Christina Cheng - Senior Director, Investor Relations Michael MacDonald - President and Chief Executive Officer Roger Rawlins - Executive Vice President and Chief Innovation Officer Deborah Ferrée - Vice Chairman and Chief Merchandising Officer Mary Meixelsperger - Senior Vice President and Chief Financial Officer.

Jill Nelson - Johnson Rice Scott Krasik - Buckingham Research Jessica Schmidt - KeyBanc Kelly Chen - Telsey Advisory Group Steve Marotta - C.L. King & Associates Camilo Lyon - Canaccord Genuity Jeff Van Sinderen - B. Riley Chris Svezia - Susquehanna Financial Group Sam Poser - Sterne Agee CRT Taposh Bari - Goldman Sachs Christian Buss - Credit Suisse.

Good morning, and welcome to DSW's third quarter earnings conference call. [Operator Instructions] I would now like to turn the conference over to Christina Cheng. Ms. Cheng, please go ahead..

Thank you, Keith. Good morning and welcome to DSW's third quarter conference call. Earlier today, we issued a press release detailing our results of operations for the 13-week period ended October 31, 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 factors including those listed in today's press release and our public filings with the SEC. We assume no obligation to update or revise our forward-looking statements.

Joining us today are Mike MacDonald, President and CEO; Roger Rawlins, EVP and Chief Innovation Officer; Debbie Ferrée, Vice Chairman and Chief Merchandising Officer; and Mary Meixelsperger, Chief Financial Officer. Mike will provide an overview of our third quarter performance.

Mary will discuss third quarter results and our outlook in greater detail. After our prepared remarks, we will open the floor to Q&A. With that, I turn the call over to Mike..

Thanks, Christina. Before we review our third quarter results, I'd like to say a few words regarding the appointment of Roger Rawlins, as DSW's Chief Executive Officer, effective January 1, 2016. The DSW Board and I have been working on my succession plan since October 2013.

The outcome of that process will facilitate a smooth transition of leadership to an industry-veteran with deep knowledge of all aspects of DSW's business. Roger joined DSW in 2006 as part of our finance team, and since then he has been an instrumental part of our senior leadership.

In 2010, I asked Roger to take over our fledgling dsw.com operation that was losing money. Within two years, he had that business contributing very meaningful sales and profitability. In 2013, Roger led a group that developed DSW's multiyear omni-channel roadmap, and in 2014 we put him in charge of implementing that plan.

Earlier this year, Roger assumed responsibility for innovation, strategic planning and the affiliated business group. Time and again, Roger has demonstrated his ability to successfully manage challenging assignments with great success. We are all thrilled that Roger has agreed to serve as DSW's next CEO.

I have had the distinct privilege of working with an extremely talented team during my tenure, and I know their passion for serving customers and driving shareholder value will only thrive under Roger's leadership. At this time, I'm going to ask Roger to say a few words.

Roger?.

Good morning, everyone. Thank you, Mike, for your kind words. It's truly my pleasure to be on the call this morning. I want to start by thanking Mike and our Board of Directors for this incredible opportunity.

Having worked with the team for the past 10 years and with Mike for more than six, I have witnessed how DSW has grown from a regional off-price chain into one of the leading footwear retailers in North America. In the past five years we have transformed DSW from a traditional brick-and-mortar operation into a powerful omni-channel retailer.

I believe the investments we have and we'll continue to make enhance our ability to compete in a fast-changing retail environment, grow market share and expand into new markets.

I believe in our team, and together, we will focus our immediate attention on creating a stronger, more nimble and more innovative DSW, better positioned to meet the demands of our evolving customers. I look forward to working with our team and meeting many of you in the coming months.

We will use the next couple of weeks to align our 2016 priorities, which we will discuss during our fourth quarter earnings call in March. Before I turn the floor back to Mike, on behalf of our Board, management team and all DSW associates, I want to thank Mike for his contributions to DSW.

Under his leadership, DSW grew its store base by 50%, improved our dotcom platform and brought DSW to Canada, nearly doubling sales and growing earnings fivefold. We are truly appreciative of Mike's leadership and I am personally gratefully for his mentorship. Now, let me turn the call back to Mike..

weather, a weak macro environment and some areas where we didn't execute as well as we could have. In terms of weather it's well-documented that September was one of the warmest on record in many parts of the country.

This resulted in weak demand for seasonal goods, as evidenced by a double-digit comp decline in women's boots and a low single-digit comp decline in the seasonal items within accessories. The comp decline in women's boots alone was responsible for 40% of the total comp sales decline.

Geographically, the Midwest and Northeast, which are our most weather-dependent regions, performed below the chain average. As the quarter progressed, we obtained a better picture of the full extent of the weakness in the macro environment, as a number of retailers reported similar declines.

The broad decline in consumer spending was also reflective in weaker comp performance in our major tourist cities and in cities located near the border. In addition to the difficult macro environment, we also had some DSW specific factors.

We capitalized on the casual shift in the fashion athletic, but we were unable to adjust inventories fast enough to take advantage of the change in women's casual into newer fashion styles. Warm weather led to the seasonal sandal business, extending well into the third quarter, but inventories were not positioned to take advantage of that.

Additionally, our swift reaction to the negative sales trends in the form of receipt reductions, reduced the fall of fresh merchandise to a level that was decremental for the business. Turning to the numbers. Our comp sales performance was down 8% in women's footwear, flat in men's and down 5% in accessories.

On a positive note, we continued to see momentum in the athletic category, which comped up 12%. At our affiliated business group, comps declined 3%. Another thing we learned in the third quarter is that incremental promotions produced only modest results. As a consequence, we will be taking more disruptive actions in the fourth quarter.

We expect weather will continue to be warm relative to historical averages and competition will be more intense. In this environment, we're taking meaningful actions to deliver stronger value to our customer and dramatically increasing our marketing spent to stimulate our customers to visit our stores and our dotcom site.

You may have already seen some of the things we've been doing. We are excited with the launch of our biggest holiday campaign ever, which promises customers DSW's unbeatable values, special brand events and the largest assortment of boots and gift-giving ideas.

We are backing this campaign with national advertising and compelling direct marketing messages. In addition, with the expansion of our omni-channel capabilities, we will provide customers with additional ways to make holiday shopping incredibly convenient at DSW.

These actions are designed to improve our sales trend, but they will create some near-term margin pressure and require additional marketing expenditures. We've partially offset the impact of these actions with expense reductions totaling $27 million. All of these puts and takes are reflected in our revised full year earnings guidance.

Right now, we are very focused on driving the topline. In the long-term, we remain confident we have the right plan in place and that we are well-positioned to meet the shifting needs of our customers.

An important part of that plan is our omni-channel strategy, the goal of which is to make our entire assortment available to our customers in a seamless fashion regardless of how and where they choose to shop. One exciting new capability we implemented this quarter is Buy Online Pick-up In-Stores or BOPIS and Buy Online Ship to Store or BOSTS.

We rolled these capabilities out to all stores in the third quarter. And with virtually no proactive marketing, this new program accounted for 1% of total sales in October. The customer reaction was immediate and significant, which proves how much they want and frankly expect these additional capabilities.

Omni-channel sales, which I define as sales that are demanded in one place and fulfilled in another, represent 5% of total sales on a year-to-date basis and they jumped to 6.5% in the month of October. This acceleration provides clear evidence that our omni-channel strategy is resonating with our customers.

In summary, the third quarter was clearly disappointing, but we've taken decisive actions to protect market share and improve our sales trends. Now, let me turn the call over to Mary to share more details on our third quarter results..

Thank you, Mike, and good morning, everyone. Our disappointing comp performance wad driven largely by lower average unit retails and unit per transaction, driven by the lower boot penetration and promotional activity. In-store traffic was down in the low-single digit and digital traffic was up in the high-single digit.

We opened 17 stores this quarter and closed one for a total of 465 stores at quarter end. Consistent with the balance of the chain, new store performance was below plan. Our gross margin contracted by 270 basis points in Q3 with 150 basis points related to an inventory valuation reserve and the balance from promotional markdowns.

We took the reserve on special inventory purchase that we intend to use to drive traffic to our largest urban stores as well as online in the fourth quarter. Initial markup rates improved by 70 basis points, more than offsetting deleverage of occupancy and distribution costs.

Due to significant cost reduction this quarter, operating expenses were down slightly and leveraged by 30 basis points. In total, third quarter operating margin declined by 240 basis points to 9.5%. Town Shoes of Canada contributed less than $0.01 per share this quarter. Town Shoes opened seven DSW Canada stores for a total of 13 DSW stores in Canada.

The customer reception was positive and these new DSW stores continued to meet our expectations. Net income from continuing operations decreased by 20.7% to $39.3 million and earnings per share decreased 20% to $0.44 per share, which included a $0.07 charge for the inventory valuation reserve. Turning to the balance sheet.

We ended the quarter with cash, short and long-term investments of $397 million. Inventories ended the quarter at $521 million, an increase of 1.8% on a cost per square foot basis and down 0.7%, excluding opportunistic buys.

Capital expenditures for the third quarter increased 1.4% to $28 million and remains on track towards the $115 million to $120 million for the full year. We repurchased 2.1 million shares for $63 million, completing our previous share repurchase authorization of $150 million.

Year-to-date, we have returned $115 million to shareholders in dividends and share repurchases. Since initiating a dividend in 2011, we have distributed $530 million in shareholder returns, representing 80% of our cumulative free cash flow. Our strong balance sheet provides us the flexibility to invest for long-term growth.

Finally, we are holding approximately US$80 million in Canadian dollar denominated investments for future needs with respect to Town Shoes of Canada. We are committed to a disciplined process in capital allocation. And as part of that, we value the role of share repurchases having enhancing returns for our shareholders.

Accordingly, our Board of Directors recently approved a new $200 million share repurchase authorization, which we plan to use opportunistically. Turning to our outlook for the remainder of the year. We are very cautious about the current retail environment, given the soft start to the fall season.

While we believe weather conditions may become more seasonal, we anticipate the environment to become more promotional during the holiday season. Our outlook assumes a flat comp for the full year with total sales growth of approximately 4%.

We are positioned to defend and acquire market share during the holiday season and anticipate markdown to be higher than normal.

With the cost reductions we identified during the third quarter, operating expenses for the full year are now expected to increase in the high-single digit range compared to the previous guidance for low-double digit growth. Full year tax rate is expected to be approximately 39%.

Assuming a share count of 89 million shares, we anticipate full year earnings per share in $1.40 to $1.50 range. And we'll now turn the floor over to the operator for questions..

[Operator Instructions] And the first question comes from Jill Nelson with Johnson Rice..

You did mention that your tourist stores did feel a bigger hit in the third quarter.

Is there any way you could maybe talk about the store volume, how much that is of your total sales and that exposure there?.

It's a couple of dozen stores, and when you do the math, it looks like those stores are accounted for about a 0.5 point of comp decline. The other stores that I mentioned are border stores, I'm thinking primarily of stores near the Canadian border.

And they also comped weak, because we didn't get as much cross-border traffic from Canada coming into the United States, because of the weakening of the Canadian dollar against the U.S. dollar. So that also was an incremental impact. But I think about 0.5 point of comp due to the performance of those large stores in tourist markets..

And then you talked about, I know you broke out some expense reductions you have planned for the back half.

If you could talk about maybe, what you experienced in the third quarter? I know you had a bonus adjustment, and then kind of what's assumed in expense reductions for fourth quarter?.

We had a total expense reduction of approximately $27 million, which is being offset by net increase in marketing of approximately $10 million. So net is about $17 million expense reduction.

The significant portion of that benefited the third quarter, as we made material adjustment to our incentive comp accruals and the smaller portion will be in the fourth quarter..

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

I don't think that you gave it this time, maybe usually you give it.

Just what was the merchandise margin actually down, because the IMU sort of offset with certain different stuff?.

Sure, the actual merch margin rate for the quarter was 43.3%..

And you obviously talked about major promotional initiatives in an tough environment, so can you just talk about order of magnitude of expectations for what your merchandise margin could be down in 4Q?.

We haven't provided specific guidance around the actual Q4 margin rates. But I think if you do the math implicit it in the fourth quarter margin rate, there is a total decline in the 400 basis point range. We do think we've taken a fairly conservative approach to that. We think that there may be some upside, as we see the success of the events.

But we'll have more to come on that in our fourth quarter, as we see the fourth quarter results reported in March..

And then how do we read into, the inventory I guess was cleaned up maybe a quarter or so ahead of what I was thinking.

So how do we read the inventory being roughly flat on an average cost per square foot basis? And as we get into the spring, is the expectation that you keep it lean? I know you had a pretty good spring and there is a lot of interesting fashion out there..

I think it's fair to say that we're going to take a reasonably conservative approach to keeping our inventories in line with our comp expectations for spring. And work to be able to chase into those inventories that we're getting early reads on, that are working with and resonating with our customers..

And just when we go back to last spring, things like fashion athletic, open-toed dress, I think some new flat casuals, maybe even some sandals up the ankle and things like that.

Any of those trends not expected to occur? Anything you expect to be much bigger than last year?.

So in the athletic area, I am looking for continued momentum, as we see now into next year. I don't see any reason why that should drop at all. The trends, as you've stated, whether they are Ghillies or lace-up, some interesting new flats, and we've gotten some positive reads on those early in third quarter. So it will continue in the fourth quarter.

And I think they become even stronger in spring of '16..

And the next question comes from Jessica Schmidt with KeyBanc..

So I guess, just a little bit more on the inventory. I know that you had mentioned that, because you did pull back on some of the inventory receipts that you maybe weren't able to have a lot of newness on the floor.

I guess, how should we think about your inventory positioning into 4Q? And when do you think you'll be able to take advantage of some of the newer fashion trends in the market? And if you could just elaborate on that a little bit..

Sure. So let me just restate that, when we started to see the slowdown, we addressed the inventory levels quickly. We lowered the sales plans. I would say we remixed the assortment. We canceled goods that looked like they were sort out early on. So we canceled the next versions, the next iterations of those. We made adjustments to content.

We adjusted retail. So I think what we did was the right thing to position the inventories in the appropriate way. We are pleased with what the inventory looks like right now, as we start to get back into some of those things that were very positive for us in early Q3. So I am pleased with assortments for Q4.

And we have been able to remix some of the on-order for Q1 and Q2 next year to where, I believe, we'll see a significant change on the face of the floor in our women's areas. And we've been successful on working those deliveries out with the wholesale community..

And just a quick follow-up. Can you talk about some of the trends you're seeing in handbags? I know you that had made some effort in accessories to sort of pull back on your position in handbags, just given some of the weakness you had been seeing.

So I guess any sort of comments you could provide on accessories, as you sort of change the mix shift that would be helpful?.

Yes. So I think on our last call, we talked about pulling the handbag volume expectation back, until that industry found a place where there were some new exciting gift items, if you will, come into the mix. The pullback that we made in sale for Q3, we actually achieved that and beat that just slightly.

So I think we've pulled the handbag area back to, I would say, what we should expect to see in the future. As far as new trends in the handbag area, it still really is coming more out of the moderate fashion area. I still don't really see a lot of newness and infusion at the very top, which is where a lot of the trend direction comes from.

I am confident though with the sales that we put in place for Q4 and for spring of next year in the handbag and the moderate area are achievable. And there are some key items that are showing up right now that I am kind of excited about as well.

So don't expect too much out of the handbag area, because the industry has not really shown me a lot that I am really excited about, but there is enough to be able to do the business that we expect to do through next year..

And the next question comes from Kelly Chen with Telsey Advisory Group..

Mary, I was wondering if you could first quantify the impacts on the incentive comp from this quarter.

And then, if you perhaps could just give a little bit more color behind, what are the main buckets of the $27 million in expense reductions that you guys have identified? And you gave the guidance for SG&A growth for this year, but how should we think about it going forward? What type of comps do you need to leverage expenses as we look ahead?.

The incentive comp benefit in the full year is approximately $16 million, which just over $11 million of that benefitted the third quarter. The balance falls into the fourth quarter.

The other areas that we looked at in terms of expense reductions includes open positions holding on certain headcounts, looking at areas of variable expenses that we can control, that we can reduce easily and quickly. We have also looked at flexing our store expenses appropriately with the sales decline that we're seeing.

Those are the primary areas that comprise the balance of that $27 million. And as I mentioned before, one of the areas that we are increasing and using some of that saving for is to reinvest in some marketing to ensure that our messaging is resonating with our customers.

In terms of future guidance, I'm going to differ on that, as we're in the process of preparing our plans, and we'll have more information in terms of our outlook at a future date..

And then just a quick follow-up. Mike, you had mentioned that in the third quarter the incremental promotions, it sounded like they had a limited impact, and that we might see something more disruptive in the fourth quarter. So I was wondering if you could just give us some more color on what that might entail.

And I know that last year you guys went through a period where you sharpened pricing. I mean do you think that you need to work on the price value equation again or just more color on again the initiatives there for the fourth quarter..

I think on the price value issue, Debbie and the merchants have already been working on that continuously in the third quarter. So that's an ongoing activity and we approach it pretty rigorously. I am not going to tell you about any future promotions. I will tell you about some things that we've already done in the fourth quarter.

We did a site capacity test that we do every year to test the volume limitations of our dotcom site. And we did that on the second last day of the third quarter. And we took 25% off the site and we blew the demand numbers away versus the high watermark, which was on Cyber Monday of last year. So it was aggressive.

And we wanted it to be aggressive to test capacity, but it told us a lot about how the customer is reacting to strong, strong value. In week two of November, you may have seen, we took 25% off of our clearance for about six days, and that was stores and online and got a good customer reaction to that.

We've also seen more recently that we've been publicizing a price match guarantee, which is pretty common place in retail today, but it was new for us and we've just started to announce that and it is similar to what other companies use for price matching purposes.

It's on identical items, which of course, limits the number of times, but it could really be employed at DSW, because only about half of our total assortment is in line product that can be directly compared against. And we're doing that as a test to see how the customer reacts to it and to see if it's meaningful.

As we expected, given the sharpness of our prices already, we really haven't seen to date a lot of customers trying to take advantage of it, but we're going to continue to monitor it and then we'll decide if that's something we want to leave it in place or suspend.

So I think you'll see additional aggressive activity and there will be different activity for every week of the entire holiday season. If I could, I want to go back to the question that you asked of Mary and the bonus.

I think Mary you answered the question in terms of savings on bonus versus what we had to put in the budget, and I don't know whether Kelly's question was related to year-over-year variance or what we had expected variance. And the answers to those questions are different.

Kelly, which did you mean?.

I meant the year-over-year?.

So I think year-over-year is $8 million in Q3, and what, $6 million in Q4?.

Yes..

And Mike, you'll be missed. Best of luck..

Thank you..

And the next question comes from Steve Marotta with C.L. King & Associates..

Is the roughly negative 2% to negative 3% implied comp for the fourth quarter, does that assume accelerating or decelerating trends for the balance of the quarter?.

If you're asking how is it going so far, we don't comment on intra-quarter performance, but if I had misinterpreted your question, let me know, Steve..

No, you can't blame a guy for trying, Mike..

Thank you..

And I have one other question about the performance of the smaller footprint stores. You mentioned that the newer stores are underperforming, as it has been consistent for most of the year.

Can you pinpoint the performance of the smaller footprint stores in particular? And also, your diagnosis, if they are continuing to underperform, why and how do you think that will be addressed?.

I don't have a lot new to report on small format stores. They are underperforming our pro forma expectations somewhat, and have been pretty consistent.

They are profitable and generating above standard returns, but we really want them to be more successful and more productive than they are, because we need to get them to a higher level of performance in order for them to be a really meaningful source of growth for our company.

And I think what we're going to focus on is we're going to focus on assortment, which is critical and illuminating styled duplications that may exist on the floor, because every slot is more meaningful in a small format store.

And we're going to focus on customer engagement, because opening up the endless aisle capabilities to our customers in a small format store is all the more critical than it would be in a 20,000 or 25,000 square foot store. So those are the things we're working on.

We are planning to also bring in a retail veteran who's been in field operations for their career and have them visit everyone one of those stores to give us some objective third-party input to see if we might be missing something.

And then, I guess, the last thing I'd say is that, we continue to test our endless aisle capabilities in 10 stores or so and we are beginning to see meaningful lift in endless aisle transactions that is where customers are able to purchase a style that perhaps they don't see in front of them at the store.

We're seeing the penetration of those endless aisle transactions create separation versus what it would be in a group of control stores. So we're giving good indications that endless aisle is going to be a meaningful service to our customer. And of course, if it works well in big stores, it's going to be even more important in the small stores.

So hopefully that gives you some sense of our direction on small format stores and our commitment to them..

Just one more follow-up.

Mike, would you lay any of the issues at real estate selection?.

Well, we've learned a lot. I think I had said before that when a customer is within driving distance of a 25,000 square foot store, but they're closer to a 10,000 square foot store, they end up gravitating to that 25,000 square foot store and so that was very instructive to us, as we go forward in terms of locating these small format stores.

So yes, there is definitely real estate learning..

And the next question comes from Camilo Lyon with Canaccord Genuity..

My question relates to just kind of like the overall picture on how you view your gross margin potentials. It seems like over the past few years there has been a continual pressure on merchandise margins and you talked about the consumer responding really well to highly promoted product.

How do you think about your margin opportunity here given that there is a lot of competition in this space? It seems to be year-in and year-out highly promoted product that drives ultimate traffic.

Is this a business that's basically in a margin decline sort of state?.

Well, I think there is countervailing influences. I think there is some spin-up particularly right now in terms of the competitiveness, and obviously the transparency of pricing that causes us to need to be sharp and on our toes and continuously assessing our value proposition compared to the relevant competitors.

And we've been doing that every quarter, but next year we will put in place a tool that will allow us to do it dynamically, which is just going to give us much greater information with more frequency, so we can react more quickly.

But I think the things that work in the other direction are things like assortment and planning, things like order routing optimization, and it's those kinds of systematic technologies that are going to help us offset whatever there might be in terms of competitive pressure. So we don't think that we're in a shrinking margin situation.

We think that right now it's taking more compelling value to get the customer to get up off the couch and either to her computer or go to the store and we're reacting to that situation that exists. And hopefully we're reacting strongly and it will have the desired impact.

I don't think the current situation is necessarily indicative of longer term trends, and we do have some things that will fight whatever that competitive impact is..

I guess that leads me to my next question on opportunistic buys. I think you came into the quarter pretty well stocked or pretty well inventoried on product you had brought earlier, not anticipating the sales deceleration to the magnitude of what it ended up being.

How do you view your ability to continue to buy opportunistically in the market, given that there is a lot of product available? And how would that impact your ability to buy spring products? In other words, are you going to increase the mix of opportunistic buys that you're willing to take on?.

In terms of, what I call, opportunity buys or pre-buys, we have a very disciplined approach on how we engage each one of those buckets. In terms of pre-buys, we're always looking for compelling offerings, as we plan to take advantage of market opportunities that are in the right product, that allow us to acquire sharp deals for our customers.

So we're always on the lookout for those. The lift on the opportunity buy list that are out right now, there are many, and there is a lot of product out there. We sit in a good inventory position right now to be able to take advantage of whatever that right product and the right deal is for our customer.

When we planned, we planned mix under each department, close-outs, private brands, SMUs in line products, and I would say, that I think we're in a good position to take advantage of whatever we need to be able to put the right product on the floor and to drive business..

And then just, Debbie, my final question. So Mike mentioned in his prepared remarks about some DSW self-inflicted issues during the quarter, missing out on some of the key fashion styles, but then there was a comment made up on the spring '16 outlook in the sense of taking a cautious stand on inventories and hoping to chase product.

How do you marry those two comments to the point of -- to have to a level of comfort that you need to have to make sure that you're in stock on the right products in spring of '16?.

So let me give some clarification around what the, self-inflicted, really means. We had the shift from women's casual into athletic was dramatic and we really capitalized on that, so was really pleased with that. We did, in the women's area we tested some new products in third quarter that proved very, very strong for us.

And when we say self-inflicted, I couldn't get back into that product fast enough. That product is coming in now and will continue through the spring season. That was mostly in the women's casual area. In the dress area, the dress business moderated downward overall, with the exception of one big category and that was dress sandals.

And as Mike stated in the script, the third quarter seasonal business actually extended, because of the temperatures far into third quarter than we had planned. So we actually ran out of some of the dress sandals, and that was really where I took my biggest hit.

So I think that self-inflicted, you can call it self-inflicted, I would say our inability to be able to speed up the supply chain fast enough where we could deliver and get back into those things that were working for us. When I look at inventory plans, I always take a balanced approach.

I like to make sure that I leave myself some liquidity, and I don't like to plan my inventories higher than what I think the comp sales trend is going to be. We have several different levers that we can pull to help us not only support upfront buying, but in season buying. And that is specifically opportunity buys in the pre-buy bucket.

So we do have some levers that will allow us to capitalize on trends that will prove to be stronger than we thought, but I am pleased with where inventories are positioned for spring. And I really don't want to get ahead of my thoughts. I want to make sure that my sales and my inventory stay in line, until I see how the customer is voting..

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

Regarding competitive differentiation and thinking about that going forward, how are the sell-throughs of some of the more, I guess you would call it, off price positioned product versus the rest of your assortment? And then would it make sense for you to think about shifting more of your business to sort of that deep discount going forward?.

Sure. So when you take a look at, and I'm not going to give you specific numbers, but when you take a look at spring, we are trying to balance the right product, the right assortment with good value, so it's always a balancing act. I think that you will start to see more opportunity buys, if you will.

And I don't want to use the word close-out because sometimes that has a negative perception, but I'll call it, opportunity buys, and you'll start to see that. And what we will do there is we're going to pass more value on to the consumer. So you're right, in that that percent goes up slightly, but I think it's always a balance between mix and price..

And just a follow-up on the marketing spend, obviously that is something you are ramping for Q4.

And just wondering how we should think about that beyond Q4? Is it something that you think will strategically change where you'll have more investment there into next year or how should we think about that?.

We're taking a look at it right now, and it will be part of our next year planning process. It's possible that we may need to tweak that, but we haven't made that decision yet..

The next question comes from Chris Svezia with Susquehanna Financial Group..

I guess, first, Debbie, for you. I just want to clarify, just on inventory, I guess, one point.

Do you anticipate some of the promotional cadence that you'll have out there, that you'll have your inventories clean, and where you want them to be? In other words, pulling back on the promotional cadence as you step into first quarter of next year or do you still feel like there are certain categories you're going to continue to be promotional on? And more specifically with regard to product, outside of boots, which I think, you might have said it was 40% of the comp decline.

What happened in some of the other categories? You referenced athletic. Can you just touch on casual? You touched a little on dress.

Just maybe a little more color about some of the puts and takes in some of those categories?.

So let me take the -- I guess, you're really asking about what does the competitive landscape look like in terms of the promotional activity and how we're really going to address that. So I would just tell you, retail continues to go through periods of significant change.

This is not a whole lot different than what we've been experiencing all retailers over time. We're going to continue to focus on putting the right product on the floor at short values to the consumer.

The mix of the product, as I just stated in the previous question, Chris, we'll change slightly, as we continue to try to put great values on the floor for our customers. In terms of what happened in the balance of the categories over third quarter, athletic was the shining star.

Not only was there a strong comp increase, there was a strong penetration shift into the athletic space. We're very pleased with what happened there. Fashion was healthy. Performance was healthy. Women's was healthy. Men's was healthy. It was across the board. And I guess that I really don't see a reason why that would moderate.

In terms of the dress and casual area, that was where we had the toughest business. In the dress area specifically, it was around that third quarter extending dress sandals into third quarter, where actually we do have a zone strategy that addressed that, but with the warmer weather, it's just wasn't big enough. We didn't have enough receipts there.

In casual, the way I look at casual, Chris, now is I combine women's casual with women's athletic fashion casual, and what we saw was a shift, a significant shift going to the athletic fashion casual business. And we comped up pretty significantly high, high double-digit numbers there, but the blend of the two was still down in the mid-single digit.

So I think there is a lot of excitement happening in women's casual right now. We started to test those goods in third quarter. We're getting the reorders back in now and I'm looking forward to what spring is going to deliver there. So I think there is enough newness to offset some of the weakness that we've seen in those other two categories.

And I'm looking forward to spring getting here, so we can get that started..

Debbie, can I just tack on some of the things. When you think, Chris, about fourth quarter, we've said we're going to get more aggressive, and that's true compared to last year.

But a different perspective on what we're going to do in fourth quarter is that we're going to use our promotion and marketing plan to take advantage of an opportunity that we've always had in the fourth quarter. And let me tell you what I mean.

Just like other retailers, as we move from October to November, November to December, customer traffic increases. However, unlike other retailers, our capture rate, our conversion rate, tends to decline. And if you actually look at our weekly sales, our October weekly sales are greater than November, and November is greater than December.

So I mean, it's an anomalous situation that we should take advantage of. That's why when you go into our stores right now, you'll see a much stronger sort of collateral to support gift-giving, not just accessories, but shoes as well.

And so we're going to take advantage of that additional traffic that naturally comes into our stores, and we're going to covert more of those customers by virtue of our offers and by virtue of our holiday gift-giving stance. And so, yes, we're ramping it up versus prior year.

But I think what we're doing is taking advantage of an opportunity we've really had and haven't taken full advantage of. So hopefully that helps..

So I mean, to some degree it seems like part of it is just you need to move inventory and product and part of it is the strategic change to take advantage of traffic trends that are going on in the store to improve conversion.

Is that latter portion continue to be a philosophy, as you go into the first quarter or no to a degree, because traffic then dissipates in Q1 relative to the holiday?.

Yes, it certainly does. I think the advantage or the opportunity we have in Q4 is somewhat unique. But we're going to take the learnings we get from this Q4 and apply to those other parts of the year where it makes sense to. And so hopefully that helps you understand where we are in our thinking..

And then last, just for Roger. I got a question for you..

Well, thanks, Chris..

Sure. So I guess just thoughts on the business, things maybe you think could be done to a degree differently, areas you think maybe can be improved upon. I mean you're coming from the omni side of the business for the most part, has been an area of focus and investment.

Whether or not people think it's really ultimately generating more consistent results or not is, I guess, time will tell.

But I'm just curious about just your thoughts on the business, where you really think things could be done differently that maybe you guys have been missing?.

Chris, what I would tell you is, for the past two years I've been working with our leadership team to build our strategy. So frankly, very much aligned with what we've been communicating. And our goal would be, when we have our Q4 earnings call, to give you some updates on I think some tweaks that we will likely make to our strategy.

But I don't see it as any material change from the work that we've already been doing..

And the next question comes from Sam Poser with Sterne Agee CRT..

A lot of questions have been asked.

But on the flipside of the self-inflicted issues regarding the casual business, and I guess the athletic casual business, do you feel like you are fast enough in addressing the slow sellers early in the quarter?.

Yes, Sam, as a matter of fact, I will tell you, probably too fast. When things started to moderate at the end of August, beginning of September, we reacted very quickly. And we went thorough an entire assortment review by item on what was delivering the expectations and what wasn't. At that point in time, we started to make those adjustments quickly.

So we remixed assortment. We did some pricing adjustments. We did a lot of reorders early that have proved to be very beneficial to us. But a couple of the areas that I said we just couldn't catch, we couldn't catch. And so I am pleased with how the merchant team responded.

And we're going to start to see the benefits of those adjustments as we move forward..

A couple of follow-ups. One, the op buys that you're talking about that you're getting, are those current goods -- because you took the valuation reserved on special inventory purchase, I assume those were some kind of opportunity buys at the time you bought them. I'd like to just get some clarification there.

And then also that you said that there was a shift to the casual athletic fashion business, where I believe that's probably where you couldn't chase it down. I assume that that's from the key vendors Nike, Skechers, and so on and so forth. And I was just trying to understand those things..

Sure, Sam. So let me address the pre-buy situation. First of all, like I said, we have a very disciplined approach to what we buy and what we put into that bucket. This was a particular buy that didn't achieve our expected sell-throughs, and we made a decision very quickly to use it as a traffic driver and to attract new customers.

We are overall pleased with how we approach, what we put into pre-buy. Those dollars are precious, as they usually do have to sit there for a small period of time, before they can be allocated out into the right season for the consumer. So I am pleased with what's in there right now.

Because we have a pretty rigorous review of what goes in and a lot of conversation about it, I am comfortable with what's sitting in there right now. Now, the lists that are coming out now are a combination of industry cancellations, market cancellations, wholesale cancellations, it could be for a variety of reasons.

We look at every single buy and make sure that we love it as much in the future as we love it today. So it has to be bought at the right price. It has to be the right product. So when we talk about close-outs and pre-buys, we're not just buying price to allocate value in the future. The mix has to be correct along with the price..

Then the part about the athletic, the fashion casual athletic business that you talked about?.

So what I was referring to there, Sam, is when you look at women's athletic fashion, very, very healthy. When you look at the women's casual just in the black and brown side, that part was weaker. So that comped negative and casual fashion athletic comp is highly positive.

I think that customers were shifting, as they are moving into more of a casual lifestyle. And so we did see a shift of business that moved I think out of the women's area into the women's athletic area. What was left behind in the women's casual area, were those buys that I said we tested early and they were pretty strong.

So those were things like flat, a little bit of sports. So we expect to capitalize on that go-forward. We took advantage of every opportunity in the athletic area, both in make-ups and in close-outs that delivered the kind of results that we saw at plus-12%. So I was pleased with how we reacted there. We didn't have any inventory issues there.

We got what we needed. I was pleased with that. And like I said before, I don't think that business stopped. There is a strong momentum there that will capitalize on for spring '16..

And the next question comes from Taposh Bari with Goldman Sachs..

I was hoping, Debbie, you can disaggregate the comment around boots, so just we can kind of specifically talk about fashion boots, booties, cold weather boots, how those performed specifically? And then just, as it's a high-level question, it seems like athletics working kind of across the board, across retail, and it's a smaller piece of your business.

So I'm trying to better understand at a high level, how much flexibility you have, as you think about call it the next 12 to 18 months to be able to mix your assortment away from the slow moving goods, until where the market really is trending towards?.

Let me take the boot question first. So boots comped down about 10%, 9.5%. The stores comped down a little bit more than dotcom; dotcom was actually relatively flattish. We did plan a shift in mix between boots and booties, we saw that shift occur.

But the down trend of the tall boots actually happened in a much larger way that we originally anticipated. So the booty comp very, very strong, continues to be strong. We re-ordered very early on in third quarter on best selling booties. The combined total between boots and booties was not enough to comp positive for the quarter though.

Cold weather actually comped up in the low-single digits for third quarter as well. So what we saw was a penetration shift between boots and booties. We have some really strong selling items right now. Some of the slow selling items, we've already taken action on. So I think it was really more of a mix issue. There was some weather issue in there.

But I'm anxious to see what next year, what the wholesalers will actually come up with, what our brands will come up with, in terms of delivering fresh new fashion into boots. And to me, that's the big question right now. And as it relates to athletic, athletic for Q3 last year was about a 12% penetration of my business. This year it was 14%.

It is healthy across the board. I have reflected an even higher penetration for next year 2016 and 2015. I am planning, I don't want to say aggressive comps, but I am planning healthy comps. And I am going to support that business, because there is a less ability to chase back into that business.

I'm going to support it with the appropriate inventory to support the comps that I have planned..

Can I just ask a quick follow-up on the boot piece?.

Sure..

If weather is the issue, why is cold weather comping up low-single digits and boots being down? How's the production down there?.

So the cold weather category includes not just functional cold weather, but fashion cold weather. And if you look at our mix this year versus last year, when you go into one of our stores or even look online, you're going to see the brand selection significantly better than it was last year.

We have all of the big brands, the important brands, and that we skewed that more towards fashion than we did function, even though those boots are functional. So I think the customers right now are buying that more as a fashion play. And we think that as we move further into Q4 that they will be buying it both as a functional play..

And Mary, can you just quickly comment on the re-class between short-term investments and long-term investments? What the nature of that was? And the US$80 million related to Town where is that being recorded on the balance sheet?.

The US$80 million, Canadian dollar denominated investment is in long-term investment. And the short-term investment shift to long-term during the quarter reflects a shift of our investment management to an external third-party, and the intention at the end of the quarter for those investments that were moved to a third-party to behold long-term..

And the next question comes from Christian Buss with Credit Suisse..

I was wondering if you could provide some perspective of how are you thinking about using special buys for next year, in light of what's likely going to be an excess inventory situation across some of the retail channels and wholesale channels?.

So special buys, I'll call them, opportunity buys and pre buys offer the opportunity to pass some significant value on to our customers. I am increasing that slightly to next year, but the real important thing to think about is the product, the content has to be right.

So as I mentioned before, we won't buy opportunity buys and pre-buys just to buy price. The mix between the right product and the right value has to be correct.

So as the opportunities avail themselves in the marketplace, we'll take a look at those lists, we'll take a look at the opportunities and we'll make the right decisions that are right for our customer..

Thank you. And this concludes our question-and-answer session. So at this time, I would like to turn the call back over to Mike MacDonald for any closing remarks. End of Q&A.

Thanks very much. And thanks to all of you on the call for your interest and your attention today. And I hope that you and your families all have a very happy Thanksgiving holiday. And I hope we all have a successful Black Friday weekend. Thanks again..

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