DSW Inc. (DSW) Q3 2018 Earnings Conference Call Transcript

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DSW, Inc. (NYSE: DSW)Q3 2018 Earnings Conference CallDec. 11, 2018, 8:30 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. At this time, all participants are in a listen-only mode. As a reminder, today's conference is being recorded. Now, I would like to turn the conference over to Christina Cheng, Senior Director of Investor Relations. Please go ahead, ma'am.

Christina Cheng -- Senior Director, Investor Relations

Thank you. Good morning, and welcome to DSW's Third Quarter 2018 Conference Call. Earlier today, we issued a press release comparing results of operations for the 13-week periods ending November 3rd, 2018 and October 28th, 2017. Comparable sales were calculated for the same 13-week periods ending November 3rd, 2018 and November 4th, 2017.

Please note that remarks made about the future expectations, plans, and prospects of the company constitute forward-looking statements. Results may differ materially due to various factors listed in today's press release and our public filings with the SEC, and we assume no obligation to update any forward-looking statement. Joining us today are Roger Rawlins, Chief Executive Officer, and Jared Poff, Chief Financial Officer. Now, let me turn the call over to Roger.

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Roger L. Rawlins -- Chief Executive Officer

Thanks, Christina, and good morning. For two years, we've been articulating our vision to position DSW, Inc. for strong earnings growth, and today, I'm pleased to report our team's result. Our strong momentum has continued, as we delivered a 7% comp and 56% earnings-per-share growth this quarter following our 10% comp and 66% earnings-per-share growth in the second quarter. On a 12-month rolling basis, we've driven a 5% comp, operating growth of 35%, and earnings-per-share growth of 56%. Gross profit and operating margins are leveraging, demonstrating the strength and discipline we have in our core business.

As I compare our results to the retail landscape, I'm excited to see DSW, Inc. at the top of the list, both from a comp sales and profitability increase standpoint. Fiscal 2018 will be one of the best earnings growth years in our history. I am confident that with the investments we made, the strategies we laid out, our team will continue to sustain our strong momentum.

We've also completed two major acquisitions in the last 12 months while delivering the outstanding performance in our core businesses. This would not have been possible without the leadership talent upgrades we've made across the business over the last three years. As these leaders focus on running the business, this has allowed me and a few other key executives to pursue new growth opportunities. As a leadership team, we are clear on our responsibilities, and nothing will distract us from delivering on our mission to inspire self-expression.

The strategies we have laid out to drive the business are the force behind our third-quarter and year-to-date results. The $833 million of revenue this quarter and the quarterly increase of $122 million are both company records, driven by substantial comp growth in our core U.S. retail segment. Additionally, the Canadian retail segment had an outstanding quarter and drove significant earnings into the business in just the second quarter since the acquisition was completed. At our U.S. retail segment, every category -- Women's, Men's, Athletic, and Accessories -- had positive comps in Q3. We're committed to fueling this incredible momentum going forward with the right investments, and consequently, we are raising our 2018 earnings guidance.

On November 5th, we closed on our acquisition of the Camuto Group, transforming our organization into one of North America's leading designers, producers, and retailers of footwear and accessories. We're excited to welcome our new associates and wholesale partners to the family. We're focusing on delivering on founder Vince Camuto's vision for his brand, its associates, and its customers. We are also excited about the margin opportunities this acquisition creates for the DSW brand and the new wholesale, direct-to-customer, and licensing revenue streams it provides. Let me turn the call to Jared to provide more details on our financial performance and updated guidance.

Jared A. Poff -- Chief Financial Officer

Thanks, Roger, and good morning, everyone. Let me echo Roger and say how pleased we are to report our second consecutive quarter of strong comp and earnings-per-share growth. Our comps in the last two quarters have been our strongest in seven years, and bring our year-to-date comps to 6%. Third-quarter revenues increased by 17% to $833 million this quarter, including $80 million from the Canadian retail segment.

On an organic basis, excluding the acquisition and business exits, total sales increased 10%, driven by a 7% increase in comparable sales. The strong volume growth, coupled with gross profit rate expanding by 320 basis points, drove outstanding profitability this quarter. Adjusted earnings per share for the quarter were $0.70, up 56% over last year. This includes a loss of $0.02 per share from the operating loss related to the wind-down of the Town Shoes banner, which is excluded from guidance. As a reminder, the financials that I will reference during today's call exclude GAAP-only items. For a complete reconciliation of adjusted to GAAP earnings, please reference our press release.

I would like to give you an update on our largest business, Designer Shoe Warehouse, and their product, marketing, and people strategies that have been driving our outstanding results. From a product standpoint, all categories posted positive comp growth for the second quarter in a row. Our Footwear category exceeded our expectations with an 8% comp increase, the sixth quarter in a row of positive comp. Women's Footwear comped in the high single digits, Men's in the low single digits, and Accessories in the low double digits. Our strategy for growing the business through key product distortions continued, as Kids' and Boot categories drove over 79% of the volume increase versus last year.

Customer demand for fresh fashion drove our exceptional Boot business this quarter, which was the highest in three years. Our double-digit percentage increase in inventory drove double-digit comp growth. In our Kids' business, this was our first back-to-school season with Kids' product in all our warehouses. The result was the highest Kids' volume quarter in company history, driven by increased location and strong comp performance in warehouses that have had Kids' product longer than one year. Kids' footwear accounts for 10% of the U.S. footwear market, but goes as high as 20% at our Canadian retail operations. Thus, given these data points, we are confident we have room to significantly grow Kids' Footwear at our DSW segment.

Men's Footwear, including Athletic, had its second quarter in a row of positive comps, and we continue to focus on introducing fresh takes on dress and casual comfort. Accessories continued its strong performance, producing double-digit comps for strong regular-priced selling. Increased depth in hosiery and handbags are driving this business.

Our marketing strategies continue to drive strong traffic and conversion in our warehouses and e-commerce platforms. Our two most significant investments in marketing this year are digital marketing and VIP Rewards relaunch. Increasing digital marketing spend is driving a lift in traffic and new customer acquisitions. The VIP relaunch, which was unveiled in Q2, launched additional perks this quarter, including real-time points and rewards accumulation, the ability to donate rewards to DSW's nonprofit partners, and the ability to earn points for engaging with the brand by trying on shoes, filling out customer profiles, or watching our online videos. These features offer our customers more convenience and create a stronger emotional connection with our brand.

Finally, we are excited about our investment in people and the foundation our new operating model creates. This was our first full quarter under our new operating model in all warehouses, which improved our customer experience in two key ways: 1). It provides role clarity between our customer-facing and warehouse execution teams, and 2). It provides sales coverage and better alignment of payroll hours to peak traffic pattern. We will continue to refine this new operating model as we provide continuous improvements to our customer experience.

Our Canadian retail segment and Other business segment also had strong performances this quarter. The Canadian retail segment generated $80 million in sales this quarter, with $8 million coming from the ongoing exit of the Town Shoes banner. Third quarter, due to back-to-school volume, is the highest-volume quarter for these family footwear brands. Our leadership's focus on the Shoe Company, Shoe Warehouse, and DSW Canada banner drove high single-digit comp growth and earnings of $0.07 to our Q3 adjusted EPS. We are excited to see the business well on its way to drive the $10-15 million of annual operating income target that was referenced on our last call.

At our Other business segment, we reported total sales of $30 million compared to $54 million last year, with the exit of Ebuys and Gordmans driving the decline. Our ABG business continued its strong momentum with a 7% comp this quarter. We continue to be encouraged with the response to our marketing and merchandise initiatives at Stein Mart. The ABG business ended the quarter with 287 locations.

Turning to gross profit, total company gross profit as a percentage of sales increased 320 basis points, driven by business mix and improvement in the DSW segment. On an organic basis, the DSW and ABG businesses' gross margin improved by 190 basis points, largely driven by stronger regular-price selling, lower clearance markdowns, favorable sourcing costs, and occupancy leverage at the DSW segment. With our inventory discipline, improved sell-through, and vendor accountability, we are committed to driving gross margin improvements on a sustainable basis.

Q3 SG&A expenses increased by 27%, driven by our planned investments in marketing, increased bonus expectations, and the acquisition of our Canadian retail segment. Growth in our gross profit dollars more than offset SG&A growth, delivering operating profits of 36% this quarter. Our third-quarter adjusted income tax rate decreased from 38.3% last year to 24.5%, primarily due to the implementation of tax reform.

Next, I would like to provide an update on the wind-down of the Town Shoes banner and our Camuto Group acquisition. We have agreed to terms with landlords to exit Town Shoes leases by the end of our fiscal year. Total expenses to exit these leases will be approximately $20 million, $13 million of which was incurred in Q3 and the balance in Q4. In Q3, we also absorbed $13 million in acquisition costs related to Camuto Group. These are GAAP-only items and are not included in our adjusted earnings per share result.

As it relates to Camuto Group, I would like to share some history and color on what attracted us to this acquisition and our near-term financial expectations. Camuto Group is one of the premier footwear design and production houses in the industry, and as we looked to develop our own design and production capabilities, we found that the opportunity to purchase this well-established, reputable, and highly experienced infrastructure was just too good to pass up.

The fact that this premier asset was available at the price we paid was strictly the result of unfortunate strategic missteps that severely strained the liquidity profile of the Camuto Group. The first of those missteps was a big and sudden jump into retail with no prior retail experience. The company ultimately exited these retail stores, but at a cost of well over $100 million in cash. The second misstep was bringing on line a new distribution center during their busiest time of year. Not only were there the typical learning curve issues, but the execution problems were so severe that the Camuto Group had to physically shuttle inventory between two facilities at significant expense, incur extensive personnel and consulting expense to address the operational issues, and ultimately miss critical delivery commitments, resulting in excessive order cancellation. This resulted in a significant operating loss for 2017.

With these two strategic missteps eroding their working capital, their factory partners, who now were experiencing delayed payments from Camuto and having just been burned by several industry bankruptcies, including Nine West and Rockport, began to dramatically pull back on capacity, low-ship orders, and increase their costs to cover Camuto's credit risk. This obviously put significant pressure into the Camuto P&L, with increased cost of goods and significant expense to air-freight product in from China. All the while, Camuto continued to experience a higher late delivery rate with their customers than is customary, resulting in higher discounting.

What we saw in this opportunity, however, was a design and production infrastructure that was still very much in place and fully operating with a reputation that was second to none, but at a priced-to-move purchase price as Camuto Group hurried to shore up their liquidity. After completing extensive due diligence, we were comfortable that 1). There were no material lingering costs related to the retail experiment, 2). Our purchase immediately freed up their liquidity profile, bringing their factory partners back to current payment terms and restoring them to normal capacity and service levels, and 3). Our own distribution expertise could bring the needed engineering and operating guidance they sorely need to optimize and better leverage their new, state-of-the-art distribution center.

And, while the business has immediately benefited from our resources and expertise starting on day one, it will take a little while to show up in Camuto's financials. Although the factories are back to normal, the lead time in footwear is nearly nine months, so we won't see that flow through the P&L until later in 2019. Furthermore, the improvements with the distribution center operations will take a few months to develop and fully implement. As such, we are approaching the fourth quarter and 2019 with an appropriate level of conservatism. Our guidance assumes the acquisition will be $0.05-0.10 diluted for the fourth quarter.

It should be noted, however, that this is not the quarterly run rate of the business. Their business is cyclical throughout the year, as is ours, and their fourth quarter is one of their weakest quarters from a sales and operating income performance. Accordingly, if you were to look at their full 2018 year, they are projecting to lose approximately $10 million before tax. Included in this amount is $9 million of interest expense, which immediately goes away with our acquisition.

Thus, given ongoing improvements, future enhancements as we further learn the business, and synergies we expect to see as we integrate the business, we believe fiscal '19 results will be in the range of marginally dilutive to marginally accretive. With 2020 and beyond, we expect the acquisition to deliver double-digit earnings per share accretion as we move the sourcing of our own exclusive brand volume onto Camuto Group's infrastructure. While we will remain a house of brand, we will accelerate the growth of our exclusive brands, which will enable us to gain greater control of our product destiny and exert greater leverage with the vendor community.

From a growth perspective, we are excited to see Camuto's long and deep relationships with their wholesale and private-label customers remain solid, with spring 2019 orders on track to increase from last year. As we support Camuto Group's wholesale business, keep in mind that our affiliated business group has long served third-party retailers with a business-to-business model.

A good example is our long-standing relationship with Stein Mart to help them drive sales. Our investments in marketing and our strong assortment are helping drive store traffic, and consequently, our Footwear department has comped 8% year to date, which is clearly one of the best-performing departments in that chain. We will tap this business-to-business experience to protect and grow our long-standing and meaningful relationships with our Camuto Group wholesale customers. We are absolutely committed to preserving this wholesale and private-label business, and look forward to expanding our addressable market beyond our traditional channels.

Finally, we are excited to bring our best-in-class direct-to-consumer expertise and infrastructure to the Camuto organization to build their own DTC business, which is nearly nonexistent today. As we have shared repeatedly, technology has allowed established brands to increasingly bypass traditional retail channels and go direct to the consumer, and while most of Camuto's peers have been focusing on and growing this business, Camuto has not developed this capability in any meaningful way. We believe that this is a huge white space for the Camuto Group.

Turning to the balance sheet, excluding inventory from our Canadian retail segment and exited businesses last year, inventory per square foot was 10% above last year, with Kids' accounting for nearly a third of that increase. On a two-year basis, inventory per square foot increased by 8%, which is in line with our two-year comp growth of 7%. Our liquidity has allowed us to continue to chase goods and opportunistic buys for next year. Inventories in our Canadian retail segment declined by 24% with dramatic improvements in inventory aging and healthier profit margins.

Our strong capital position enables us to invest in our core business while strategically acquiring assets that can leverage our expertise and expand our customer base. We ended the quarter with $294 million in cash and cash investments compared to last year's $330 million. Our balance sheet does not reflect the $238 million paid for the acquisition of Camuto Group, which was closed in the fourth quarter.

We spent $15 million in CapEx this quarter, including $2 million for our Canadian retail segment. Full-year CapEx is expected to be $80 million this year, including incremental CapEx from our Canadian acquisition. For our organic businesses, we're on budget with our $70 million of CapEx spend, which is primarily driven by store maintenance, DSW Kids, and our new store design pilot. We ended the quarter with 519 warehouses in the U.S. with a net two new openings this quarter. We plan to open three to six net new locations this year. In Canada, we closed three Town Shoe locations and one Shoe Warehouse for a total of 172 locations at quarter end.

Turning to our outlook for 2018, based on our continued strong momentum across all of our businesses, we are raising our comp and earnings guidance for fiscal 2018. We now expect full-year comps to increase in the mid-single- to high single-digit range and expect total revenues to grow in the 12-14% range. This will put us over $3 billion in top-line revenues for the first time. The forecast assumes revenues of $215 million from our Canadian retail segment and approximately $100 million from the Camuto Group acquisition.

We've raised our full-year outlook for adjusted earnings per share for our ongoing business to range from $1.70-1.85 per share compared to our previous outlook of $1.60-1.75 per share excluding business exits. It should be noted that this guidance includes $0.05-0.10 of a headwind from our Camuto business. Although results from our business exits are included in our adjusted earnings, we believe excluding them better reflects the results from our ongoing operations. As a reminder, the wind-down of the Town Shoes banner has driven a $0.03 operating loss, and Ebuys resulted in a $0.04 loss for a total of $0.07 lost year to date. We incorporated a table in our press release that allows you to see the guidance increase including and excluding Camuto Group and the year-to-date business impacts mentioned above.

Excluding the $0.07 loss from our year-to-date adjusted EPS of $1.72 implies Q4 adjusted earnings per share will range from a loss of $0.09 to a gain of $0.06 per share, down substantially to last year, as I previously pointed out. The main drivers are: 1). While comp sales are expected to remain strong in Q4, DSW segment will be down to last year in Q4 as a result of losing the 53rd week and a calendar shift in which we lose a high-volume week of October but pick up a low-volume week of February. The volume losses in our biggest business will cause substantial earnings decline and deleverage in the total P&L for Q4.

2). Clearance markdown dollars will be up to last year in Q4 despite the decline in volume. The week that we pick up in February is a higher-markdown week due to the clearing end-of-season goods. Also, we had a record low clearance markdown rate last year due to low inventory levels, which we will not anniversary this year. 3). The Camuto Group acquisition is estimated to be $0.05-0.10 dilutive in Q4. And lastly, our Canadian retail segment excluding the operating loss from the wind-down of Town Shoes is expected to be earnings neutral in Q4.

The fourth quarter is an anomaly this year and is not reflective of the outstanding business we've had year to date, nor the trajectory of the business into 2019. This year will be one of the strongest earnings performances in company history, and we look to improve upon that in 2019. With that, let me turn the call over to Roger to share his closing thoughts on the state of the business.

Roger L. Rawlins -- Chief Executive Officer

Thanks, Jared. Our strategic objective to gain market share in 2018 is delivering better-than-expected results. I'm excited and proud that we will become a $3 billion retail business in 2018. Next year, with a full year of the Canadian retail segment and Camuto Group's wholesale business in our sales, we will be well on our way to $4 billion in annual revenue, which includes approximately $500 million from Camuto Group's businesses. This wholesale and private-label business reflects approximately $1 billion in downstream retail sales, thus giving DSW, Inc. the ability to participate in close to $5 billion of footwear market share.

From 2011 to 2018, we drove $1 billion of top-line growth, with approximately $1 billion investment in over 200 store buildouts, operating costs, and inventory. During this timeframe, we captured modest market share, as pure play e-commerce companies and brands who are going direct to consumers made significant market share gain. As we were making these investments, the footwear market changed significantly, so to stay relevant, we must change. We must look for new markets and play at different spots in the supply chain to remain an industry leader. The acquisitions we made over the past six months have added more market share than the $1 billion investment we made over the past six years, and will transform our company into the most disruptive force in the industry while enabling us to grow well into the future.

To conclude our prepared remarks, I want to summarize what I see as our key accomplishments now that we are three-quarters into 2018. First, we continue to beat earnings and comp sales expectations, driven by the outstanding execution against our core strategy. In 2018, we will have our strongest comp performance since 2011 and highest earnings per share since 2013. This is the second quarter in a row where we have raised guidance, with our new guidance midpoint going up $0.10 from the previous guidance.

Second, we completed our Canadian retail segment acquisition at the beginning of Q2, and it is already accretive to our annual earnings. The addition of Bill Jordan as President and Mary Turner as Chief Operating Officer have been crucial to the success we are seeing, as they have the same focus on driving profitable results. Third, we completed the Camuto Group acquisition at the beginning of the fourth quarter, immediately giving us world-class design and sourcing capabilities that will generate access to new revenue streams, transform our business, and accelerate future growth.

And lastly, we continue to innovate. We are expanding our W Nail Bar and footwear repair services to more locations. We will continue to test new fixture packages that drive better customer experience. DSW has long been an innovator, and we will continue to test ideas that provide exceptional and differentiated customer experiences. We must find ways to emotionally connect consumers with our brand and the brands of our retail partners.

Our core businesses, along with our recent acquisitions, will work to create a force in the industry unlike anything that exists today, once again demonstrating DSW, Inc.'s ability to disrupt and grab meaningful market share. I want to thank our leaders and all our associates for driving these remarkable third-quarter results. Their passion and energy to realize our vision is certainly an inspiration to me. We'll keep operating with focus, tempo, and disruption as we transform our business for long-term sustainable growth. With that, let me turn the call over to the operator for Q&A.

Questions and Answers:

Operator

Thank you, Mr. Rawlins. We will now begin the question and answer session. To ask a question, you may press *1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been addressed, you may withdraw from the queue by pressing *2. Once again, it is *1 to ask a question. And, the first question will be from Rick Patel of Needham and Company. Please go ahead.

Rick Patel -- Needham and Company -- Analyst

Thank you. Good morning, everyone, and congrats on the very strong execution.

Roger L. Rawlins -- Chief Executive Officer

Thanks, Rick.

Rick Patel -- Needham and Company -- Analyst

Can you help us with the modeling of Camuto as we think about the fourth quarter and 2019? Any context on that business's stand-alone gross margins and SG&A versus DSW would be helpful. And, I was also hoping you could talk about the pathway to accretion. It sounds like you need to make some additional investments before we can see that segment improve, so, just curious how we should be thinking about the overall sales growth for that segment versus expense growth over the next few quarters.

Jared A. Poff -- Chief Financial Officer

I'll start with that. We are still really getting our hands around that business and how to put the financial disciplines in place around projections, modeling, and things like that. I will tell you on an overall run rate -- on a more normalized basis -- they tend to be relatively similar to our own operating income margins. I don't see a great deal of accretion or dilution from a rate standpoint.

As I mentioned in the call, they still have some headwinds facing them throughout '19. Many of those -- well over half of them -- went away with our acquisition. The liquidity freed up, the factories have all been brought current, and capacity is starting to be restored, but that is going to take more time to bleed in just given the lead times. Spring orders have long been -- already started to be queued in the factories, and so, we've got some time to see that flow through, but in general, on a healthy operating basis, you see them at an operating margin rate similar to ours.

Where we do see some opportunities are really in the white space areas we talked about, and those are retail areas, so you can expect to see some different margin profiles related to growth and retail sales for them versus their traditional wholesale channels. I think you asked about CapEx, but overall, we don't see a large amount of capital expenditures. We think there's a little bit needed to bring their operating efficiency to their warehouse, but overall, they've made the investments that they need to.

Rick Patel -- Needham and Company -- Analyst

That's very helpful. I was also hoping you could talk about the outlook for merchandise margins for the core DSW segment when we exclude the impact of weekly shifts. Your performance in 3Q is very strong and in contrast to some of the numbers we've seen out of the value space, so can you provide a little bit more color on what you think drove the strength there in your outlook as you think about the fourth quarter excluding the shifts and into next year?

Roger L. Rawlins -- Chief Executive Officer

Rick, I'll take that question. Rather than talk about Q4, what I would say is general direction of where we believe our margins should be able to go. A huge benefit we've had over the last -- it's been roughly about nine months of doing diligence around both Nine West and Camuto is our learning in that process that in general, we pay more for goods than others, and I think the learning of what it actually costs to manufacture goods, how we can be better within the DSW brand around the sourcing side, around logistics, speed to market -- there are huge learnings we're getting from this. So, our belief is we're going to continue to press hard on the vendor community to make us comparable to like-sized retailers, and I think that should create upside for us, go forward in margins, and that's a huge benefit that I think of acquiring this kind of capability to just get line of sight to what it actually costs to manufacture goods.

Rick Patel -- Needham and Company -- Analyst

Thanks very much, and happy holidays, everyone.

Roger L. Rawlins -- Chief Executive Officer

Thanks.

Operator

The next question will be from Paul Trussell of Deutsche Bank. Please go ahead.

Paul Trussell -- Deutsche Bank -- Managing Director

Hey, good morning. Congrats on strong results.

Roger L. Rawlins -- Chief Executive Officer

Thanks, Paul.

Paul Trussell -- Deutsche Bank -- Managing Director

Just wanted to maybe touch a bit more on the VIP Rewards program since the relaunch. Obviously, having some success there. Just maybe go a little bit more in detail on what you're seeing in terms of customer acquisition, average spending levels, would just be helpful to have a little bit more granular color on the success and potential how we can think about the sustainability of the success with that program going forward.

Roger L. Rawlins -- Chief Executive Officer

Thanks, Paul. I'm not going to give you specifics, but I would tell you it's the ultimate win -- it's the triple play kind of thing in that it's attracting more members, we have a higher retention, and we're getting a higher spend, which, as you know, in retail, that's about as good as it can get. And so, Amy and our team that lead that marketing effort have just done a phenomenal job. I'm really proud of what they've done, and it's not just about the certs and all the discounts, those kinds of benefits, but it's about the connection I think it creates for the consumer.

I think our philanthropic efforts around Soles for Souls, which I think we're now at close to 600,000 pairs of shoes, something north of that, that we have been able to collect and put back into our communities -- those kinds of things -- those are resonating with our customer, and attracting a new customer, and creating more loyalty with our customers. So, all of the things we had set out to do with this relaunch -- which, if you recall, Paul, we had not touched this in a meaningful way in about 10 years. And so, I think it was time for us to make some changes, but I think all of those elements combined is where we're seeing success, and as you look out into the future -- to your question -- I think when you merge into this elements of services and other capabilities we can bring to bear with personalization, I think there's continued growth in that area.

Paul Trussell -- Deutsche Bank -- Managing Director

Thank you. And, you also mentioned, I believe, that Kids' and Boots drove over 79% of the volume increase versus last year. As we kind of break that down for the Kids' business, can you help us understand what did you see out of the stores that actually have had Kids' now for two back-to-school seasons as we think about comps in the Kids' business versus just additional stores that have the assortment? And, on the Boots side, just curious of your view on the sustainability of that strength into 4Q.

Roger L. Rawlins -- Chief Executive Officer

Great question, Paul. We have seen real success with Kids', not just in the fact that it's in more doors, but it's close to double-digit comps in warehouses that have had it for multiple years. And, I think the learnings we have from our Canadian operation where, when we see Kids' penetrate up to 10-20% during certain periods of time and we're nowhere near that here in the U.S., we think there's continued upside to the Kids' business.

From a Boots perspective, I can't speak to Q4, but I think just in general, an investment in Boots is a good investment for us, and I was just looking at this last night. If you go back and look at history, our penetration -- even as good as we've been in Q3 -- is still well below where it was if you go back to our heyday, and this goes back to focusing our efforts on our best that win at categories, putting our inventory behind it, putting this great marketing machine we have behind it, and then, elevating that boot assortment in the warehouses so that a consumer can see it, and I think there's more upside to that. So, those are things -- this comes back to we've had -- done a ton of work around our mission, our vision, and our strategies, and these things are playing out exactly like we had penciled them, and we're using data to make those decisions.

Jared A. Poff -- Chief Financial Officer

I would add to that, Paul, that the learnings that we're getting from our Canadian company, where Kids' is much heavier, especially during the third quarter, are things that we're able to kind of reverse important back here into the United States and really has informed the way we're approaching going to market here and dealing with this opportunity that Roger talked about.

Paul Trussell -- Deutsche Bank -- Managing Director

Thanks for the color. Best of luck.

Roger L. Rawlins -- Chief Executive Officer

Thanks, Paul.

Operator

And, the next question will be from Richard Magnusen for Jeff van Sinderin of B. Riley FBR. Please go ahead.

Richard Magnusen -- B. Riley FBR -- Analyst

Good morning. Congratulations on the strong quarter and thank you for taking our call. Regarding Camuto acquisition, can you provide any details guiding growing the brand internationally versus domestically and what intentions you may have regarding the longer-term international target of growing that brand?

Roger L. Rawlins -- Chief Executive Officer

I think with the Camuto brand right now, our focus is how do we strengthen it here in the U.S. That's what I would tell you for us -- how we can do a better job of bringing that brand to life in a more meaningful way within our partners at Macy's, Nordstrom, Dillard's, other locations. Those are all opportunities. And then, the international play will be more with ABG and the relationship we've built there in leveraging their expertise because what we've seen from them in the brands that they've acquired and grown, a large chunk of that has come internationally, and so, we'll be working with ABG to make that happen.

Richard Magnusen -- B. Riley FBR -- Analyst

Okay. And then, what more can you tell us about expectations to leverage Camuto operations, and then, along with any digital capabilities to strengthen and then further develop your own private label portfolio?

Roger L. Rawlins -- Chief Executive Officer

I would describe it as -- it's a significant opportunity, and I'll start first with the private brand side. I think if you guys go -- and, I know you do this research and look at other retailers, where they are growing their business, and where their focus is, a lot of it is around private brand, and when I compare our performance to others, we're underpenetrated there. So, I think our expectation is that over the next 12 months, we would love to have our portfolio of private brands to be manufactured -- I should say designed and sourced by our Camuto enterprise, so I think that has significant upside. Our vision of trying to get that to be closer to 25-30% of what you would see in the non-athletic space -- that's where we would like to get to, but still have roughly 800 labels that we would carry. But, you'd see a much higher penetration of key items provided by Camuto to us. I think that's the biggest opportunity.

And then, on the other side, the direct-to-consumer, as Jared had mentioned in his comments, we have significant upside here. I think our team here at Designer Shoe Warehouse does a fantastic job with our website. I think the experiences we've created in omnichannel, which have been recognized, are second to none, and how do we bring those things to life at Camuto across all of the brands that we manage now in that portfolio as well as brands that ABG is going to give us access to? So, I think if you look at the competitive landscape, the two largest players that have grown in our space -- it's been Amazon and it's been brands going direct to consumer, and the area where I'd say the biggest opportunity within the Camuto enterprise itself is to find ways for that brand to be able to go direct to consumer.

Richard Magnusen -- B. Riley FBR -- Analyst

Okay. And then, one last one. You've managed the inventory somewhat in chase mode. Can you describe more how it enabled you to maintain really improved margins versus giving up some sales? And then, how you feel inventory is positioned as you approach the last two final weeks and two final weekends before Christmas?

Roger L. Rawlins -- Chief Executive Officer

We can't speak to inventories for Christmas, but what I would tell you is I think our merchants -- what Debbie and the team have done is a fantastic job of doing -- again, they've invested in key items, and they've put depth behind those key items, which you have put our in-stocks in the best position -- I've been here a long time, it feels like, at times, and a short time at other times, but I think it's the best we've had our inventory positioned as it's consumer-facing, and that's because they made investments in key items, they got behind it with lots of inventory, and I'm really proud of that. I think we can do even better at that as we head into future periods.

Richard Magnusen -- B. Riley FBR -- Analyst

Thank you.

Roger L. Rawlins -- Chief Executive Officer

You're welcome.

Operator

And, the next question will be from Camilo Lyon of Canaccord Genuity. Please go ahead.

Camilo Lyon -- Canaccord Genuity -- Managing Director

Good morning, everyone. Just thinking about what's going on in the marketplace with respect to China tariffs and those fears of escalating, eventually expanding to different categories, the risk associated with that, as well as the moves that other manufacturers and brands are taking to diversify their exposure to China. How do you view the -- does this alter your view on Camuto's sourcing arm capabilities and the strength that you view from that production perspective? Because that capability is mainland-driven. Is there a way that you start to mitigate any potential risks around Camuto's manufacturing exposure?

Roger L. Rawlins -- Chief Executive Officer

Camilo, as I mentioned earlier, one of the big benefits that we have through the acquisition is just line of sight into cost of goods for DSW as a brand, our ABG-affiliated business group, and a recognition that we're paying too much for product. When we look at where we have opportunity to mitigate tariffs, I think it's a combination of things. It would be to go get dollars back from the vendor community where we can see that we are paying too much for product, and we think that is a way in which we can mitigate a large portion of that risk.

What I like about our team at Camuto and the work that they were doing well before we got involved is they've been looking for other ways to move outside of China. We also have manufacturing in Brazil, and they're looking at other countries, so I think the combination of going back to the vendor community to be able to deal with some of the tariff challenges, going larger on some of our key items so that you get the benefits of having depth behind inventory, which means you also get better costing, and then, obviously, there would be some areas where I think you would pass it on to a consumer. I think we have a pretty good game plan for how we'll deal with it. Our preference would be not to have to do that, but in the event that it does happen, I do feel like we have a plan to address it.

Camilo Lyon -- Canaccord Genuity -- Managing Director

Got it. Thanks for that, Roger.

Roger L. Rawlins -- Chief Executive Officer

You're welcome.

Camilo Lyon -- Canaccord Genuity -- Managing Director

Jared, you talked about spring orders being up for Camuto. Does that -- is that an overall Camuto comment, or does that also apply to the private label piece of the business? And then, my second question around private label is if you could just articulate on the DSW business how private label performed in Women's versus branded performance in Women's, and if there was any delta in the comps between the two categories.

Jared A. Poff -- Chief Financial Officer

Sure. On your first question, what I was referring to specifically was the health of their underlying wholesale business. So, it was specifically around their major existing customers, and when we look at the spring orders versus spring of last year, they are trending to be greater than what they were last year. So, it was in context to primarily their wholesale business.

As I mentioned, we are still getting our hands around how we are going to report out and talk about their overall business, and to be perfectly honest, I have not landed on how much visibility we get into the private label business. That tends to be a little more held to the vest with some of the customers there. From a DSW standpoint, our private label performance in Women's was, I think, slightly better than the branded performance, but there's still significant opportunity for growth in our overall private label business. As Roger mentioned, we think that that business is something well north of where it's at, and our Camuto acquisition gives us the infrastructure to be able to handle that.

Camilo Lyon -- Canaccord Genuity -- Managing Director

Got it. And then, just finally, clearly, the VIP Rewards refresh, if you will, is having the intended benefits, right? It's helping comps. There is a component of marketing around it that you talked about. How should we think about the SG&A profile of the business for next year and the run rate of SG&A dollar growth as it relates to the investments around marketing? Are these investments that you'll continue to be making, or are they more one-time in nature to reacclimate the consumers to this new revamp/reformat of the VIP membership program?

Jared A. Poff -- Chief Financial Officer

We don't want to give too much color yet around '19 or beyond Q4 because that's something that we have not put out there publicly. What I will say is we have seen great results from our investment in marketing. Like with anything, there are some things that resonate very well, some things that don't resonate quite as well as you thought, and so, I think there will be an opportunity to look at maximizing those dollars or optimizing those dollars and making sure that we're getting the most spend for it, but without that, I don't want to give too much color into '19 yet.

Camilo Lyon -- Canaccord Genuity -- Managing Director

Okay, fair enough. Good luck in the holidays, guys.

Jared A. Poff -- Chief Financial Officer

Thank you.

Roger L. Rawlins -- Chief Executive Officer

Thank you.

Operator

And, the next question will be from Christopher Svezia of Wedbush. Please go ahead.

Christopher Svezia -- Wedbush Securities -- Analyst

Good morning, everyone, and thanks for taking my question, and nice job on the quarter.

Roger L. Rawlins -- Chief Executive Officer

Thank you.

Christopher Svezia -- Wedbush Securities -- Analyst

Just on the guidance of $1.70-1.85 in earnings, just so I'm clear, it includes the $0.05-0.10 related to Camuto, but it also excludes the $0.07 related to these non-go-forward businesses, which was in your nine-month so far, but we don't have a pro forma to break that out from a P&L perspective. So, I guess the way we're looking at it on an analyze basis is $1.63-1.78, if you understand where I'm going with this. Am I thinking about that right?

Jared A. Poff -- Chief Financial Officer

I'd be happy to go over more specific modeling questions on the one-on-ones, so we can dig into that. I think if you look at the $1.72 year-to-date adjusted earnings, that includes that $0.07 of business exits. So, if you're looking at the business excluding that, you'd have to add those two together, but that $1.72 run rate is where we're at.

Christopher Svezia -- Wedbush Securities -- Analyst

Okay. On Camuto, you made the observation that you've lost -- roughly, the run rate you've seen is a $10 million loss, of which $9 million is interest expense related, and you expect it to be slightly dilutive, slightly accretive for next year. There's also a lot of other separate moving parts -- licensing, fee income, fee that's actually going to be given to authentic brands, and the 40% you're going to get back, the fully loaded margin on Jessica Simpson and, I think, the Lucky brand. That's all embedded into that thought process. Is there any color about how we think about those moving parts? I would assume the $10 million loss doesn't include that licensing fee that you're paying to ABG Group, obviously.

Jared A. Poff -- Chief Financial Officer

It does, for only the fourth quarter, obviously, because that was the only part that was applicable. So, that slightly dilutive to slightly accretive for '19 does include the whole kit and caboodle, if you will, and to give you just a little bit of color, of the royalty payments that we expect to be paying to ABG -- to the joint venture that we own with ABG, I should make it clear -- well over half of that ends up coming back to us, coming back to that joint venture, and then our 40% from recouping our own royalties because we're a 40% owner. There's also apparel that is being sold that is paying royalties into that, and there is licensing outside of the footwear and apparel space around the other lifestyle type of products.

So, you take all that, and you're left with something that is less than half of the royalties that are going out, and then you look at the margin enhancements that we get from the products already sold to DSW today -- that's the Lucky and Jessica type of products -- that profit margin now stays in the family, as well as us converting over our private label makes that piece of the puzzle really an accretive story as opposed to one being dilutive.

Christopher Svezia -- Wedbush Securities -- Analyst

Okay, thank you. And then, just finally, you've done a nice job, obviously, this year. As you start to think about -- I know you're not giving any outlook for next year, but just comping the comp giving how you've outperformed, you're confident in being able to put out positive comp against some of these numbers Q2/Q3, just maybe if you could, or any level of confidence you have to be able to do that. If we could maybe have some color about that, that would be helpful.

Roger L. Rawlins -- Chief Executive Officer

There's still lots of runway, I believe, and opportunity to continue to grow this business, and if we follow the same approach that we've taken this year, which is where we are investing in product where we need to differentiate ourselves -- an example would be going after boots and sandals, all those seasonal categories, in a big way. We believe there's still lots of headroom there. We believe in the Kids' business in a meaningful way, and as happy as we are with the results we've had, we still are well under the penetration that we think we should be based on the information we can see from MPD as well as our Canadian operation. So, I think there's still lots of white space within the assortment.

I think the work we've done around marketing with the VIP launch -- there are other elements of that we're going to bring to life which I don't want to share -- it's some competitive stuff that I'd prefer not to share at this point -- but personalization is a huge opportunity for us, and having 26-27 million members of your rewards program and making that experienced more personalized -- it will drive traffic and it'll drive conversion, so I think those are a big play. And then, the third of the three legs of the stool is the people, and I think we've acquired the level of talent that we are -- we're looking at Drive for Five, and that's our motto. That's what we're going after day in and day out. That is the expectation that we have to have as a brand. Those are the three things that we approached this year, and we think we still have opportunities as we head into 2019 and beyond for the DSW brand specifically, is what I'm speaking to.

Christopher Svezia -- Wedbush Securities -- Analyst

Okay, thank you. I appreciate it, and happy holidays to you all.

Roger L. Rawlins -- Chief Executive Officer

Thank you.

Jared A. Poff -- Chief Financial Officer

Thank you.

Operator

The next question will be from Dana Telsey of Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

Good morning, everyone, and nice to see the progress.

Roger L. Rawlins -- Chief Executive Officer

Thank you.

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

Given the comps that you delivered this quarter and what you talked about in terms of categories, what did you see on Men's and Women's? What is working for you? Did seasonal make the difference this year, and how are price points changing? Thank you.

Roger L. Rawlins -- Chief Executive Officer

For us, we don't really give color other than the key things we had in our script, but again, it's about Boots, it's about Kids'... The things where we are focusing our efforts -- again, both with product and marketing -- those are where the real opportunities lie. And then, the other element that we haven't spoken to in a big way today is the opportunity around services, and when you think about the success we've had here in Columbus with our W Nail Bar, repairs, orthotics, other kind of services, creating the emotional connection with our consumer, bringing those things to life in a much larger way, following models that have been created by a brand like Best Buy on how they've elevated services in a meaningful way while still selling product -- those are all opportunities as we head into '19 and beyond.

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

Thank you.

Operator

And, ladies and gentlemen, as a reminder, if you would like to ask a question, please press *1. And, the next question will be from Tom Nikic of Wells Fargo. Please go ahead.

Tom Nikic -- Wells Fargo Securities -- Vice President

Good morning, everyone. Thanks for taking my question. I just wanted to ask -- now that you've got Camuto in-house and you're going to have this sort of hybrid operating model with a bunch of brick and mortar stores while also running a wholesale business selling to other partners, can you just talk a little bit about balancing the two channels and how you don't run into any sort of channel conflict there? Anything that you can do to help us under -- or, explain to help us understand the way that you balance the two channels that you're going to be operating in would be really helpful.

Roger L. Rawlins -- Chief Executive Officer

I think the best example I would give you is the relationship we have with Stein Mart, and we've been doing footwear with Stein Mart for many years, and I think if Hunt were on this call, he would tell you that we are a key driver for their business because footwear is something that attracts a consumer into their doors day in and day out, and that has been a great relationship that we've had with them, and we've had to balance that as we've managed the DSW brands, even though in many cases, we have a DSW that's right next to a Stein Mart. So, I think we have a history of managing that way.

What I would tell you is that as we've shared with our retail partners, we do not see them as competitors, and frankly, over the last several years, we have not. Our primary competitors that we see are Amazon and the brands going direct to consumer, and we've shared that with our partners at the other retail segments, and we want to work with them to provide them insight to what we see within our customer file at the DSW brands, the success we've had with our rewards program, how we can help share insights -- we want to help them grow their business, and we think we're all fighting the same fight.

I think that's how you manage that conflict -- you see one another as partners, and you provide great insight so that both of you win, and that's the approach that we have been taking and that we will take. Frankly, I think that's different than anyone else in our space. The insights I think we can share compared to others that might want to provide that service -- I think that puts us in a unique position.

Tom Nikic -- Wells Fargo Securities -- Vice President

That's very helpful. Thanks for the color, Roger. Best of luck for the rest of the year.

Roger L. Rawlins -- Chief Executive Officer

You're welcome. Thanks, Tom.

Operator

And, the next question will be from Sam Poser of Susquehanna. Please go ahead.

Sam Poser -- Susquehanna International Group -- Analyst

Thank you for taking my question. Just one quick one on interest expense. Can you give us some idea of how you're seeing that?

Jared A. Poff -- Chief Financial Officer

We actually are expected to see a net interest expense in Q4 as opposed to a net interest income, and that's primarily because we've decided to take out a slug of debt, although -- as you may have noted on the press release -- we still also have cash in investments. We've decided from a liquidity-prudent standpoint that we will keep a turn of working capital in cash and cash investments and then fund what we need to on the revolver, so that's what we've modeled out.

Roger L. Rawlins -- Chief Executive Officer

Sam, you've got to at least throw us a bone and say "Good quarter," dude. Come on.

Sam Poser -- Susquehanna International Group -- Analyst

Oh, all right. Thank you. Well, look -- you guys had a very good quarter. My question, though, really, is -- and, you brought up a second ago -- to follow up from Tom's question, you brought up your relationship with Stein Mart, but Stein Mart is arguably a more moderate retailer than you are, and a lot of the customers of Camuto Group are much higher end. So, that's a very different -- when you're offering higher-end insights to more moderate retailers, that's one thing, but when you have retailers from Nordstrom, Dillard's, and so on, that would arguably sell higher-ticket items to maybe a more affluent consumer, that moves in a different direction. Can you explain how that all works even though you have this great relationship with Stein Mart and so on?

Roger L. Rawlins -- Chief Executive Officer

As I shared about the information we have within our rewards program, where we have roughly 26 million members with a household income that ranges from $75,000.00-100,000.00, which is a pretty strong household income -- I think you would agree -- in the competitive landscape, I think there's insights that we can share based on our learnings, and I think those are all things we can share, and you take into account the fact that the Camuto Group is staying as it is today, and those relationships that they have spent years -- that Vince spent years and Alex spent years building with our retail partners -- they're not changes that we're making there, and I think again, that positions us differently than anyone else that would have acquired this enterprise.

Sam Poser -- Susquehanna International Group -- Analyst

Thank you very much, and good luck.

Roger L. Rawlins -- Chief Executive Officer

All right. Thanks, Sam.

Sam Poser -- Susquehanna International Group -- Analyst

Happy holidays.

Roger L. Rawlins -- Chief Executive Officer

Yeah, you too.

Operator

Ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back to Roger Rawlins for his closing remarks.

Roger L. Rawlins -- Chief Executive Officer

Just want to say thanks to all of our associates on the call, all of our partners as well. Thanks for a great third quarter, and looking forward to getting through the holidays. Happy holidays to you and your family. Have a great day.

Operator

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 59 minutes

Call participants:

Christina Cheng -- Senior Director, Investor Relations

Roger L. Rawlins -- Chief Executive Officer

Jared A. Poff -- Chief Financial Officer

Rick Patel -- Needham and Company -- Analyst

Paul Trussell -- Deutsche Bank -- Managing Director

Richard Magnusen -- B. Riley FBR -- Analyst

Camilo Lyon -- Canaccord Genuity -- Managing Director

Christopher Svezia -- Wedbush Securities -- Analyst

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

Tom Nikic -- Wells Fargo Securities -- Vice President

Sam Poser -- Susquehanna International Group -- Analyst

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