Designer Brands Inc (DBI) 2002 Q1 法說會逐字稿

Thank you for holding ladies

and gentlemen and welcome to the Value City

Department first-quarter operating results

conference call. At this time, all lines are in a

listen-only mode. There will be an opportunity to

ask questions at the end of today's conference.

Instructions for asking questions will be given at

a later time.

I thank you very much for your attention. I now

turn the conference over to our host, Mr. Jim

McGrady.

Thank you, Brandon. Good

afternoon, everybody. Welcome to our discussion

of the first-quarter 2002 operating results and

also a discussion that we will have regarding the

refinancing that we've just completed and issued a

press release on concurrent with the operations

results.

My name is Jim McGrady. I'm the chief financial

officer of Value City Department Stores. Joining

me today are John Rossler, our president and chief

executive officer, Ed Kozlowski, our chief

operating officer, and Alan Schlesinger, president

of Filene's Basement.

Before beginning, a little housekeeping. I would

like to remind everyone that during this

discussion, we may make certain forward-looking

statements based upon our current expectations and

beliefs. We caution that actual events and

results may differ materially from those

anticipated based upon the risk factors described

in the reports we've filed with the SEC, and we

encourage you to read these filings.

Our first-quarter loss of $2.7 million, or 8 cents

a share, was less than we had previously

estimated. While our comparable store sales were

below our expectations, we did benefit from a flat

gross margin on a higher sales base, and saw

benefits from cost reduction programs which

lowered our overall SG and A as a percent of sales by

about 1.2% in comparison to the prior-year

quarter.

Our inventory level declined 13.8% when compared

to the first quarter of fiscal 2001. This

includes a 27-and-a-half million dollar increase

attributable to our VCM operations which we

acquired at the end of fiscal 2001, and 12.2%

increase in the number of store operations -

stores in operation, excuse me for the comparative

quarter ends.

Total sales for the quarter increased

$55.8 million, or about 10-and-a-half percent, to

$585.9 million from $530.1 million.

Sales for the quarter ended May 4th of 2002

included $25 million attributable to the sales of

the departments which were formerly operated by

the VCM operations.

Comparable store sales for the quarter were flat.

By segment, our comparable store sales were

department stores negative 1.3%, DSW was positive

1.4%, and Filene's Basement was positive 4.9.

Value City's non-apparel - apparel, excuse me,

comparable store sales increased 2%, while apparel

sales decreased 2.8%. The three apparel

divisions, children's, men's and ladies, each

recorded negative comps for the quarter.

Children's was down 1.6, men's down 6.4, and

ladies' down about a half percent.

DSW's sales were $156 million, a 28.1% increase in

the quarter, which included an increase of 27

stores.

Filene's Basement sales were $70.7 million, 11.3%

in the quarter, which included a net increase of

two stores.

Got profit increased $21.3 million, or about

10-and-a-half percent, from $201.9 million to

223.2 million, and remained as a percentage of

sales at 38.1%.

Gross profit as a percent of sales by segment was

department stores 37.9%, DSW 39%, Filene's

Basement 37%.

Our SG and A expenses increased $14.8 million from

208.5 million to 223.3 million. However, they did

decrease as a percentage of sales from 39.3% to

38.1%. This increase includes $15.5 million

attributable to the new store operations for DSW

and Filene's, and a charge for 1.1 million for the

closing of one Value City store located in

Missouri, and $1.7 million for severance costs.

SG and A expenses as a percent of sales in the first

quarter were, Value City Department Stores 39.6%,

DSW 35.9%, and Filene's Basement 35.6%. Operating

profit in the first quarter by division was

$4.3 million operating loss at the department

stores, $5 million operating profit at DSW, and a

$1.4 million operating profit at Filene's for a

total of $2.1 million.

Our interest expense decreased about $2.1 million

to $6.3 million. This decrease is due primarily

to a - about a 2.8% decline in our weighted

average borrowing rate and a $24 million reduction

in the average borrowing outstanding during the

period.

Our effective tax rate for the first quarter was

about 36.7%, and we expect it to run probably in

that area for the balance of the year.

Potentially a little bit higher, once we get some

of our tax planning initiatives set, we may be

able to get a little more benefit out of it than

that.

Turning to our balance sheet, our inventory

totaled $417.4 million versus 484.1 million last

year. This is a decrease of about 13.8%, or

$66.7 million, and remember, this is after we have

absorbed the joint venture VCM inventory and have

added about $8.5 million for new store inventories

at the Filene's and DSW operations.

Working capital was $213.8 million compared to

$281.4 million the prior year. However, I would

like to say the cash provided by operating

activities in the current quarter was a positive

13.7 million compared to an use of cash in the

prior year quarter of about $17.1 million. We

spent about $5.6 million for capital expenditures,

and our depreciation and amortization in the

quarter was 13-and-a-half million dollars compared

to about $12.8 million in the prior year.

EBITDA in the first quarter was $15.6 million.

As of May 4th, we were in compliance with the bank

agreement, and our availability thereunder was

about $85.4 million, and about $80 million was

available under the SSC line.

I would like to remind everybody that the FASB

announcement that we are presently evaluating

relates to goodwill and other intangible assets.

We have about $41 million worth of unamortized

goodwill on our balance sheet, and we're in the

process of completing an evaluation required under

this FASB. We expect to have it completed in the

second quarter, and we'll let everybody know as

soon as we find out what the results of that

evaluation is.

Last year, in the first quarter, we had about

$850,000 worth of goodwill amortization compared

to none in the first quarter of this year.

That really concludes a review of the first

quarter 2002.

With respect to the remainder of fiscal 2002, we

really remain cautious in light of the current

economic environment and soft retail sales,

especially along the apparel lines.

We are not, though, however changing our estimate

of annual comparable store sales in the range of 2

to 3%, and a sales growth overall of about 12 to

14%, and as a reminder, that includes about

$140 million of the joint venture sales that are

included in this year's top line.

We now anticipate that we'll open approximately 20

to 25 new DSW shoe warehouse stores during the

year, and we have already opened the one planned

Filene's Basement store.

We have not planned any openings of Value City

stores. However, I will say that as exceptional

real estate opportunities do become available to

us, we will definitely take a look at them.

We anticipate gross margins to be about the same

as they were for fiscal 2001.

As we saw in the first quarter of 2002, SG and A

expenses are expected to decline in 2002 as a

result of the cost-saving initiatives that we've

started up in the latter part of fiscal - of

2001, and we expect to see some benefits from the

workforce reductions at both the central office,

the distribution centers, and the stores.

To date, the workforce reduction program that we

announced in the latter part of the third quarter

of 2001 has resulted in a head count reduction and

job eliminations at the department stores of

around 360 people. The estimated annual savings

from this program is about $15.9 million. That

includes benefits.

Our expectations from these estimates remains

unchanged for the balance of the year, and we

anticipate an operating profit of about 1.5 to 2%.

Turning to the second quarter of 2002, we expect

comparable store sales to be in the low

single-digit range, resulting in an estimated flat

earnings quarter, and that's before any

extraordinary charge and we will have an

extraordinary charge that I'll discuss a little

bit later for the refinancing that has occurred.

Today, as I said, we have also announced that

we've completed a refinancing which is comprised

of a new three-year $350 million revolving credit

facility, a new three-year $100 million term loan

facility, and we've also amended and restated the

company's $75 million convertible loan. That was

initially entered into back in March 15 of 2000.

As we proceed with our turnaround, it's important

that - to us that any credit availability issues

are put to rest. These financing agreements are a

significant step in providing the company with the

liquidity and added financial flexibility to

support our current operating initiatives and

growth objectives. I would like to say that we

are particularly appreciative of the quality of

our lending group, as well as the continuing

financial investment by Schottenstein Stores

Corporation.

At the company - or excuse me. At the closing,

we have over $115 million of excess availability.

Actually, that number is around 138 - a little

bit north of $138 million. The refinancing

provides us with significant credit availability

and liquidity to grow the business, as I said

before, and execute our strategic objectives over

the next three years.

It also reduces our cash pay debt by about

$175 million, and also eliminates financial

maintenance covenants that we had under the prior

credit facilities.

As a summary for some of the credit facilities

that I've just described, under the revolving

credit facility, it's - the borrowing base

formula is structured in a manner that allows the

company the availability based upon the value of

inventories and receivables. The primary security

for this facility is provided by first priority

lien on all inventory and receivables, as well as

some certain payment intangibles.

The interest rate is essentially a LIBOR plus 2 to

2 and three-quarters percent, and it's initially

set at about - at 2 and a quarter percent for the

first couple of months of the facility.

The term loans are comprised of a $50 million term

loan B and a term loan C in the same amount. All

of the obligations under the term loans are senior

debt, and they rank pari passu with the revolving

credit facility in the senior and the convertible

facility.

The term loans have a stated interest rate at 14%

if paid in cash and 15% if the PIK option is

elected by the company. During the first two

years. The company has the option to pay the

interest by PIK, if we want to, and during the

latter part, the last year of the agreement, we

have an option to pay 50% in PIK.

During the last year of the agreement, the rate

increases to 15% if paid by cash, and

15-and-a-half percent if paid by the PIK option.

We have agreed to issue to the term loan C lenders

warrants to purchase common stock of the company

for up to 8 and three-quarters percent of the

shares outstanding. That can be adjusted at a

later date based upon certain issuances of common

stock of the company. The initial exercise price

is $4.50 a share, and that can be - could be

adjusted downwards based upon an EBITDA test that

the company must achieve, and that will be

determined at the February 3rd of this - this -

the end of this current fiscal year.

I would like to note that the warrants are subject

to shareholder approval, and that Schottenstein

stores corporation has agreed to vote its share of

the company shares in favor of approval of the

issuance of the warrants.

The $75 million convertible note that was

outstanding that the company had initially entered

into back in 2000 has been amended, and the stated

rate of interest in there now is 10% per annum,

and the maturity has been extended by - from

September of 2003 to March of 2009, so it's a

seven-year loan.

I would also - I think I forgot to say, back up

in the - under the warrants, the warrants are

outstanding for a 10-year period of time.

The company has certain options under the convert

to pay some of the interest in PIK and some of it

in cash, and these things are all subject to

seeing what's in the agreement that we are filing

with the SEC today, as we speak.

The convertible notes are convertible at the

option of the holders. Like I said, at an initial

price of $4.50 a share. They can be adjusted down

to $4 per share. Again, based upon the same

EBITDA test that we have with the warrants.

The conversion of the senior convertible loan in

excess of 19% of the shares, 19.9% of the shares

of the common stock currently outstanding is also

subject to shareholder approval. Again,

Schottenstein stores has agreed to vote its shares

of the company in favor of the approval of such

conversion rights.

I would encourage everybody to read the 8-K that

we filed today. It has a summary in there of

these loan agreements, and it is very informative.

I think we will, in fact, be filing our 8 - or

excuse me, our 10-Q within a week, and at that

point in time we will have in there as exhibits

these agreements in their entirety.

With that, Brandon, I think now I would like to

open the call up to questions.

Thank you, Mr. McGrady.

To ask a question, please press a 1 followed by a

4 on your touch-tone phone. If for any reason you

need to retract your question, you may press a 1

followed by a 3. All questions will be taken in

the order that they are received. Once again, to

ask a question, please press a 1 followed by a 4.

Brandon.

Mr. McGrady, I'm not having any

questions that we're - oh, we just barely got

one.

Okay.

That comes from Mr. Rick Shay

with Varden Capital Management. Go ahead, please,

sir.

Hi, Jim.

How are you?

I'm well. Thank you.

Can I just get an update on your systems

initiative?

Okay. We are still in the

process of evaluating where we're going with the

systems. Actually, Ed Kozlowski is here, and I

think I would like to really have him address that

question.

The company has been

reevaluating its position with systems relative to

all of our businesses. We have currently been in

search for a CIO. We've actually completed that

search. And are looking for that individual to

begin in July. We're going to go forward with our

decision. We've been in a fact-gathering position

over the course of the last four months. We are

evaluating the changes in business management, and

business processes, and looking at how best to

serve our needs.

So while we have not made any definitive

decisions, we've been moving forward in

preparation for that, and we are close to be

getting those initiatives which will probably

start to take place probably early third quarter.

Okay. In terms of the

liening, could you - are you working with any

outside consultants and can you just give me some

indication whether you're looking internally or

externally in terms of systems?

No, we are looking at a

variety of outside package systems that would best

serve our needs, and we have currently terminated

the arrangements that were with outside

consultants. We are doing our fact-gathering

inside. We are creating a steering committee

which will be evaluating the data.

Uh-huh. Would it be safe to

assume that the - the CIO candidate is in the

been there, done that category?

I would say that's very

true.

Okay:

Thank you Mr. Shay. Your next

question comes from Mr. David Mann with Johnson

Rice.

Yes. A couple questions.

On the second quarter guidance, you said - I

think you used the word "flat." Do you mean

break-even or flat with last year?

Break-even.

Okay. Great. And then in

terms of your growth plans on DSW, that seemed to

be a - you know, a downtick from what you'd

talked about before. What's the thought behind

that?

David, this is John

Rossler. I'd like to tell you that we

intentionally put our real estate development

pipeline on hold for a couple months back a few

months ago for DSW, to really allow us to focus

our entire mental energy on improving our

merchandising support structure initiatives. We

think that we have those in additiontives far

enough in place that we've just started - we've

reopened the pipeline about a month ago. So

whether we can get up to the original 30 that we

had planned on, we're not quite certain, but

that's why we're looking more certain that we'd

end up with probably about 25.

In terms of the guidance for

the rest of the year, obviously you're - with

flat in the first quarter, you're implying that

you expect comps to accelerate at least to the low

single digits for the rest of the year. Can you

comment on, you know - you know, specifically

where you think your comp gains are going to come.

You know, whether you can turn around what's been

sluggish at Value City, and maybe any comments on

some of the pricing initiatives you have going on

in Value City?

Actually, David, I think

one of the primary areas that we focused on and

where we think we're really going to see some

benefits is in the back-to-school campaign that

we've - or campaign, excuse me - program that

we've put together, and just to actually get out

there and have merchandise that's going to be

available that's really trended for that type

of - you know, that type of the season, and go

from there.

I think in the back-to-school and later on as we

get into the holiday season but also for the -

what I'll call the Halloween season and things

like that, we're going to see a lot of the

programs that Ray Blanton has been putting

together start to come to the table for us here.

And that's really from the department store's

perspective.

Alan, would you like to say anything about the

Filene's initiatives

You know, I think

we've - you know, we've talked about it, David.

It's been trending very nicely, and I think

there's been a softness the last - the last

couple of weeks, and we thought it was - we

haven't been able to sell a lot of shorts in the

tanks and the T's based on some weather, but we

feel very confident about what we have going. Our

women's business is strong and our men's business

is - has picked up considerably, so we're feeling

confident about what we have going for the next -

next nine months to a year, David.

Thank you.

Thank you, Mr. Man. Once

again, to ask a question, please press a 1

followed by a 4 on your touch-tone phone.

Mr. McGrady, I'm happy - no further questions

that are queued up.

Okay, Brandon.

All right, everybody. I would like to say thank

you very much for attending the call, and I will

be available if anybody has any questions that

they think of afterwards. Please give me a -

give me a ring. Again, thank you, and good

evening.

This concludes today's

conference call. Thank you for your

participation.