, can you just help us better understand how that ultimately benefits your P&L? Just in terms of the timing, you've been doing this for about four quarters now, have you seen an actual benefit to gross margin through first half of this year? If so, can you quantify? And if it's not a first half event, can you help us better understand when those initiatives start to help the P&L? Thank you..

Sure. From an opportunistic buy perspective, we have two ways of flowing those goods into our assortments. We can flow them directly into the assortment or we could do what we call a pre-buy, which will basically be stored and allow us to allocate those opportunistic buys more consistently into our assortments over time.

So, as you might imagine, when those opportunities are available, don't always match our desire to have them consistently represented in our assortments and so we will flow those goods over time. And from an overall opportunistic buy perspective, there's two primary components of that.

The first is brands, highly desirable brands that are not always available to us in our assortment. The second is great deals from a cost perspective. And in the former on the brands that aren't always available, typically those will have slightly lower-than-average margin characteristics.

And on the great deal, we'll make decisions about which of those great deals we want to pass the value on to the customer and which of those deals we use to drive our margin overall.

So, there is not a single rule around the margins for opportunistic brands, but we look at it as a broader part of our total assortment and strategy and our total overall margin strategy every day that we're in the market.

So, Debbie, do you want to expand on that at all?.

No, I think you explained it accurately, Mary..

Okay..

Perfect. Thank you..

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

Thanks very much. Many thanks to everyone for participating in today's call and thanks for your continuing interest and support of DSW. We'll work hard to continue to earn that support. Thank you..

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