Designer Brands Inc (DBI) 2003 Q3 法說會逐字稿

Welcome to the Retail Ventures Inc. third-quarter conference call.

At this time all lines are in the listen only mode.

There will be an opportunity to ask questions at the end of today's conference.

Instructions will be given at a later time.

I thank you for your attention and I now turn (indiscernible) over to your host -- Mr. John Rossler.

Thank you.

Good afternoon, everyone, and welcome to Retail Ventures third-quarter fiscal 2003 conference call.

I'm John Rossler, President and CEO.

With me today is Ed Kozlowski, our Chief Operating Officer and Jim McGrady, our Chief Financial Officer.

Before proceeding I'd like to restate for you the Company's policy with respect to forward-looking information pursuant to the Private Securities Litigation Reform Act of 1995.

Statements made in the course of this call that are not purely historical such as statements regarding the Company's or management's intentions, expectations or projections of the future are forward-looking statements.

Actual results could materially differ from the forward-looking statements.

Factors that could cause or contribute to such differences include but are not limited to the factors and risks discussed in the Company's annual report on form 10-K for the period ended February 1st, 2003, and the other reports filed from time to time by the Company with the Securities and Exchange Commission.

Any forward looking statements made during this call are based upon information presently available to the Company and the Company assumes no obligation to update any such forward looking statements.

Recalling our second-quarter conference call, we've positioned ourselves as a business on the upswing and building momentum.

We also stated that we are halfway through what we feel is a three-year turnaround.

While many system and business process improvements need to be made during the remainder of our turnaround period, we are aware of what they are, and we know they're not insurmountable.

Today, momentum remains on our side and while an improving economy is playing a role I believe the key was investing in what was needed to fix this Company and our three brands.

New talent, new systems and new marketing.

Secondly, why do I say our business is on the upswing?

Sales are meeting our expectations.

This is in the face of some unpredictable weather changes which influenced our department stores seasonal apparel sales.

Comparable sales increased 5.4 percent for the quarter and each brand had a positive comp sales during that 13 week period.

As encouraging, we are pleased with our customer counts in each division.

While our margin rate declined during the quarter as a result of aggressive seasonal mark downs taken in our department stores early in the period, this allowed us to be prepared early for the holiday shopping season with a fresh and exciting new presentation of goods.

Our third-quarter net income of $901,000 -- which includes a disproportionate tax rate that Jim will discuss later -- was in my line with our expectations.

During this quarter, as throughout the first nine months of the year, we have invested heavily in our marketing efforts, particularly in the DSW and Value City operations.

We expect our investment to continue into the fourth quarter.

For the third-quarter and year-to-date periods, advertising expenditures to create heightened brand awareness and promote our value pricing were about $2.9 million and $17.3 million above last year's respective amounts.

We're starting to see the positive impact of our investment in these programs.

You may have seen or heard many of these campaigns like DSW's Thrill of the Hunt or one of Value City's brands in an extreme value promotions such as Bargain Blitz, Best Bargains in the City, 10 under 10, Once in a Blue Moon, or Mallbusters.

Additionally, Filene's Basement continues to focus its merchandising and its events based marketing on best brands for less.

Unquestionably, creating and maintaining momentum and improving systems and processes are an ongoing process.

We believe our results are starting to be reflective of the investments we're making.

I'll now ask our CFO, Jim McGrady, to proceed with the financial review.

Thanks, John.

Good afternoon, everybody.

Today, this afternoon, we announced the net profit for the quarter $901,000 or 3 cents a share compared to a loss last year of 3.5 million or 10 cents a share.

Our loss for the first 9 months of the year is $15.9 million or about 47 cents a share, compared to the prior year's loss which included a change in accounting principle and that totaled $9 million or about 27 cents a share.

Total third-quarter sales increased $63.6 million or about 10.3 percent.

Comparable store sales for the quarter increased 5.4 percent as John mentioned.

Our comparable stores by business unit were Value City improved 2.3 percent, (indiscernible) DSW 11.7 percent and Filene's Basement 8.5 (ph)percent.

At our Value City operating units we saw sales were about $375.4 million, which is an increase of about $8.4 million in the prior year's quarter.

Apparel sales in the quarter improved 1.4 percent.

The apparel categories of ladies -- men's or excuse me -- ladies', men's, and children's were up approximately 60.4 percent for the total retail business at the department stores.

And they had a comparable sales of .9 percent, a -1.3 percent and 6.7 percent, respectively.

Our non apparel sales improved 5.1 percent in the quarter and this is primarily the result of the strong performance in our domestics and houseware categories, which were up 7.2 percent and 13.3 percent, respectively.

Shoes in the Value City operations also had a positive quarter at 1.6 percent.

Our DSW sales were $215.8 million, which is about a 26.8 percent increase in the quarter.

And this includes 13 new DSW stores and an additional 98 lease locations over last year.

Comparable sales, as I said earlier, were up 11.7 percent and during the 9 month period the comp store sales increased 4.2 percent.

Our DSW sales rose to 591.1 million in the nine month period -- an increase of about $106.1 million or 21.9 percent.

Our lease department operations account for about 6.9 percent and 1.1 percent of the total DSW sales in the quarter and year-to-date period.

Filene sales were $89.5 million -- a 12.2 percent increase in the quarter which includes one new store.

As comparable stores sales increased 8.5 percent the improvement was influenced by a broader assortment of brand-name merchandise available in the period.

For the nine-month period, Filene's sales increase was about .6 percent as sales rose $227.8 million.

This actually -- the repositioning of our merchandising plan to improve brand mix and merchandise presentation.

In the third-quarter, gross profit as a percent of sales increased about (ph) 60 basis points to 38.4 percent, total gross profit increased around $28.3 million, which is a 12.1 percent improvement.

And for the year-to-date period, gross profits improved by about $35 million -- around 5.1 percent.

Our gross profit didn't decrease as a percent to sales to 38.1 percent from 38.4 percent in the year-to-date period.

For the three month period gross profit was positively impacted by margin improvements in DSW and Filene's Basement, as improved initial markups and -- excuse me lower markdowns [indiscernible] in these business units.

For our year-to-date period, our department store gross profit decrease is attributable to a lower IMU during the nine-month period and some higher markdowns as John mentioned earlier.

The DSW increase is a result of those improvements IMUs purchased during the first nine months in our Filene's Basement which really had a negative impact by some markdowns required to transition to our merchandising plan that we have in place right now.

By our operating units our gross profit was at our department stores 38 percent;

DSW saw 40.8 percent and Filene's Basement was at 34.2.

Total selling, general, and administrative expenses in the quarter increased by $19.3 million to about 250.6 million and decreased as a percentage of sales from 37.5 percent from 36.8 percent.

Included in the dollar increase is about $8.6 million, which is attributable to 14 new stores that are in operations in the 98 lease shoe department I had mentioned earlier.

Year-to-date our SG&A increased $43.6 million to 717.5 million.

And we did see an increase as a percent of sales there to 38.3 percent from 38 percent.

The dollar increase -- excuse me -- has about $28.9 million attributable to the new stores we have in operation.

And the 98 new lease show departments compared to the prior year's quarter.

Our current quarter and year-to-date SG&A includes the additional advertising expenses that John mentioned earlier.

And this is, particularly, in the DSW and Value City segments.

As John also said, we do expect to see promotional efforts continue especially for Value City into the fourth quarter.

Remember also that our prior year SG&A includes a $3.3 million debt extinguishing expense that last year was reported as an extraordinary item.

Operating profit for the quarter improved $9.2 million to a profit of 12.3 million, and that's in contrast to the $3.1 million we saw in last year's third-quarter.

Year-to-date our operating profit for the current year is 1.2 million versus a profit of 11.8 million for the same period last year.

Our interest expense for the quarter decreased $200,000 to about $8.6 million.

This decrease includes a $46.5 million increase in our weighted average borrowings for the period which was offset by about a 122 basis point drop in the weighted average borrowing rate we had.

Year-to-date we saw a little bit of the opposite.

We have a $3.3 million increase to $26.2 million and that results from a $14.9 million increase in the weighted average borrowings.

And year-to-date we've got about 147 basis point improvement in the weighted average borrowing rate.

As John also mentioned earlier, we've got a little disproportionate tax rate that has occurred to us in this quarter.

The effective tax rate for the three months is 75.5 percent and versus 38.5 percent in last year.

Also remember that we did not change the valuation allowance for our deferred taxes during the quarter.

For the nine-month period our effective tax rate was 36.4 versus 37.8 last year.

We do have a valuation allowance that we established early on in the year of about $9.8 million.

And prior to this allowance, our tax rate is 75.5 percent.

This reflects the impact of some nondeductible expenses that we have in our books that we can't deduct for tax purposes.

As we turn to our balance sheet, inventory was $547.7 million, which is about a 12.2 percent increase over the prior year.

Our net working capital was 285.3 million and versus 247.1 in the prior year.

Our current ratio was 1.79 and 1.67, at those respective dates.

We used cash and operating activities this year of about $80.3 million compared to cash provided last year of about $13.9 million.

The decrease in our operating cash flow is really compared -- is really -- is primarily the result of the loss which, principally, came to us in the first quarter of this year and the increased inventory levels that we have right now to support new DSW stores and the leased operations plus some early buying that we did in the Value City and Filene's Basement operations to make sure we got an early start on our merchandise for the holiday season.

Depreciation and amortization in the third-quarter was $13.9 million and that compares to about 13.7 million in the prior year.

Turning to capital expenditures, we had about $43.5 million we spent in the nine-month period this year and that compares to 30 million last year.

During this period of time, we've spent about $11 million for new stores, $20.2 million for improvements in existing stores, and about 12.3 million for corporate and IT equipment and systems upgrades.

Our EBITDA in the third-quarter and year-to-date were 26.1 and $42.9 million, respectively.

At this time, we are in compliance with all of the terms of our lending agreements and availability under our revolving credit agreement was over $120 million and we have a cash balance as you see of about $8.5 million.

That concludes the review of the third-quarter.

Looking forward with respect to the remainder of this year, we anticipate that our comp stores will be in the low single digit area for the fourth quarter.

And, again, as we experience in the first nine months and have said we will continue to advertise to promote our brands.

And we believe that these costs will continue to be balanced somewhat by the savings that we can generate and have generated in our store operations, warehouse, and support areas.

We do anticipate a breakeven year for fiscal 2003.

At this time, we are not prepared and ready to give provide guidance for fiscal 2004.

We will do that at our fourth quarter call and that concludes our review.

I would now like to open the lines for -- ask Mikel (ph) to open the lines for questions and thank you, everybody.

[Operator Instructions].

Jeff Feinberg.

Thank you.

Congratulations, guys, nicely done.

Just a question for John.

As you're looking at the improvements and you mentioned you feel like you're maybe a little bit more than halfway through right now, would you be kind enough just to -- as you look at the end of the rainbow just to give a little perspective when you benchmark yourself versus others where you hope to get the operating margins for the Company and with the key [indiscernible]?

Jeff -- I think, as we said, we're going to wait until we give guidance for the fourth quarter before we really go into any of the details of what our true expectations are as we look out here over the next 12 months.

Lee Beck (ph).

Lee Backus.

First, could you give us a sense of the balance sheet?

What the balance sheet will look like at year end?

Well I think actually, obviously, we're going to see a pretty good size reduction in the inventory levels, Lee, but we always build as we get into -- as we get into January, we start to build our inventory levels for our DSW operations for the shoe operations as they get ready for the spring season.

So I think really we're going to see because we have a number of new stores that are out there with us this year we're going to see an increment over what we saw last year but I don't think it's going to be anything out of proportion to the store growth that we do have.

We have and continue to do so do some forward investment in the Value City operations, trying to get ready -- be prepared for the season rather than buy right on top of the need.

We're trying to temper that right now, as we take a look at our operations, to make sure that we really don't get too far out in front of ourselves.

So any increase that we see there is really going to be something that we have managed well as we go into the season.

Could you give a sense on your inventories maybe by concept your level of comfort with your current inventory levels -- especially your Value City Department Stores?

You indicated you had some early buying in that area.

Could you compare and contrast [indiscernible] your feeling of the inventory this year versus the same time last year?

This is Ed Kozlowski.

If you really look at the three businesses, first of all in the Value City one of the things we return to [indiscernible] so we are going to have a little more inventory at year end as we get ready for spring because we've got [indiscernible] the process of either here or coming.

In addition to that from a quality of inventory I would say the quality of inventory is as good as it was a year ago.

We are clean from the standpoint that we did not pack away anything from last spring to next spring.

That's all gone out of the system.

We have plenty of current goods to sell through the Christmas selling season and we expect to enter into the January February in a similar position as we were over a year ago probably with a few more dollars [indiscernible] but the quality of that is the type of goods that we need.

And in DSW as Jim said, we're heading into the spring selling season.

Plus we have a few more openings planned for the first part of next year than we had in the first part of '03, so that will give us an attributable increase in the amount of inventory that will be on hand at year end in the DSW.

In addition to that Filene's Basement we had one opening this year, we are looking to have one or two in the first part of the next year so, again, their inventory levels will be up a little bit.

But, again, these numbers will be in relationship to what we're planning to do for the spring season.

OK and if this performance continues and you have a good Q4, and that continues into next year, could you talk a little bit about the possibility of refinancing some of your high interest debt?

Sure -- that's obviously what we've -- what we're focusing on right now and we have to get through the fourth quarter here and see what our first quarter is -- looks like it's going to bring to us.

But we're definitely taking a look at that right now, Lee.

We don't have anything at this point in time to report but it is definitely a very hot priority for us.

And just to get back to Jeff's question, I believe in the last conference call, you indicated that over the next year and a half, two years, you would get back to '99 operating profit margin levels of the --

Yes that's correct and I'm sorry I didn't mean to cut Jeff off probably as quickly as I did there but that is definitely still our expectation.

[Operator Instructions].

Jonas Gertzle.

At the beginning, you said you still have systems to implement -- could you share with us what those systems are?

What the timetables of each would be?

First of all, I'm sorry, I didn't catch the name.

I apologize.

Jonas Gertzle.

Jonas, hi.

Yes, we implemented in the third-quarter of this year planning an allocation [indiscernible] planning an allocation at DSW and they came on other than minor system (indiscernible) which you always get with the implementation that's been relatively smooth and we've seen no effect on performance.

We are beginning to anticipate the benefits of that as we head into spring and summer season of next year.

And right after inventories this year we're planning to implement point-of-sale systems in new in-store systems at Value City Department Stores that will take place very late in the fourth quarter and very early in the first quarter.

In warehouse and merchandising systems, we will begin a phase-in implementation at the beginning of the year.

This will be a three prong phase, one very early in the first quarter, one around late after the spring selling season, but before the back to school build up and then the third one after the Christmas buy and ship of next year.

So during the course of 2004, we will see heavy systems implementation in Value City, and -- but that will be phased and not affect the primary selling season.

And it will be done in three phases.

What -- going forward, what tax rate do we use for modeling purposes?

I would say going forward once we get beyond 2003 here that I would be comfortable with something about 40.5 percent.

OK and could you give us an early indication of [indiscernible] holiday season so far, what's looking better than you figured, what little tougher cost [indiscernible] all three areas?

Jonas, it's John.

I guess with the DSW business not (indiscernible) much everything's been selling.

With the basement and the Value City brands we've been very successful with our home goods and hard goods.

In the case of soft goods it's been, unfortunately, on a daily basis a roller coaster ride, as you can imagine.

For instance in the city of Boston we did not fare too well the past couple of days and on one day we seem to have summer weather trying to sell outerwear and another day we will have three feet of snow but on the normal seasonal days our outerwear's been doing very well.

OK and last question.

You mentioned that in the first early next year you anticipate opening one or two Filene's stores -- you have a number you might open in the second half?

How many?

We're looking to open two Filene's Basement's in the second half and two [indiscernible]

Jeff Feinberg.

Two follow-up questions, please, one for Jim, one for John, please, I guess just with regard to the financials to understand -- I thought you said in the conference call before this year guidance was still breakeven.

I just wanted to know what type of (indiscernible) was predicated on in December or January, please?

And with regard to -- John, I'd just like to understand a little bit, which areas of the Company allow for the most improvement from an operational perspective that will allow us, hopefully, to get to longer-term goals you've elaborated?

This is Jim.

For the quarter, I can address your question a little easier.

If we can have a mid single digit, low mid single digit, we should be able to achieve our goals as we said.

That's our expectation right now.

Does that answer your question?

Low to mid single digit comp for the quarter.

Low mid single digit comp -- somewhere probably somewhere in the area of 3 to 4 percent.

Jeff, it's John.

I have to answer the question about areas of improvement by brands and then fourth brand is our service division.

First, on our service corporate overhead, we're pleased with how we've been able to reduce corporate overhead to manage it, it's a long-term process.

We know that our corporate overhead is still high, but it continues to head in the right direction.

We continue -- and we're certain we can become more effective and cost-efficient in our service business.

In the case of DSW, we've believed for the most part simply a case of continuing to leverage the brand.

You know, there's always tweaking to be done with any brand but it's in real good shape.

And I think it's incumbent upon us to accelerate the number of openings this year.

We will have open in the neighborhood of about 18 stores and, really, we should get it to a point -- back to a point of opening 30 stores continuing to leverage that brand.

In the case of Filene's Basement, I believe we have a situation where we've taken an extremely strong merchant and business manager in the case of Filene's Basement.

Haywood has been around, been with the brand now for ten months and has obtained a lot a market research, consumer research and has worked in market hand-in-hand with our buyers.

He has worked hand-in-hand with each of our store managers and we are at a point that the business was small enough and few enough stores, he's been able to get his hands around the vision of getting it back to best brands for less and marketing and business as events based marketing subsequent to [indiscernible] income operations instead of a POS business like we had been running it.

I think they're in Filene's Basement, we're just talking about passage of time.

I feel certain [indiscernible] at least by the second half of next year the Basement will be firing on a lot more cylinders than it is currently.

In case of Value City Department Stores there are a number of issues I think for the mid-term.

I think that the biggest issues are the systems that we keep talking about.

We are about a year and a half year and year to half [indiscernible] substantially totally renovating the systems and it is for real.

That work's way down the road and as it gets implemented and put [indiscernible] I think that will help our business for the long-term.

More currently as we look into 2004 we've been around long enough now to --

A couple of years ago we really had no consumer research to operate off of and we did not really know, clearly, who our customer was and what they wanted (indiscernible) by category.

We've come to learn the brand and our customers a lot better now and the store itself was a big box and since it's a turnaround, it's almost like trying to tame a jungle.

But we've identified all of the animals.

We have half of them domesticated and I would say that again, it's just passage of time.

The retail formula being as complicated as it is to keep in balance that being stock to sales ratio and average unit retail and initial markup, we actually just don't have one business in that big box but it's a grouping of several businesses.

And each meets its own precise combination of those retail factors.

So I think that's probably the thing that we've struggled the most with is the fact there's so many businesses within one roof -- that's the thing that I believe will make the most progress and will most greatly impact our business in the year 2004 is just continuing to refine that retail formula within each of our categories, Jeff.

Miss Julie Lerner.

Few questions for you guys.

First, could you give a little more depth on the nondeductible [inaudible] just give an idea of what I should model for the end of this year for tax rate?

Julie -- it's Jim.

Actually there's two things that [indiscernible] the biggest and, obviously, the most impactful thing is the OID (ph) on the warrants that we have and that really comes into play.

I would suggest that for the balance of the year that probably -- if we do breakeven, I would say that is going to be a very high-end rate.

It will probably come in at about the 75 percent rate that we're seeing right now.

That would be my expectation and (MULTIPLE SPEAKERS)

75 percent for the quarter or for the year.

For the year.

The smaller the pretax profit the more impactful that nondeductible liability becomes and it forces that rate higher and higher.

(indiscernible] what happens.

Second question.

Could you speak a little bit about I guess the free cash flow generation ability?

If there is any, what your expectations would be for this year but also going forward how you look at the free cash flow and, especially, I am also very interested in how you look at DSW and financing that into free cash flow ability [indiscernible] segment.

Well it -- we've really looked at these things in total and try to evaluate the businesses where we can but it's really a (indiscernible).

We really haven't done any type of discussions or disclosures yet on what we think -- excuse me, free cash flow expectations are out and into the future, but I would say that if you are capital expenditures for this year and if the EBITDA calculation, that, something in those areas as far as depreciation and amortization capital expenditures I would think we would probably be the in-line with what you would expect to see next year.

And I guess just wrapping up.

On DSW could you give me a sense -- I know you said last conference call that you might be better prepared to talk about this one, on how big you guys view it can get not only in number of stores over the next year or two, but as well as the EBITDA that can generate?

Julie, hi, it's John.

You broke up, I wasn't sure that...

Sorry -- I am asking about DSW in the next year or two, how big it can be on both the store number as well as the EBITDA potential -- if you guys think about that?

On the number of stores, we continually -- through market research update our national market screening survey.

And we are currently confident that DSW in its present form can be a 450 store chain.

As far as EBITDA, again, we haven't talked much about that, what our expectations are for that or anything but I would say that it's very, very good cash generator business.

It takes, generally, about three years for the stores to reach a full maturity base for us, so as we invest in new stores we see them come online.

It's really -- you are investing for the future.

I would expect that EBITDA in the future is probably going to be somewhere a little bit stronger than what we've seen here in the past for it, but at this point in time I don't think we're ready to discuss that.

Okay, and one last question Value City --

Julie -- you keep breaking up.

I apologize so I was in a bunch of your stores recently and the box seems enormous.

Have you given any thought to decreasing the box size or how do you guys think about that?

Julie, it's John.

Sad to say but one of the reasons why it's not such a quick turnaround as we'd all like to see is that standpoint from information availability that our systems really are 1960s legacy systems.

And it's believe it or not been very difficult for us to get and get on a rolling basis information about gross margin per square foot which is sort of a foundation not only to see if we can use the whole box but within what box size we are going to use, how we should reduce the size of some categories, and then increase the size of other categories.

So we are not totally concluded yet on the subject of how we're going to move the space around, let alone if we're going to use all of the space.

I'm optimistic that we can use, continue to use all the space if not for our own departments at least to be able to farm some of the excess space out for certain licensing activities.

David Mann.

Good afternoon, just a follow-up on that last question.

Could you give a little more detail on the CapEx that you spent on existing stores?

And especially if you've done any reformats?

And, when you look at your base of stores are you starting to see if you may be that you'd like to close this year in the DSW or -- excuse me, in the Value City format?

Yes, we did do a reformat and a pretty extensive renovation at two of our locations.

One which is in the Covington area which we are continuing to evaluate on how that's going as it goes out throughout the entire year.

We have another one that we just recently completed that is still too early to tell on that and a couple of others that we did not quite do as an extensive (ph) of a remodel that we had on these other two and we're really in the process -- we did these later in the summer season except for Covington so we really don't have a lot of information right now that I can share with you that I think is tangible.

We do look at our stores annually and actually it's more than annually about what's upcoming for new lease renewals and potential for relocations.

And those that are underperforming which ones we each might want to call out of the herd here.

We do critically evaluate that and I think that there are definitely some that we do have as candidates for replacement that we would like to do but again, it's something that we have to evaluate financially to make sure that it really fits the needs of the total Company and we have marketing and advertising considerations that we can close the store in a certain area and don't have a replacement for it, we could damage frankly the ability to fund the marketing that we see in those areas.

In terms of advertising, can you just give a sense in terms of '04 should we expect a similar spend as this year or should that increase somewhat?

It will not increase.

I think it will be in the same general vicinity.

I think that we are definitely taken with the redeploying where we are investing our marketing money in as far as the type of media we are going to promote and the branding and awareness that we're trying to achieve.

So there's right now I do believe that we will probably see it at about the same vicinity as what we're seeing this year.

And in terms of the inventory, I think, Ed, you talked about an increase in packaway inventory.

Can you give a sense Ed or Jim in terms of the magnitude of packaway now that you're doing vs. what you perhaps did in the third quarter last year and as a percentage of inventory where you see that number going maybe at year end and into the future?

Yes, on all brands -- frankly last year we did very little packaway (indiscernible) the season and I -- please be aware -- when we talk about packaway we're talking about goods that have not had a full presentation.

These are things that we got in early.

They're not something that's been on the self selling floor that we take off of the sales floor and put into the packaway program.

So once it's on the floor it's had a presentation.

I would say that at the very most that we're probably at 10 percent of the inventory level being packed away and that's really -- that would be the absolute maximum.

We're not committed to do that.

This is really something that we committed to do, earlier on this year, just to be prepared for the season in case we had the ability to bring up perhaps a system or two that we wanted to get implemented that we're wouldn't have (indiscernible) and we didn't bring the system up because quite honestly, it wasn't the right time to do it.

It would have got into the way of the early part of the holiday season.

So that's where we are with the packaways right now and it is really something that we will continue to do but it's going to be a very specific programs.

It's not an individual buyer program.

This is something that each one of the business operating units has to approve and [indiscernible].

And in terms of the amount you're carrying in the third quarter?

Was it a few percent this year?

Yes it's actually the -- David?

Got a lot of noise there.

In the department stores it's somewhere around $11 million that we're carrying.

Okay, and then I'm sorry last question just to clarify things with Julie Lerner had asked.

If we look at the fourth quarter guidance that you basically gave about having a breakeven year that would capture in the higher tax rate?

Yes.

Lee Backus.

You talked about Value City and some of the [indiscernible] on businesses they seem to be in different stages of improvement.

Maybe you can give us a sense of which ones you're starting to feel good about and maybe talk a little bit about the shoe business there and whether you think the merchandise mix is where it should be, in relation to the customer you're going after?

The merchandise mix relative to each brand?

Relative to footwear -- women's apparel, men's apparel, kids' apparel, household -- just give it a sense of if you think -- -- over the last years merchandise mix has really changed when you went after higher end customer, lower end customer (indiscernible) -- is it now positioned the way you want it positioned?

As laid by brand, I would say in the case of all our shoe businesses we are about as close to work precision as we can expect to be now and in the case of DSW it's really come with extensive investment in market research.

And being close to our loyalty club over half of our sales in DSW come from loyalty club customers.

And we know the demographic and psychographic profiles and things.

So we've been able to merchandise to precision with that and we've been around our other lease department operations -- we're in pretty good shape there.

I think in the case of our Stein Mart lease departments, we're just within a year -- one year on that business and it is a little different business because the departments are very slow on small turn (ph).

That business requires us to allocate goods to it, footwear to it with much more precision than we've ever been called upon before.

So I believe that with the new Arthur planning and allocation system that we just put into our she businesses and with the strength of half a dozen very talented planning and allocation people, I think that we are up for that challenge and we [indiscernible] stores at this time, people every day, they believe the same thing.

I the case of Filene's Basement we feel that with the merchandise -- we had gotten too low-end and too POS promotional and, again, Haywood's business vision for the business was best brands for less.

And I think that if you visit stores today the merchandise does have Haywood's fingerprints beginning to have his fingerprints on it.

And you will start -- you are starting to see test (ph) brands rather than just brands and better brands you're saying best brands extreme value.

So I think we're getting a lot closer in focus with customer needs in Filene's Basement.

In the case of Value City -- as you know, Lee, you've followed us for a long time -- the brand's been footballed around where sometimes we think that we're competing at a Wal-Mart price level and sometimes we have Newman Marcus type goods in.

We are getting close to -- closer, I believe, to the brands that we should be carrying.

And I think we're getting closer to the price points we should be carrying.

It's been complicated because we pretty much two years ago, had zero consumer research but now we do have 18 months of consumer research and we're better able to focus on on what the needs are there.

So it's been very difficult because of the lack of systems that are needed to control that buying disciplines on a daily basis, you know.

When the buyers are in the field making big buys, it's not like they have a laptop that they can put the purchase order in and see how it's run on their IMU or AUR up-and-down so that's why systems is really relevant to that business.

But, if for no other reason just through trial and error, you know where we moved [indiscernible] AURS up and now we brought them back down a little bit even through trial and error we're getting closer to it so I would say to you, we understand better now, the nature of the customer in Value City.

They're substantially budget customers but we have a good tier of moderate customers in there.

And we just have to be careful within each of the categories of that big box that we allow and provide merchandise at both levels.

Jeff Feinberg.

Just one follow-up and thank you for the perspective.

When will the system ... ?

Two part question.

One, when do you think businesses might be (indiscernible) where you would like, and -- second part -- just in terms of the brand of the [indiscernible] noticed in stores, you do a much better job on the brands on the brand names and some of the better buys if you can talk a little bit about that?

How you're feeling with the brand of purchasing?

On the case of the brand of purchasing, Jeff, which of the brands would you be referring to?

Filene's Basement, DSW, or Value City.

Focusing on Value City.

Okay, with the brands we are getting better brands in Value City department stores and for a number of reasons.

First of all we have a focus and intent that this store needs better brands so that's what were chasing.

The second thing is that we have got a group of merchants now that have very good vendor relationships.

And I know some of you -- Lief (ph), for instance, visit with us at the Magic Show.

We have merchants now cam now walk in and out of any brand booth at the Show -- very good relationships with any level management and owner of brands.

So, I think having people like Stu Glasser you know that can walk in and have those vendor relationships -- very, very important to us to be able to start delivering the brands you're starting to see.

On the systems I'd think that any of the three of us could probably would probably answer that the best but I'd think that our chief operating officer should run back through that just a little bit.

Ed, you want to talk about [indiscernible]

The systems where we're really starting to see benefits from planning and allocation in DSW in '04.

I really think the shakeout will occur through the spring season and then you'll start to see more benefit and more precision of allocation as you head into fall of '04.

Value City -- since we're putting the systems in over the course of the year -- I really don't believe you'll see any substantive improvement until '05.

And I would argue you won't see it in the soft line side of the business until the second half of '05 because that's going to be the last half of our implementation.

So it's unfortunate that it pushes out so far but the reality is the systems have to be put in at a time when we are best able to implement it without disruption to the business.

So we've had to push the soft lines to the back half of the year [indiscernible] hard line (inaudible) more to the front half.

[Operator Instructions].

I'm showing no further questions at this time.

Thank you, everybody, for joining us and look forward to speaking with you again in the fourth quarter.

Thank you, Mikel (ph).

That concludes today's conference call.

Thank you for your participation.