Designer Brands Inc (DBI) 2004 Q1 法說會逐字稿

Welcome to the Retail Ventures Inc. first-quarter operating results conference call.

At this time all lines are in a listen-only mode.

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

Instructions for asking questions will be given at a later time.

I thank you for your attention and now turn the conference over to our host, Mr. John Rossler.

Good morning and welcome to Retail Ventures Inc.'s first-quarter fiscal 2004 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 January 31, 2004 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.

A little over two years ago our Company embarked on a turnaround strategy.

Our goal at the time was not just to return to profitability but to build a strong foundation that could support and sustain a healthy, growing and prosperous company for many years to come.

It was anticipated that this turnaround effort would take three years.

RVI appears to have turned the corner and is on a path to complete the turnaround within the anticipated time frame.

Yesterday we announced the RVI first-quarter 2004 operating results.

The first-quarter was successful and exceeded expectations.

This was the third quarter in a row with substantially improved sales and profitability over the prior year.

Progress is being achieved in all three retail divisions across numerous financial metrics.

This is a positive sign that the strategic financial, organizational and human capital investments RVI has made over the last two years are beginning to pay off.

Highlighting some of the specific performance measures of Q1 2004 compared to 2003.

Total sales were up 9.8 percent; gross profit as a percentage to sales increased 330 basis points; operating profit increased $18.6 million.

Jim will discuss more of the financial results a little later.

Regarding our individual business segments, at the corporate level RVI has spent the last six months strengthening its retail support expertise.

These up front investments will ultimately lead to increased productivity across the entire portfolio.

In the Value City department store business segment our financial performance for Q1 continued the trend of improved operations that began in the third quarter of last year.

In the first half of 2003 Value City had focused efforts on increasing traffic.

Although this effort was successful in increasing transactions, it created lower than anticipated average unit retail prices.

Beginning around six months ago Value City took a more balanced approach to its recovery.

Rather than single-mindedly chasing sales with promotional pricing reductions, we have moved our strategy towards building a more sustainable profit model.

This new model is based on reducing inventories and raising average unit retails while still maintaining our extreme value position with the customer.

The combination of lower-cost and higher AUR will provide a solid foundation to fund future top line growth initiatives.

We have not yet fully completed this transformation.

Due to the length of our buying cycles it is anticipated that the full impact on prices will not be felt until we reach the back to school season.

Even so, Q1 for Value City saw meaningful improvement in both IMU and gross margin percent.

Value City is contributing positive cash flow.

The momentum is in place to achieve our higher AUR goals in the coming fall season.

We are clearly moving in the proper direction.

The DSW segment continues to show strong improvement as a growth retailer.

In Q1 DSW continued its strong comp store sales growth and opened nine new stores.

In spite of the cost and efforts associated with that many successful new openings, DSW produced a substantially improved operating performance.

DSW has been successful in converting its strong top line growth into even greater bottom line growth by leveraging its cost over the increased volume.

At the same time DSW has been making long-term investments in both people and technology to improve the management of the entire supply chain.

These investments will allow DSW to support its growth and continue improving productivity.

As we move into the remainder of fiscal 2004, DSW will be facing stronger comp store sales and margin comparisons with 2003.

Although this increase -- this will increase the challenge; we anticipate that our front loaded investments in combination with increased efficiencies will allow us to continue our year-over-year improvements at DSW.

In total we plan on opening 35 new DSW stores in 2004.

Filene's Basement used the year 2003 as a strategic recalibration year, returning to its legendary roots by increasing the quality of the fashion brand mix and shifting promotions to event based marketing.

The favorable results of Q1 indicated that these efforts are already having a positive impact on the top line.

Comp store sales growth for Filene's Basement was quite strong.

AUR and IMU also increased during the quarter.

Although there was a slight decline in operating profits, this was entirely due to the cost associated with the opening of three new Filene's Basement stores during the quarter.

Preopening expenses for Filene's Basement during Q4 were $1.3 million.

Excluding this cost, operating profits for Filene's Basement would have improved nearly $0.5 million.

We anticipate that one additional Filene's Basement store will be opened in the fall season.

In summary with the completion of the first quarter RVI has now posted three consecutive quarters of improved performance.

Every brand is showing improvement.

The change initiatives implemented over the past two years are beginning to positively impact operating results.

Although the transformation from a struggling company to a solid growth oriented enterprise is not yet complete, we are on the upswing and we have momentum in our favor.

Our goal for the remainder of the year will be to continue this trend by maintaining our focus on increasing sales, improving margins and reducing cost.

As a final note, two years ago to fund the turnaround effort RVI restructured its debt.

At the time it was anticipated that this additional debt would be temporary and that it would be reduced and restructured again by the end of three years.

This is still our intent.

We are currently exploring our alternatives and expect to have this matter resolved during the year.

Thank you.

I will now ask Jim McGrady, our Chief Financial Officer, to proceed with our financial review.

Good morning, everyone.

Yesterday as John said, we announced a net loss for the first quarter of $1.5 million or 5 cents a share versus a loss of $13.2 million or 39 cents a share in the prior year.

Total sales for the first quarter increased $57.8 million or 9.8 percent to 646.3 million from 588.5 million.

Comparable store sales for the quarter increased 4.2 percent as compared to the prior year decline of 4.4 percent.

Our comp store sales by business segment were Value City department stores had a decline of 1.1;

DSW increased 10.6; and Filene's Basement improved 15.8 percent.

Our Value City segment sales decreased $3.8 million, as mentioned earlier, 1.1 percent to 339.1 million and, as previously mentioned, had a negative comp of 1.1.

The decrease in comp sales is comprised of a decrease in nonapparel hardlines of 8/10 of a percent, a decrease in apparel of 1.8 percent and an increase in jewelry sales of 0.9 percent.

The apparel divisions of men's and ladies had decreases of 1.8 and 4.9 percent, respectively while children's increased 7.1 percent.

Shoe sales in the Value City segment were a positive 0.5 percent during the quarter.

DSW sales were 227.3 million which is a 24.2 percent increase in the quarter.

This includes a net increase of 22 stores from a year ago along with the quarter's comp store sales increase of 10.6 percent.

The categories of women's dress, casual and sandals and accessories had favorable increases during the period.

During the quarter we had a net decrease in the leased (ph) shoe department operations of 10 due to store reductions.

Filene's Basement sales increased 27.7 percent in the quarter to $79.9 million.

This includes a net increase of four stores during the comparable periods and a comp store increase of 15.8 percent.

The merchandise categories of men's, ladies and children's all had comp sales increases of 15.5 percent, 10.3 percent and 37.4 percent respectively.

Other categories such as jewelry, shoes and home also showed improvement.

As you may recall, our business units during last year were negatively impacted by some weather conditions that we had -- has incurred throughout most of the markets where we operate.

Just putting that out there as a reminder to everybody.

In the first quarter our gross profit as a percent of sales increased 330 basis points to 40.1 percent compared to 36.8 percent for the prior year.

The increase in our margin is attributable to higher initial markups in all three of our operating divisions.

The sales improvement is driven by strong comps in DSW and Filene's and a focus, as John mentioned, as we get back to higher average unit retails in the Value City unit.

All of these contributed to a lower markdown during the quarter particularly in POS markdowns; this again was across all segments.

Total gross profit increased 42.7 million to 259.4 million as a result of this.

As a percent of sales by segment gross profit in the first quarter was Value City department stores 39 percent;

DSW 43.5 percent;

Filene's Basement 35.4 percent and again overall 40.1 percent.

Total selling, general and administrative expenses for the quarter increased by $24.2 million to 255.3 million.

As a percent of sales SG&A was 39.5 compared to 39.3 in the first quarter of the prior year.

Preopening expenses for stores opened since the fiscal year end increased $3.6 million over the prior year's quarters.

We opened a total of 12 new stores during the first quarter, nine DSW and three of Filene's Basement.

Total SG&A expenses associated with these stores opened subsequent to May 3rd of the prior year through May 1 of 2004 was $13.3 million and represents approximately 55 percent of our SG&A expense increase.

Other costs that increased during the year include employee health and welfare and retirement.

Our SG&A as a percent of sales by segment in the first quarter was comprised of Value City department stores 40.6 percent;

DSW was at 37.8;

Filene's Basement 39.5 for a total of 39.5 percent overall.

Operating profit for the quarter was a $5.7 million profit, an increase of $18.5 million from the prior year's operating loss of $12.8 million.

This is about 9/10 of sales for the first-quarter versus a -2.2 for the prior year.

Operating profit by segment was at Value City department stores a loss of 4.4 million; at DSW income and operating profit of 12.9 -- actually 13 million; and an operating loss of 2.9 million at Filene's Basement.

Overall again $5.7 million.

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

This decrease is attributable to a decrease of approximately 1 full percentage point in our weighted average borrowing rate offset by about $33.6 million and an increase in weighted average barrowings.

The effective tax rate for the quarter is 40.7 percent versus 40. -- 41.2 percent for the prior year.

As I turn to our balance sheet, our inventory totaled $469 million at May 1, 2004; in contrast it was $452.9 million last year.

This is an increase of about 3.6 percent and $16.1 million.

The increase of the 22 new DSW stores and four new Filene's Basement stores and a net reduction in leased locations accounts for the net change of about $24 million.

Net working capital was $248. (technical difficulty) million and $242.5 million at May 1, 2004 and May 3, 2003 respectively.

Our current ratio of both of those dates was 1.8 percent.

Net cash provided by operations was about $600,000 in the year-to-date fiscal 2004 period and this is in contrast to a use of $38.1 million in the prior year first quarter.

Net cash used for capital expenditures was $14 million and $10.8 million for the comparable two periods.

During the three months ended May 1st of this year, CAPEX included $7.4 million for new stores, $4.2 million for improvements to existing stores and $2.4 million for technology equipment upgrades and new systems.

In addition to the capital expenditures during the first quarter of this year we also acquired the Leslie Fay trade name for approximately $4 million.

EBITDA in the first quarter was $19 million.

Availability under our revolving credit agreement was $160.8 million and direct borrowings aggregated $140 million plus $13.9 million of letters of credit were issued during that period.

This concludes the review of the first quarter.

As we take a look forward with respect to the remainder of fiscal 2004 we are optimistic yet cautious with our projections for comp store sales volume for the second quarter and for the balance of the year.

Our expectations are in the low single digit range for the second quarter and throughout the balance of 2004.

As John mentioned earlier, we're committed and focused to controlling our cost in all of our operations and support areas.

Our efforts to improve margin rates in our businesses, particularly at Value City and Filene's, will continue to be a focus of those enterprises throughout the balance of the year.

Our EPS expedition for the year is in the range of 42 to 47 cents per diluted share.

By quarter we would expect EPS to be around 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.

We expect our gross margin rate, as we had mentioned in the fourth-quarter call last year, to improve by about 25 to 30 basis points compared to the prior year.

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

The expectation for DSW is that we'll probably maintain that 2003 margin rate.

The SG&A expense rate overall is expected to decline by around 10 basis points versus the prior year.

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

The Company expects interest expense this year in 2004 again to be about $33 to $35 million and our tax rate will be somewhere in the range of 40 to 41 percent as we approach year end.

That concludes the financial review.

And at this time I would like to ask Connie if she would be kind enough to open up the line to questions.

(OPERATOR INSTRUCTIONS) David Mann, Johnson Rice.

John, can you talk a little bit about the DSW business?

That margin and SG&A performance seemed fairly impressive.

What in addition to the comp leverage is going on there and should we expect that to continue going forward notwithstanding your comments on the tough comparisons?

From a high level -- the first thing that happened for us was it was an extremely great boot season last fall/winter and it just drove people in the stores; had great full sales; cleaned the merchandise -- the fall/winter goods out, and we were able to get into the stores our spring/summer merchandise really early.

And as mother nature had it, she blessed us with some early good weather compared to last year and the industry itself was a very colorful season, the spring/summer season is about colors.

So the fact that we were able to bring the new colors of the season in early, the weather gave us a lift that early, full price sales helped the top line and helped our margin also.

We were able to -- with focus from our operations group we were able to leverage those sales increases by pounding the expenses down.

The margins just pretty much happen to flow with the fact that we had clean inventories and a fresh season of color.

In terms of the Value City gross margin, I guess last year you implemented a planning and allocation system.

Is that one of the drivers that's helped out your -- the increased margin in the first quarter?

Actually, David –-this is Ed Kozlowski -- the new planning and allocation was introduced into DSW (multiple speakers) and we really did not anticipate and do not anticipate that we'll really start receiving benefits from that until fall of this year.

We get really fully integrated and really understand that planning and allocation.

Value City's gross margin drivers were really from the fact that, as we talked about in the third-quarter conference call I believe, that we had -- averaging the retail issues that we started to address.

As a result of addressing these average unit retail issues we've been able to improve the IMU and make sure that we're still giving the consumer the bargain prices they want and deserve.

But that's really been the fundamental driver.

Also being more inventory conscious and more control oriented we were able to buy right, buy smarter and the sell throughs are better and as a result our markdown percentage is lower in the first quarter for Value City.

So those were the two principal drivers of the increased gross margin at Value City, IMU and controlled markdown.

And then, John, you talked about your turnaround schedule.

Does that suggest that you're still believing that you can get back to sort of that 2 percent net margin by the end of that timetable?

Yes, David, that's right.

Probably the three things that are still hanging out on the turnaround the most -- one is information technology.

We're two years into improving the -- renovating the systems for Value City and we're probably somewhere in the neighborhood of two years to finish the job.

So that's just sort of a passage of time and continuing to spend some money on it.

The second thing is that we continue to improve the merchandise content and the price points that our customers want to see in Value City.

We do really think we're right ready to come through the door with that.

We've learned an awful lot in the past couple years with market research and by trial and error.

We're very excited about -- while we're not really overly proud of ourselves with the merchandise content in Value City for the spring/summer season, we are very enthusiastic.

We just completed our line reviews for the back to school and fall season.

We're enthusiastic about the content that we'll be presenting going forward including -- and the average unit retails.

And then the third thing, as I had mentioned earlier, we know that is still on the docket is the restructuring of our financing.

And just one last question on that financing timetable.

I think last quarter you talked about a second-quarter timetable, though now it seems like you're talking about sometime this year.

Is that correct or can you clarify?

I think it will probably be sometime during the second-quarter, David.

This is Jim.

During the second quarter we left ourselves a little bit of leeway there because we do have a couple of alternatives that we may decide to pursue that might let us leak over a little bit into the third if we go down that path.

But right now I still would anticipate that we should have something by the end of the second quarter.

Thank you very much.

(OPERATOR INSTRUCTIONS) Arnold Brief (ph), Goldsmith & Harris.

The Value City comps, do you expect that weakness to continue all year or do you think the programs you have in place and the merchandise you expect for back to school will get your Value City comps up as you progress through the year?

It’s John.

I feel that we have a much better chance for the back to school and fall season.

I think because the average unit retails will be in better condition by then and also the enthusiasm I have for the line reviews -- merchandise line reviews that we've just completed.

Filene's showed extraordinarily good comps -- earnings didn't progress as much even when you adjust for the new store opening expenses.

What's transpiring there in terms of the -- seemingly the leverage of the comps didn't quite get as much -- didn't get as much leverage out of the comps as you would think?

Actually some of that's still a little bit hidden.

While we talked about the preopening, we still have the initial operating results of those three new stores which also would have been dilutive to the EBIT margins.

So in the comp stores though we saw marked improvement in virtually all the operating metrics throughout Filene's Basement.

Another number I might ask for is -- could you, in addition to the preopening expenses, could you tell us what all the new stores lost in the first-quarter?

Arnold, we don't talk about specifics on a store-by-store basis.

I'm going to have to decline on that one.

I can say that, as Ed did mention, in our comp stores that across all the metrics that we did see improvements in every one of those categories.

There was a significant charge in there for the preopening expense and that's just -- that doesn't include the management time that goes into that as well as some of the operating statistics that we have to kind of push aside a little bit as we go to open up a new store.

Opening up three stores in the first quarter; while that was a challenge it should start to benefit us throughout the balance of the year here on a -- hopefully on a very, very quick basis.

Let me rephrase the question.

Would you expect the stores opened in the first quarter to be profitable for the rest of the year as a total?

I would say that they'll probably be breakeven in the first year, Arnold.

Which would mean they could be profitable for the last nine months as a total if they lost money in the first quarter.

That's correct, yes.

Okay.

Could you discuss the inventories per store and what kind of shape?

It looks to me like your inventory is in very good shape.

On a per store basis; you might actually have to build some inventories as you go through the year and use some working capital?

Actually all of the increases throughout all three of the operating units, the increases in inventory, the total increase was attributable to the new stores.

So really on a store-by-store basis we are on a -- flat compared to where we were in the prior year and actually up in the department store segment we have a little bit of a decline there.

That's as we want it to be.

As John said, we really want to focus upon that average unit retail and reducing the number of units at the stores and the number of times that we touch goods as they go through our processing systems to get from the vendor to the store.

So really we are very happy about that.

We're excited about the freshness of the inventory as well.

We've been able to maintain a relatively good margin, as you can see, as we've operated here through the first quarter and still maintain inventories on a seasonally fresh basis.

So I agree with your statement; yes, we are in good shape with our inventories at the first quarter.

Would you expect some inventory build through the rest of the year to accommodate the (multiple speakers) comp stores?

Yes, absolutely.

As we go through -- the inventory will build a little bit throughout the year for the holiday season obviously and as we see more of the comp store base come through us, yes, and more of the new store openings come through us for DSW.

Yes, we'll definitely see some inventory build but I don't think you're going to see anything that's going to build on a per store basis that is significant other than like, as I said, for the new stores.

Last question and I'll give somebody else a turn.

There's some fashion trends going on in the shoe business; color, platforms -- when you get fashion changes like this do they stimulate sales?

Do the fashion trends last?

Is there any definable period that you can look for these trends to last a couple years maybe to stimulate shoe sales maybe a little above the historical secular trends?

It’s John.

In the shoe business we love fashion trends, fashion changes.

So for instance the spring/summer season, as I mentioned, were bright colors.

We enjoyed that because women had to run out and buy lots of pairs for the fall season, it'll be about colors again or darkened colors and we expect momentum to be good.

What we don't like in the shoe business is from time to time there is no change where fashion trends stick too long and we do not like when it goes back to the plain black, white, brown.

But the industry gives us that from time to time and we just work through those time periods.

But right now it's -- fashion is in our favor.

Can you update us on the inventory, MIS, POS, all the kind of information systems that you're on schedule; are there any problems, what stage of implementation in Value City, etc.?

It's in the second half of its POS implementation which is the precursor for the other systems to come online.

We expect to complete that by midsummer.

And then we'll move into new store systems and then move towards merchandising and warehousing after that.

All those projects are in concert with our plan and we are moving forward.

As John said, we really feel we're about halfway through that process and we will continue.

And we feel good about where we are at this time.

I hate to ask this question on quarterly earnings because I frankly don't focus that much on them.

But your first quarter exceeded your expectations by quite a margin.

You've upped your estimate for the year because of the first quarter.

You've made no changes in the second, third and fourth quarters despite the improvement above expectations in the first quarter.

Is there -- I know you're up against a little harder comparisons but still in all you've got some momentum going it would seem, based on the first quarter and no changes in the second quarter, you might be a little conservative.

Arnold, it is Jim.

I would say that we haven't changed our expectations for the balance of the year.

As we take a look at how the seasonality happens and taken a look at the prior year's weather, we still have some concerns that perhaps we did presell some of -- shoes and things like that and some of the spring goods earlier on this year that maybe we sold later on in the prior year.

So that we really haven't gone back and moved any of our expectations or changed anything compared to our original plans as we put them together.

So I would agree that we did exceed our expectations by a pretty good margin in the first quarter and we're quite pleased about that.

But still, as we take a look at the balance of the year, we're going to remain very, very cautious about how we're going to approach the balance of the year and our expectations.

Thank you.

David Mann, Johnson Rice.

Can you talk a little bit about the latest information you've gotten from your market research in terms of what you're doing at Value City?

David, it is John.

I think probably the most impactful thing that we have determined is that coming back to the idea that our customer does not need us to be chintzy cheap.

We've learned our customer is just looking for good value.

We have found by a thorough study of our merchandise content and sales that we've been selling some of the same product that we can find in our principal competitors for such a huge discount off of their lowest final bottom barrel clearance season price for the same units that we think that that research gives us the confidence that we can take the higher average unit retail, push our top line up and help our margin but yet still be able to be in line with the extreme value requirement of our customers.

I think that's the one biggest thing that we found that our pricing is so low out of line in relation to the same goods in other retailers.

Can you give a sense on what the trend was in traffic and average unit retail in the quarter?

David, it is Jim.

We actually saw in the first quarter -- on average we saw an improved customer count coming through the door at the department stores.

Our average unit retail was about flat compared to the first quarter of last year and as far as units were concerned we did see a -- they were a slight decline, very, very minimal.

So overall it was -- the slight decline in the unit count going through the register that really seemed to affect our sales volume for the period.

But again, as we take a look at that with the IMU that we were able to maintain throughout the quarter, I can't say that we want to maintain the negative sales momentum that we have going here, but we do seem to be able to sell units at a higher price.

So that's really one thing that we see improving for us as we go out throughout the balance of the year as we are again able to get this buying cycle cleared through us that we had at end of last year when this AUR issue first arose.

So do you think it's -- should we not expect you to be profitable in Value City in the second quarter?

I wouldn't say I wouldn't expect that.

I would say that it's -- it could go -- it's probably very close to a -- going to be close to a breakeven scenario.

David, this is Ed.

One of the things that's going to occur in the second quarter, with inventories in Value City being more tightly controlled there's less units to clear.

So as a result those less units to clear mean less units out the door.

The real key is going to be selling fresh product, new introduced product at fuller margins.

So I think that slightly less units is not necessarily a negative as you look at the second quarter because if you sell more first price units at a higher retail and a higher margin versus trying to clear what we ran into clearly a year ago when we had too many units as we were heading out of the season.

So I think it's the quality of that sale that's really going to be improved in the second quarter.

And then one last question for me.

The Leslie Fay brand that you purchased, can you just give us a sense on what your plans are for that and how that may or may not show up in the numbers and the guidance you've given?

It is John, David.

First of all, the decision about doing the Leslie Fay was an investment decision.

We just felt the pricing of the brand was such that we had to do it as an investment opportunity.

We see two possibilities whether we would just flip the brand out in a very short time frame which seems to be possible and it would have been a good investment.

But on the other hand, what our more probable outcome will be is we have a tremendous amount of licensee interest to license the brand for apparel and then after we have that in place we would license it out for the other categories; handbags and shoes and accessories.

I don't believe that the Leslie Fay brand will be a factor in our earnings statements for probably at least 12 months -- unless of course we would choose to flip it.

Should we expect to see Leslie Fay merchandise within each of your stores or just in Value City or how should we expect that?

It's a Retail Ventures investment and I think we should -- if we develop it through licensing arrangements we'll see it in some level of retail stores.

And what we'll see in Value City or Filene's Basement would just be to a great extent standard closeout business like we see work with other national brands.

The same thing once we get into shoe licensing it would end up making DSW the same as other national brands, but not more -- not a larger representation.

Thank you.

Julie Lerner, Metropolitan Capital.

Congratulations.

A quick question for you.

I'm just thinking about the Value City comps which have been I guess negative to a large extent.

Wondering if the gas prices are perhaps behind that and kind of I guess your concerns given that it is lower end customer and how that might affect I guess the third and fourth quarter as you get into that?

Julie, it’s John.

There's no question that DSW and Filene's Basement have some luxury elements or luxury characteristics to their brands and maybe the stock market or the Dow is more impactful to those retail brands.

And in the case of Value City issues such as unemployment, which of course trailed the recovery in the financial markets, has kind of been an anchor around us in the Value City business.

But as you mentioned, home heating costs and gasoline prices certainly affect the Value City customer much more than the Filene's Basement/DSW customer.

And it will continue -- I think it will continue and it has affected us, it will continue in second, third, fourth quarters.

But amongst ourselves we feel that we have -- there's things that we can do to impact the business positively more than what the gasoline prices are going to affect us negatively.

But yes, it is an additional challenge to that customer.

And I guess did you guys see a drop-off drastically in traffic starting in April when gas prices started to spike?

And does your forecast incorporate a similar traffic pattern or not?

We did not see what I would call a significant drop-off in the traffic patterns across any of the operating units, Julie, in April when -- as you said, when the escalation started.

But have we factored that into the balance of the year?

I would say that we have not taken that into consideration beyond where we did at the beginning of the year when we put together some of our estimates and things like that.

We certainly are very aware of it and are cognizant of it and watch these statistics very, very closely.

So as we proceed throughout the year, if we do see a market decline in the customer counts and believe that that's attributable to external factors that we can’t control we'll obviously make adjustments as we go throughout the balance of the year at that time.

But until that statistic starts to really be extremely impactful and beyond things that we can do, as John said, within our control to affect us that we think that we have some momentum going here and we're not at this point in time changing our expectations.

Great.

Well, congratulations.

Arnold Brief, Goldsmith & Harris.

Would you discuss your sourcing?

Any trends in sourcing over the last three, four months?

I'm thinking in terms of were there any unusual buys, number one?

And number two, have you opened up any new brand names that you previously didn't have -- any new relationships?

I think on the negative side on our buying in the case of department stores we really were late pulling the trigger on purchasing makeup goods at branded and unbranded makeup programs to start the season off with the great colors that were impactful for the spring/summer season.

We waited around too long for the closeout market and the closeout market never delivered color to us.

I think that's where from a sourcing standpoint we got ourselves on the negative side.

And on the positive side, I don't really feel there were any major brands added and really no -- this past quarter no substance of big special buys made that were impactful.

But what it is is it's been a methodical process of improving the grade of merchandise that we're buying from our existing vendors.

I think that's been continuing to improve for us and I think, as I mentioned earlier, our brands where we did jump all over the color of the spring/summer season, the bright colors, that sourcing was very helpful to our business.

Thank you.

And Arnold, for fall, as I said, it's still colors -- it's a version of colors, the darker version of colors.

But I think that all three brands will be well-positioned for fall with the upcoming color season.

(OPERATOR INSTRUCTIONS) It appears we have no further questions at this time.

Thank you, everyone.

Thank you, Connie.

And look forward to seeing everybody and have a good second quarter.

This concludes today's conference call.

Thank you for your participation.