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DSW Inc. (NYSE:DSW) Q4 2018 Earnings Conference Call Marc. 19, 2019, 8:30 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:
Ryan Kirsh -- Head of Investor Relations
All right. Good morning and welcome. My name is Ryan Kirsh. I'm the Head of Investor Relations. And thank you for joining us today. Before we begin, I want to call out that today, there will be forward-looking statements in our presentation. For those of you in the room, you can see on both sides of the screen, this is our statement. Please take a quick moment to read it. You can also find our forward-looking statements in our SEC filings, and it will be available in this presentation online after today's meeting. In this presentation, we will also talk about adjusted financial statements, which is a non-GAAP item. Please note that in the appendix on today's presentation online, you will be able to find a GAAP to adjusted reconciliation.
Now, I would like to introduce our leaders that will be talking to you today. First, Roger Rawlins, our Chief Executive Officer, will be discussing our vision and strategy. Then you'll hear from Bill Jordan, President of the DSW Segment; Mary Turner, President of the Shoe Company; and Simon Nankervis, President of the Camuto Group. Finally, you'll hear from Jared Poff, our Chief Financial Officer, who will provide our financial outlook for the company through 2021. There will be a question and answer session at the end of today's presentations. And for those of you following along on the webcast, you will be able to submit questions.
With that, it is now my great honor to present our first speaker, Chief Executive Officer Mr. Roger Rawlins.
Roger Rawlins -- Chief Executive Officer
Thanks, Ryan. Good morning, everyone. Three years ago, when I moved into this role here at DSW, what we talked about was we were going to build an elite team. And I'm so proud today to get the opportunity to introduce you to all of my teammates.
And when you look at our results that we delivered in 2018, I think they demonstrate the quality of the team that we have built; the 6% comp we delivered in 2018; the fact that when you adjust for the closure of the town enterprise, that we grew our earnings by 17% the last year; the fact that we bought back two million shares; the fact that we increased our earnings expectations twice in 2018 and delivered up on that. But I think more importantly, it's the fact, while we were doing all of that and driving the business, do what we do, we were also going after Camuto. We were also acquiring Shoe Company. So I think it really demonstrated the quality of the team that we have.
So today, I'm going to introduce you to my teammates. The first one -- frankly, I wouldn't be in this role if it weren't for her. DSW wouldn't be here if it wasn't for her. Her name is Debbie Ferree. Debbie, if you did not know this, there is a Shoe Hall of Fame, and Debbie is in the Shoe Hall of Fame. So please give it up for my partner Debbie Ferree. Next, you're gonna get the opportunity to hear from Bill Jordan.
Bill's been with the business for 13 years. Bill is now leading the DSW brand. Prior to that, Bill had served in just about every role you could possibly have within our corporate offices at DSW. But more importantly, a year ago, Bill had the opportunity to go to Canada and really help us manage this business that was transitioning to be a part of DSW Inc., so really happy to have Bill leading now the DSW brand across North America.
Next, you're gonna get to hear from Mary Turner. Mary joined our business two years ago. Great merchant, great retail expert in Canada, which is so important to us, because that's not an expertise that we have. So, so excited to have Mary on the team. And Mary's gonna talk to you a little bit about what we're doing with Shoe Company.
Next, you're gonna have the opportunity to hear from Simon. Simon joined our business three years taken, has taken over the Camuto enterprise. And what Simon brings to the table is experience in both vertical retail, which he did at American Eagle, but also on the wholesale side as well. So, perfectly positioned to lead the Camuto business.
Next, you're gonna get to hear from Jared. I've known Jared for over 20 years. Great background. Worked in vertical retail through Abercrombie. Worked in big box retail, a company called Big Lots you guys probably all follow, and a large, large company called Cardinal Health. So Jared is our CFO.
We also have three individuals that are not with us today but are back in our home office in Columbus that are sharing this message with our team in Columbus. We have Michelle Love -- 32 years with Nordstrom and joined our business about two years ago. We have Drew Domecq. Drew's our CIO. Drew has been with our business now for a year. Great experience in the invasion space with Wendy's. And we have Tom Jessop, who's been with our business for five years. And Tom leads our supply chain as well as our HR functions.
So next, I want to take you back to 1978. Do you guys remember 1978 at all? Okay. I do vividly, because in 1978, I was a 12-year-old, and I was the twelfth man on a 12-man basketball team. Do you guys know what that means? Okay. That means at the end of the game, there's 20 seconds left in the game. Your team is ahead by 20 points, or you're behind by 20 points, and the coach looks to the end of the bench, and he grabs Rawlins by the shoulder and says, "It's time for you to go in the game." I did not have a lot of self-confidence when I was 12 years old. But something changed. This. You might laugh, but this is the shoe that changed my life when I was 12. Why? Because my parents went out and invested in this shoe. Now, if you guys don't remember, back in the day, this was a crazy expensive shoe, because this is what Larry Bird, this is what Magic Johnson, Pistol Pete Maravich -- these guys were all wearing this.
Now remember, I'm the twelfth man. I never got in a game. But when I put these shoes on, when I came out, I made every single layup. I made every jump shot. Every single cheerleader was looking at Roger. Every single thing that was going on was about these shoes for me. They gave me a level of self-confidence.
That's what we're talking about today. That's the kind of energy we're gonna bring through our brands, that you're gonna hear those stories from each of my teammates. It's why today, I'm wearing Mercante. If you guys go out today, this is exclusive at DSW. Please go make a purchase this afternoon. I think we have some gifts for you. But I wanted to share that story because you're gonna hear several of those again today from my teammates.
So let's talk a little bit about our history. And when you think about what's happened, this business was actually founded 50 years ago. 50 years ago, by Jerome Schottenstein. And it started with this, doing lease businesses. So we get questions a lot about, you know, what's it like working in other retailers? We've been doing it now for almost 50 years. Then in the '80s, how this thing involved was they got into open cell concept.
They started loyalty programs. They did special makeup, all of these things that allowed DSW to be positioned differently in the marketplace, which led to the 2000s, which in 2005, we went public and really sort of set the stage for where we could go. Also at that time, we started rolling out our digital experience. Now I'm real proud of the fact that from 2008 to 2013, I got to lead our digital business and really did sort of help our business up for growth.
Then, in 2014, this changed. Our CEO then, Mike McDonald, and our board said, you know what? Things are happening to us. We don't know exactly what they are, but we've got to figure this out. So we went and created an innovation team. And we went and collected data all over the place. We looked at every part of retail. We looked at the consumer experience, how things were evolving, and we said, you know what? We have to change. And so, we went to What's Next, which you see that sort of posted all over the place. And we told this team, go put together what's next for this enterprise.
And I'm real proud of the fact that that team built the strategy -- the mission, vision, and strategy -- that we've been following since 2014. In 2015, we built out our infrastructure. And when I say infrastructure, we built what everyone calls omnichannel. And you know what? We were recently recognized as the number one omnichannel retailer in all of retail. I will tell you, we don't call it omnichannel. It's called the customer. And I think that lens is something we have always been lucky enough to have. Then in 2016, we rolled out Kids. So we added a new category to what we were doing day in and day out.
Then in 2017, we started testing services. So we went after nail services first, and you're gonna hear from Bill today, because this thing is killing it. This thing has great growth potential. This is attracting people to our brand. They create an emotional connection, no different than that shoe experience I had when I was 12 years old. Pretty soon, you'll be able to have a drink as you're having your nail service, and you'll be able to shop our brand. And it creates this emotional connection, again. And in 2018 -- you'll hear a lot about what we did this year from Bill -- we relaunched our rewards program. And it's the first time we'd really done anything with that program in 10 years. We did a six comp this year. Roughly half of that, I think you could credit to what we did within this whole concept.
So again, those were all things we did that were defined in 2014 as the direction we wanted to head. Then we said, now that we have this incredible infrastructure, what's next? What are we gonna do next? So we said, we have to grow. We have to find ways to get into new markets. We have to find ways to create new products, differentiated products. So we acquired Shoe Company and acquired the Camuto Group.
So, what does that mean? That means we are a dramatically different business in 2019 than we were at the start of 2018. We now have our three owned companies -- Camuto, DSW, Shoe Company. We also have our two lease businesses, Stein Mart and Frugal Fannie. So ultimately, this is a dramatically different company. So why did we have to evolve? Why did this all change? You guys ask us this question a lot. There were three big factors, and I think these are really, really important to understand why we've determined what's next and where we're headed.
The first one is this: technology. I see just about everyone in here has a device up in front of them. If you go back years ago, that wasn't the case, right? Technology changed consumer behavior. They have access to information at their fingertips they never had before. They have the ability to have price transparency. So our model was being challenged because our everyday value model was being offset by people discounting in the online space, right?
So we had to think differently. And the one that we kept referencing was electronics. And we talked a lot about this with our board. We are not going to stand by and let that happen to our company, to our 16,000 associates that we're so passionate about. We are not going to stand on the sideline and be HH Greg-ed, or Radio Shack-ed, or Circuit City-ed. We're going to be Best Buy of our space. That's the approach we took when we were looking at how we were going to evolve our business, which led to this.
As we looked at this next data point -- I've shared this, I think, with some of you. From 2011 to 2017, there were five companies -- I'd say five segments -- that really, really grew market share. And when I say really grew, they picked up 20 percentage points. Not 20 basis points -- 20 percentage points of market share, OK? The first one, a brand we all know and love: a company called DSW. We went from 3.1 to 3.3% market share from 2011 to 2017.
How did we do that? We did the old school way. Let's open stores. We incurred about a billion dollars -- I shouldn't say incurred. We invested about a billion dollars of our shareholders' cash opening those stores, and we grew market share, which was great. The challenge is these other elements. Number two. Who else grew? Athletics space, because guess what? You can't see everybody feet. More people are wearing sneakers than they were back in 2011. It's just the facts. So I think that segment had a sort of leg up on everyone else.
Next, Nordstrom. How? By the inline business, Nordstrom, they've done a nice job, but also the launching of Nordstrom Rack, which now we get to service through our Camuto enterprise. But this is the one everybody talks about and focuses on, and it's called Amazon, right? They're the big bad player that everyone should dislike in the industry. Why? Because from 2011 to 2017, they picked up almost six percentage points of market share. All of you guys talk about this. You're always asking us, what is it that you're gonna do to differentiate yourself from Amazon in those kind of things? The reality is, we want to partner with them, and we're figuring that out as a larger enterprise.
But this is the data point that you need to understand changed our mind on where we have to go. It's this: our vendor partners. We invested a billion dollars building our brand and their brands. Meanwhile, while we're building their brands, which we needed to do, technology has allowed the consumer to go around DSW and allowed that brand to go direct to consumer. They pick up 12 full percentage points.
Remember, these are the people that we are representing in our box. Again, an example of how we used data to say, we cannot let that happen. We are not going to sit on the sideline. We are going to think differently. We are going to find what's next, which also, as all of that was going on, you had this happening. You had brands that are being gobbled up, because guess what? If you can't do that direct to consumer thing, you'd better find someone that can help you, or else you're not gonna be relevant.
And so, that's what's happened. Caleres, Steve Madden, Marc Fisher, DSW. All of them have been buying brands, so there are fewer and fewer players, big players, that are out in that marketplace, which ultimately led us to say we've got to transform this enterprise. We have to drive value. We have to take control of our destiny. And what does that destiny look like? It looks like this, because now what we have is this world-class retailer called DSW -- the thing that's doing over $3 billion dollars in sales, that has over 500 warehouses with a kick-butt digital experience that involves their consumer, different experiences, different product. That's a core of what we do, driving a lot of cash.
We also have this new thing called Shoe Company, which gives us an edge in the last mile. And Mary's gonna talk about this. But envision how you can fill in market voids with a much smaller box that's much more targeted than something that is over 20,000 square feet providing all of the services we're providing at a DSW.
And then you marry that with this thing called Camuto Group, which is a world-class organization. Vince was a leader with Nine West of building brands, and Simon's gonna share that. So ultimately, when we do all of those things, when we bring all three of those to life, it is different than DSW. It is something dramatically different. It is something that's what next in this industry, and it is Designer Brands.
So, this is where we are going. This is what those three companies look like. This is a combination that no one else in our industry can match. We have the ability to build brands. We have the ability to bring product to life that differentiates experiences at DSW, at Shoe Company, and the ability to leverage this incredible infrastructure we have just spent 50 years investing in to do something dramatically different. So what does this mean day in and day out? It means our parent company is now Designer Brands. It means our ticker is gonna be DBI. It means how our associates connect with our brand is gonna be at a higher level than an individual brand that they work at. That is what Designer Brands looks like. But I want to share with you what Designer Brands looks like compared to what DSW Inc. used to look like.
DSW was only attached to about 20% of the total footwear market. That market was really restricted to just people that play in the space that we play in day in and day out, selling shoes and the retail concepts. With Designer Brands, we now have access to 80% of the footwear market. It's not just about us running stores. It's us playing in the wholesale space. It's playing in the direct to consumer space. I want you to think about these five things, OK? They are, first, Shoe Company gives us access to the Canadian market and gives us the ability to fill in around DSWs. That's number one.
Number two, our DSW digital expertise is going to be applied to Shoe Company and to Camuto. I mentioned on that vendor front how those vendors had gone after it in a big way to grab 12 percentage points. You're gonna hear from Simon, one of those brands that just does not know how to do that, has not had that expertise, is the Camuto organization. Digital penetrates less than 1% of their sales. Guys, think about that. 1% of their sales. We know how to do digital. That's what we can bring to the table.
Number three, we can expand this wholesale business that Camuto has been operating in a major way across our DSW, our Shoe Company platforms. Love to see more Jessica Simpson, look to see more Lucky, love to see other brands that ultimately, we can acquire as part of the Camuto Group.
Number four, we will build our private brands. We have a history of building brands. Bill will share in his presentation, as we were making those investments in stores, in our digital experience, we were growing brand sales faster than they were growing them themselves. That's an important fact I want you guys to think about as we talk about that. And then finally, what we want to do is take all of these things we've learned -- we know footwear.
We know footwear better than anyone else in our industry. We want to go share that with our other retail partners. We want to sit with Alex Dillard and share what we're doing with our rewards program to drive his footwear sales, just like we're doing with Stein Mart. And I'll go meet with Hunt on Thursday morning down in Jacksonville to share with them what it is we're doing and how that can impact their business. We want Nordstrom to sell more shoes. We just want them to sell our shoes.
So that's the direction we're headed as Designer Brands. It's dramatically different and has access to 8% of the market. And before. I talked about over a six-year period of time, we grew our market share 20 basis points, 3.1. to 3.3. In the last nine months, we've gone from 3.3% of the footwear in peoples' closets to over 5%. That's the way Designer Brands is going to be thinking.
Next, we had no brands that were produced in-house. Frankly, we've struggled to have success from this. Carol Lee from our board has always been challenging us over the last 13 years that we've been public, why can't you grow private brand? Why can't you grow private brand? Because we could never find the right partnership. And we tried a lot of players. We dated a lot of people in our industry. And we said, you know what? The only folks that really know how to do this, because they've doing it for years with Alex Dillard and Macy's, is the Camuto Group.
And so now, what we have is the capability to design, source, and market our own brands to develop differentiated product. And I want to share these data points. And I think we've talked about this in some -- I know in a couple luncheons we had. But think about this. At the beginning of 2008, the DSW brand had 800 labels that they dealt with day in and day out. That means we were putting 800 of these labels in front of the consumer.
The top 25 were really brands, right? Those 25, think of Nike, it's Skechers, it's Steve Madden -- it's those kind of folks. They accounted for 40% of our sales. Those are brands, because when someone's going online and they're looking on their device, the first thing they're looking for is that brand name. And you have to have them to present to the consumer that you know what are the appropriate brands. So you've got to have that in your mix.
Next, 75 -- I would call them item brands, meaning they have a key item that if you don't have it, the customer thinks you don't know what you're doing. Hunter Boot, as an example. Whatever that item might be, you've got to have it. That's 30% of our total sales. So 70% is really embedded in these top 100 sort of brands. The next 20% is 700 labels. Why are they even relevant to the consumer? Because we decided to put them on our selling floor, to put them on our website, to make them available to our 30 million rewards members we have across North America. That is where there's opportunity to grow our private brand from today about 10% to be closer to 25 or 30% over the next three years. That's the vision that we have.
Next, this one is probably my favorite -- limited visibility to cost. So let's talk a little bit about how we've historically cost goods. Remember, when we started, our heritage was closeout buying. In closeout buying, you don't have a lot of negotiating power, right? And the way we priced goods, we have something we want to retail for $50.00. We say we need a 60% IMU. So what do we do? We write a check for $20 bucks, and we say to that vendor, hey, we're not coming back to you for any more money.
We don't need any -- we don't come back for markdown money or any of those things. We know we're gonna take some markdowns. We'll margin out in the mid-40s. That is the way we costed goods. Guess what? That game has changed, because now, we have visibility and we understand how to manufacture footwear as Designer Brands. We have the ability to determine what costs we're going to pay.
I'm gonna give you the best example I can think of. We went to Nine West, and we looked at acquiring Nine West, and we got real close to pulling the trigger on that. We decided not to. As we did that assessment of Nine West, we were by far their best account. Why? Because we paid more for product than anyone else. We also didn't create a pain for them because we didn't come back and ask for markdown allowances and all the other things.
Then we went to Camuto. We did our due diligence at Camuto, and guess what? It was the same thing. The scorecard showed large department stores, their margins on their product is down here. Mid-tier department stores, the margin was here. The margin on DSW product is up here. Guess what? That game has to change. We will not accept that anymore. That is why Debbie is now the president of Designer Brands, because she's got those relationships over the past 22 years that we're gonna leverage so that we can have that conversation with the vendors and say, this is what we're going to pay for goods because we know this is what it costs. Major game-changer that you're gonna hear about today.
Next, we were only in the U.S. footwear market, right? Our DSW business was really isolated, focused on what we do here in the U.S. Where we're at now, as I mentioned earlier, the Shoe Company, we have the incredible opportunity to fill in market voids. We have the ability to grow DSW north of the border. Incredible opportunities to continue to expand as Designer Brands. We also were brand to brand retailer, so we were facing that challenge of the consumer going around us, the brands going direct to the consumer.
That's not where we're at now. We have a platform that will drive growth and consolidate this industry. That is the way we are thinking about it as Designer Brands. Ultimately what this gives us is the ability to control our own destiny. That has not been the case. We have been reliant upon others to deliver products on our behalf. We still will to a certain extent, but we now have the ability to go direct to consumer the same way everyone else has.
So ultimately, when you think of Designer Brands, this is what I want you to think of. We are brand builders delivering differentiated experiences powered by the scale of one of North America's largest footwear enterprises. That is who we are now. That is dramatically different than who we were as DSW. And you can see these -- we're gonna talk about these later, about how all of these come together, connecting all of these enterprises. So how do we win? It's doing this. Do what we do.
You're going to hear today, there isn't any secret thing we have to do. It's go and execute the way that we always have. It's Simon taking the Camuto Group with Alex and the team we have at Camuto and delivering the same thing they have done for Dillard's and they have done for Macy's -- just go do it for DSW. And guess what? They have the capacity to do that. If you're at DSW, keep continuing the seven consecutive quarters of positive comp you have generated, the momentum you have, and keep that ball rolling, and let's go grab share.
And if you're at Shoe Company, continue to execute the way that you have and leverage all the capabilities you now have at your fingertips by being connected to Designer Brands. When we do that, we will have differentiated products, we will have differentiated experiences, and we will grow market share. I mentioned the comps. Seven consecutive quarters, we're gonna keep that up. New categories -- Kids, Beauty, other things that we can bring to life. And ultimately, it's new markets, which will include us continuing to expand in Canada and finding ways to grow this enterprise.
So next, before -- or I'm sorry, as I finish up here, this is what all of you probably came today to hear. So what are we doing? What's the end result of all of these things? When you add it all up and you hear what each one of my teammates are gonna be delivering, it is getting to that number -- $2.75, although Jared tells me I have to give you the range -- between $2.65 and $2.75. It's about a 17% compounded annual growth rate of earnings, is what we're targeting between now and the end of 2021. When we did this acquisition and you challenged us as to what does this mean to the shareholder, this is what it means, because we will have a differentiated brand, we will have differentiated experiences -- we'll have a growing company, both bottom line as well as top line.
So next, I want to bring up my partner running the DSW brand, Bill Jordan. But before Bill comes up, we have a brief video to show you -- what the future of DSW brand looks like.
Bill Jordan -- President, DSW Designer Shoe Warehouse
Good morning. DSW is a world-class retailer with a strong track record and a loyal customer base. As part of the unique Designer Brands model that Roger just shared, we are uniquely positioned to drive growth and profitability by just continuing to do what we already know how to do. I want to start by sharing a story. I love shoes. And what you have to know about me is I've been in the footwear business since the day I was born. And the reason I say that is that my father was in the footwear business from the time he was 13 years old until the time he retired at age 65. He worked as a store manager and a district manager, and was on the front lines of product and customer.
So when I graduated from law school -- yes, I'm a lawyer. Insert your lawyer joke here. When I graduated from law school, what do you think my dad bought me as a graduation gift? A new pair of shoes. And not just any pair of shoes, but a pair of black leather wingtips. They were gorgeous. They were probably the most expensive shoes my dad had ever bought in his life, and he gave them to me because he thought that that's what a lawyer should wear. And you know what? I wasn't a very good lawyer when I started practicing law, but that first day when I walked into that firm, I felt like a lawyer. I had confidence. I knew I belonged because of what I was wearing on my feet. That's the power of self-expression, and that's what shoes can do for people.
So who is DSW? We are a destination for brand name and designer footwear and accessories. We offer value, convenience, and differentiated experiences to our customers. We have over 500 warehouses -- we call our stores warehouses -- across the U.S. and Canada. We have a world-class digital site. And we have a sticky 26 million members in an award-winning loyalty program. We have a consistent track record of growth. We are a growth company. We've grown sales each of the last 27 years. That's every year that DSW has been in existence.
Last year, we posted a +6% comp. As Roger mentioned, we've made investments over the last five or six years to make sure that we've got momentum to propel us for positive comps going forward. Those investments include investments in our omnichannel capabilities, where we've been awarded Best Omnichannel Retailer in America. Inventory management and supply chain capabilities that allow us to get the right shoes to the right place at the right time. Marketing programs that allow us to engage millions of customers and influence their buying decisions. And our loyalty program, which is one of the most successful loyalty programs across industries.
We have a very strong and engaged customer base. As we've already mentioned, we've got 26 million members in the U.S. engaged in our loyalty program. And looking at these charts, you can see that our transaction growth correlates to the growth of our loyalty program. We have grown our customer base substantially over the last decade, with over 90% of our sales coming from members in our loyalty program. What does this mean for us? It means that we've got data on our customers, and we know how to use that data to drive sales, create better experiences for our customers, and be more efficient with our marketing. This gives us a strong base for continued growth.
Within the DSW segment, we believe we can drive 13% operating income growth CAGR over the next three years. 13% CAGR. All's we need to do -- we don't need to do it on anything more than a low single-digit comp. We have three pillars that are gonna -- strategies that are gonna drive that growth: differentiated product, differentiated experience, and operational excellence. And I'm gonna walk through each of those three for you this morning.
First, I want to take you through how we think about product. As Roger touched on, we are brand builders. We've helped major brands grow their businesses through DSW, like Caleres, Skechers, and Steve Madden, to name just a few. This slide shows the combined sales of Caleres and Steve Madden over a 15-year period of time. From public data, wholesale sales of Caleres and Steve Madden have grown at an 8% CAGR over those years. Well, at DSW, they've grown at 12%. These brands grew their business 50% faster through DSW than through their other locations. Combined, we did $375 million in sales with these two brands last year. We are a key driver of growth for other brands and will continue to be so in the future.
We've also been able to create and grow our own brands, like Kelly & Katie and Mix No. 6. In that same 15-year period, we've grown our exclusive brands -- and exclusive brands are brands that are only available at DSW -- from $0 to almost $300 million. In fact, our Kelly & Katie brand is the number two brand that we sell in our entire assortment, and our customers love it.
Why are exclusive brands important? Three reasons. One, it allows us to offer differentiated product to the customer. Two, it allows us to offer great value to our customers. And three, it margins out substantially higher than the balance of our assortment. I'm really excited about the relationship we have formed with the Camuto Group because of this. They are industry leaders in creating private brands for other retailers, and they're gonna help propel us on our journey to grow our private brand substantially.
As Roger said earlier, we're taking control of our own destiny and disrupting the footwear business through this Designer Brands model. One of our key strategies is to grow the amount of product that we sell that we also produce, over $700 million by the end of 2021. This means selling more product produced and made by the Camuto Group. These sales will be a combination of our exclusive brands, like Kelly & Katie and Mix No. 6, and Camuto-produced wholesale brands like Lucky and Jessica Simpson. Together, we call this Camuto-produced brands.
And why is it important that we sell Camuto-produced brands? Well, number one, it gives us the chance to sell unique and differentiated product to our customers. Number two? Camuto-based products will have higher margin than the balance of the assortment at DSW, and Designer Brands gets to capture both the retail and wholesale margins associated with those sales. And third, as we grow the Camuto brands, we'll naturally need to reduce the choices and the balance of our assortment. That means we will use that limited shelf space that is available to go to our vendors and let our vendors compete for space on our floor, which means we can push on costing and quality to make sure we've got the best in business.
This slide shows the breadth of our offering -- our own exclusive brands and other brands that we now make through the Camuto Group. As Roger said today, our top 25 brands make up about 40% of our sales. Those are brands we must have on the floor. The next 75 brands make up 30% of our sales, and those are important, and we've got to have them as well. But the next 700 brands, which represent 20% of our sales, are really not brands. They're labels, and they're only there because we've chosen to put them on the floor. We can replace those labels that don't have brand equity with brands that we are producing through the Camuto Group that have growing brand equity and margin out better the DSW and Designer Brands enterprise.
Next, I want to turn to Kids. We recently introduced Kids to our warehouses, and the customer is responding. We are the fastest-growing retailer in Kids shoes, and we have a lot of runway in front of us. The Kids footwear market is about $6.5 billion, or roughly 10% of the total footwear market. In a short period of time, we've grown our Kids sales to almost 4% of our sales and are targeting 10% of our sales by 2021. That's an incremental $185 million in footwear sales over the next three years.
But the reason we entered Kids was not to sell kids shoes. It was to sell more adult footwear, and it's working. We are attracting a new customer. We are driving additional traffic to our warehouses. Customers that buy kids products are spending $75.00 more per year than non-kid buyers. And 31% of the time, when a kid's shoe is purchased, an adult shoe is purchased. This strategy is working, and we've got to step on the accelerator and bring it to our customers even faster. We're gonna win at Kids, and it's gonna help propel our Adult comps along the way.
Now, I want to talk about seasonal product. Seasonal product is what we call our best ad strategy, meaning we want to be known for standing for this product. This is where we differentiate ourselves from other footwear retailers. And about 30% of our sales over the course of the year are in seasonal product. That gets as high as 40% during peak sandal and boot seasons. The customer response to our seasonal product is overwhelming. Last year, we grew that product by 10%, and it represented a large percentage of our incremental +6% comp growth. We're gonna put more receipts into boots and sandals, and believe we have a real opportunity to increase our sales in these key categories by having higher in-stocks in boots and sandals all year long.
Our second strategy is to build differentiated experiences. We've got to have a connection with our customers. And we have a history of being at the forefront of retail, and Roger talked about. But our experience always starts with our loyalty program. We originally launched our loyalty program in the early 1990s, well before other retailers even though about having a loyalty program. As I said, we have over 26 million active and engaged members, and over 90% of our sales come through our loyalty program. This program allows us to have a consistent and customizable way to engage with our loyalty customers.
In 2018, we relaunched this program and changed the name to VIP, and it's really working. We're adding new customers at a faster rate. We are increasing the percentage of sales coming through the program. Members are spending more per transaction, and we're retaining members at a faster rate -- higher rate than we ever have before. That's awesome. That's why Shopify recently named our VIP program the number one innovative customer loyalty retail program. But loyalty is more than just offering a discount on a future purchase, which we do, to the tune of $5.00 per every $100.00 spent.
Our program engages customers to establish an emotional connection and gives unique benefits and experiences, like gifts with purchase, for members only; or ways to earn points without making a purchase. As part of our VIP relaunch in 2018, we asked our members what benefits they wanted. Their response? The ability to donate shoes. So we partnered with Soles4Souls, and our customers in the past year have donated almost one million pairs of shoes. And we're giving customers loyalty points for donating shoes. It's a win-win all the way around, and we're gonna continue to innovate in our loyalty program.
But we're not done yet. In May, we will launch VIP phase three, which includes personalized benefits where you have the opportunity to pick what benefits are important to you and that you want to have. We're gonna offer one free next day shipping to all members, because we know speed is important sometimes. You need that shoe. We're gonna add mobile wallet and the ability to enroll in the program via SMS.
And by yearend, we're gonna launch phase four, which will create a DSW.com customer community; offer enhanced rewards for purchasing our exclusive brands, which ties back to our strategy on growing exclusive brands; create My Brands, which will identify customers' favorite brands based on past shopping experiences; and offer rewards for social media interactions. We're gonna continue to enhance this program because We know how much it means to our customers and how much it means to our bottom line.
We are innovators at DSW, and we are a disruptor in the footwear space. We have been testing services, as Roger said, within our warehouse, including nail bars, orthotics, repair services, and even testing subscription models. The customer is responding. We are seeing strong attachment rates and increased traffic into our warehouses by shoppers that frequently make use of these services. We recently announced that we're expanding our nail bar test to five additional locations this year, and we're very excited about that opportunity.
Along with services, we've created a redesigned store layout and fixture package that allows us to offer more choices to the customer, which is now in 10 of our stores. Innovation is the core of who we are and why we will continue to win in the future.
Personalization is so important, and personalization always starts with data. We've been able to gather a tremendous amount of data about our assortment and our customers because of our loyalty program in place. This data allows us to focus our assortments on customer preferences and drive customer engagement. First, we're using customer buying patterns to inform what shoes we put in what warehouses, which means we know what she's demanding and where she's demanding it, so we are evolving our assortments to have what she wants when she walks into our warehouse.
Second, we are using data to inform how we market to customers. We are targeting promotions to customers based upon their prior shopping patterns. This will allow us to offer customers the right promotion to drive purchases and eliminate less rich offers to customers who don't need them. We're also able to drive traffic through more targeted messages by using content in our messaging that is relevant to the customer. If we know the customer like to buy athletic shoes, then we're gonna serve messages that target athletic. If we know that she likes to buy Kelly & Katie, we're gonna send messages that send Kelly & Katie.
Our third strategy is around operational excellence, and this starts with inventory management. If we can get the right shoe in the right place at the right time, we will win. Easy said, hard to do. The number one reason a customer does not buy when she is in our store? We don't have her size. Guess what? Size matters. So what are we doing about this? We're increasing our key items by 20% this year. Key items are items that we buy in depth and have flow behind. Because of this depth, we have better in-stocks by size, which drives sales and conversion. It also creates better margins for us. How? Well, when we buy larger quantities, we get better pricing on shoes upfront. And second, when we stand for an item, our market down rate is substantially less.
An increase in key items also lets us edit the balance of the assortments, which means we're gonna decrease the number of non-key items sitting on our floor. What's the result of that? Higher in-stocks by size, a better customer shopping experience, and more sales and margin for DSW.
We're also focused on fulfillment optimization. Our digital penetration continues to grow and grow, and we've got huge momentum in the digital space. Where we fulfill orders from can drive sales and margin. As I've said, we've got the ability to use our inventory no matter where in our system it is -- any warehouse, any fulfillment center, any distribution center. So we've created an order routing algorithm that allows us to pick where a shoe is shipped from for a digital order. We look at a lot of factors when we do it, but the most important factor is to target a place that's most likely to take a markdown. Because if we can avoid a markdown, it'll help our margin substantially, our bottom line substantially. We're gonna continue to optimize this order routing algorithm because we know digital will continue to be a huge part of our business.
Operational excellence also extends directly into our warehouses. We've rolled out a new service model for our associates that focuses on operational excellence and engagement with our customers. When I talk about operational excellence, I mean running a neat, clean store, making sure associates are properly scheduled for when customers are there in the store, fast checkout lanes, flawless visual execution, and fulfillment accuracy. Engagement is about greeting the customer, enrolling new members into our VIP program, and executing our new service model. Our goal is to be operationally excellent and engage with our customer to drive conversion in our warehouses.
We also have to have strong execution as it relates to our digital site. We're gonna continue to invest here, and we call this continuous digital optimization. We've structured our team so that we're adding new features on a continual basis. What used to take weeks and months, we can now do in days. We've added headcount to support a continuous digital optimization, and we've rolled out new payment, AB testing, and personalization in the last six months. All these efforts are driving stronger digital conversion online, and we're excited about those results.
Finally, real estate -- this is a competitive advantage for us. First, our portfolio is strong and balanced. We have less than five stores that are not four-wall profitable, and about approximately 20% of our leases are up for renewal every year. That means we have huge flexibility, and if we need to change our footprint, we can do it quickly. Second, our warehouses have four benefits that we like to talk about. The first? It's a traditional store. You walk in, you buy a pair of shoes, you walk out. Second, it's a billboard for our brand. When we open a store in a new geography, our digital sales in that geography increase greatly. When we close a store, those sales go away. Warehouses drive digital.
Third, it's a return center for online demand. This is a big deal. Having the ability for a customer to return a product right to a warehouse is a key differentiator from some of our competitors who don't have that and you've got to send it back through the mail. And we know that 28% of the time, if she makes a return into our warehouse, she makes a purchase. Huge advantage.
Finally, fulfillment center for our digital orders. We've said that we are within 20 minutes of 70% of the population, and as speed to consumer becomes more relevant, we are close to the customer. Finally, as it relates to real estate, we've got the ability to open up another 100+ locations across the U.S. and Canada that can further drive top line growth.
So how are we gonna win at DSW? We've made a lot of key investments over the last few years, and we've honed our operating disciplines. We are one of the best performing retailers in the U.S., and we're gonna continue to be so. Our focus is on driving three key strategies to get to that 13% operating income growth CAGR: differentiated product, differentiated experience, and operational excellence. We are excited about being a part of this new Designer Brands model and the leverage and power it bring us to further disrupt the footwear market.
And now, I'd like to introduce my partner, Mary Turner, the President of The Shoe Company.
Mary Turner -- President, The Shoe Company
Good morning. I'm here to tell you about Designer Brands' business in Canada and also to share a little bit more about my banner, The Shoe Company. The Shoe Company is the backbone of Designer Brands' Canadian business. And today, I'm going to explain how its format positions it as a powerful last-mile solution and also as the perfect complement to the DSW segment business.
But I'll tell you my shoe story first. It all started when I was eight years old with a pair of white go-go boots. It was love at first sight. But more than that, I knew in that moment that fashion was absolutely my passion, and that was the business I wanted to be in when I grew up. So fast-forward to this year, when once again, white booties are a key fashion trend. Every time I look at my Rebecca Minkoffs or put them on, I think, how lucky am I that not only was I able to follow my passion, but this is the business that I'm in now that I've grown up?
But that's enough about me, because I'd much rather talk to you about what's going on with our business in Canada. We've been selling shoes here for 65 years. As you may know, the footwear market in Canada is about $7.6 billion and grew at 2% last year. Designer Brands in Canada is the third largest player in the market, and even more importantly, had the second highest growth rate last year. I'm very proud to tell you that we're number one share in Women's and number three share in Kids. More than 3.5 million Canadians belong to our loyalty program, which is about 10% of our overall population. And we have 27 DSW warehouses and 112 Shoe Companies -- 113 Shoe Companies -- sorry, we just opened one -- across Canada.
Now let's take a look at The Shoe Company, which is my other passion. If you ask about the difference between the DSW segment and The Shoe Company model, I think the videos tell it all. The Shoe Company is a small, friendly, family based retail chain. Quite frankly, we're a small scrappy team, but we love our Shoe Company business. We love that we make it easy for our customer with a carefully edited assortment in a simple, shoppable box, and most importantly, conveniently close to her home.
As I said, we are a family footwear solution, and 21% of our business is Kids. Overall, what our customer is looking for from us is athletic, comfort, seasonal, and everything she needs for her family. But in smaller markets, we're often the only game in town, so we make sure that we have an edited assortment that meets all of her needs.
We just completed a significant research project with Maru/Matchbox, both with customers, and more importantly, with non-customers. As part of our strategy to maximize the Shoe Company opportunity, this gave us some excellent actionable insights. So who is our customer? She's likely married, she usually has kids at home, and she's almost always a working home.
But here is the really interesting thing. As busy as she is, she loves to shop for shoes. More than half of our surveyed customers describe themselves as shoefies and have bought at least five pairs of shoes for themselves in the last 12 months, in addition to the purchases they'd made for their family. And here's what she says about us. Our great Kids assortment is a key differentiator for her, and we're definitely her seasonal destination, whether for sandals or for boots. But most importantly for us, she rates us above our competitive set on almost every criteria.
The two key takeaways that we had from the Maru survey are to get a larger share of our shoefies' wallet by ensuring we have exactly what she wants every time, and the critical important of driving top funnel awareness, as we actually do a very good job of converting the customer for consideration to purchase once we get them either into our store or onto our website.
This is to help you understand the very significant difference between the two formats. When you think about the success of the DSW Warehouse, it's in a 20,000-square-foot box in markets of 400,000 people or more. But here's the beautiful thing: The Shoe Company is successful and highly profitable in 4,000 square feet in markets as small as 50,000 or even less.
It reminds me of the high school experiment that we all did, which taught us that there's always room for the grains of sand, even when the jar looks like it's already full of rocks. The Shoe Company is just like that sand. Our small boxes in smaller markets close to where our customer lives provide a very broad network of storefront marketing, of efficient fulfillment, and ease of pickup and return for our customer. That's exactly what makes us a powerful last-mile solution.
And to further leverage that last-mile network with the launch of the new digital platform that I'm going to speak more about shortly, we'll expose the much broader DSW assortment on The Shoe Company website as well to ensure that we're maximizing not only her assortment options, but our inventory productivity. And we'll build the widest possible reach for Designer Brands' digital business in Canada that way.
So, what are our strategic pillars? It's around differentiated experiences, both between the two banners in Canada, as well as against our competition; it's about leveraging the scale of designer brands for the Canadian business; and it's about our growth engines, both digital and bricks and mortar. And all of these things will help us drive a 19% operating income CAGR over the next three years.
You heard from Bill that loyalty has been a key driver in the DSW segment success story. Up until now, in Canada, both The Shoe Company and DSW have shared one common banner agnostic rewards program. More clearly defining and supporting the two separate banner propositions on all touch points is a key objective as we go forward. So in support of that, as part of our commitment to delivering an authentic DSW experience in Canada, we'll be launching the hugely successful DSW VIP program in Canada in Q2 of this year. We can then leverage the very rich information from our Maru survey to tailor a dedicated loyalty program that creates an emotional connection with our Shoe Company customer, and that will launch in fall of 2019. Oh, sorry. Phase one and phase two.
This is really big news. Moving from a 1.5% spend to a 2.1% spend gives us a 14% increase in our marketing dollars. This increase spend is critically needed to drive the engagement and frequency with our existing customer, but even more importantly, to build a new customer acquisition. As I called out earlier, this was a key action point coming out of the Shoe Company survey, which clearly identified that segments that we should target with this increased spend. And again, in keeping with our commitment to deliver on a consistent and authentic DSW experience, as of this spring, we're mirroring the DSW U.S. marketing campaigns in Canada for that banner.
Leveraging scale is a significant win for the Canadian business. Our acquisitions by Designer Brands is a game-changer for us in Canada. I liken it to suddenly having a big brother and being able to play with all of his toys. We'll have access to a free trade zone this September, which will allow the businesses on both sides of the border to best use shared inventories. This will be a particularly big win for the private brand business, and it will facilitate the significant growth that both Bill and I have planned in partnership with Simon and the Camuto Group. Going from 150 locations to being part of a thousand points of distribution clearly has a significant opportunity with vendor negotiation, not just in terms of pricing, but also in terms of access to exclusive product and special makeups. And even things like associate training programs and best practices are greatly enhanced by being part of a larger entity.
But what's the biggest leverage win? It's about digital. Our digital replatform would absolutely not have been possible without the access to the award-winning U.S. ATG platform and the access to the IT team and all of their incredible best practices that Bill just spoke to you about. The Canadian footwear business penetrates at about 19% to total for digital. And I'm here to tell you that in the past, we at Designer Brands in Canada have lagged significantly behind that number and significant behind DSW segment's penetration in the U.S.
So, this is a really big deal for us. Our move to the ATG platform in April will address not only our functionality, but much more importantly, it will enhance our consumer experience on both banners' websites and will allow us to more than double our e-commerce revenue by 2021. And although this growth sounds very high, it's actually completely consistent with the results the DSW segment has already shown and delivered in the past.
We have room to grow both DSW and The Shoe Company. And not very many retailers have the appetite or the ability to make that statement. Quebec represents 25% of the Canadian population, and we're currently not in that market at all, so definitely an opportunity. We'll also continue the expansion in smaller markets for The Shoe Company right across Canada as we continue to build the reach of our last-mile network.
So, in summary, here's how we're going to win. We'll connect with our consumers through new banner-specific loyalty programs and significantly increase marketing investment. We'll leverage the scale of Designer Brands through shared inventories, vendor negotiations, and common platforms. And we'll drive growth through increased digital penetration and organic expansion in Canada. And we will deliver a 19% operating income CAGR over the next three years.
Thank you. And I'd now like to introduce Simon Nankervis, President of the Camuto Group.
Simon Nankervis -- President, Camuto Group
Thank you, Mary. Bill and Mary have already spoken to you about the unique components of their business models and how Camuto Group and Camuto-produced products are going to play into those models. I'd like to take a little bit of time this morning and explain to you what is Camuto Group and the world-class digital design and sourcing platform that we developed.
In November of last year, Camuto Group became part of DSW, which is now Designer Brands. And as part of that, we inherited design and sourcing and branded services. We have three major brands -- our namesake brand, Vince Camuto; and our licensed brands of Lucky and Jessica Simpson. And we believe that with the addition of Camuto Group, we are positioned to drive the future of Designer Brands. We're going to accelerate our growth into the private branded business. We're grow our existing branded business through our existing retail partners. And lastly, we're gonna expand our direct-to-consumer capabilities, which to this day have been very limited.
Our mission is simple. There's a lot of words, but if you think about it, we do two things. We design great shoes and brands that customers want to buy. That's what we do. How do we that? How did we get to this place? I want to take a couple of minutes just to walk you through the history of Camuto Group so you can understand how we got to this place.
In 2001, Camuto Group was founded through a relationship with Dillard's and Vince Camuto. At that point in time, Alex Dillard granted Vince the permission to build his exclusive brands. 18 years ago, this company was founded on the development of private brands. In 2002, we landed our first license agreement with Max Azria for the development of BCBG. And over the next five years, that brand grew into a significant footwear brand in North America. In 2005, Vince, as a visionary and an entrepreneur, recognizes the value of celebrity. When you think about it, 2005.
Today, we talk about a number of brands and number of celebrities, but that was at a time when celebrity was just starting. And they signed the master license to Jessica Simpson, and we still have the footwear license today. And that brand still represents north of $150 million of retail sales for our group.
In 2006, Camuto Group partners with Tory Burch to develop probably one of the largest and strongest North American footwear brands today. And the relationship has just ended. In 2009, at the request of his retail partners and after a number of people saying, "Come on, Vince, why don't you have your own brand? You do this for everyone else. You can it for yourself," they then launched their namesake brand, Vince Camuto, and they entered the license for Lucky brand. In 2010, they begin to license the brand Vince Camuto into a number of our categories -- men's apparel, fragrance, women's apparel -- and that licensing continues today. We also launched vincecamuto.com nine years ago.
In 2013, the company continues its expansion by launching Louise et Cie. And then in 2015, two big events happened. One, the company divests itself of the master license to Jessica Simpson, to sequential brands, and the Simpson family, but retains the rights to the footwear. But more importantly, in 2015, the founder and entrepreneurial leader of the company passes away. Most companies at that point look to their executive team and say, now you have to stand up, because without that visionary and without the patriarch of the family leading the company, you can only go one of two ways.
This team stood up, and in 2016, they had their best year ever. They continued to expand their portfolio and acquired a number of other brands, including the acquisitions of Sole Society, and they produced the most numbers of pairs of shoes the company has ever produced, 33 million pairs. 19 million pairs of private branded footwear, 14 million pairs of branded footwear.
In 2017, the company [audio cuts out] moving into a new state-of-the-art distribution center which was only just completed now. And then in 2018, the company goes through a sale process with a number of significant footwear companies participating in that acquisition process. And what's important about that process is this was not a process where it was a company who won because they paid more money than another company. The company that won the right to continue with Vince's legacy was the company that they chose, and that company was Designer Brands.
Who we are. So if you think about our history and contemplate everything that we've done, we have three very clear revenue streams. We have private brand, where we design and source product for retailers and for vertical brands. We have our branded business, where we own brans or we license brands. And then lastly, we have our direct-to-consumer business through vincecamuto.com and solesociety.com.
We have a common set of key competencies that run throughout all [audio cuts out] business. Those competencies have been built over our 18-year history. It is a muscle that has been honed. It is a group of talented individuals that have been assembled, and it is a global scale. If you think about it, the vision that we had for Designer Brands, there was one piece of that puzzle missing. And Camuto Group was the missing piece.
By bringing Camuto Group into the family, what we did was we de-risked the design and sourcing operations. Roger laid that vision out for you earlier. And all we're asking for Camuto Group to do is what we've done for 18 years -- make great shoes that people want to buy. It's product that we make for vertical retailers. It's product that we sell into wholesale. It's a product that we sell to the consumer. It's what we've done for 18 years, and we're just being asked to continue to keep doing it.
What is essential to the success of Camuto Group and our history of building and designing brands? It's our fundamental ability to understand what today's customer wants. And it's not just the ultimate customer; it's what our retail partners want. We spend a lot of time in meetings with our retail partners talking about what is their consumer looking for?
What does our assortment need to look like? How does our assortment fit their needs? It is a company that is known for exceptional quality. We walk into meetings and people say to us, "Hey, I've got a little bit of an issue with this shoe. Can you talk to me about it?" And we look at the shoe and go, "We understand where you're coming from." We go, "But you're asking us to stick to a higher standard than you expect other people." And they go, "Yeah, because you're Camuto. We expect it from you."
We give great value to our retailers, and we give great value to our customers. If you buy a shoe from us, you know you can rely on it. And we have industry-leading design and sourcing services. We are a company that was founded on it. Think about our DNA. Go back to the beginning. 18 years of doing this business for other people. So all we're gonna do is what we do best: keep doing that. Designing and sourcing great product and marketing great brands that customers want to buy.
Over the past 18 years, we have built an extensive and diverse global infrastructure around design, sourcing, development, production, distribution, and wholesale. Think about it. 50+ factories in 13 countries through six global design offices. Contemplate what we have done. We have managed to de-risk what DSW would have had to have done itself. Designer Brands has inherited an ability to access a global infrastructure without taking the risks. We don't have the loss of time. We don't have the potential of missteps. So how does this all come together? What are we gonna do with this amazing machine that we've now brought into the family?
We at Camuto Group are going to do three things. We're going to accelerate private brand through our existing partnerships with a core focus on accelerating our move into DSW private brand. We're gonna grow our branded business, so continue to partner with the retail partners we've got today and figure out how to grow that business. And lastly, we're gonna innovate through speed to market.
Now let me take you through each of those. As the leader in private brand and as a business that we've been doing for 18 years, we partner with most of the major retailers, and we partner with a number of vertical brands. In providing these services, we reach a billion dollars of retail sales and produced last year 12 million pairs. If you
