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.