DSW Inc. (DSW) Q4 2018 Earnings Conference Call Transcript

We too consume three individuals that are no with us today besides are uphold can our family office can Columbus that are sharing this data with our team can Columbus. We consume Michelle passion -- 32 years with Nordstrom and joined our affair nearly two years ago. We consume Drew Domecq. Drew's our CIO. Drew has been with our affair now because a year. big undergo can the aggression space with Wendy's. And we consume Tom Jessop, who's been with our affair because five years. And Tom leads our equip bind also though our HR functions.

So next, I wish ought receive you uphold ought 1978. conduct you guys remember 1978 can all? Okay. I conduct vividly, though can 1978, I was a 12-year-old, and I was the twelfth man above a 12-man basketball team. conduct you guys know what that means? Okay. That manner can the aim of the game, there's 20 seconds left can the game. Your team is ahead by 20 points, or you're after by 20 points, and the lorry looks ought the aim of the bench, and he grabs Rawlins by the shoulder and says, "It's time because you ought progress can the game." I did no consume a lot of self-confidence when I was 12 years old. besides something changed. This. You force laugh, besides this is the shoe that changed my life when I was 12. Why? though my parents went out and invested can this shoe. Now, if you guys don't remember, uphold can the day, this was a mad expensive shoe, though this is what Larry Bird, this is what Magic Johnson, fifle Pete Maravich -- these guys were complete wearing this.

Now remember, I'm the twelfth man. I never got can a game. besides when I spot these shoes on, when I came out, I made each only layup. I made each leap shot. each only cheerleader was looking can Roger. each only affair that was going above was nearly these shoes because me. They gave me a flat of self-confidence.

That's what we're talking nearly today. That's the friendly of force we're gonna expend across our brands, that you're gonna hear those stories from each of my teammates. It's why today, I'm wearing Mercante. if you guys progress out today, this is exclusive can DSW. entertain progress pattern a buy this afternoon. I fancy we consume some gifts because you. besides I wanted ought division that fiction though you're gonna hear few of those again today from my teammates.

So let's oration a little division nearly our history. And when you fancy nearly what's happened, this affair was indeed founded 50 years ago. 50 years ago, by Jerome Schottenstein. And it started with this, doing let businesses. accordingly we favour questions a lot about, you know, what's it alike working can other retailers? We've been doing it now because about 50 years. Then can the '80s, how this affair involved was they got into blank prison concept.

They started loyalty programs. They did special makeup, complete of these things that allowed DSW ought be positioned differently can the marketplace, which led ought the 2000s, which can 2005, we went public and indeed organize of put the stage because where we could go. too can that time, we started rolling out our digital experience. Now I'm genuine haughty of the fact that from 2008 ought 2013, I got ought guide our digital affair and indeed did organize of assist our affair up because growth.

Then, can 2014, this changed. Our CEO then, Mike McDonald, and our board said, you know what? Things are occurrence ought us. We don't know exactly what they are, besides we've got ought pattern this out. accordingly we went and created an innovation team. And we went and collected data complete can the place. We looked can each part of retail. We looked can the consumer experience, how things were evolving, and we said, you know what? We consume ought change. And so, we went ought What's Next, which you visit that organize of posted complete can the place. And we told this team, progress spot together what's next because this enterprise.

And I'm genuine haughty of the fact that that team built the tactic -- the mission, vision, and tactic -- that we've been following though 2014. can 2015, we built out our infrastructure. And when I tell infrastructure, we built what everyone calls omnichannel. And you know what? We were recently recognized though the quantity one omnichannel retailer can complete of retail. I will tell you, we don't exclaim it omnichannel. It's called the customer. And I fancy that lens is something we consume frequently been joyful enough ought have. Then can 2016, we rolled out Kids. accordingly we added a new type ought what we were doing engagement can and engagement out.

Then can 2017, we started testing services. accordingly we went back nail services first, and you're gonna hear from Bill today, though this affair is killing it. This affair has big growth potential. This is attracting nation ought our brand. They pattern an emotional connection, no different than that shoe undergo I had when I was 12 years old. beautiful soon, you'll be capable ought consume a drink though you're having your nail service, and you'll be capable ought maintain our brand. And it creates this emotional connection, again. And can 2018 -- you'll hear a lot nearly what we did this year from Bill -- we relaunched our rewards program. And it's the first time we'd indeed done anything with that program can 10 years. We did a six comp this year. about half of that, I fancy you could confidence ought what we did within this complete concept.

So again, those were complete things we did that were defined can 2014 though the bid we wanted ought head. Then we said, now that we consume this incredible infrastructure, what's next? What are we gonna conduct next? accordingly we said, we consume ought grow. We consume ought discover ways ought favour into new markets. We consume ought discover ways ought pattern new products, differentiated products. accordingly we acquired Shoe company and acquired the Camuto Group.

So, what does that mean? That manner we are a dramatically different affair can 2019 than we were can the start of 2018. We now consume our three owned companies -- Camuto, DSW, Shoe Company. We too consume our two let businesses, Stein Mart and Frugal Fannie. accordingly ultimately, this is a dramatically different company. accordingly why did we consume ought evolve? Why did this complete change? You guys implore us this puzzle a lot. There were three big factors, and I fancy these are really, indeed significant ought understand why we've determined what's next and where we're headed.

The first one is this: technology. I visit impartial nearly everyone can here has a instrument up before them. if you progress uphold years ago, that wasn't the case, right? technique changed consumer behavior. They consume access ought data can their fingertips they never had before. They consume the capacity ought consume price transparency. accordingly our xerox was being challenged though our daily appraise xerox was being offset by nation discounting can the online space, right?

So we had ought fancy differently. And the one that we kept referencing was electronics. And we talked a lot nearly this with our board. We are no going ought lie by and allow that occur ought our company, ought our 16,000 associates that we're accordingly passionate about. We are no going ought lie above the sideline and be HH Greg-ed, or Radio Shack-ed, or Circuit City-ed. We're going ought be Best buy of our space. That's the means we took when we were looking can how we were going ought evolve our business, which led ought this.

As we looked can this next data point -- I've shared this, I think, with some of you. From 2011 ought 2017, there were five companies -- I'd tell five segments -- that really, indeed grew neutral share. And when I tell indeed grew, they picked up 20 percent points. no 20 base points -- 20 percent points of neutral share, OK? The first one, a brand we complete know and love: a company called DSW. We went from 3.1 ought 3.3% neutral division from 2011 ought 2017.

How did we conduct that? We did the old school way. Let's blank stores. We incurred nearly a billion dollars -- I shouldn't tell incurred. We invested nearly a billion dollars of our shareholders' money opening those stores, and we grew neutral share, which was great. The challenge is these other elements. quantity two. Who else grew? sport space, though presume what? You can't visit everybody feet. More nation are wearing sneakers than they were uphold can 2011. It's impartial the facts. accordingly I fancy that fragment had a organize of leg up above everyone else.

Next, Nordstrom. How? By the inline business, Nordstrom, they've done a gay job, besides too the launching of Nordstrom Rack, which now we favour ought service across our Camuto enterprise. besides this is the one everybody talks nearly and focuses on, and it's called Amazon, right? They're the big bad actor that everyone ought disgust can the industry. Why? though from 2011 ought 2017, they picked up about six percent points of neutral share. complete of you guys oration nearly this. You're frequently asking us, what is it that you're gonna conduct ought differentiate yourself from Amazon can those friendly of things? The reality is, we wish ought colleague with them, and we're figuring that out though a larger enterprise.

But this is the data point that you lack ought understand changed our worry above where we consume ought go. It's this: our vendor partners. We invested a billion dollars house our brand and their brands. Meanwhile, cabin we're house their brands, which we needed ought do, technique has allowed the consumer ought progress nearly DSW and allowed that brand ought progress control ought consumer. They majestic up 12 complete percent points.

Remember, these are the nation that we are representing can our box. Again, an sample of how we used data ought say, we cannot allow that happen. We are no going ought sit above the sideline. We are going ought fancy differently. We are going ought discover what's next, which also, though complete of that was going on, you had this happening. You had brands that are being gobbled up, though presume what? if you can't conduct that control ought consumer thing, you'd better discover someone that can assist you, or else you're no gonna be relevant.

And so, that's what's happened. Caleres, Steve Madden, Marc Fisher, DSW. complete of them consume been buying brands, accordingly there are fewer and fewer players, big players, that are out can that marketplace, which ultimately led us ought tell we've got ought modify this enterprise. We consume ought motivate value. We consume ought receive supervise of our destiny. And what does that luck appearance like? It looks alike this, though now what we consume is this world-class retailer called DSW -- the affair that's doing can $3 billion dollars can sales, that has can 500 warehouses with a kick-butt digital undergo that involves their consumer, different experiences, different product. That's a middle of what we do, driving a lot of cash.

We too consume this new affair called Shoe Company, which gives us an rim can the final mile. And Mary's gonna oration nearly this. besides envision how you can fill can neutral voids with a much smaller box that's much more targeted than something that is can 20,000 square feet providing complete of the services we're providing can a DSW.

And then you marry that with this affair called Camuto Group, which is a world-class organization. Vince was a head with Nine West of house brands, and Simon's gonna division that. accordingly ultimately, when we conduct complete of those things, when we expend complete three of those ought life, it is different than DSW. It is something dramatically different. It is something that's what next can this industry, and it is Designer Brands.

So, this is where we are going. This is what those three companies appearance like. This is a mixture that nobody else can our industry can match. We consume the capacity ought build brands. We consume the capacity ought expend produce ought life that differentiates experiences can DSW, can Shoe Company, and the capacity ought leverage this incredible infrastructure we consume impartial spent 50 years investing can ought conduct something dramatically different. accordingly what does this intend engagement can and engagement out? It manner our parent company is now Designer Brands. It manner our ticker is gonna be DBI. It manner how our associates couple with our brand is gonna be can a higher flat than an wealth brand that they work at. That is what Designer Brands looks like. besides I wish ought division with you what Designer Brands looks alike compared ought what DSW Inc. used ought appearance like.

DSW was sole attached ought nearly 20% of the sum footwear market. That neutral was indeed restricted ought impartial nation that play can the space that we play can engagement can and engagement out, selling shoes and the retail concepts. With Designer Brands, we now consume access ought 80% of the footwear market. It's no impartial nearly us running stores. It's us playing can the wholesale space. It's playing can the control ought consumer space. I wish you ought fancy nearly these five things, OK? They are, first, Shoe company gives us access ought the Canadian neutral and gives us the capacity ought fill can nearly DSWs. That's quantity one.

Number two, our DSW digital expertise is going ought be applied ought Shoe company and ought Camuto. I mentioned above that vendor front how those vendors had gone back it can a big manner ought appreciate 12 percent points. You're gonna hear from Simon, one of those brands that impartial does no know how ought conduct that, has no had that expertise, is the Camuto organization. Digital penetrates less than 1% of their sales. Guys, fancy nearly that. 1% of their sales. We know how ought conduct digital. That's what we can expend ought the table.

Number three, we can amplify this wholesale affair that Camuto has been operating can a leading manner along our DSW, our Shoe company platforms. passion ought visit more Jessica Simpson, appearance ought visit more Lucky, passion ought visit other brands that ultimately, we can favour though part of the Camuto Group.

Number four, we will build our personal brands. We consume a history of house brands. Bill will division can his presentation, though we were making those investments can stores, can our digital experience, we were growing brand sales faster than they were growing them themselves. That's an significant fact I wish you guys ought fancy nearly though we oration nearly that. And then finally, what we wish ought conduct is receive complete of these things we've learned -- we know footwear.

We know footwear better than anyone else can our industry. We wish ought progress division that with our other retail partners. We wish ought sit with Alex Dillard and division what we're doing with our rewards program ought motivate his footwear sales, impartial alike we're doing with Stein Mart. And I'll progress satisfy with explore above Thursday morning down can Jacksonville ought division with them what it is we're doing and how that can shock their business. We wish Nordstrom ought sell more shoes. We impartial wish them ought sell our shoes.

So that's the bid we're headed though Designer Brands. It's dramatically different and has access ought 8% of the market. And before. I talked nearly can a six-year epoch of time, we grew our neutral division 20 base points, 3.1. ought 3.3. can the final nine months, we've gone from 3.3% of the footwear can peoples' closets ought can 5%. That's the manner Designer Brands is going ought be thinking.

Next, we had no brands that were produced in-house. Frankly, we've struggled ought consume success from this. Carol Lee from our board has frequently been challenging us can the final 13 years that we've been public, why can't you modify personal brand? Why can't you modify personal brand? though we could never discover the accurate partnership. And we tried a lot of players. We dated a lot of nation can our industry. And we said, you know what? The sole folks that indeed know how ought conduct this, though they've doing it because years with Alex Dillard and Macy's, is the Camuto Group.

And accordingly now, what we consume is the ability ought design, source, and neutral our reserve brands ought mature differentiated product. And I wish ought division these data points. And I fancy we've talked nearly this can some -- I know can a link luncheons we had. besides fancy nearly this. can the beginning of 2008, the DSW brand had 800 labels that they dealt with engagement can and engagement out. That manner we were putting 800 of these labels before the consumer.

The sumit 25 were indeed brands, right? Those 25, fancy of Nike, it's Skechers, it's Steve Madden -- it's those friendly of folks. They accounted because 40% of our sales. Those are brands, though when someone's going online and they're looking above their device, the first affair they're looking because is that brand name. And you consume ought consume them ought gift ought the consumer that you know what are the suitable brands. accordingly you've got ought consume that can your mix.

Next, 75 -- I used to exclaim them item brands, implication they consume a key item that if you don't consume it, the guest thinks you don't know what you're doing. Hunter Boot, though an example. Whatever that item force be, you've got ought consume it. That's 30% of our sum sales. accordingly 70% is indeed embedded can these sumit 100 organize of brands. The next 20% is 700 labels. Why are they flat relevant ought the consumer? though we decided ought spot them above our selling floor, ought spot them above our website, ought pattern them available ought our 30 million rewards members we consume along North America. That is where there's occur ought modify our personal brand from today nearly 10% ought be closer ought 25 or 30% can the next three years. That's the eyesight that we have.

Next, this one is maybe my favorite -- limited visibility ought cost. accordingly let's oration a little division nearly how we've historically expend goods. Remember, when we started, our heritage was closeout buying. can closeout buying, you don't consume a lot of negotiating power, right? And the manner we priced goods, we consume something we wish ought retail because $50.00. We tell we lack a 60% IMU. accordingly what conduct we do? We write a restrain because $20 bucks, and we tell ought that vendor, hey, we're no coming uphold ought you because any more money.

We don't lack any -- we don't modify uphold because markdown money or any of those things. We know we're gonna receive some markdowns. We'll border out can the mid-40s. That is the manner we costed goods. presume what? That sport has changed, though now, we consume visibility and we understand how ought fabricate footwear though Designer Brands. We consume the capacity ought decide what costs we're going ought pay.

I'm gonna award you the best sample I can fancy of. We went ought Nine West, and we looked can acquiring Nine West, and we got genuine end ought pulling the trigger above that. We decided no to. though we did that assessment of Nine West, we were by distant their best account. Why? though we paid more because produce than anyone else. We too didn't pattern a ache because them though we didn't modify uphold and implore because markdown allowances and complete the other things.

Then we went ought Camuto. We did our due diligence can Camuto, and presume what? It was the too thing. The scorecard showed big maintain stores, their margins above their produce is down here. Mid-tier maintain stores, the border was here. The border above DSW produce is up here. presume what? That sport has ought change. We will no receive that anymore. That is why Debbie is now the headmaster of Designer Brands, though she's got those relationships can the past 22 years that we're gonna leverage accordingly that we can consume that conversation with the vendors and say, this is what we're going ought earnings because merchandise though we know this is what it costs. leading game-changer that you're gonna hear nearly today.

Next, we were sole can the U.S. footwear market, right? Our DSW affair was indeed isolated, focused above what we conduct here can the U.S. Where we're can now, though I mentioned earlier, the Shoe Company, we consume the incredible occur ought fill can neutral voids. We consume the capacity ought modify DSW north of the border. Incredible opportunities ought abstract ought amplify though Designer Brands. We too were brand ought brand retailer, accordingly we were facing that challenge of the consumer going nearly us, the brands going control ought the consumer.

That's no where we're can now. We consume a platform that will motivate growth and consolidate this industry. That is the manner we are thinking nearly it though Designer Brands. Ultimately what this gives us is the capacity ought supervise our reserve destiny. That has no been the case. We consume been reliant upon others ought send products above our behalf. We however will ought a sure extent, besides we now consume the capacity ought progress control ought consumer the too manner everyone else has.

So ultimately, when you fancy of Designer Brands, this is what I wish you ought fancy of. We are brand builders delivering differentiated experiences powered by the scale of one of North America's largest footwear enterprises. That is who we are now. That is dramatically different than who we were though DSW. And you can visit these -- we're gonna oration nearly these later, nearly how complete of these modify together, connecting complete of these enterprises. accordingly how conduct we win? It's doing this. conduct what we do.

You're going ought hear today, there isn't any secret affair we consume ought do. It's progress and kill the manner that we frequently have. It's Simon taking the Camuto gang with Alex and the team we consume can Camuto and delivering the too affair they consume done because Dillard's and they consume done because Macy's -- impartial progress conduct it because DSW. And presume what? They consume the capacity ought conduct that. if you're can DSW, reserve continuing the seven consecutive apartment of certain comp you consume generated, the momentum you have, and reserve that ball rolling, and let's progress appreciate share.

And if you're can Shoe Company, abstract ought kill the manner that you consume and leverage complete the capabilities you now consume can your fingertips by being connected ought Designer Brands. when we conduct that, we will consume differentiated products, we will consume differentiated experiences, and we will modify neutral share. I mentioned the comps. Seven consecutive quarters, we're gonna reserve that up. New categories -- Kids, Beauty, other things that we can expend ought life. And ultimately, it's new markets, which will contain us continuing ought amplify can Canada and finding ways ought modify this enterprise.

So next, ago -- or I'm sorry, though I end up here, this is what complete of you maybe came today