Designer Brands Inc (DBI) 2002 Q2 法說會逐字稿

Thank you for holding ladies and gentlemen and welcome to the second quarter operating results of Value City Department Store conference call.

During the presentation, all lines will be in 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. John Rossler.

Thank you Jill.

Good morning and welcome to Value City Department Store second quarter fiscal 2002 conference call.

Joining me today are Alan Schlesniger, President of Filene's Basement;

Ray Blanton, Chief Merchandising Officer of Value City Department Stores;

Ed Kozlowski, our Chief Operating Officer; and Jim McGrady, our Chief Financial Officer.

Before starting, I would like to remind everyone that during this discussion, we will make certain forward-looking statements based upon current expectations or beliefs.

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

Wednesday evening, we announced our second quarter results that reflected a net loss of 700,000 dollars or 2 cents per share.

As Jim will more fully discuss, this included an after-tax extraordinary charge of 6 cents per share.

The earnings per share before this extraordinary charge was 4 cents or 1.3 million dollars.

Our sales for the quarter increased 6.1 percent to 569.1 million.

On negative comp-store sales of 4.3 percent.

Needless to say that department stores sales performance in the second quarter was disappointing.

However, as planned we were significantly less promotional in the current quarter compared to 2001.

Department store retail markdowns recorded in the second quarter were less than 50 percent of those recorded in the previous years quarter.

Sales at Filene's Basement were slightly below our plan and markdowns were above plan levels.

DSW sales were slightly below expectations; however, markdowns were below planned levels.

In comparison to the second quarter of 2001, we had a total operating profit improvement of 11.5 million dollars, which is comprised of 5.6 million in the Department store business, 10.2 million in DSW, and a decline of 4.3 million at Filene's Basement.

Cash provided by operating activities over the past 6 months is 45.4 million dollars, in contrast to a 30.1 million dollar use of cash for the same time frame of 2001.

Our total inventory level was approximately 30 million dollars below the 2001second quarter level.

Our focus for department stores during the first 6 months of 2002 was to manage inventory levels, improve turns and margin, reduce SG&A costs, and increase our sales volume.

As the results indicate with the exception of top line growth, our retail operations have started to see the benefits of the initiatives put in place earlier this year.

We are critically evaluating our marketing plans for the balance of 2002, in an effort to better understand our customer and augment the mix of merchandise presentation necessary to return customers to our sales floor and drive future business.

I will now turn the discussion over to Jim to review the operating results.

Thank you John.

Good morning everybody.

As John has said, Wednesday we announced the net loss for the quarter, which was about 700,000 dollars or 2 cents per share versus the loss of 5.8 million dollars or 17 cents per share in the prior year.

Our second quarter profit before the extraordinary item that you see on the income statements 1.3 million dollars, 4 cents a share.

Year-to-date loss including extraordinary items and a change in accounting is 5.5 million dollars or 16 cents per share compared to our prior year-to-date loss of 13.6 million dollars or 40 cents a share.

Excluding the extraordinary charge in accounting change in 2002 year-to-date loss is 1.4 million or 4 cents a share.

Total sales for the second quarter increased 32.6 million dollars to 6.1 percent to 569.1 million dollars from 536.5 million last years.

Second quarter 2002 sales includes 24 million dollars, attributable to sales at the department stores, the department formerly operated by the joint venture VCM.

By segments, sales were for the quarter, department stores 336.5, DSW 158.8, and Filene's 73.8.

Year-to-date, our sales were Value City 695.7, DSW 314.8, and Filene's 144.5.

Value City's noncomparable sales decreased 5.8 percent while sales, excuse me, while apparel sales decreased 8.1 percent.

Of the three apparel divisions, children's, men's, and ladies, each recorded negative comps for the quarter.

Children's is down 14.1, men's 11.4, and ladies 2.8.

Our shoe sales at the department stores that is operated by the Shonac division were a positive 3 percent for the quarter and 1.1 percent positive in the year-to-date period.

DSW sales were 158.8 million dollars, a 21.3 percent increase in the quarter, which includes a net increase of 28 stores and a comparable sales store decline of 2.1 percent.

Including the 6-month comp store sales decrease of about 0.4 percent, less than a point, DSW sales rose to 314.8 million dollars for the year-to-date period.

Filene's sales were 73.8 million dollars, a 7.1 percent increase in the quarter.

This included a net increase two stores and a comparable store increase of 1.2 percent.

Including the 6-month comp store sales increase of 3 percent, Filene's sales rose to 144.5 million for the year-to-date period.

Comp store sales by segment were department stores negative 6.1, DSW negative 2.1, Filene's a positive 1.2 for a total negative of 4.3 in the quarter.

As in regards to margin in the second quarter gross profits as a percentage of sales increased 100 basis points to 39.3 percent.

Total gross profits rose 18 million dollars, an 8.8 percent improvement to 223.6 million.

For the year-to-date period, the gross profit rose 39.3 million, a 9.6 percent improvement to 446.8 million.

Gross profit percentage was 38.7 percent, an increase of 50 basis points from the same fiscal year 2001 period.

Gross profit, as a percent of sales by segment in the second quarter were Value City 39.7, DSW 40.9, and Filene 33.9, for a total of 39.3.

As John mentioned the department store operation in DSW were much less promotional in the second quarter and has benefited from improved

.

Total SG&A expenses for the quarter increased by 4.7 million dollars to 216 million.

Seven million dollars of this is associated with new stores in operation at DSW and Filene.

As a percentage of sales, SG&A was 38 percent compared to 39.4 percent in the second quarter of 2001.

This is an improvement of about 140 basis points.

Year-to-date, SG&A increased 19.5 million dollars to 439.3 million or 38 percent of sales compared to 39.5 percent compared to prior year.

This is an improvement of about a 150 basis points.

Eleven point seven million dollars is the increase in dollars associated with the operation of 28 new DSW and two new Filene Basement stores.

SG&A as a percent of sales by segment in the second quarter were Department stores, 39.9, DSW 35.5, and Filene 34.3 for a total of 38.0.

Our operating profit by segment was in the Department stores, we had an operating profit of 892,000 dollars, DSW was 8.8 million, and Filene was about 0.4 million.

Year-to-date, Department stores had an operating loss of 3.4 million dollars, while DSW and Filene had operating profits of 13.8 million and 1.8 million respectively.

Our net increases for the quarter decreased by about 200,000 dollars to 7.9 million dollars.

This decrease is attributable to a decline in our weighted average borrowings and a decrease in the weighted average borrowing rate.

For the year, interest decreased 2.3 million dollars to 14.2 million dollars.

This decrease is attributable to a 34 million dollar drop in weighted average borrowings for the year-to-date period and a significant decrease in the weighted average borrowing rate.

The effective tax rate for the three-months ended August 3rd, 2002 was 37.8 versus 41.3 for the prior year.

Effective tax rate for the comparable 6-month period was 35.6 versus 41.4.

We do anticipate to trend at a lower tax rate than we did last year.

As our statement of operations indicates, reported in the second quarter is a loss associated with the write-off of an unamortized cost related to the old debt facility, which we re-financed in June.

The amount of loss, net of tax was 2.1 million dollars.

The gross charge was about 3.4 million.

The company has also completed implementation of FAS 142, which is entitled goodwill and other intangible assets.

As a result of the implementation, Value City stores wrote-off about 2.1 million dollars, net of taxes the value of goodwill at the beginning of the year.

On the balance sheet, we have remaining unamortized goodwill about 37.6 million dollars, which was deemed appropriate based upon our initial beginning of the year debt.

We will review the evaluation of the goodwill

annually and this will be in the fall season and it will start this year.

Last years quarter and year-to-date included goodwill amortization expense of 700,000 and 1.7 million dollars compared to none for this years comparable period.

As we turn to our balance sheet, as John noted, inventory totaled 417.3 million dollars at August 3rd of 2002 versus 447 million dollars last year, a decrease of about 6 percent or 29.7 million dollars.

This is after we absorbed the VCM inventory in the current year, which was about 23.5 million dollars and we have added 28 new DSW and 2 new Filene's Basement stores.

Our working capital in 2002 was 209 million dollars compared to 273.8 million in the prior year.

Our net cash used for capital expenditures was 13.5 million dollars.

Depreciation and amortization in the second quarter totaled 13.9 million dollars compared with 12.4 million in the prior year.

EBITDA in the second quarter and year-to-date was 25.2 million and 42.1 million respectively.

Availability under revolving credit agreement was in excess of 140 million dollars and as the balance sheet indicates, we had cash on hand of about 31.9 million dollars.

This concludes our review of the second quarter.

With respect to the remainder of 2002, we remain very cautious in light of the current economic environment and as such, we are reducing the estimate of our comparable store sales volume to a negative mid-single digit range for the balance of 2002.

With a total sales growth to be flat for the period excluding sales of 90 million dollars that we had from the joint venture line last year.

We now anticipate opening about same number of stores within, through the year of about 20 to 25 DSW shoes and we have already opened in one planned Filene's Basement store, and we have scheduled a closing of one Filene's Basement store located in Massachusetts, due to the loss of the lease there.

We have not scheduled any new Value City store openings for this year.

We do anticipate the gross margin improvement seen in the first two quarters will stabilize.

We remain cautioned about the benefits overall due to the current sales trend in the industry; however.

As we experienced in the first and second quarters, we continued to reflect the benefits of the Selling, General, and Administrative expense reductions.

These reductions and benefits are expected to continue to influence our SG&A for the balance of 2002.

These cost savings initiatives relate to workforce reductions, labor efficiencies at those stores, distribution centers as well as the planned reductions in number of units processed for Value City Department Stores, but that comes in to the business.

As I said, you know, the second quarter to date, the workforce reduction program that we had started earlier in the year has resulted in an headcount reduction of about 360 people at the department stores and the estimated annual savings out of that is about 15.9 million dollars.

We still anticipate to have an operating profits for the year of about 1.5 to 2 percent of sales.

For the third quarter, our expectation is for a mid-single digit comp store sales decline resulting in a very low positive earnings quarter.

That concludes the financial review of the quarter and what we are seeing and I would now like to turn it back over to John for more comments.

Thank you Jim.

Although our sales performance is not been as strong as anticipated and we do not see a recovery in the short term.

We remain positive about the balance of the year for our bottom line.

The cost savings inventory on margin and management initiatives are working.

At this time Jill, I would like to open the phone for questions please.

Thank you.

To ask a question please press the one followed by the four on your touchtone phone.

To retract your question, press the one followed by the three.

All questions will be taken in the order they are received and you will be placed back into the conference following your question.

Once again, to ask a question press the one followed by the four.

We do have Miss.

Marsha Allen, go ahead ma'am.

Hi, good morning.

John, first of all, you should be aware that your press release isn't out on any of the wire services and so you might want to check on that, but can you talk a little bit more about the inventory, I know it's down on a year-over-year basis.

It maybe, you talked to the quality of the inventory?

I am sorry Marsha, could you say that again?

Yes.

Could you talk to the quality of the inventory, how do you feel about the mix of inventory that you have in your stores today, you know, what progress have you made in cleaning up and may be, can you talk about what the average price of your inventory is in apparel and I know that's been an issue?

Yeah it has been.

I'll share this with the question with Ray Blanton, what I think is that we have been very cautious about how we stepping inventories in the stores and we have definitely approached upon to few areas in the back-to-school season that we have just gone through.

I would say that the quality of inventory is right now, probably as good as it has been for, you know. a long time and definitely better than we started the year with.

We have definitely dispatched most of our seasonal merchandize, don't really anything left on hand that is you know, significant essential into back store program and I think what we have on order is really going to be something we going to be happy to see to present our customers.

Thank you.

This is Ray Blanton and the thing that we have really stressed around here is to make sure than we get our inventory content in a much better position that we have in the past.

Just a few highlights, we have reduced the back stock, the goods are much more fresher, we are much more branded than we have been.

We are improving the price points.

We are trying to elevate, we have a lot less units and the unit decline in the stores is down 17 percent.

And the whole focus is to strictly to go into, on getting more brands at better values.

Great.

Thank you.

Our next question is Mr. David Mann, go ahead sir.

Yes.

Ray, Can you just give a little more detail, sort of, on the average unit prices, where you were and where you are now?

Actually David, we have seen an increase in the averaging unit price that's going through the register at the store, you know, we tried to do that and obviously reduced the number of items that we have got out there.

I think that, you know, our unit pricing is coming back into line, it takes a little bit of time to move that up with great leaps and bounds but you know, what the customer is at this time buying is definitely a more higher-priced ticket than what they had purchased last year.

Ray.

Just to give you an idea on the, excuse me, the heavy concentration that we put on for the mix was in our young men's and juniors area and our young men's area for the back-to-school period of August was up 14.5 percent and juniors was up 31.5 percent and that's attributed to the fact that we really pursued a lot more brands, a lot more fashion, and we pursued the manufacturers to allow us to advertise the brands, example like in juniors we had a circular where we were able to advertise all of the current brands that are in department stores like

,

, Hot

,

, Bang

, and the list goes on and we were selling this product at 14, 16, and 19 and it was in the department stores anywhere from on sale, 19 to 29.99, so we were much more fashionable and I think that is attributed to the success in those areas.

We just have to maintain and stress to get that same kind of mix brands within the whole content of our four walls, which we are strategically working on as we speak.

Okay, in terms of the DSW business, it's been kind of surprising that the sales there have been weaker over the last several quarters, can you just give a quick overview on why you think that's being and what you are doing to trying to get that business in the right direction on the top line?

Yes, it's John, I think that couple of things are going on with DSW and one of which is that I think that the retail world is experiencing less indulgence purchasing by consumers.

In the DSW business, while a substantial proportion of our sales are need based what has, first it's over the top in years such as 1999 and 2000, as some of the indulgence spending where, our customers coming and do this store like they do launching, just a kind of looking around but walk out with 5, 6 pairs of shoes most of which they don't need but they happened to be, they were roaming through the store and they saw them, they like them, and they bought them.

We are experiencing a little less of that type of traffic.

We are experiencing less multiple pair purchases and we are experiencing some downward price points were may be a shoe buyer, a 59 dollar pair instead of an 89 dollar pair.

What we have to do to offset that is to bring in additional new customers and we have initiatives in place attempting to do exactly that.

Having said that, we consciously at the beginning of this fiscal year decided and within DSW much as same as we have decided within the department stores that we would attempt to sell merchandize more profitably.

Last year we have had for a couple of reasons, gotten ourselves, probably a little bit to promotional than hurt ourselves with excessive markdowns and excessive advertising costs and while our top line's are off a little bit, we're extremely proud of the resultant margin that we're realizing in DSW and the advertising expense control, and those two factors are more than offsetting the sales shortfall.

Do you anticipate that DSW will turn positive in its comps in the back half?

We would expect now, you know, sort of studying what the market place is, that for the remainder of the year, we would think the comps would be about flat.

Okay and then one last question, in terms of distribution cost, I know you've been very focused John in trying to improve the efficiency there.

Can you give a sense on where you are in terms of that initiative and may be with any specific in terms of what percentage of sales distribution costs that are running now versus previously?

I'll ask Ed Kozlowski to step in on that question.

Initiatives when we talked about this the last quarter, is that we have consolidated our efforts and basically we are improving our efficiency of the distribution centers we operate.

As I, we had closed one of the facilities and that was in the very first quarter and now, we are just running out of really three boxes.

In addition, we led an initiative to improve productivity both from flow point of view.

Also with the increased price point in the store in less units, we are in a position now where we're not shuffling inventory but I think historically has always been a problem with too much inventory, we had too many touches and touches create cost.

So we are in that initiative.

As we move forward, we are in a process of further making change to the material handling side which is a flow issues and I expect to continue to reap the benefits of that on an increasing basis as we enter 2003.

But as a percentage of sales, any color on where you've been and where you are now?

Yeah actually David it's Jim.

That's a little bit hard of a comparison because last year as you remember, during the, especially during the first quarter and the second quarter, we had lot of the costs from the excess buy that we're still running through there on the warehouses.

And so but, I would say that we were down in the year-to-date period, probably somewhere about, what does that look like, yeah, we are down probably about 3 quarters of a percent on a lower sales base.

Thank you.

Okay.

One again, to ask a question, press the one followed by a four on your touchtone phone.

It doesn't appear there are any questions at this time.

Okay, with that, I would like to say thank you for attending and if anybody has any question, please feel free to give me a call.

Again, thank you everybody and have a good weekend.

This now concludes today's conference call.

Thank you for your participation.