Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's DSW Inc.'s Third Quarter Fiscal 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a questions-and-answer session instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded.
Now I would like to turn the conference over to Mr. Doug Probst, Chief Financial Officer. Please go ahead.
Douglas J. Probst - EVP and CFO: Thank you, and good morning. Welcome to DSW's third quarter earnings conference call. With me today in Columbus are Mike MacDonald, CEO; and Debbie Ferree, Vice Chairperson and Chief Merchandising Officer. Please note that various remarks we make 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 as a result of various important factors, including those listed in today's press release and in our public filings with the SEC.
Similar to the format of our presentation in our second quarter call, I will be commenting on our reported results for the third quarter, and then Mike will provide his comments on our operating performance.
Earlier this morning we issued a press release, detailing the results of operations for the quarter ended October 29, 2011. Our reported net income was $53.7 million and included $13.9 million in items related to our merger with Retail Ventures Inc., which was completed on May 26, 2011, the settlement of the Premium Income Exchangeable Securities or PIES on September 15, 2011 and related items. You can find these items detailed in the condensed consolidated statements of operations, and reconciliation of adjusted results attached to our press release issued this morning. Again, similar to our discussion in the second quarter, we thought it would be beneficial to walk you through the details of the costs and benefits associated with the merger and related items, and the specifics of where they are reflected on our P&L, so that you have a clear comparison of our operating performance to last year.
The $13.9 million in RVI merger and related items in the third quarter, breaks down into the following five components. First, $300,000 in costs included in SG&A, primarily related to RVI operating expenses. Second, $20.9 million in a non-cash benefit related to the change in fair value of derivatives instruments. This reflects the change in fair value of the PIES from the beginning of the quarter to the settlement date and the change in the fair value of the warrants for the entire quarter. Although this is a benefit for reported net income, in accordance with GAAP, this item is excluded from net income for the reported diluted EPS calculation.
Third, net interest expense of $1.5 million related to the interest on the PIES. Fourth, $300,000 in non-cash income tax expense due to the merger-related tax items; and finally, a $5 million impairment charge related to a leased office facility that DSW inherited in the merger with RVI. The tables in our press release outline these adjustments in more detail.
Now that we have reviewed these items, the remainder of our discussions will refer to our adjusted results. As we have stated before, our guidance for the fiscal 2011 has been based and will continue to be based on adjusted results, excluding any impact from the merger with RVI and related items. On an adjusted basis, third quarter 2011 net income increased 12% to $39.8 million or $0.88 per diluted share, compared to net income of $35.5 million or $0.79 per diluted share in the third quarter of 2010.
We are very pleased with our third quarter performance, which continued the strong growth that we have achieved for the past nine quarters. Net sales were $530.7 million and comparable sales grew 5.2% on top of the 10.1% comp increase last year, which represents a two-year comp of 15%. By segment, our comps for our DSW business, which includes dsw.com, were up 5.2%; and our comps for the leased business division were up 4.9%.
Our total Company merchandise margin rate was 46.4% for the third quarter and represented a 130 basis point improvement compared to last year. In addition to increasing private brand penetration, we were able to achieve this margin expansion by working with our vendors to mitigate cost collectively passing on price increases and better mark down productivity.
On a total company basis, we achieved occupancy leverage of 40 basis points for a 10.6% occupancy rate primarily due to the increased sales. This was slightly offset by a 20 basis points of deleverage in our distributions and fulfillment centers to support our size replenishment initiatives and dsw.com business.
Combined with the increase in merchandized margins, the net effect was a 150 basis point increase in gross profit margins. Our adjusted SG&A rate as a percentage of sales increased 40 basis points to 21.7% due to increased spend in our new stores and marketing. New store expenses were double what they were in the third quarter of 2010 as we continued to increase our footprint in new and existing markets. Marketing spend is higher than last year primarily due to a shift into the third quarter from the fourth quarter. This timing shift has been planned since the beginning of the year and is more consistent with our historical marketing spend.
Strong sales growth combined with expansion and gross profit margin resulted in 18.5% increase in adjusted operating profit to $65.2 million or 12.3% of net sales. Our adjusted tax rate for the third quarter which is a based on a full year view was 39.3%. As we have said before, one of the benefits of the merger with RVI is that we have ability to utilize the NOL assumed in the merger. This cash benefit which will be realized over the next two to three years was recognized for P&L purposes as a one time item in Q2.
Given this treatment, our ongoing effective tax rate for this quarter and future quarters is not impacted by this item. On November 2, SYMS Corp. which operated under SYMS and Filene's Basement banners filed for bankruptcy protection and indicated that the Company plans to close all stores. We currently have leased shoe departments in 27 Filene's and SYMS stores.
In the third quarter we reserved $1.7 million for inventory related to Filene's Basement and SYMS and we continue to diligently manage the effects of the pending bankruptcy. As mentioned adjusted EPS increased 11.4% to $0.88 per diluted share.
Our balance sheet remained strong and we ended the quarter with cash and investments totaling $369 million, inventory for DSW stores increased 5% on a cost per square foot basis. Capital expenditures for the quarter were $20.7 million reflecting 8 new stores opened, 17 store remodels and various business and IT projects.
For the year we continue to expect capital expenditures of nearly $80 million, which includes an investment in our fulfillment center to further support our growing DSW.com business as well as one more new store which opened last week. One additional relocation and 12 additional remodels.
Now turning to our guidance as most of you are aware we will continue to present our guidance on an adjusted basis excluding any impact from the merger RVI and related items. As we believe this more accurately reflects the ongoing operations of the business.
Based on our strong year-to-date performance we are raising our annual adjusted diluted earnings per share guidance for fiscal 2011 to a range of $2.90 to $2.95 on 45.3 million shares. This is an increase to our previous range of $2.70 to $2.85. The midpoint of this range represents a 22% increase over our 2010 earnings of $2.40. We now expect comparable sales to increase between 7% and 8% for the year, which implies a low single digit comparable sales increase in the fourth quarter of 2011. I would like to note, that we achieved a 14.9% comparable sales increase in the fourth quarter of 2010, making this the most challenging comparison of the year.
With that, I will turn the call over to Mike, to highlight our third quarter performance in more detail.
Michael R. MacDonald - President and CEO: Thanks Doug and good morning everyone. We are pleased to share with another strong performance at DSW. Our third quarter included increased sales expansion and merchandise margin, and leverage and occupancy, all of which contributed to a record earnings performance. Doug mentioned our comparable sales rose 5.2% in the quarter, which we believe is pretty impressive, because it follows two years of double digit comp sales increases. Our comparable sales increase was driven by growth in traffic count, with more modest gains in AUR and UPTs. We found that our customers are increasingly opting for DSW, because of our fashion relevance. This, combined with our expansive assortment of brands, everyday value and the ease of our assisted self-select service approach, drove increased sales across all categories and genders.
Let me highlight our progress on some of our key initiatives. First, we continued to grow sales productivity, the key driver of profitability. On a trailing four quarter basis, our sales per square foot now totals $240, and that compares to just $196 per square foot in fiscal 2008, representing a 22% increase. We continue to see opportunity to increase sales productivity further, as we improve our assortments, enhance our precision marketing, and further develop our supply chain initiatives.
Second, we successfully drove increased store and online traffic through impactful national advertising and through precision direct mail and email marketing that targeted our 18 million loyalty number base. As you have seen, we continued our, Where'd you get those shoes? TV campaign for the fall with new (winapps) and updated fashion looks, and the impact of our precision marketing is reflected in the fact that rewards members accounted for 88% of total sales in the quarter.
Speaking of marketing, let me say couple of things about our marketing efforts for the upcoming Thanksgiving weekend. First, we will have special offers, featured items and GWPs in both our stores and dotcom channels for Black Friday through Cyber Monday. Also, in support of our fast growing gift card business, we'll kick off our annual gift card promotion on Black Friday and it will run through December 24. However, we will not give the store away, and we will not open up in the middle of the night. We are pleased that our everyday discount pricing model enables us to predictably record the biggest day of the year on Black Friday, without sacrificing margins or inconveniencing our customers and associates.
Getting back to our initiatives, the third major area where we continue to make progress is the addition of product excitement and innovation in all categories of merchandise. This continuous injection of newness is helping us to evolve the DSW brand to fashion authority status for both footwear and accessories.
Fourth, we continue to expand our private brand penetration. Year-to-date, our private brands have represented 10% of total sales compared to 7% in the first nine months of 2010. This penetration increase was driven by growth in our existing brands and the addition of new brands.
Turning to category performance in the DSW segment, our comp sales performance was positive for all major categories and included a strong double-digit comp performance in boots for both women and men.
Our largest category women's footwear grew by 4.3%, led by a positive response to our boot selection as our team did an excellent job in identifying trends and brands.
We also experienced very strong growth in dress shoes especially pumps and anything with glitter, which should bode well for the holiday season when our customers are looking for festive dress shoes. Men's which is a strategic growth area recorded a comp increase of 13.5%. Men's boot sales actually outpaced women's and I believe this reflects our growing ability to attract a fashion forward male customer.
Athletic footwear had a 0.3% increase in the quarter with technical athletic footwear leading our performance. Excluding the toning category from both this year and last year athletic grew by 13% over the prior year. Accessories which includes handbags, smaller other goods, casual hosiery and fashion accessories, grew by 4.8%. The big driver of that increase continues to be casual hosiery which includes tights, leggings, boot liners and other fashionable leg wear.
For the quarter overall sales growth was relatively balanced across all regions with comps ranging from plus 2% to plus 5%. The weakest performing region was the northeast at plus 2%.
As you recall this part of the country was affected by Hurricane Irene in August and an early snow storm in October. Regarding our store expansion during the quarter we opened 8 new stores this included 2 stores in the smaller Alabama markets of Mobile and Montgomery. As you will recall our strategy is to open full size stores in smaller markets but still achieve good returns by sharpening our real estate and build out costs.
In just last week we opened our 17th and final new store of the year in Lawrence, New York. We also made further progress on our aggressive program for remodels and clearance wall removals.
To-date we’ve completed 46 of the approximately 60 stores planned for the year. We’ve relocated 2 stores so far in 2011 with relocations being undertaken to either improve the quality of our location or to achieve lower store occupancy costs or both.
Our e-commerce business remained strong in the third quarter. The three new initiatives we implemented earlier this year are complementing the improved product assortment leading to increased site traffic and higher conversion. We continued to make refinements to our Shoephoria stock locator system which as many of you are aware allows our in-store customers to buy product from e-commerce when it's not available in our stores. Sales generated by our Shoephoria system continue to grow and we believe this system is contributing to an overall positive customer service experience.
Our second DSW.com initiative, our mobile website that we launched in June, is driving traffic from smartphones and tablets, as customers checked every reward balances, researched specific items, and find stores in their area. Since the launch of mobile, we have seen a significant uptick in traffic, and conversion has increased as well.
The third initiative, is the addition of kid shoes to our website offering at the beginning of the fall season. Kids represented 1.6% of dotcom volume. We expect this penetration to grow, as we begin to market kid's shoes and as we define this customer base. Finally, we are excited to announce, that by the end of the fourth quarter, we will have the capability to ship internationally from dsw.com.
Our leased business division had another good quarter, posting a 4.9% comparable sales increase. This was our eighth consecutive quarter of positive comps in leased. Our merchandise offerings are helping to drive sales across other areas of the host stores, which further solidifies DSW as a valued business partner. Following quarter end, we were disappointed to learn the depending closure of SYMS Corp. We remain confident that the strategies we have in place, will lead to continued growth in the leased business, and we remain focused on adding new partnerships that capitalize on our unique operating platform, in order to expand this business.
As Doug mentioned, we completed the settlement of the PIES on September 15. In addition, our board approved the company's second quarterly dividend of $0.15 per share. We are pleased to be able to continue to return value directly to our shareholders.
Looking ahead to the remainder of the year, we remain confident in our ability to achieve the objectives we set for ourselves. DSW is well established as a destination for quality, value priced footwear. We're growing our brand awareness through our marketing efforts, and we're increasing our productivity through solid execution in merchandising, inventory management, and by virtue of our systems enhancements, such as stock locator and replenishment.
These improvements in execution, coupled with our well developed loyalty program, have us poised to continue to gain market share this holiday season. As our guidance suggests, we continue to believe it's prudent to plan comparable sale to a modest increase. I know you are well aware we're facing our toughest comparison from last year when comps rose 14.9% in the fourth quarter. However, given our flexible business model, we're well positioned to chase upside opportunities as they present themselves.
With that, I'll turn the call back over to the operator to open the lines so we can take your questions.
Operator: Chris Svezia, Susquehanna Financial Group.
Christopher Svezia - Susquehanna Financial Group: I guess, first just on the product margins, just some of your thoughts, in and around that? I think initially you probably expected it to be kind of flat in the back half, some opportunity show improvement, obviously did a great job here in the third quarter. Any thoughts about how you think about fourth quarter or just a trajectory on the product margin, I mean do you really think there is still greater opportunity to drive product margins in this business.
Michael R. MacDonald - President and CEO: Debbie probably had some comments here too Chris, that from the beginning of the year, we knew the cost pressures would gradually increase as we got into the fall season. The cost pressures will be greater in the fourth quarter than they were in the third and third was greater than second, so we anticipated some of this, but as we planned since the beginning of the year, the private brand, the other things that we've talked about to mitigate those pressures are there. Help offset that, and mitigate it, but the pressures will continue to increase through the fourth quarter. Debbie.
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: We’re seeing the cost pressures continue to increase we were able as Doug pointed out to mitigate most of that in the third quarter, we are seeing in the low to mid single-digit cost increases in fourth quarter. Q1 orders that have been placed so far and certainly all of Q1 isn't put to bed yet. Looks like it continues to have an additional mid single-digit cost increase as well. So having said that we still have a lot of work ahead of us, similar to what we looked at third quarter right and working with our resources balancing out our private brand against our domestic buys. There is still lot of work yet to be done to try to alleviate some of that pressure, but that’s the initial cost increases that we're seeing right now.
Christopher Svezia - Susquehanna Financial Group: More specifically, what do you think in terms of the fourth quarter, in terms of product margins, you still expect to show an increase or is that flatten out in the fourth quarter, assumed in your guidance?
Michael R. MacDonald - President and CEO: I would say it wouldn’t be as strong as the third quarter and it's baked into our guidance.
Christopher Svezia - Susquehanna Financial Group: Debbie for you, I guess any, I mean boots did a great job great to see the comp performance there. I mean I guess whether any impact whatsoever you saw as the quarter unfolded or no any thoughts to that.
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Well certainly there was a little bit of that in third quarter, I never like to use that as an excuse though, so I will just say that I was really happy with our double digit comp performance in boots and the same script that we called out early that we thought would do well in third quarter did, and that was everything from riding boots, casual boots, engineer boots and anything that had shearling or fur. So those were the early indicators those trends are continuing into fourth quarter and now I kind of look forward to some of the real cold weather that the nasty weather hitting, so that we sell our functional products. So there really wasn’t any surprise for me in third quarter in terms of how we did in boots. What fourth quarter is going to look like?
Christopher Svezia - Susquehanna Financial Group: Debbie, I am just kind of surprised on the athletic side, on the athletic side the business was little bit softer than I thought I am just curious just from a toning comparison I mean, do they ease significantly in the fourth quarter or did you take advantage I think last year there was a lot of that discounting going on I guess maybe you took advantage of that to sell some product. Just tell me your thoughts where you stand right now and I guess that comparison gets much easier in Q4 is that fair to say.
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: So, Chris let me just say that in the third quarter last year, toning was approximately 12% of our business, this year it was 2.7% so it was significantly different what I am really pleased about is that we were able to pick up volume over last year in third quarter in spite of the toning erosion that we projected. So we were able to offset all of that toning volume, and add additional volume to that category. The comparisons get a little bit easier, but I will tell you that we still have on that promotional business we were up against last year, if you remember third quarter, that's when we started to accelerate things into rotation and take the markdowns, to kind of get ourselves clean from the toning and I am really happy that we did that early last year, because it nets for a better comparison for us this year, and we are not up against quite the pressures in toning that some other people are. But I think that, we are going to continue to be up against some numbers in fourth quarter. After fourth quarter, I think that's pretty much behind it, but it looks like the strategies in place are enough to offset any of that promotional activity we will be facing.
Operator: Steve Marotta, C.L. King and Associates.
Steven Marotta - C.L. King and Associates: Doug, inventory was up 14% versus last year, with sales up 8.5. Can you parse out new stores, and talk a little bit about your inventory position going into the fourth quarter?
Douglas J. Probst - EVP and CFO: Yeah, that's why we break out cost per square foot, which was a 5% increase, and we like our inventory position and how we are managing it to our targets for the beginning of Q1. So, the balance of it is, what you have talked about, new stores etcetera. So we like where we are.
Steven Marotta - C.L. King and Associates: I understand your normal reticence to talk about quarter trends to date, but that said, has the Northeast accelerated from the up 2, that you realized in the third quarter?
Douglas J. Probst - EVP and CFO: We are going to continue to be reticent for responding to that. It's really early, but as Mike said in his script, that the sales by region of the country weren't that terribly different, and obviously they are probably little more pressured in the Northeast in that third quarter because of the weather items going on. But they all tend to even out over the course of a third quarter and certainly, a fall season.
Steven Marotta - C.L. King and Associates: Right. And I guess what I'm trying to drive at is, I wouldn't be surprised if that pendulum has swung a little bit, given the weather break in the fourth quarter here in the Northeast?
Douglas J. Probst - EVP and CFO: Probably not a bad assumption. But we won't comment on that.
Steven Marotta - C.L. King and Associates: I understand. Lastly, Doug, what do you expect your yearend cash to be, please?
Douglas J. Probst - EVP and CFO: Close to $400 million. That's cash end investments of course.
Operator: Claire Gallacher, Auriga Investment.
Claire Gallacher - Auriga Investments: Just a follow-up on the inventory question, could you comment on your clearance inventory levels? Where you were at the end of the quarter this year versus last year?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: This is Debbie. So our clearance inventory is actually in a fairly good position. Let's just speak to the footwear clearance inventory. The penetration is equal to what it was last year at this same time, and were only up about 1.4% per average store in footwear clearance, which is about 72 units per average store. So I think we're pretty comparable, pretty flat to last year.
Claire Gallacher - Auriga Investments: Then, you talked about a low single digit comp for Q3 essentially. You came in a little bit ahead of that. Was there one – I mean, it looks like men's put up really strong number. Is there where you saw the upside or was it from the women's side as well? Where did you see the upside for the quarter?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Well, the upside was in men's. Obviously, as our strategy there continued to rollout and take hold. But also in the boot area we saw the really strong comps which was about – it was double-digit comp increases. And I just like to point out in the dress area, Mike had mentioned about some things happening in dress, we were really pleased that two of our biggest and strong categories continue to perform well for us and that is in the evening shoes where we really think that there is a category domination there with all the assortments that we have that across is a pretty broad life style and also in the plain pumps that doesn’t seem to be letting up at all, which we talked about that on our last call.
Claire Gallacher - Auriga Investments: And then just lastly, you mentioned shipping internationally for e-commerce by the end of the year. Can you talk about the opportunity there, just kind of where you see that business going?
Michael R. MacDonald - President and CEO: I don’t think we're public on our expectations, I don’t think we actually know. We're going to open it to about 200 countries, so I think we'll get some reads that we'll probably build gradually over time and we'll see where it goes and I think we've been on record with saying, that’s where we want to judge the appetite for DSW internationally first. So we're still on that tact.
Operator: David Mann, Johnson Rice.
David Mann - Johnson Rice: A couple of questions, in terms of boots can you elaborate on the percentage penetration Q3 versus Q4, remind us what that is?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: So let me just say that Q3 as a percentage to our total fall boot expectations is 44% of the season. So Q3 represents 44% and Q4 represents 56%. So we have more volume in Q4 for the back of the season than we have in the front end of the season and once again we are up against some pretty strong comps going into the fourth quarter. But that’s how it breaks out.
David Mann - Johnson Rice: Can you parse that out in terms of sort of percentage of the mix or revenues in Q3 and Q4?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Let me get back to you on that.
Douglas J. Probst - EVP and CFO: I think it's about 21 and may be 24 something like that, 21, 24.5 something like that between 3 and 4.
David Mann - Johnson Rice: On the rewards program can you just go a little deeper into the kind of penetration you are seeing how fast that’s growing is that accelerating in terms of the acquisition of new rewards customers.
Douglas J. Probst - EVP and CFO: I think we ended last year at a little under $17 million and we are now at $18 million in terms of members and I think in terms of penetration of sales I mentioned we are 88% and my recollection is its been around 86%, 87%, 88% for the last several quarters. So its maintaining its positioning and growing slightly.
David Mann - Johnson Rice: On the dot com business can you elaborate a little more on the pace of growth there. And where do you stand in terms of that business, relative to the profitability, if not specific generally how much money is that loosing or do you think – how far away from a breakpoint do you think you are?
Douglas J. Probst - EVP and CFO: Well first of all that business has been contributing quite significantly to our total profitability for many quarters now. So I want to clarify that. And in terms of the pace of growth, we don't break out that business specifically, just because we believe there is so much interplay between both the brick and mortar channel and the dotcom channel, and in fact, that's how we market it. We market cross-channel shopping to both customer segments, and so – and particularly, when you consider the implementation of our Shoephoria stock locator system earlier this year. We are really facilitating that cross channel shopping. That's a long way of saying, we don't break out dotcom sales, but I'd be – it is easy for me to say, it continues to be the fastest growing segment of our business.
David Mann - Johnson Rice: Then lastly on your – what you have tried to in terms of passing through price increases, can you just talk a little bit more about the elasticity there? Where you have been able to pass through the price increases and what you have been able to accomplish with that?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Well, I will tell you the AUR in all areas of the business was up. So, I think the thing that's most notable to talk about, is specifically in the boot category, where we saw the AURs up by a little less than 7% over last year, and still driving double digit comp increases. I think what we really have to go back to is, on what the strategy was, in addressing these cost increases and how we were going to manage it, and that was number one, to try to maintain our sensitive pricing on our core items. So on our key commodity core items, we wanted to kind of maintain those sensitive price points, which I think we did a fairly good job on that. Then past those cost increases in places that were more cutting edge fashion, that had less price resistance due to the emotional buying of that product, versus logical buying or rational buying, I should say. So there isn't any definitive pricing strategy we have across the entire mix. We looked at each individual item, looked at the kind of increases we were having to absorb here, and looked at the kind of prices we thought, the retails we could get to that product. So I think the strategy that we incorporated which was looking at each individual item and pricing each item based on what we thought we could get for it, that actually is the big story and there is not one size fits all strategy across the entire business and how we manage those cost increases and those retail increases.
Operator: Scott Krasik, BB&T Capital Markets.
Scott Krasik - BB&T Capital Markets: Just a few questions. Remind me Debbie, did you actually capture cold weather boot sales last year, the Sorel. If I remember, it sort of happened a little late and this would be incremental this year. How do you feel about the cold weather product?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Could you repeat that question, Scott. There was a few different questions there, I think.
Scott Krasik - BB&T Capital Markets: If I remember correctly, the real cold weather product, the Sorel looked to hit a little later in Q4 or Q1 and you guys missed that last year, and it was going to be incremental this year.
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: No. I don't think so Scott. I think we always deliver little bit of that cold weather product at the end of Q3, which we did this year as well. So I don't really see a big difference. I know we had fairly large although the volume is small, comp decreases in third quarter because the cold weather, the sloppy cold weather didn’t come as early as it did last year, but there is really not a big difference between Q4 this year and last year in terms of our cold weather boot expectations.
Scott Krasik - BB&T Capital Markets: Private label sales at 10% now, where do you see that going and how is that split between bags, accessories and footwear?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: We continue to see opportunity for private brand, we believe that over the next three to five years that number could accelerate up to penetration of close to 15%. That’s where the trend suggests it could lead. So as far as the split between footwear and accessories, we're a lot more developed in accessories than we are footwear right now. But that split is still primarily mostly in footwear versus accessories.
Scott Krasik - BB&T Capital Markets: Then to the extent I don’t think you spoke about conversion in the stores, was that up Mike and what sort of impact are the inventory management systems having and remind us of what you expect to get?
Michael R. MacDonald - President and CEO: Actually our conversion in the stores was down slightly. We believe – and of course I always think of conversion as being a parameter of the attractiveness of assortment, the in-stock positioning, the value and the in-store experience. So it's not any one thing, it's all of those things. As you might imagine given that we had a slight decline in conversion, we're pretty focused on that and our stores are focused on that. One thing you should know is that as our Shoephoria sales increase and that is a customer coming in finding a style she likes but not the size going up to the checkout area and having one of our associates find it online. That sale which prior to this year may have resulted in a customer buying another style within the store, that sale is now being captured by the Shoephoria system and the sale is credited to the dot com business, so that’s an all new phenomenon this year, and to the extent that's happening and we are transferring the business that would have otherwise happened in the four walls of the store to the Shoephoria system it would have depressing impact on the conversion. Now if you did the math and you said everyone of those sales that you did on Shoephoria is a sale that otherwise would have been transacted in the store our conversion would have been about flat. I don’t think that’s true, I think there is true incremental sales being generated by Shoephoria and so we would still be left with a small conversion decline. I can’t tell you whether it’s the customer being more selective or in-stock position which I can’t imagine or one of those other factors, but we know it went down a little bit.
Scott Krasik - BB&T Capital Markets: The traffic was up and I guess that leads to my next question. The newer loyalty customers that you signed up in the last year or two are there any demographics, like geographic differences that you see that tells you that you are pulling market share from some other channels.
Douglas J. Probst - EVP and CFO: I don’t have that data and we really classify our customers not by demographic but based on their purchase behavior, and that’s how we market to them, we call them clustomers not clusters not customers, but customer clusters or clustomers and so I can't tell you where it's coming from, I can just tell you how they behave, because that drives our marketing.
Operator: Jeff Van Sinderen, B. Riley.
Jeff Van Sinderen - B. Riley: Just to clarify, was there anything out of the ordinary outside of the weather, that I know you mentioned about the sales progression monthly basis throughout the quarter? And I guess more specifically, was there anything unusual in October?
Michael R. MacDonald - President and CEO: As you know Jeff, many of the people on the call know that we look at September and October together and we term it Soctober. There is always oddity between those two months, but we find historically, that when you combine those two months, those nine weeks together, the patterns are pretty stable, and I would say that again for 2011.
Jeff Van Sinderen - B. Riley: Then I know you briefly mentioned some of the things you are doing for holiday promotions, loyalty customers and so forth. Overall, is the plan for you to be more or less promotional versus last year in the programs you are running?
Michael R. MacDonald - President and CEO: I would say, we will certainly not be more promotional. Probably, pretty comparably, maybe slightly less this coming weekend.
Jeff Van Sinderen - B. Riley: Then as far as the most likely drivers of your same store sales for holiday, AUR, UPT, do you think that those are going to be similar to Q3 or Q4?
Michael R. MacDonald - President and CEO: There is no one significant contributor, even the conversion drop was very slight. So, all those components, AUR, UPTs, conversion, traffic all those will be probably slight contributors. But given a low single-digit comp, they will all be pretty close to flat would be my guess?
Jeff Van Sinderen - B. Riley: Then finally, any more color you can give us on the men's business? I know that's small, but it sounds like it's running pretty strong, especially in boots. Is there anything outside of boots to note, and then -- maybe you could just comment on sort of, what you are learning on the men's business?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: I think the core item replenishment, price replenishment piece of our business, which is about a third of the business, that continues to be strong and that ensures that we don't disappoint our core customers from finding their size, and what I call those non-negotiable must have items that continue to work well for us. Number two, the fact that we continue to add great fashion to the men's area, and men's acceptance of buying some of these fashion items, I think, really points to the fact that men are a little bit more comfortable with making those choices for themselves right now, and not buying just the core classic items, but really embracing some of the great new fashion that the men's market is showing us right now. I think those are really the two big things; and then we continue to add new products – elevate new products within the existing brands we have, and add some other brands into our mix, and the customer is really responding very nicely to it. So this to me, is just beginning of a nice trajectory in men's.
Operator: Jeff Black, Citi.
Jeff Black - Citigroup: Question on just the AUR, given your comments around conversion and what sort of level of comfort here that we have, additional price increases, it sounds like in 4Q that we can take price up a little bit more in 4Q if that’s the plan and even more important in spring when we don’t have the fashion boot category, what's our level of comfort we can continue to use the price lever there?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: We do have – still continue to wins in the pricing, what we're finding right now is using the strategy that we have maintaining prices on our core commodity items and taking those increases in the fashion item is working for us right now, that’s a strategy that we will continue to implement going forward. But I do want to continue to stress that we will continue work on mitigating those cost increases that seem to be coming at us right now and trying to control those as best we can. Right now, our private brand increase has been able to kind of help us offset some of those cost increases and having more balanced AUT assortment out there, but there is no question that we're up against those headwinds. But I think that the strategies, we're implementing right now will continue to be utilized through next year and hopefully they'll hold for it.
Michael R. MacDonald - President and CEO: The other part of Jeff's question was an implication that when we cross over into spring, our floor is suddenly devoid of fashion and therefore we don’t have pricing power on chunk of our inventory and I think you'd want to say that’s just not true.
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: We have fashion all the time. Fashion is a core component of our assortment strategy and we're never devoid of fashion.
Jeff Black - Citigroup: Well, I guess the question was really, you don’t have the boot price points in spring. So higher prices on items that are lower priced in general might have more sensitivity that was the real question and then Doug, did you say how much marketing shifted into 3Q from 4Q?
Michael R. MacDonald - President and CEO: Jeff, the other thing you got it right is that although the price point in spring is lower than it is in fall because of the boot penetration. Boots take up about 1.5 to 2 times as much space on the floor as do sandals or regular footwear. So in terms of dollars per square foot, it's pretty flat. In terms of the marketing spend – Doug, did you want to comment on that.
Douglas J. Probst - EVP and CFO: It's about $3 million to $4 million.
Operator: Mark Montagna, Avondale Partners.
Mark Montagna - Avondale Partners: Just a follow-up on the Shoephoria. If you were to credit all the sales of Shoephoria or the incremental sales of this year versus last year on Shoephoria. How might that have impacted the comps?
Douglas J. Probst - EVP and CFO: It wouldn't have impacted the comps at all because the both dotcom sales and the store sales are in the comp calc.
Mark Montagna - Avondale Partners: Then just regarding clearance, I imagine it's fairly low, is it flat to last year or perhaps even lower than last year?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: In footwear, it's pretty flat to last year it's up just a little over 1%, about 72 units per average store.
Mark Montagna - Avondale Partners: Then just looking at – in the past, you've spoken about trying to grow the performance of athletic. I'm wondering how that's going – what percentage of sales would performance be versus more the fashion athletic and is it really more targeted at women's for the performance athletic or also some men?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: So it really is a blend and I will just tell you that the percentage – and we really call that technical athletic, which is the performance athletic piece. That is running around 25% of our total, and that has continued to accelerate, if you look at Q1, Q2, and Q3, it continues to accelerate in terms of penetration to total. So we are really pleased with the performance there, because that allows us to get into some of the more technical, more fashionable, and higher priced goods of some of our core brands, and that piece of our strategy is going very well. How much higher than 25% will it go, I don't know, we are kind of testing the waters right now, making sure that the customer is embracing all this new exciting products we are throwing at her. She seems to be accepting it well, and so I think that there could be more opportunity there, but we are happy with that 25% of total.
Mark Montagna - Avondale Partners: Do you include lightweight running in that figure?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Lightweight running kind of crosses between that and some of the other lifestyle. So, lightweight as a percent of total is about 15% of the total athletic business.
Mark Montagna - Avondale Partners: Then, last year, in the fourth quarter, you had some expenses related to the distribution centers. Are you expecting – I am assuming you are not really expecting anything related to that again this year?
Michael R. MacDonald - President and CEO: We continue to increase into our DC and FC as the businesses grow and we support the initiatives that we have. So it is actually a delevering impact into our results in 2011 and into 2012.
Operator: Patrick McKeever, MKM Partners.
Patrick McKeever - MKM Research: I am wondering if you might elaborate a little bit on the comments about international shipping, and I think you said at the end of the fourth quarter, you'll be in a position to do that. Are we talking about Canada and the U.K., other places just -- I mean, how might the logistics work there, and what kind of an opportunity do you see to do business internationally through your e-commerce site?
Michael R. MacDonald - President and CEO: We're doing it through a third-party called or MyUS.com and I think the initial opening is going to represent about 200 countries, including Canada and the U.K. and we really don't know how big it's going to be. I think it will be something that builds over time as the customer recognizes that we have that capability. So that's as much detail as I can give you right now.
Patrick McKeever - MKM Research: Then any updated thoughts on the balance sheet and the – all the cash and no debt now that you've completed the RVI merger and settled the PIES and paid the special cash dividend and initiated the quarterly dividend. I mean, it's a lot of cash on the balance sheet. Any thoughts to potentially accelerating your store growth next year, possible acquisitions, those kinds of things for the cash?
Douglas J. Probst - EVP and CFO: You went through a nice list of the activity that we've done in the last six months or so. Thank you for crediting that. But first and foremost, it is due invested back into our business and if the real estate provides itself – a good real estate provides itself, available to us. We will open more stores. But we're not prepared to tell you how many that would be, but certainly that would be an option for us and the other items that you mentioned would be secondary to the investment back in the DSW.
Operator: Chris Svezia, Susquehanna Financial Group.
Christopher Svezia - Susquehanna Financial Group: Debbie, just a clarifying point, earlier when we just chatted briefly about, toning you mentioned it was roughly 12% of the business, that’s just athletic?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: That was 12% of the athletics business last year, was toning this year 2.7%.
Christopher Svezia - Susquehanna Financial Group: Then would you expect I know athletic is not a critical driver in the fourth quarter, would you expect that business to improve sequentially in terms of trends lines, just as you cycle through some of the toning pieces or no?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: I think I'd plan it pretty flat with what we've seen in third quarter Chris. Like I said we're up against from a volume perspective a little lighter toning volume in the fourth quarter that we were – than we were in third quarter not by much, but a little bit lighter. So I think we have to cycle through fourth quarter and hopefully the strategies we have in place right now, with technical and some of our other big brands will hold against those toning numbers and they are all through fourth quarter.
Christopher Svezia - Susquehanna Financial Group: I know you're building out with Nike on the men's side specifically, how has that been progressing for you guys?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Very well, we have great partnership with that brand and the products that we're getting in from them are doing very, very well.
Christopher Svezia - Susquehanna Financial Group: And then Mike for you, size optimization, I guess that has no impact here in the fourth quarter or did it and how would you characterize the opportunity for DSW, there is from a comp perspective being in-stock in certain sizes or from a margin perspective and that type of thing. I am just trying to understand, what that could do for you guys and when we expect to start seeing some benefit from that?
Michael R. MacDonald - President and CEO: First of all, size replenishment is the system capability we put in over a year ago and that we have gradually been ramping up the percentage of our inventory that is able to take advantage of that ability and I think we're now at like 30% and that’s fully penetrated at this point and I think what we said is that the items that we put on size replenishment had about 10% lift as we put those items on replenishment and that’s happened gradually over the last call it year or year and half. The second system is size optimization which affects the proportion of styles that are allocated by size by store. In accordance with the natural demand patterns in each store location by size and we've had no impact from that system yet because we haven’t put it in and I now believe we will not put that system in until probably the end of the first quarter of 2012, which is a little later than we may have signaled to you previously. But that’s a big system and it's a big capability and it's one that will both increase our sales and reduce our mark down simply because we're going to more accurately allocate by size by store. Hopefully that clarifies the two different systems and the timing of each.
Operator: Scott Krasik, BB&T Capital Markets.
Scott Krasik - BB&T Capital Markets: Just you mentioned Debbie, you had been buying into Q1 already. Are you seeing some of the same trends first spring that you did last year, preppy and certainly, the technical running? Are there new trends that you are chasing at this point, how do you think about that?
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: As far as the women's business is concerned. I think it's less about new styling that's coming out, than it is about new materials and new expressions in some of the existing styles we had. For example, wedges will continue to be strong, but the way that wedges will be expressed both through material and this new infusion, it's a wonderful infusion of color, that's going to be coming into the assortments, will make it seem really-really fresh to the customer. So it's more about taking some key existing patterns, and kind of – kind of reenergizing them with new materials and color. So I am really excited about that piece. Whenever color comes into a season, it really does give the assortment a nice exciting kind of lift, and gives the customer a reason to buy, because color has not been a big trend in the business for many-many years. Naturals, which we talked about last year, that's going to continue this year. Naturals, you are going to see not only in color, but in new materials as well. So, to me, there is enough freshness going on there that I think it will give the customer a reason to buy, and let's not forget booties for first quarter, and some of those new booties that you are seeing right now in fourth quarter, that are kind of ankle grazing, the thicker, chunkier heels, are doing very well right now. And that just continues into Q1, as you start to see all of the new prints, and the vintage and all the crochet dressing, that's going to be happening in women. So I am actually pretty excited with the strength that we have got right now in the floor, that really look to be very strong and could be key items for us in first quarter next year. As far as athletic, you brought that up Scott, I continue to see the ability to drive the technical piece, the lightweight piece through the infusion of new products that are coming to us from our core resources, and I don't think that that's going to weaken at all. I think that just gets stronger.
Scott Krasik - BB&T Capital Markets: That's great. And just on the kids business, now that you are through back-to-school for that decrease, as a percentage of the total penetration or are you going to accelerate the branding there and try and grow that even off-peak?
Michael R. MacDonald - President and CEO: Scott, that would be a logical theory, but we are still so early into it, we only have our own history built with some kid's experience, you would think that that would drop-off a little bit, but we will learn, and it's a very small part of our business. So we got to keep our focus on it, but we are not going to let it drive our decision making too much, we will learn a lot about it in the first year, and build on it after there.
Operator: And that is all the time we do have for questions today. At this time, I would like to turn things back over to management for any additional or closing remarks.
Michael R. MacDonald - President and CEO: Thanks very much and thanks to all of you for your interest in DSW and your support of DSW, and we hope you have a great thanksgiving. Thanks again.
Deborah L. Ferree - Vice Chairman and Chief Merchandising Officer: Thank you.
Operator: That does conclude today's teleconference. Thank you all for joining.