Designer Brands Inc (DBI) 2003 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Retail Ventures 2003 fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS).

Thank you for your attention.

I'll now turn the time over to your host, Mr. John Rossler.

Good morning and welcome to Retail Ventures' fourth 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 would 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 1, 2003, and 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.

Today we announced the fourth quarter and fiscal 2003 operating results.

The fourth quarter was very successful, continuing to build on the progress made in the third quarter.

The fourth quarter net income more than doubled from the prior year, and our net loss for the fiscal year was below our previously announced estimate.

We had continued strong fourth quarter comparable store sales at DSW and Filene's Basement, and the consolidated gross profit increased 2 full points over the prior year.

Jim will discuss more of the details a little later.

2003 on off to a slow start for Retail Ventures, as it did for most retailers with the sluggish economy and the consumer preoccupation with the war in Iraq.

However, the third and the fourth quarters showed substantial improvement in operating profit over 2002, increasing by 80 percent. 2003 completed the second year of our turnaround effort toward realizing our three-year goal of returning this Company to a respectable profit level.

Our businesses are now well-positioned for improved results and we expect our management group to leverage this positioning.

In Value City Department Stores we saw a positive momentum shift in the number of units sold beginning late in the first quarter, and sustained positively through the back-to-school period and through our traditional holiday selling season.

Unfortunately, this important step forward of increasing the number of units sold was offset by a lower than planned average unit retail.

This issue was discussed in December during our third quarter conference call.

Initiatives have been in place for four months to improve this situation.

While we have made strides in moving the average unit retail northward, we do not expect the full impact on sales to be seen until the back-to-school season due to the length of our buying cycles.

We believe the continued high value perception of our product offering presents a clear opportunity to generate a higher average unit retail from our loyal customer base.

DSW continues to show strong improvement as a growth retailer.

DSW enjoyed the best best comp store sales of any major footwear retailer in 2003.

We have leveraged these strong comps in 2003 through improved gross profit as well.

We expect strong comps store sales increases in the low mid single digits for the first half of 2004.

We plan to open 35 new stores in 2004, with 9 units in the first quarter.

We expect continued favorable leverage in the comp store's operating structure, but anticipate a slight offset from increased preopening expenses in 2004 due to the increase in the number of store openings.

Filene's Basement strategy used the year 2003 as a recalibrating year by returning to its legendary roots of using event-based marketing to promote its Best Brands for Less offering.

The consumer has responded favorably and the Basement is now positioned for successful growth going forward, with sales comps showing significant improvement during the final two quarters of fiscal 2003 and into the beginning of 2004.

Filene's Basement opened one unit in 2003, which to date has exceeded its sales expectations.

Filene's Basement is planning to open four stores in 2004, three of which will open in the first quarter.

Having re-established its market position in 2003, we expect gross margin improvement in 2004, specifically from improved IMU and controlled markdowns.

In summary, over the past two years Retail Ventures has undertaken a number of change initiatives which have resulted in the creation of a portfolio of strong brands, each with its own unique and compelling position.

We're starting to see the results of this effort.

Our principal goal for 2004 is to leverage these positions and continue the momentum experienced during the third and fourth quarters of 2003.

Thank you.

I will now ask Jim McGrady to proceed with the financial review.

Good morning everyone.

And again welcome to the discussion of fourth quarter 2003 and the fiscal year results.

As John mentioned, we announced a fourth quarter profit of $11.5 million compared with a profit in the prior year quarter of 5.3 million.

Per diluted earnings per share were 25 cents in the quarter versus 12 cents in the prior year quarter.

For the fiscal year, we are reporting a loss of $4.4 million compared to the prior year loss of $3.7 million.

And as a reminder, that includes the accumulative effect of an accounting change in the expenses that were associated with the refinancing of our debt facility back in 2002.

The dilutive loss per share for each respective year is 13 and 11 cents.

Total sales for the fourth quarter increased $41.7 million, and about 6.1 percent to $720.4 million from the prior year of $678.8 million.

Comp store sales for the quarter increased 2 percent.

By business segment for the quarter these were, Value City had a decline of 1.3 percent, DSW was positive 11 percent, Filene's Basement was positive 8.1 percent, and again that in summary is 2 percent.

Value City's comp quarterly sales decreased in non-hardlines by about 1.2 percent and in apparel by 3.1 percent.

Jewelry increased 12.7 percent for the period.

The apparel divisions of men's and ladies had its decreases of 6.4 percent and 3.9 percent respectively, while we saw an improvement in the children's business of 6.4 percent.

Shoe sales at the Value City operations were a positive 2.3 percent for the quarter.

Our DSW sales were 181.1 -- $181.5 million, and that is a 26 percent increase in the quarter, which includes a net increase of 16 stores and 53 additional lease shoe departments, along with the comparable store increase that we mentioned earlier of 11 percent.

For the year to date period comp store sales increased 5.6 percent of DSW and rose to $772.6 million for the year to date period, and that includes the new stores and the leased departments.

Filene's Basement sales increased 12.9 percent through the quarter to $89.1 million, and comparable sales increased 8.1 percent.

For the year to date our comp store sales at Filene's increased 2.6 percent to $316.9 million, and that includes the one new Filene's Basement store that John mentioned we opened during the year.

In the fourth quarter gross profit as a percentage of sales increased by 200 full basis points to 39.8 percent from the previous year's quarter of 37.8 percent.

The total gross profit increased by $30.3 million to 286.5 million due to higher IMUs and lower markdowns in our DSW segment and the change in the merchandise strategy at Filene's resulting in again lower markdowns.

These positive items were negatively impacted by a lower IMU that reduced -- a lower IMU and markups at reduced sales in the Value City segment.

For the year to date period the gross profit percentage increased 40 basis points to 38.6 percent from the prior year 38.2 percent.

Gross profit by segment in the fourth quarter was 39.7 percent at Value City, 43.4 percent at DSW, 32.9 percent for Filene's, and again 39.8 overall.

Our total SG&A expenses for the comparative quarters increased $21.7 million to 260.7 million, and as a percentage of sales increased from 35.2 to 36.2.

For the year to date period our SG&A increased $65.3 million and 978.2 million, or 37.7 percent of sales compared to 912.9 million or 37.3 percent of sales in the prior year.

The 16 new DSW stores added approximately $14.4 million in SG&A expense, while the new single Filene's Basement added approximately $4 million to the SG&A.

SG&A as are percent of sales by division in the fourth quarter was, at department stores 34.4 percent;

DSW 41.9;

Filene's Basement 33.5; and again the total was 36.2 for the year -- excuse me -- for the quarter.

Our operating profit by segment in the quarter at Value City was 24.1 million; at DSW it was 2.9 million; and at Filene's it was 72,000.

Again, the total for the quarter was $27.2 million.

Our interest expense for the quarter decreased by $1.2 million to 8.3 million.

The components of this is we had an increase in our weighted average borrowings which was offset by a decrease of about 146 basis points in the weighted average borrowing rate we had.

And this was due to the availability of lower market rates on our LIBOR loans.

For the fiscal year interest expense increased $2.1 million to 34.6 million.

Our weighted average borrowings increased over the year by about 26.1 million, and the weighted average borrowing rate increased through the year by about 70 basis points.

During the current year we established a valuation allowance for our deferred tax assets of about $1.5 million.

The reserve reflects a reduction in the estimated amount for future tax deductions.

And this is primarily for state and local taxes, and a little bit of an excess contribution carryforward.

Our tax rate for the current year was 27.9 percent and was affected by the permanent differences in the amortization of our warrants issued in connection with the 2002 refinancing.

And it also was affected by the evaluation reserve.

As we turn and look at our balance sheet, our inventory totaled $420.3 million at the end of the year, compared to 389.8 million last year.

This is an increase of about 7.8 percent.

The total increase includes approximately $11.3 million for the new DSW stores; approximately $5.5 million for the leased departments; and $2.1 million for our new Filene's Basement store.

Net working capital at the end of the year was $234.9 million compared with 181.4 million in the prior year.

Our current ratio was 1.9 and 1.6 respectively in each of the past two years.

Net cash used for capital expenditures was approximately $68.7 million this year, while depreciation and amortization totaled $57 million.

And this is in contrast to $60.3 million in the prior year.

EBITDA in the fourth quarter was $42.5 million versus 34.9 last year, and fiscal year 2003 EBITDA was 85.4 million versus last year's 90.9.

Availability under our secured credit facility was $120 million at the end of the year, and is presently about $161 million.

That ends the review of the historical numbers, and now we're going to turn and look forward to 2004.

As John mentioned, we anticipate that we will open 35 DSW and 4 Filene's Basement stores.

Capital expenditures for our store opening program is estimated to be about 27 to $30 million, and total Capex in 2004 is planned is between 53 to $56 million.

Depreciation and amortization is expected between 59 to $61 million next year.

Our EPS expectation for the year is in the range of 30 to 35 cents per diluted share.

By quarter we expect earnings per share to be in these ranges.

In the first quarter a loss of 20 to 25 cents per share improving to a breakeven in the second quarter.

And earnings of 15 to 20 cents in the third quarter, and 25 to 30 cents in the fourth quarter.

These estimates are based on a comparable sales increase in the mid single-digit range with total sales up in the high single to low double-digit range.

We expect gross margin to improve by 25 to 30 basis points compared to 2003.

And this improvement will result from an improved IMU and AUR at Value City plus the full year effect of our market repositioning at Filene's Basement.

The expectation is that DSW will maintain its 2003 margin rate.

The SG&A expense rate is expected to decreased by about 10 basis points versus the prior year.

This includes the impact of preopening expenses for our store program.

We expect interest expense to be about 33 to $35 million, and our tax rate should be in the area of 40 to 41 percent for the year.

That concludes at this point in time the financial review and our forward-looking 2004 review.

And at this time I would like to ask Joe if he would kindly open up the lines for questions.

(OPERATOR INSTRUCTIONS).

David Mann.

Congratulations on some of your turnaround efforts.

I guess a couple of questions.

First of all, on the gross margin strength that you saw can you just walk through -- were there any other benefits or factors that helped gross margins such as shrink?

Can you also talk a little bit about some of the initiatives you're doing at Value City to try and improve the average unit retail?

Actually we did -- we probably had three components that we saw that improved the margin rate for us in the fourth quarter and really throughout some of the year.

We had a very strong IMU in our DSW division, which was really a key factor to us.

We did also have -- see an improved number at Filene's Basement as well as far as IMU is concerned.

We also had very good end of year clearance and that helped us with our markdown reserve as we entered into fiscal 2004.

But we had to -- what we evaluate there.

And we also did have a record good year for shrink results for the Company.

These three things were key elements in helping us with our margin rate in the fourth quarter and also throughout the year.

You also asked, I believe, about the efforts that are going forward for the AUR at Value City, David, is that correct?

Yes.

That's right.

I think as we look at this we're really taking a hard look at what our customer base is willing to support.

This is a complicated formula, and it is something that we really are working on it.

And because of our buying cycles it takes a pretty long period of time to really be able to affect exactly how we're going to do that on a chainwide basis in the department stores.

David, it is John.

Good morning.

I know that most of the people that follow us know that our systems are not yet up to the state-of-the-art.

It has made it difficult to manage average unit retail at Value City Department Stores.

We went for a time period -- went for about a year effectively without what I would term to be a Chief Merchant.

And it really was not until about October when we hit the Retail Ventures reorganization and we put Stu Glasser as the President and Chief Merchant at Value City Department Stores.

He is now focused 24 7 on managing that average unit retail.

We didn't do it earlier in the year because he had his hands full moving our buying offices -- the soft goods buying office to New York and whatnot.

We think -- we talk an awful lot about having the right people in the right place, and what really happened last year we kind of had an empty chair too many months of the year.

But that is going to be the biggest impact on getting the average unit retail back up is just having a Chief Merchant and price managing every day.

Is the issue with averaging at retail consistent across all of the categories?

I know you've had some success on the hardline side.

Are you seeing any progress there?

Hardlines was -- it was easier to bring the hardlines up to speed quicker with the buying cycle.

The buying cycle on the soft goods is such it has just taken us a little bit more time.

One question on your debt situation.

Can you give any update on any refinancing efforts on some of your high-cost debt, and what kind of timetable you might see on that?

And then is any kind of refinancing built into the guidance that you have given?

First, there is no refinancing that is built into any of the guidance that we have just stated.

And, I guess as an update, we really are still in the process of evaluating a lot of our options that we do have making -- trying to make sure that this is not a bridge type of an agreement.

It is something that really will be for the best in the long run for the Company and everybody that is involved with it.

I believe that we will probably have something in place sometime during the second quarter.

Lee Backus.

First maybe you had discussed in the past marketing efforts to bring the customer back into Value City Department Stores.

Maybe you can discuss those and any success that you have had with those.

Lee, good morning, it's John.

Over on DSW side it took us a couple of years to find the key to that door.

And Value City it has taken us a while also.

In the spring/summer season last year we had a new electronic campaign that we felt failed.

And then in the fall season we came up with a campaign that we thought was much more brands relevant.

And our market research has shown us that it has been extremely successful in improving brand awareness and bringing more traffic in.

In fact, our records show that in the second half we sold more units than 2003 versus 2002.

We think that was achievable to some extent to our new marketing campaign.

Could you also discuss preopening expenses this year?

You said preopening expenses would be up?

Could you quantify that, preopening versus last year?

Actually I think overall for the entire year we are planning on about $8 million higher preopening expenses during the year than what we had in the prior year.

Also, John, you have discussed in past conference calls your longer-term goals as far as operating profit margins.

Could you update us on that?

Yes.

Actually as I said I think that longer-term as we look down the road, and I'm talking beyond actually 2004, we would like to get back to somewhere around a full 3 percent, if not higher, pretax profit in the short run.

And I think that is achievable as we look around the corner beyond 2004.

I know that is a long way out, but we are excited about that.

I think that as we see the comp store sales and the sales growth and the store growth that we are able to achieve, we're going to be able to start to approach that on a long-range basis.

But I think again that next year the guidance that we gave is probably going to be something, as we take a look and get further and further into the year here, is something that we are going to have to evaluate again.

I have noticed in Q4 -- I would think that by Q4 a lot of the efforts that you are taking you would start to see some results, but if anything that guidance isn't that much of an increase over what you have done this year.

Could you comment on your thinking there?

Actually as we take a look at that there is a little bit of -- the big impact is obviously in the margin that is out there.

And I think really we had a great quarter for margin as you take a look at it.

And I don't know if we can really improve on that substantially in the margin rate as we look forward.

And I think that there is some conservatism in our fourth quarter estimates that are out there.

But in fact I think that they are really, at this point in time, what we believe it is achievable.

Arnold Breef (ph).

A few questions.

Just as a quick one, on the guidance that you provided would you tell us the number of shares that you have used?

You said fully diluted -- 53 million or --?

Our fully diluted is approximately 52 million.

I just wanted to make sure you're using the same number you had there.

This is the third year of your effort to turnaround, if I remember correctly.

You became CEO in February of '02.

Actually, Arnold, it is our second year.

We have just completed our second year and this will be the start of our third.

This will be the third year?

Yes.

Quite often in the third year the results of a turnaround effort begin to take hold and then accelerate in the fourth year.

I guess maybe you will have for some people who have followed your Company for longer than we have, but could you give us a rundown of what your major efforts in the last couple of years sort of focused on, and how well you have come along in terms of achieving those efforts.

And finally, what you think the major effort form here is to focus.

I know you've still got the IT program.

So just sort of walk us through what you tried to do.

What you actually have accomplished, and what is still in front of you?

Arnold, it is John.

In the case of Filene's Basement that was an acquisition back in 2000 out of Chapter 11.

It had really lost itself and continued to not be on track until this year.

As I had mentioned that we really returned the strategy to its legendary roots of Best Brands for Less.

It had gotten to too low grade brands and ended up in the pack with -- at the T.J.

Maxx levels of -- and we tried to boost it up closer to a Lohman's type level.

And we got out of POS marketing, which was very devastating to its customer following and its margins.

And we are back to the legendary event-based marketing such as the suit sale and the legendary bridal gown sale.

We see -- we're very excited about the sales increases we see in that division now.

And we are excited about the prospects for improving the margins in --.

Could I just ask one question before you go into any other divisions?

You had very good comps in Filene's in the fourth quarter and not to much in earnings.

What has transpired in Filene's?

One thing happened, again, the complication of the retail formula.

Heywood Wilansky, this 2003 was his first year as President of that division.

And the one factor -- the retail formula being an initial markup really fell short for us last year.

And that is something that has been -- had his attention for the past few months.

And that is really the area, along with controlled markdowns -- that IMU is really the area where we see margin improvement in Filene's Basement.

Could you go on then and --?

Then in the case of DSW, we have continued to pound away trying to improve marketing, merchandising and store operations.

In the years going back, Arnold, in time in the years 1999 and 2000, DSW enjoyed back-to-back years of 19 percent comp store increases.

And then in the years of 2001 and 2002 DSW had flat comps.

And during those years, because we have traffic counters in the stores and we have a very sophisticated customer loyalty program, we were well aware of the fact that we were bringing in new customers during '01 and 02, but we were not getting credit for it in the top line.

And to a great extent we feel that was because of that indulgence spending had slowed down a little bit.

DSW acts a little bit like a luxury brand in that regard where a lot of our customers come in and they do indulgence spending.

So sure enough in the year 2003 when the market started turning around, we started seeing the indulgence spending take hold again, and it has been very good for our sales.

We work very hard on our vendor relationships.

And we have found with each passing year -- and we expect this to continue in the future that our vendor partnerships will continue to help strengthen our opportunities in DSW.

The biggest challenge from a turnaround standpoint was in Value City Department Stores.

And it is really the turnaround efforts are throughout that organization.

The corporate supporter, or overhead structure, was far in excess of what any retail company could pay and still be profitable.

So we have made drastic reductions in the cost of the overhead support to that business.

On the retailing side, it is been a matter to try to -- through market research-based knowledge to try to come to grips better with who the customer is and what type of merchandise the customer wants.

And it has kind of been two steps forward and one step back from that standpoint.

We have gone a little high; we've gone a little low.

We think we're zeroed in at the right level now.

We did have about a twelve month period where, as I had mentioned earlier, we did not have a person in the Chief Merchant chair.

And we all sort of shared that chair on a part-time basis, and it was ineffective and allowed our average unit retail to get out of control.

We know we have been selling more units the last few months.

Even in the month of February, but we're disappointed, our 6 percent comp store sales increase that month in February was not substantially more.

It would have been had we been able to be at the same average unit retail that we were at February of '03.

So it took us sort of a nine month process for the average unit retail to rear its ugly face.

And it has sort of taken us 6 to 9 months to get it back.

We're starting to see the light of day now.

And I can see by back-to-school season that the average unit retails will be back in place.

We had gotten to a point where some of the same merchandise that our competitors offer, we were far, far beneath their low offering prices, and it just is a matter of on a daily basis managing it from the point of purchase order a little better.

As I mentioned earlier, we are extremely enthused about our new marketing campaign for Value City.

It did take us a while, a little bit of trial and error, but we felt we hit it real good in the fall season.

We know from market research that it was very brand relevant.

It created more awareness and is generating more traffic.

So at this point you feel the management is in place in all three of your operations?

The management changes and everything of that nature in turn has been completed?

Yes.

And again the most challenging one being department stores where we're very pleased with our management structure now.

You mentioned a 3 percent guidance as a target.

But 3 percent is for the company overall as opposed to Value City?

Yes.

Wouldn't DSW margin potential, once you get through the heavy opening expenses and the store starts to mature, be substantially higher than that?

Yes, that would be true.

I think one of the -- this is Ed Kozlowski.

One of the things that is beginning to happen now -- and you talk about a turnaround -- as John mentioned earlier, our complete overhead structure, in fact when you go back to 2000, was just too high to support the store basis we had.

We have been able to bring that overhead structure down over the last two years.

We have spent less money in 2003 than we did in 2002, which was less than we spent in 2001, which was less money that was spent in 2000 in aggregate.

So we have been able to leverage the entire overhead.

And I'm talking about from distribution all the way down through corporate expense as an aggregate.

And we have been able to leverage those costs substantially the last two years.

As we move into 2004, the other place where we are beginning to leverage and enjoying increases, somewhat as you saw in the third and fourth quarter, is the store operating costs.

In DSW specifically, and you're correct, we are beginning on a comp base to show stronger operating profits from DSW.

We believe in 2004 we will start showing strong improvement in the comp store -- comp operating cost of Filene's Basement.

In addition with positive comps in 2004, Value City would begin to start to leverage its operating structure.

Value City while having a slightly negative comp for 2003 was able to maintain at best its store operating cost structure just by the fact of increasing wages and health care costs.

So as we move into 2004, we expect to begin to leverage at the store level in Filene's Basement and DSW, and begin to leverage in Value City as we move through the year.

The corporate operating costs are continuing to leverage in 2004 as well.

And that is somewhat offset by the additional preopening that we're planning to have this year.

I think Jim said somewhere in the neighborhood of $8 million incremental increase year-over-year.

Can you give us the actual numbers last year versus this year (indiscernible)?

Yes, hold on just a minute.

Go-ahead, Ed, and I'll get those.

All of this has been accomplished with -- as John mentioned earlier, we have had very, very poor systems.

And we have been in the process of replacing those systems one at a time.

So we have been able to gain corporate leverage while replacing systems.

To date what we have accomplished in DSW, we have a new point-of-sale system that was installed in the very beginning of 2003.

In addition to that we put a new planning and allocation system in the fall of '03, and we're beginning to see the benefits.

Now we felt that we would see the benefits in putting the right goods at the right place first, and then secondly our ability our ability to understand our markdown structure even greater.

We don't believe we will start to enjoy those benefits until the fall of '04.

In Value City Department Stores we have installed -- we're in the process right as we speak, and we have right now about 40 of 116 stores completed in new point-of-sale equipment and also new store operating systems as well.

This will enable us to when we finely install the new merchandise system, the new planning and allocation in Value City at the beginning of '05 for all the systems to finally talk to one another.

We brought up in the very beginning of this first quarter our jewelry division on the new JDA, as well as the Manhattan system, and then has gone very well as far as new installs go.

This will be the first of the three divisions, and then soft lines and hardlines will follow in early '05.

We brought jewelry up early because one of the things we want to do is make sure that we have all the bugs worked out of the system, all the right reporting structures, all the right -- so that these systems do talk with one another, and that the resulting will be better information to manage the Company by.

And so we are going to take the balance of '04 to get that installed exactly as we want it so that when we bring in the larger two divisions we have a very smooth transition.

As I gather, just as a broader brush kind of thing, you have made some major cuts in overhead, but that total SG&A ratio is still, I think, extraordinarily high for a retailer.

One of the reasons I gather is that you have taken the money you have saved in the cost-cutting procedures and put them back into marketing and the IT systems.

So that the real benefit isn't so much from a lower expense ratio, the real benefit will be as these marketing and IT system provide you information -- that you'll drive the sales and leverage your SG&A down as the sales go up?

Is that a summary of what has been going on?

I would say that is a very good summary.

And that is our expectation and --.

So from our standpoint the expectation -- the risk and reward is both in hoping that these -- the IT systems and the marketing programs start to drive sales so that we can see that leverage.

That is on the (indiscernible) so to speak.

Right. (multiple speakers)

And you have seen better sales in both Filene's and DSW for the last four or five months.

Right, and again I think that has a lot to do with -- at the Filene's side that really, as John said, that we finally have got the full year effect -- the full effect of Heywood Wilansky's positioning of the merchandising there.

And the merchandising strategy that has been put in place at DSW is just strong consumer desire for the product.

You had asked earlier what the numbers were, Arnold, on the preopening.

It is about 4 9 in 2003, and it will be close to the 13 in 2004.

And the last question -- I will give somebody else a turn.

On DSW, if you look further out, not '04, not necessarily even '05, but maybe two or three years down the road when all the efforts of the turnaround should really be in place, although I don't really consider DSW a turnaround.

But what would be a goal or an operating margin that you think this Company on a model that is running the way it should be running -- is this a Company that can do a 5 percent operating margin two or three years down the road?

I think two or three years down the road that that is a possibility, yes.

I will give somebody else a turn and get back in line.

Jonas Gertzle.

A couple of questions.

I don't know if I missed it, or if you didn't give it.

Value City Department Stores' year-to-date, what are their comps running?

Year-to-date in comp stores at Value City were negative .7.

DSW was a positive 5.6, Filene's was positive 2.6, and overall it was positive 1.2, Jonas.

Do you have how that compares to last year?

Yes, last year department stores was negative 5.1, DSW was negative .1, and Basement was .3 positive, and overall last year it was negative 3.5.

That is '03 versus '02.

The average -- you mentioned for Value City, your whole back-to-school the average unit retail price will be up, the systems will kick in.

What about the assortment?

Are you still as pleased with the assortment that he has on the floor?

Will there be changes, whether space demands or furniture or whatever?

As we turn the corner into April, I think that Stu is pleased where we are in the progress of content.

We're not satisfied for the spring season that we're up to speed, but we're satisfied that we're making good progress.

And we're satisfied that more progress will be made it looks like for the back-to-school and fall season.

Are you closing any Value City stores this year?

We don't have any plans to do so at this time, Jonas.

And your capital expenditures I see is going to be roughly about 10 to 12 million below a year ago.

And you are opening more stores so I imagine your store opening costs are up.

And I know you're spending a lot of money on systems.

Is the difference that -- less on systems than last year?

Actually one of the major pieces of it is existing stores.

What we have to do there to get renovations and improvements in those is one thing.

And we're spending less at the corporate level this year.

I see.

By the end of this year will basically the implementation of systems be complete?

I don't think that it will at the end of this year.

I think that it will be -- a real good piece of it will be done.

But I don't think that it is going to be totally complete at the end of the fiscal 2004.

'05 will be the implementation year for some key distribution systems for Value City.

The other date when the DSW Filene's will open on 14th Street?

It will be mid to late September, Jonas.

Do you want to discuss that a little bit, because I imagine that is a very important and a key location?

How many square feet that will be and just in general?

It is a key location and some people refer to it as flagship, but to us it is not a flagship for the purpose of brand visibility, although it will be to an extreme process for the purpose of being profitable like we open other stores.

But what it will be in Union Square is DSW will have a 30,000 square foot store on the second, which is the size that is pretty close to its prototype size.

Filene's Basement has 90,000 square feet on floor Street 4 and 5.

Some of that space we're going to use for office and storage, so it won't be like -- it will be the equivalent of probably a 70,000 square foot store.

We're very excited about it.

We know it is going to come on strong.

We're experienced with second floor -- multiple floor stores.

So yes, it should be good.

It should be very good.

That size of Filene's, what is that compares to the normal Filene's store?

There is quite a range in Filene's, but typically the right size for Filene's Basement would be 40 to 60,000 square feet in most instances.

We will be opening a store the end of April in White Plains that is closer.

It in the neighborhood of 70,000 square feet -- Filene's Basement.

The larger stores are you adding any more categories or anything or just a wider assortment of the regular size store?

Much larger home goods assortment and a few departments will expand.

Our recent opening in Atlanta was right around 50,000 square feet, and that has exceeded our expectations.

(OPERATOR INSTRUCTIONS).

Arnold Breef.

I go back in line.

That surprised me.

Could you give us some comments on how the DSW store license departments are performing in Stein Mart?

We're very pleased with our progress.

We're not satisfied with how we're doing today.

We're still in a relatively new relationship, but we and Stein Mart are both very pleased with our progress.

It continues to improve with each passing day.

Do you report sales through Stein Mart or you just report license income?

We report sales, and they are included in the DSW segment.

That would be the same for your DSW sales in Value City?

Those sales are in DSW?

Those sales are in the department stores.

Department stores.

And then you just show the license income in DSW?

Say again, Arnold?

The sales are in Value City.

The license income is in DSW?

Right, but it gets eliminated in consolidation.

So the profitability shows up in Value City?

Right.

I am looking for comparable companies but DSW looks sort of easy -- I mean, Famous Footwear and Shoe Carnival are out there and your comps are outperforming them substantially.

With Value City it is a little harder.

I looked at Big Lots and they don't have nearly the same merchandise mix I don't think.

It is a comparable concept, but the merchandise mix is completely different.

The Cost Plus looks fairly comparable.

And if so, their operating margins, I don't think they're there yet, but I think they're talking about going to 8 percent.

What is the difference in their business and your business that would prevent you from showing substantially higher margins than 3 percent or margins more comparable to them?

Is there some difference in mix or operations or whatever?

I have to say that I am not 100 percent familiar with their operations.

I'm familiar with the company.

I would say that probably some of their costs of distribution are different than ours, and some of their store operating costs are definitely different then ours.

But I would say that those are probably the two major components that are in there, Arnold.

That is generally what we find.

So Value City doesn't have the potential to have a 5, 6, 7 percent operating margin?

Again, that is going to be dependent upon the sales growth that we have -- are able to put into the business, yes.

Arnold, I think the other thing is that once Value City gets its systems completed -- and I won't say completed, but once we get to the next step in 2005, we're then within the potential to begin reducing the distribution costs.

When we got involved with the Company two years ago the distribution side of Value City was a very labor intensive, nonsystem, nonrecognized operation.

We have improved it, but without further capital investment and without these systems, we're not going to make -- we're not going to be able to take it to the next step.

So we made substantial improvement in the two years.

This year we're going to mark time to a degree until we get to that systems install in '05.

Once we get that systems installed with capital expenditure we can then make the next step move in reducing those distribution costs down to levels that are seen by, say, a TJX or a Ross or some other folks who are in the off-price business.

The off-price business, depending on the amount of rework you're always going to have higher costs than you might like to have because of just the amount of labor you have to put into the product.

But within a couple of years we can get to where we are within the peer group which we operate.

But that is still a couple of years away to achieve those kinds of levels.

So I think your big question is in the long run can Value City achieve an improved operating margin?

And Jim is right, with comps we can definitely start to leverage the store operating structure, but then the distribution structure is really two steps away, the systems install and the capital install to then leveraging those costs one more time.

So if you do the distribution by the first -- the MIS by the first quarter of '05 would the capital expenditures then follow in '05?

And will you see better results in '06, or is that --?

We're in the process of evaluating exactly when those systems will be complete, and then what the second step is.

Yes, you're right, it could come that fast, but it could take a little bit longer as well.

So we have not yet reached the decision point on exactly how long that will take.

This is a difficult question to ask.

I'm hesitant to get off the phone now because I just got on -- be hooked up, and I guess there was nobody else there.

I don't want to lose the call frankly.

How to phrase this?

I know you can't tell us at this point what you're going to do in terms of restructuring your financial situation at this point.

But I wonder if you could discuss what you see the alternatives are, without indicating at this point which way you're going to go on the assumption that you don't know which way you're going to go.

But there must be two or three different things that you're looking at.

Maybe you could just sort of rationalize us through those to have some understanding of what we might be looking at?

Arnold, at this time we're really not going to say anything about what our expectations are for a refinancing at this point in time.

I would say that we are definitely pleased with what we expect we can do.

But until we get the full opportunity to evaluate everything, I think it is just far too preliminary to really say anything.

I'm going to ask you another question I don't think you can answer.

But the convertible debt is not due I think until 2009?

Is there any indication at all that the holders of that would consider converting prior to 2009?

I can't answer that question.

I tried.

Just as an analyst to understand, the DSW has a footprint of about 25,000 square feet, which is some 2, 2.5 times the size of a couple of the leading competitors with a similar number of SKUs.

Could you give us the rationale of why the bigger store, the bigger capital investment?

I'm not criticizing;

I'm just trying to understand it, because obviously your comps are doing much better than theirs.

I'm not sure that we have a bigger capital investment as perhaps maybe paying rent.

If obviously you have more square footage, you have more rent.

But the success formula for DSW is selection convenience and value.

You need a fairly big box to get the selection out and display it in an impactful manner.

And we know from -- we are a market research-based retailer and we know from research that the customer finds it convenient to be able to walk in the store and look across the tops of the display shelves and be able to see able to see the entire offering.

That is not the case in our competitors where they have smaller boxes and pile the goods high where you walk in and you can't see over fixtures.

You can't really see the offering.

We spend substantial money every year for probably the past 10, 12, 13 years on DSW.

And we know how the customer feels about the environment and the convenience of it.

And that is all I can tell you.

It's part of the success formula.

It works.

Could you give us some idea of the merchandise mix at DSW, male, female, athletic, casual, dress, some understanding of how the mix goes?

It is mostly a female, ladies type of a merchandise mix that we do have.

We do blend it in.

Men's would be second in that line, and then athletic would probably follow after that.

That is really the concept.

And the driver behind it is ladies area is still the big driver for the DSW operations.

One other question and hopefully you will get somebody else on.

But could you give us some feel -- you gave us a lot of guidance, could you give us some feel on the inventory turns outlook this year versus last year?

And the implications it would be for increased needs or less need for working capital?

I actually think that this year that we are, as we improve our AURs we take a look at it that we're actually going to see some improvement in the turn.

I don't think that it is going to be a real large number, but we will see an improvement there.

At the same point in time we have somewhat changed how we're doing some of our buying.

And we're buying out in front of the seasons now where we hadn't done that in the past.

That may slow us down a little bit.

But overall our expectations is that on a per store basis that our turn will improve, especially in the department stores.

And we're going to try to operate these stores with a little bit less inventory in number of units at each location, but as with -- as I said with a higher unit of retail.

David Mann.

Just a couple of follow-ups.

In terms of your advertising expense in '03, can you give us a sense of what that total number was versus '02, and how you would expect that to ramp or change in '04?

We actually spent about -- in actual store advertising chainwide we spend about $110 million.

And I think that our expectation is that we will spend that same amount in '04.

And the amount that we did spend in '03, I believe it is actually about $10 million higher, 10 to $11 million higher than it was in the previous year.

And then in terms of Filene's Basement, now that you're going to embark on a growth pattern, can you give us a sense on what your market analysis is showing you in terms of the number of stores that that could handle?

It sounds like somebody got cut off.

David, right now we feel confident there could be 100 stores, but we're in the infant stage of that.

I remember back many years ago we thought DSW could be 50 to 100 stores.

And then they got to a point we thought it could be 200, then 300.

Today we think it could be could be as many as 500.

So as the concept evolves that might increase.

But we feel confident about saying there could be 100 stores.

In terms of the number of sites that you have identified for Basement, how many -- do you already have a pipeline for the next couple of years?

Yes, we definitely have the four taken care of for '04.

And we have -- we feel comfortable with our '05 pipeline, if we want to five for '04 -- or four of them for '05 also.

Arnold Breef.

I got back in line quickly.

Most retailers basically try to buy what is selling to the consumer.

And as I understand the closeouts, you buy what you can and then try to sell it to the consumer, and it is a more difficult procedure.

I guess there are two questions coming out of that assumption which you could comment on also.

One, as you get bigger does the nature of this business become more and more difficult?

And two, is the reason the IT investment becomes so important is that it is critical to running a closeout type of business where to allocate merchandise and to know what is selling in each store becomes extremely important?

Arnold, it is John.

I think as retail concepts evolve it is very important to do what you say, that you buy what the customer wants.

You also are right that in a closeout business you sort of buy what is available.

It is a matter of refining that formula.

And as we learn these brands more and more, I know in the case of DSW we first started, all we bought was what was available closeouts, without regard to what the customer wanted, and then we tried to sell it to them.

And every year over the years we have evolved more towards buying what the customer -- a lot more what the customer wants and a lot less just what happens to be available.

And it is an evolution.

We're starting to -- we started last year to make an evolution successfully in Filene's Basement.

And over the next couple a few years I think it will continue.

In the case of Value City it is more complicated because there is so many categories under one roof.

But it is the same thing.

It will help our business to maybe shy away a little bit from some of the opportunities -- some of the situations that are available.

If they're not really opportunistic in relation to what the customer wants, we have to walk from those situations and work harder on programs, you know, with vendors and vendor partnerships.

And that plays into the hand to allowing you to grow also, because you are right, there comes a day when there is only so much closeouts to go around to all the closeout players.

And you get to a point where you do have to do branded makeup programs and cutting deals and things like that.

But it is an evolution that is necessary to better serve the customer.

And it is an evolution that plays into the hand allowing us to grow and have a never-ending source of supply.

And as you get bigger and your financial position becomes cleaner so to speak, the vendors see that and it becomes easier to make deals with them?

That is exactly right.

(OPERATOR INSTRUCTIONS).

It looks like we have no further questions.

I would like to at this point in time thank you everybody for joining us this morning for our conference call, and wish everybody a good day.

Thank you.

This now concludes today's Retail Ventures Inc. 2003 fourth quarter earnings conference call.

Thank you for your participation.