DSW Inc. tends to think on a big scale, and rightly so. Its average store measures 21,000 square feet, and the retailer stocks roughly 23,000 pairs of shoes in its more than 490 locations.
Even its headquarters is vast. The 143,000-sq.-ft. building, perched on the edge of John Glenn Columbus International Airport in Columbus, Ohio, is a renovated hangar and still retains the lofty ceilings and exposed beams of its former life. There is a sense of space and openness here, as though this is the type of place where little ideas have room to turn into something big.
Recently CEO Roger Rawlins and vice chairman and chief merchandising officer Debbie Ferrée sat down with Footwear News at their offices. Joined by Bill Jordan, EVP and chief administrative officer; Simon Nankervis, EVP and chief commercial officer; and Jared Poff, SVP and interim CFO, the executives shared a few insights into their vision for DSW as the company marks its 25th anniversary and looks ahead to the next quarter-century.
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Leading an Evolution
Rawlins, 50, was officially promoted into the CEO role in January following the retirement of former chief Michael MacDonald. In his first year at the helm, Rawlins said he has emphasized three essential words: focus, tempo and disruption.
“In regard to focus, we had lost our way because we were doing so many projects, whether it was omnichannel work, enterprise planning, assortment planning, you name it,” he said. “We’re getting focused on the business.”
At the same time, he wants to pick up the pace of innovation: “But it’s not just, ‘Oh, let’s run and scatter.’ Instead, we want to pinpoint three or four very important things and then execute quickly.”
As for disruption, Rawlins believes it is at the core of DSW’s DNA. “When you think about our history, in my opinion, we are one of the most disruptive companies in retail,” he said. “We were the first to have an open-sell format the way we do. We were the first to have the type of clearance section we have, and we were one of the first with a rewards program.”
According to company lore, the idea for DSW was discovered when Steve Nacht, one of the owners of the Shonac retail firm, visited an Atlanta warehouse that was selling its shoe inventory at a steep discount. He then returned home and within six months opened a store for footwear closeouts in Dublin, Ohio, in 1991.
Since the company’s inception, much about it has remained the same. Its big-box stores continue to be a haven for shoe lovers, with aisles upon aisles of popular brands and must-have styles. Over the years, though, it has adapted.
In the late 1990s, for instance, after Ferrée joined DSW as its chief merchant, she helped transition the company away from the closeout business to being an in-line, off-price retailer. Today, she describes it as having a hybrid format. “It’s a blend of closeouts, special makeups and in-line product,” said Ferrée. “Because what we believe is that we should provide the customer with access to everything that she wants.”
Now, Rawlins aims to advance both the shopping experience and DSW’s operational capabilities. And it all goes back to the name.
What’s in a Warehouse?
In a way, Rawlins has been developing this initiative throughout his 10 years with DSW. After joining the firm in 2006 as controller and VP of finance, he eventually took over leadership of its dot-com business and omnichannel division, and most recently served as chief innovation officer.
The idea is to have DSW stores live up to their warehouse names. “We’ve been building tools and capabilities for all of our nearly 500 warehouses to function like a fulfillment center,” explained Rawlins. “By leveraging those back-end capabilities, we can fulfill from the point that is the most profitable for DSW, but also the location that could be the closest.”
That strategy has multiple benefits, he noted. It can expand an in-store customer’s access to goods, from roughly 2,500 choices in an individual store to more than 30,000 across the enterprise, and also speed up delivery for an online shopper.
Rawlins pointed out that about 70 percent of the current U.S. population lives within 20 miles of a DSW store. “So let’s say someday — someday — we [can promise] 20 minutes or less for deliveries,” he said. “We’ve built the capabilities to provide that, so why wouldn’t we go market ourselves that way?”
Last fall, the company introduced a buy-online, pickup-in-store service and has seen a strong response. For Q2, DSW reported that digital demand grew by 21 percent, with a significant number of omnichannel orders being fulfilled from stores. “This gives us the ability to get closer to a customer and deliver goods at a value to them, while generating the highest level of profitability to us,” said Rawlins.
Camilo Lyon, an analyst with Canaccord Genuity, called DSW’s warehouse plan a “great idea.” “That ultimately is what drives productivity: more sales. If they’re able to leverage their fixed cost — i.e., their rent — then I’m all for it,” he said.
Rawlins did acknowledge, though, that his warehouses come at a slightly higher price than other traditional distribution hubs. “But our warehouses have lease terms that are pretty short,” he said, “so every five years, we have the ability to jump out and reposition that warehouse somewhere closer to that customer. That builds a level of flexibility and nimbleness that others don’t have.”
Firing on All Cylinders
In today’s competitive retail environment, though, seamless order fulfillment is hardly enough to ensure long-term success. And it is hardly the sum of DSW’s plan. The firm has been pursuing a number of other endeavors, including category growth, international expansion, opportunistic investments and more targeted merchandising and promotions.
To broaden its category coverage, the retailer rolled out its DSW Kids concept this summer in more than 200 stores for the back-to-school season. The goal: to tap into the children’s business and attract the young parent demographic it had been missing.
The company also has been testing a sneaker concept to leverage the strength of the athletic category. “We had an idea that came up on a Sunday, and by the following Sunday, we had it in store,” said Rawlins. “Was it perfect? No. But has it evolved and have we learned a ton from it? Absolutely.”
Another source of insight has been DSW’s investment into Town Shoes Ltd. The firm bought a minority interest in the Canadian retailer in 2014, and together they have launched 17 DSW locations in Canada. “That’s been a great model for us to build on,” said Nankervis, who is spearheading the company’s overseas operations.
The next target market is the Middle East, where it hopes to open about 40 DSW doors in the next few years. “There are a lot of opportunities for us to expand beyond the core business,” said Rawlins. “We always talk about the DSW brand, but hopefully five years from now we’re talking not just about the DSW brand but these other businesses that are very successful.”
In February, the company took an aggressive step to broaden its capabilities when it acquired Ebuys Inc. for $62.5 million upfront, plus future payments based on performance. As on off-price e-commerce retailer operating in the growing digital marketplaces, Ebuys represents an opportunity for DSW, according to the firm’s interim CFO. “When you look at why we bought Ebuys, it was about how the customer is evolving and where do we need to evolve as well,” said Poff.
The executives noted that digital marketplaces are opening daily throughout the world, while shopping center development has stalled. “We currently have products on 43 marketplaces around the world through Ebuys, and we’ve grown that 30 percent this year,” said Nankervis. “There are also some amazing [technological capabilities] that Ebuys brought us to enable us to play in the digital space much quicker.”
Steve Marotta, an analyst with C.L. King & Associates, pointed out the partnership will also help with managing DSW inventory. “With the purchase of Ebuys, they don’t have to be as concerned about [product that didn’t sell] during the season because they now have a place to clear merchandise aggressively without degrading the DSW brand,” he said.
The Ebuys business model does present some difficulties, though. For one, pricing on marketplaces is not carefully monitored, so online merchants have been known to undercut a manufacturer’s minimum advertised price. “[These marketplaces] have been responsible for completely dislocating price across the industry,” said Canaccord Genuity’s Lyon.
To improve the system, he added, DSW will need to incentivize brands to want to use this channel for clearance. “They seem to understand the old way of the model wouldn’t work, and do plan on having it change,” Lyon said.
Plotting the Course
These expansion efforts come at a crucial time for DSW. For the first half of 2016, the company reported a 1.4 percent decline in comparable-store sales, even though revenue increased 4.5 percent, to $1.3 billion. As a result, its stock price has slipped a few dollars in recent months, landing at $20.78 as of press time on Sept. 28.
Market watchers pointed out that DSW has been facing tough comp comparisons as it tries to move toward more full-price merchandising and away from heavy promotional activity.
Then, of course, there’s the problem of the overall retail business, which is the most challenging it’s been in decades, thanks to sluggish store traffic and a lack of trend drivers.
To woo consumers, the company is banking on its new kids’ business, but it is also working to improve the shopping experience, by hosting special events and installing in-store fixtures that will squeeze more product onto the selling floor. “We’ve seen that the more product we put in front of customers, the more sales we get,” said Rawlins.
One new innovation, called SKU over SKU, allows stores to present two styles in a single stack. “We’re only utilizing about 8 percent of our stores’ cubic capacity for actual footwear,” said Jordan, who leads the real estate group. “It’s not that we don’t have space for more product; we’ve just got to figure out better ways to do it.” The new fixtures are rolling out now to some of the top doors, he added.
But as a merchant-based organization, DSW’s most essential asset is its product presentation. In the past, the retailer has missed some key trends, but Ferrée said steps have been taken to redirect the organization’s focus. “We’re working to remove all distractions from the merchants so they are singularly focused on great product, exclusive opportunities for DSW and being good partners to the brands so that we actually grow profitably together,” she said.
Buyers are traveling more to Europe and visiting different types of trade shows to discover new designers and labels. And Rawlins, citing the “designer” in the company’s name, envisions a retail chain that is willing to take risks on unknown labels and share them in unexpected ways.
For instance, he explained, DSW could curate assortments of little-known local or international brands. “When you think of Etsy and all these other platforms, there’s incredible opportunity for us to present the customer a different kind of designer than they might’ve considered before,” he said. “We should be the house that finds the next Steve Madden or the next Tory Burch.”