Designer Brands Inc (DBI) 2001 Q4 法說會逐字稿

Thank you for holding ladies and gentlemen and welcome to the fourth quarter results of operations conference call. During the presentation all lines will be on a listen-only mode. There will be an opportunity to ask questions and instructions will be given at that time. Thank you for your attention. I will now turn the conference time over to your host, Mr. Jim McGrady.

Thank you, Rebecca. Good morning and welcome to our discussion of the fourth quarter fiscal 2001 operating results.

My name is Jim McGrady and I am the Chief Financial Officer of Value City Department Stores. Joining me today are John Rossler, our President and CEO, Ray Blanton, Senior Vice President

and Chief Merchandising Officer, Ed Kozlowski, our Chief Operating Officer, and Alan Schlesinger, our President of Filene's Basement. Excuse me.

Before beginning, I would like to remind everybody that during this discussion we may make certain forward looking statements based upon our current expectations or beliefs.

We caution that actual events and results may differ materially from those anticipated, based upon the risk factors described and those reports we file with the SEC, and we encourage you to read those filings.

Today, we announced a fourth quarter loss of $8,700,000, or 26 cents per share versus a $22,900,000 loss or 67 cents per share in the prior year quarter.

Fiscal 2001 fourth quarter operating results include approximate $14,600,000 or 31 cents per share of pre-tax charges

to severance, the write down of

and software costs related to discontinued IC systems, our DSW and warehouse relocations, and transaction fees that

were previously associated with the previously announced terminations of the proposed sale of certain Value City subsidiaries. The comparable fiscal 2000 operating results include a $19,600,000 or 35 cent per share charge of non-recurring items.

For the fiscal year, Value City is reporting a net loss of $28,700,000, or 85 cents per share compared to the prior year's net loss of $101 million or 43.03 per share. The fiscal 2000 operating results included $110 million, which is approximately $2 per share of non-recurring charges that in the third and fourth quarters,

they were associated with inventory realignment

impairment, and severance charges.

Total sales for the 13 weeks in the fourth quarter of fiscal 2001 decreased $30 million or 4.5 percent to $633,900,000m from $662,900,000 in the 14 week comparable quarter of 2000.

Excluding the sales from the extra week in fiscal 2000, total sales increased 1.8 percent.

On a consolidated basis, our comparable stores sales for the quarter were down by .9 percent. Sales for the 52 weeks ended February 2, 2002 increased by 3.2 percent to $2,280 million from $2,210 million in the 53 week period of 2000.

Excluding the extra, excuse me, excluding the extra week in fiscal 2000, total sales increased 5.2 percent and same store sales declined 2.4 percent. Fiscal 2001 sales included $293,400,000 attributable to Filene's Basement which was acquired in March 2000. Filene's Basement sales in the prior year were $249,100,000.

By division, comparable store sales were for the quarter, Value City Department stores negative 1.2 percent, DSW down 3 percent, and Filene's Basement a positive 3.2 percent. Year to date comparable stores sales were for the department stores down 3.7 percent, DSW was flat, and Filene's Basement was positive 2.2 percent.

The department stores realized a 9.7 percent comparable sales increase in domestics during the fourth quart - quarter, who strove a non- apparel sales increase of 2.6 percent.

Soft lines

declined 3 percent for the quarter, which consisted primarily of an increase of 7.6 percent in children's, and men's dropped 4.1 percent, and women's declined 5.9 percent. Department store non-apparel

sales increased 3.3 percent for the fall months. Apparel sales declined 5.9 percent for the year

to date and clean a positive comparable of 3.7 percent for children, while men's and ladies declined 4.7 percent and 10.7 percent respectively.

DSW sales were $120,500,000, a 10.6 percent increase in the quarter, which includes a net increase of 26 stores in a comparable stores sales decrease of 3 percent.

Including the flat 12 month comp store sales growth rate, DSWs sales rose almost $100 million to $509,400,000 for the year. Regarding margin in the fourth quarter,

has appraised percentage of sales increase by .7 percent to 35.3 percent. Total gross profit declined $5,700,000 to $223,500,000

due primarily to the decline of sales line from last year.

For the year-to-date period, the gross profit percentage increased 4.9 percent to 37.4 percent. Remember, last year's gross margin for the quarter in year-to-date periods include charges for realignment of excess inventory quantities of $18 million and $105,400,000 respectively.

Adjusting for the fiscal 2000 charges, the gross margin was 37.3 percent for the quarter, and 36.5 percent for the year-to-date period.

By business segment, the fourth quarter margins were department stores 35.5 percent, DSW 35 percent,

Filene's 34.6 percent. For the year-to-date period, department stores were 37.6 percent, DSW 38.2 percent, and Filene's Basement 35.1 percent.

Our total SG&A expenses for the quarter decreased by $23,600,000 to $239,800,000.

This decrease includes the $14,600,000 of additional charges previously discussed. As a percentage of sales, SG&A for the quarter decreased by 1.8 percent to 37.9 percent.

For the year-to-date period, SG&A increased $18,500,000 to $888,700,000

or 38.9 percent of sales. The 52-week period ended February 2, 2002, includes approximately $24,700,000, or 47 cents per share, for employee benefits and severance costs right off of the IT development costs. DSW Shoe Warehouse locations and the previous mentioned fees associated

with the terminated sales certain by a city subsidiaries. The 53-week period ended February 3, 2001, included pre-tax charges of $4,600,000 for asset

and severance costs.

New DSW stores added approximately $67,000 FGA during the year.

SG&A as a percent of sales by division in the fourth quarter were 38.8 percent for department stores, 39.2 percent for DSW, and 31.5 percent for Filene's. On the year-to-date basis, they were 40.4 percent for department stores, DSW at 30.8 percent, and Filene's Basement was 32.9 percent.

Excuse me. Operating profits for the fourth quarter by division was Value City at a operating loss of $70,800,000, DSW at a operating loss of $4,800,000 and Filene's had an operating profit of $3,200,000, for a total of $9,400,000 in the quarter.

Year-to-date operating profits were a loss, department stores of $25,900,000, DSW was about $1 million profit, and Filene's was $8,600,000 operating profit.

Net interest expense for the quarter decreased by $4,700,000 to $4,600,000,

which was primarily a result of lower interests rates and lower borrowings as the planned inventory levels of the company declined. Our earnings from the joint venture with

for the quarter were $2 million, compared to a loss of $600,000 in the prior year quarter. On February 2,

we acquired our partner's 50 percent interest in the joint venture for $8,400,000. Consequentially, the ventures earnings are presented in our P&L and joint venture line for fiscal 2001, however their balance sheet has been consolidated at the end of the fiscal year.

Our effective tax rate, excuse me, benefit rate is 36.5 percent

in 2001 versus 39.2 percent in 2000. As we turn to our balance sheet, inventory totaled $396,800,000 at February 2, versus $393,600,000 last year, an increase of less than one percent. This total also includes 26 new DSW stores and one Filene's Basement store

in addition to $20 million of, $22 million of inventory that's associated with the now

joint venture. The department store's inventories were down by $19,300,000 or 10 percent compared to last year's ending numbers.

Our working capital on February 2, 2002 was $228 million compared to $211,400,000 last year. Net cash used for capital expenditures was approximately $40,200,000 during the current year. Depreciation and amortization in the fourth quarter totaled $18,100,000 compared to $14,600,000 in the prior year.

EBITDA in the fourth quarter was $10,800,000 versus a negative $13,900,000 last year.

For the year, EBITDA was $40,300,000 versus a negative $89,400,000 last year. At this time on our year end we are in compliance with the covenants of our bank agreement and availability

at year end was about $31,900,000 under the bank in addition to $80,000 of availability under the SSC line, and as you can see a cash balance of about $35,900,000.

That concludes the review of the history - historical results of operations.

Looking to fiscal 2002, I would say that we continue to be cautious in light of last year's turbulent economic environment, and we've based our plans on what we believe to be a realistic sales outlook. We expect comparable stores sales increase of two to three percent with total sales up in the range of about 12 to 14 percent.

This includes sales of approximately $140 million from the departments reported in the joint venture line last year. We anticipate to open approximately 25 to 30 new DSW stores during the year and one Filene's Basement store. At this time, no new Value City stores are presently scheduled.

However we will continue to explore exceptions real estate opportunities as they are presented to us.

Our gross margins are planned at approximately the same level as reported in 2001. SG&A expenses are expected to decline significantly in 2002, as a result of cost savings initiatives with related to workforce reductions,

labor efficiencies at the stores and distribution centers, and as well as the planned reductions in the number of units that we are going to process in the department stores.

To date, the workforce reduction program that we announced in the latter part of the third quarter has resulted in a head count reduction of about 208 people at the department stores,

and has eliminated 23 open positions. The estimated annual savings from this program is approximately $11,200,000, including benefits. Our expectations based on these estimates, is for an operating profit of about 1.5 to 2 percent in fiscal 2002.

For the first quarter of 2002, the expectation is for a concourse sales growth in the low single digit range resulting in an estimated loss per share of 20 to 25 cents per share. Cap ex for 2002 is expected to be in the $30 million to $35 million range.

At this time, I would like to turn the call over John Rossler,

who as - as have read, has been appointed our CEO and President and, welcome John.

Thank you, Jim. Good morning everyone and thank you for joining our conference. I'm glad to have the opportunity to lead Value City Department Stores. I believe in Value City Department Stores and the Value City brand.

Having been involved with running the Fashion City shoe departments for the past 20 years, I've been somewhat sitting on the sidelines wanting to play in the big game.

Now is my opportunity to contribute to the success of our parent company and I am absolutely thrilled to be here. Two individuals joining Value City senior management team with me,

are Ed Kozlowski as Executive Vice President and Chief Operating Officer, and Ray Blanton, as Senior Vice President and Chief Merchandising Officer. Excuse me. I have a cold this morning. I have the utmost confidence in Ed and Ray, as well as our other senior managers.

I believe that each of our three business units, Value City Department Stores, Filene's Basement, and DSW operate in a market niche where they can and will successfully compete. Our goal is to return Value City Department Stores to profitability for the 2002 year, while increasing the profits in our other business units.

To accomplish our goals, we will seek to increase our sales and our gross margins and to reduce our operating expenses.

We intend to continue the transition of Value City back to an off-price department store serving moderate and to a certain extent, upper-moderate customers without chasing away our existing budget customer.

We intend to consciously market the Value City brand and to increase customer loyalty. We believe controlling inventory levels is a critical factor in gross margin improvement. In that regard we plan to continue the progress that George Kolber, Alan Schlesinger, and Jim McGrady made over the past year.

Corporate overhead has to be both effective and efficient.

We recognize we have problems in both areas, some of which are more immediately fixable than others. But they are fixable. 2002 will continue to be a very challenging year for retail with most stores claiming low prices.

But our name is Value City. Years ago our business was founded based upon value and our return to success will be based upon a city, if you would, of values. Therefore, this retail environment should not hinder our efforts to be successful serving the budget, moderate and upper-moderate customer.

In conclusion, I would like to again say I'm excited about the opportunity to be leading Value City, and I am as equally excited about the prospects for our business in 2002. Rebecca, we would now like to open the line for questions please.

Thank you. To ask a question, please press the one, followed by a four on your touch-tone one. To retract your question, press the one, followed by a three. All questions will be taken in the order they are received. To be placed by into the conference call once you -

once again, to ask a question please press one followed by a four. It looks like our first question comes from Mr.

. Go ahead Mr.

.

Morning. Jim, one question on SG&A. If you see a 2 to 3 percent growth in - in comparable stores sales, what kind of SG&A percentage will this likely produce for the year?

To get down to that operating profits that we had just discussed, you know it's going to take about, I don't have that right here in front of me right now, Jeff, what it is going to be next year. But I think, you can - you can do the math, you can do the math as you take it between what, you know, remaining at constant last

year's margins and getting down to the operating profit that we think we are going to have.

OK. Can you talk a little bit about management of inventories in the upcoming fiscal year? What kind of an inventory plan do you have, in other words, what kind of working capital growth or contraction will you expect to see in the current fiscal year?

Well, I - I expect to see some pretty good working capital growth at this point in time. We have put a plan in to place and our - our goal is to, as I said, is to significantly reduce the number of units that we are processing through our warehouses and at the store level. That, as John had said,

we will in fact result in what we see as a - an increase in the average item retail units that are - are being processed through the register. And you know, there's - there's a significant number of our items at this point in time that are below a price point that

we deem to be where we want to operate the business at and that is, as a matter of fact, we're making some pretty good strides right now into managing that process.

So, I - I think that we are definitely going to see some growth in working capital and we're going to continue to see a decline in the inventory levels at the department stores and especially what we are going to see, a decline of the inventory levels as a reduction in the number of units.

Thank you.

OK. Our next question comes from

. Go ahead.

Good morning, everybody. Jim, good morning. Roy Greenhouse at Century. Just one question. In, since the company has taken over the joint venture of the VCM, is that going to put a strain on the needs for an increased

credit facility and is that in the works to possibly be done?

Actually, in, when we made that acquisition we took a lot of time in making sure that we could fit that in to our existing plans and it does - it does fit.

As far as a new credit facility, we have not yet gotten to a point where we - we have not go to the commitment stage of the - of the talks yet. We are in the process of doing so and are confident that we'll be able to have something available in the short-term future.

OK. Thank you very much.

Thank you. Our next question comes from Mr.

. Go ahead, Mr. Mann.

Yes, Good morning. A few questions. First of all, following up on the joint venture, can you just discuss a little bit about your thought process on terminating that joint venture, how that's transitioning in terms of handling those departments and whose running that?

OK. Sure, Dave. As you know, most of the management team or, and I would say virtually all of the buyers that were with VCM did join Value City. The inventory,

the actual processing of the inventory through the warehouses and everything like that was something that was handled by our systems to begin with. So, that transition was pretty much seamless, as has in fact, been the transition of the buying and the planning and allocation. So that really hasn't been an issue

for us and quite frankly, I think it will work better having, you know, Value City being in control of the buying and the merchandising rather than have that responsibility under the hospice of

. What was your other question, David, I'm sorry?

Well, just a curious thing in terms of the buyers that came. Did

come with that, or some of the senior buyers there?

Yes, we have not - we have not yet at this point in time signed a contract with

, but we - we believe we will be doing so in the near-term future.

OK. In terms of the charge that you took, there's a, you know you are writing off some software development, you know of previous conference calls I think George Kolber talked about systems being a major operating issue here.

Can you just elaborate a little more on what's going on in the systems area, how far along you are towards, you know, getting to state of the art systems?

No, we really, we - we are constantly in the process of evaluating our systems and updating them, and Ed Kozlowski has taken the reigns of the IT areas.

We are in the process now of evaluating whether we can really do perhaps what I want to call a joint operating system between the two existing businesses of DSW and the department stores. So, that is an initiative that remains strong with us and we will definitely have a commitment to improve our systems.

You know, you can well imagine it's not something that you just plug in and start overnight with. The initiative is still there and it's - we're evaluating warehouse management systems and merchandise management systems in great detail at this point in time.

Thank you.

Once again, to ask questions please press the one, followed by a four. It - it looks like at this time there are no further questions.

I would like at this time to thank everybody for their participation and

wish everybody a good spring. Thank you. Thanks, Rebecca.

You're welcome. This now concludes today's conference call. Thank you for your participation.