Designer Brands Inc (DBI) 2005 Q2 法說會逐字稿

Good day and welcome to today's Retail Ventures Quarterly Conference Call.

As a reminder today's conference is being recorded.

Our discussion leaders are Mr. Heywood Wilansky and Mr. Jim McGrady.

And at this time I would like to turn the call over to Mr. Jim McGrady.

Please go ahead, sir.

Thank you.

Good morning everybody and welcome to our discussion of RVI's Second Quarter 2005 Operating Results.

Housekeeping.

Before I start 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 future -- of the future are forward-looking statements.

Actual results could materially different (ph) 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 10K for the fiscal year ended January 29, 2005, the S1 filed by DSW Inc. and other reports filed from time to time by the Company with the SEC.

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.

As you all are aware today we announced the second quarter net loss of $115.5 million or $2.96 a share on a diluted basis compared to a profit of $800,000 or $0.02 a share in the prior year quarter.

For the six months year-to-date period we reported a net loss of $127 million compared to a prior year net loss of $1.2 million.

The loss per share for each respective period is $3.38 and $0.04.

Each of these periods includes a non-cash accounting charge of $95.8 million related to the modification issues of -- issuance of warrants pursuant to FAS 133.

In according with FAS 133 the detached warrants with the dual conversion optionality met the criteria for classification as a derivative.

This requires that the warrants are to be recorded as a liability at their fair market values and marked to market thereafter.

I would also note that no tax benefit has been recognized in connection with this charge.

Future periods will also recognize this non-cash impact caused by the variations in the mark-to-market value of the warrants.

Adjusting for the FAS 133 charge, the net loss for the second quarter is 19.7 million or $0.50 a share.

Year-to-date it would have been 31.2 million or $0.83 a share.

As we take a look at our sales for the second quarter, total sales increased $35 million or 5.6% to 666.7 million from $631.7 million in the last year's quarter.

Comp store sales for the quarter decreased by 1.1%.

By business segment these were a decline at Value City in the quarter of 4.8%, an increase at DSW of 3.3%, and Filene's Basement improved 1.6%.

Value City's comparable quarterly sales decreased due to declines in customer traffic, and also we had declines in non-apparel hard line -- in non-apparel hard lines of 9.7% and in apparel of 5.1%.

Our Value City's apparel categories of men's and children's had decreases of 6.9% and 13.1% respectively and shoes were negative by 9.9%.

Ladies had an increase of 1.5% in the quarter and jewelry had an increase of 2.2%.

DSW sales were $276.2 million a 17.8% increase in the quarter which includes a net increase of 26 stores, 10 non-affiliated leased shoe departments and five Filene's Basement leased shoe departments.

This includes a recategorization of two Filene's Basement combination stores.

Again comp sales for the quarter improved 3.3% for DSW.

Filene's Basement sales increased 13.5% in the quarter to $89.4 million which includes a net increase of three stores and a comparable store sales increase of 1.6%.

The merchandise categories of men's, ladies' and children's had comp sales increases of 0.1%, 2.4% and 6.9% respectively.

Jewelry category had an increase of 11.3% driven by watches and costume jewelry.

Turning to our margin, total gross profit increased -- excuse me -- decreased $200,000 to $259.4 million.

In the second quarter gross profit as a percent of sales decreased 220 basis points to 38.9% from the previous year's quarter of 41.1%.

All three operating segments had declines.

Our gross profit as a percent of sales by segment was Value City department stores 36.9% in the quarter, DSW 42.4%, Filene's Basement 35% even, and again, the total was 38.9.

Value City's gross profit decreases $19.4 million from the comparable period last year.

This is attributable to lower initial markups as a result of the planned shift in strategy towards more brand name merchandise with a better assortment at better prices.

Value City also incurred additional mark downs in the quarter related to the point of sales discounts on clearance merchandise compared to the prior year's quarter.

Our DSW gross profit increased $15.9 million to $117.1 million in the quarter.

This is -- is from 101.1 -- excuse me -- 101.2 million in the second quarter of last year.

The decrease as a percent of sales is primarily attributable to increased mark down's caused by higher average unit retail prices on items in the clearance rotation and additional markdowns taken in the accessory catagory.

Filene's Basement gross profit increased by $3.4 million, which is attributable to new stores offset by increased mark down's in the ready to wear categories, slow moving spring domestic goods and certain imported stock categories.

During the quarter the IMU remained comparable to the prior year's markup.

SG&A.

Our total S -- selling, general and administrative expenses for the comparative quarters increased $15.9 million to $265.5 million.

And as a percentage of sales increased from 39.5% to 39.8%.

In 26 new DSW stores, 10 new leased shoe departments, added approximately $11.4 million and $4 million respectively to the SG&A expense while the three new Filene's Basement stores added approximately $4.2 million.

SG&A as a percent of sales by operating division are Value City department stores 43.7%, DSW 35.1%, Filene's Basement 43.4%, and, again, for the quarter it was 39.8%.

Again, as discussed earlier, we -- we recognized that $95.8 million non-cash charge, a result of the application of FAS 133, and just so everybody is aware we've classified this as a reduction of Value City's operating profits in our segment reporting.

Operating.

The operating results by segment were Value City had an operating loss of $113.5 million, DSW had an operating profit of $20.7 million, Filene's Basement had an operating loss of $5.3 million, and total, it was an operating loss of $98 million.

Our net interest expense for the quarter increased $500,000 to $10.4 million.

The increase is due primarily to the write-off of unamortized debt issue costs for the Company's term loans and original revolving credit facility of about $2 million and an increase in our weighted average borrowing rate of about 6%.

This is partially offset by a decease of $60.5 million in average outstanding borrowings.

Taking a look at our tax rate.

The effective tax rate for the three months in the quarter was a negative 7.2% as compared to 51.3% for the prior year.

This tax rate reflects the negative impact of a non-deductible warrant amortization, the unrealized loss on warrants included for book income but not for tax, and the write-off of $5.2 million of deferred tax assets no longer deductible as a result of changes in state tax regulations in Ohio where we are a main taxpayer.

As we turn to our balance sheet, inventory totaled $559.1 million at July 30, 2005, versus $517.5 million last year.

This is an increase of about 8%.

The total increase includes approximately $23.4 million for the 26 new DSW stores, approximately $2.3 million for the leased departments and $6.6 million for the new -- three new Filene's Basement stores.

That working capital at July 30, was $202 million compared to 293.2 million last year.

The current ratio was 1.4 and 1.9 respectively for those periods.

If we adjust for the $113 million warrant liability included in current liabilities working capital would have been $315.3 million with a current ratio of 1.8.

Net cash used for capital expenditures was approximately $24 million year-to-date while depreciation and amortization for the year totaled $28.9 million.

During fiscal 2005, our CapEx includes $6.6 million for new stores, $9.5 million for improvements in existing stores, and $7.9 million for information technology equipment upgrades and new systems.

EBITDA in the second quarter was a negative $82.6 million versus $25.1 million last year.

Again, adjusting for the FAS 133 charge, EBITDA for the quarter and 26 weeks would have been 13.2 million and $18.2 million respectively.

Our consolidated availability under our secured revolve credit facilities, at July 30, was $269 million.

Direct borrowings at that time aggregated $49 million while $41 million of letters of credit were outstanding.

Our current availability is $278 million.

That concludes our historical review of second quarter operations.

As we look forward to the remainder of fiscal 2005, we do anticipate opening a grand total of about 30 DSW stores in fiscal 2005 and we do not anticipate any additional openings for Filene's Basement beyond the one store that we've already opened.

Depreciation and amortization expense is again is expected to be between 59 to $61 million.

Heywood will address some of the Value City merchandising and marketing plans we have instituted and are completing.

The communication of the new Value City merchandising and our ability to attract and retain customers is going to be an integral part of our ability to execute the strategy.

We believe it is too early in our program to evaluate the effectiveness of our marketing and the Value City customer response.

Accordingly at this time we will not be providing guidance for the balance of fiscal 2005.

We do plan, however, to provide in our -- in our third quarter conference call guidance for fiscal 2006.

At this time, I would like to turn the call over to Heywood.

Thank you, Jim, and good morning everyone.

The second quarter financial results for Retail Ventures were in summary not up to expectations.

Overall when compared to the prior year, comp sales were down, gross margin percents were down, net profits were down.

The Value City department store segment was the chief source of the disappointing results.

And the second quarter for Retail Ventures could best be described as a transition period.

And as such, we did not expect to have an immediate improvement.

And as we said early on in our transition we needed to be further along in the process before benefits are realized.

For example in the first quarter of 2005 over 85% of the merchandise that was sold in Value City was bought under the previous strategic initiatives, former regimes.

In the second quarter north of 55% of the product offered for sale was bought under the old thought process.

For the third quarter of 2005 about 15% had been pre-committed and for the fourth quarter it's a negligible number.

And this was certainly the case in Value City in the first quarter this year.

The new leadership team at Value City developed a new vision for the division.

Since that time Value City has been working diligently to transform the division to achieve the vision.

Because this vision requires such a comprehensive change in the way we do business at Value City, it takes time to get all of the pieces in place.

The most important decision we had to make was identifying the strategic initiative of who or what Value City was going to be, which customers we were going to serve, and then what decisions had to be made to support the change in strategic direction.

And to try to put it simply, the previous five years or so, the thought process at Value City was that cheaper was better.

If you could buy one year old merchandise for $5 or five year old merchandise for $1 you bought the five year old merchandise because the price was cheaper.

Even if it had bad colors, bad sizes, bad fashion.

They believed that they could out Wal-Mart Wal-Mart.

In looking at the business when we arrived here in late in the fourth quarter of 2004, we really evaluated that that strategy really could not succeed in the long-term basis and that was a -- that was a suicide mission trying to -- to be better than Wal-Mart on everything.

It didn't make any sense.

We looked at the Company and really identified a repositioning for Value City which really moves it off of what I call the bottom tier into the low to mid-tier along with players like JC Penneys, or Kohl's, or Burlington Coat Factory, or TJX, or Marshalls.

Stores in that group.

And in order to -- to accomplish that change we had to make numerous strategic decisions to kind of get us in that -- in that vein.

Some of the new initiatives, but not in any particular order that we had to kind of institute in order to address this mid-tier customer was, first of all, we had to hire some new buyers that understood that -- that business position.

We had to development new vendor relationships with people that we hadn't done business with either ever or for a long period of time.

The new target markets needed to be identified and new merchandising strategies needed to be created and put in place to address the change in targeted markets.

One of the things that the prior team, I guess, didn't believe in was private brand development.

They -- they felt that they could buy merchandise cheaper in the market.

Well, you could, but it would be old, and it might have bad colors, bad sizes and bad fashion.

And we have now identified and started a pretty significant private brand development initiative inside the Company, as well, to help not only with -- with merchandise and sales but also with margin.

New fixturing and strategic signing needed to be ordered and placed in the stores, more in line with the Kohl's or JC Penney's type presentation.

A significant amount of old merchandise needed to be cleared to make way for the new merchandise.

New policies, procedures, disciplines and store standards needed to be put in place at the store level.

Logistics needed to be reconfigured.

New technology was necessary.

A new marketing program needed to be developed and actually it's -- the -- the -- it's being implemented as we speak over the last couple of weeks.

Customers needed time to recognize the changed strategy and to change their shopping habits.

And we really needed to try to re-attract the mid-tier customer that was once the main customer at Value City without chasing away every customer that we had that they had developed over the years.

The previous mid-tier customer had kind of been chased out of the store by the merchandise array that they had put in the stores over the previous five years.

As a result although great progress was made in transforming Value City not enough of this new vision was in place to positively impact the second quarter.

For example, if you talk before the new merchandising and marketing really didn't start until the third quarter and will be fully in place for the fourth quarter.

One thing we do know is that the pieces of the vision that are furthest along in development are starting to show improvement.

For example we have already seen the beginnings of a turn around in ladies' apparel, shoes, and jewelry, which were the areas that we tackled first.

Sales are showing positive increases in all of these areas since the beginning of the fall season.

Men's apparel is the next and over the last week or so they started to show some improvement with the new receipts coming in.

And we expect similar positive results from the men's area by the beginning of October.

The children's and the home goods departments are the final merchandising areas to be tackled.

Once their transition is complete we expect a turn around there as well.

Children's probably won't happen until the spring of 2006, and home probably is similar, based upon changing out of merchandise mix and getting new merchandise mix in that would better support this mid-tier thought process.

DSW also went through a major change in the second quarter from being a wholly owned division of RVI to becoming an independent public company.

The IPO has had a significant positive impact for both DSW and RVI.

The IPO unlocked shareholder value for DSW which the market did not fully realize when DSW was hidden within the RVI portfolio.

In addition the IPO provided DSW with a balance sheet which should allow them greater flexibility in obtaining their strategic goals.

RVI benefited by having the improved shareholder value of its controlling ownership of DSW reflected in its own stock.

In addition the proceeds of the IPO allowed RVI to substantially reduce its debt and the high interest charges associated with that debt.

It also provided the means to fund some of the transition activity at Value City.

Filene's Basement continues along its path of transformation from a turn around story to a growth story and it is anticipated this segment will reach EBIT profitability in 2006.

Filene's Basement is preparing its infrastructure for return to growth by revamping its logistics capabilities and by moving to new divisional headquarters that will make operations more efficient and provide room for future growth.

The RVI corporate group is also undergoing a transformation from a centralized retail support center to a more decentralized structure.

It is anticipated that this will cut out significant redundancies between corporate and the divisions and allow the retail operating companies greater flexibility in reacting to the market place.

The benefits of this change should be realized over the next six months.

As you can see there are many changes taking place at RVI and at its retail brands.

And we anticipate that these changes will positively impact performance in the near future.

We believe that the foundation has been put in place, now we need strong execution and we need some time to get the consumer to understand what we've done and react to it.

And then we can begin to build upon these changes.

And now I'd like to open the call to any questions for Jim or myself.

[OPERATOR INSTRUCTIONS] David Mann, Johnson Rice.

Good morning, David.

Mr. Mann, your line is open.

Hello?

Hi, Dave.

I'm sorry about that, good morning.

In terms of Heywood, your last comments about the cost structure and RVI corporate, can you give us some sense in terms of, you know, what kind of range of dollar savings we might be looking towards.

Dave, I think actually, I could probably give a little bit better idea there.

We're taking a look at some of our back-room operations and obviously as we get our inventory management system in place, that's going to be fully operational in -- in the first quarter of next year we'll start to see benefits from that.

We'll start to see some of the, you know, -- kind of go into more of a -- a maintenance mode rather than a growth mode on some of these IT projects that we have had on -- in place for quite a period of time.

I would think actually, our goal, right now, is to take, you know, approximately 6.5 to $7 million out of the RVI function.

Not all of this cost is going to -- savings is going fall directly to the bottom line because some of it will shift to the various operating segments.

But I would say, that you know, with the efficiencies that we should recognize from the other system's implementations and warehouse type systems that we're putting in place and hope to have in place in -- by -- by the end of the first quarter of next year, if not before, that we -- we should certainly be able to see that amount of savings on an annual basis.

A second question in terms of real estate, as you transform or are in the midst of transforming the mix, are you identifying some stores that you think will not fit that demographic that may need to be closed or are on track to lose money on a four-wall basis and if so, how many and how big of a -- of a drag might we be talking about?

David, we have 114 stores today.

This change in merchandising strategy to upgrade into -- into more of a mid--tier placement is clearly not going to be effective in all 114 stores.

We're going to try to evaluate over the course of the season which of those stores either cannot or will not react based upon customer profile or geographic location or things of that -- or site location.

And I think that we're taking a pretty hard look at whether -- whether it's one store or 30 stores that don't react, to look at taking action on those stores and perhaps jettisoning those stores and reinvest in the existing stores that do react to the change in strategy.

And the time line to sort of decide on -- on some kind of decision on that?

Is that the end of this year, or would it be later than that?

I think we'll have a pretty good sense by the end of 2005 when we go through the fourth quarter when all of the merchandise is really put in place, we'll get a pretty good sense over the course of the fourth quarter of who is not going to react at all, and we'll take action on those stores.

Okay, and you mentioned the number 30, should we assume it could be as much as 30?

Or --?

You know that's just a -- I don't know David.

I'm trying to not to get ahead of myself in the guesswork.

We know it's more than 1.

We don't know what the high number is, and we're going to find that out over the course of the next four, five months.

And then one last question.

You gave a few categories where you -- your know, in terms of ladies' and men's and those categories, as you are seeing the -- the response to the transformation of merchandise.

Jim, maybe can you give us a sense as to what percentage of sales these are so we can gauge, you know, how -- how far into the -- the business you have had some effect already?

You know, actually as -- as -- as we take a look at it on -- on a year-to-date basis, and the men's -- the men's category is approximately, you know, 18%, 19%.

Women's in total is probably about 25 to 30% of the total sales, and this is just year-to-date.

Obviously that -- that skew gets a little bit higher as we go through the balance of the year and get into the -- into the holiday season.

But right now that's -- that's about where we're -- where we're -- where we're looking at.

Okay.

Great.

Good luck, guys.

Thank, David.

[OPERATOR INSTRUCTIONS] Lee Backus, Buckingham Research.

Yes, Heywood, you know, Jim, you talked a little bit about inventory levels, Heywood could you talk more about the inventory that currently exists at Value City department stores, how much of that has been transformed into -- into merchandise that you think is appropriate?

What kind of mark down levels still exist in that inventory?

Well, you know, I would say that about -- about 70% of what we sold or received in the first and second quarter was merchandise we probably wouldn't want to have on a go-forward basis.

And add that to the receipts that you've gotten into August and the beginning of September and take out the mark down's that we have been taking along the way, I would say we probably have in the ladies' area about 65% of the inventory now in place where we want it and 35% that still needs to be run through.

Now you're always going to have a certain level of clearance regardless of the time period so it's not as excessive as 35% against zero, but it's probably 35% against maybe 15% would be a better number of conversion out merchandise that you'd like to get rid of.

So we still have to deal with some of that over the course of September.

In the men's area it would be a little less than the ladies'?

So if ladies' is 65%, men's might be at -- at 45 or 50%.

Accessories is probably in the same category as men's, and they are doing pretty well.

Jewelry is -- is less of an issue from a product mix.

Although it was an issue, but it's probably 75% there and 25% not.

And home is the big issue with a -- with a pretty significant amount of product that we have to reconfigure and reconvert, so they are probably the weakest of the group at this point in time.

Also, could you talk a little bit about the current warrants that exist out there.

The plan for them.

I know there's a fairly large short position in the stock.

Could you discuss that and the -- and the warrants that currently exist [under] it with Cerberus?

Jim.

Cerberus, what -- what action that they're -- they're going to take at this point in time I don't -- I don't have a firm direction on right now, Lee, to be honest with you.

You know, if you take a look at what happened in -- in the transition with the -- the payment of the term -- term debt and the payment of the convertible debt, the $25 million payment was we modified those loans.

You know, we obviously switched over to -- from a convertible feature to warrants.

At the end of the day, the Company is probably in the same position as it was before.

So I -- you know, right now, I -- I can't really -- really tell you 100% what Cerberus' intention is to do with the warrants.

I don't know.

Also you could discuss -- you discussed some of your systems, inventory systems.

Maybe you could discuss the balance of your systems and your distribution center, how efficient it is now, and how pleased you are with -- with the service you are getting from -- from the distribution center.

Well, right -- right now -- and I'll just focus my answer on Value City because I can say that the Filene's Basement and DSW operations we are, you know, very satisfied with how they -- they are operating.

We obviously always try to make it better than what it is.

We have improved the turn -- the -- the days -- the floor in the Value City operations.

We're getting down to pretty close to a 14-day turn if the product is brought in and it's what we call clean.

It will pass through the system.

It's actually less days than that.

I'm giving myself a little bit of room for items that are probably almost clean, where we don't have to handle them.

So we have got a lot more efficient.

We've -- we have been working a long time as everybody is aware on our JDA merchandising system, and we are getting very close, again to having that implemented.

We're starting to bring up pieces of it as we go through the -- the third quarter here.

It's doubtful whether we're going to do anything that will be too dramatic in the fourth quarter just because of the fourth quarter being so significant to us on our -- on the systems side of the business.

But we do anticipate to have our JDA merchandising system fully in place by the end of the first quarter of '06, and hopefully, it will be, you know, not -- not the end, it will be earlier than that.

We -- we have made some commitments on the warehousing side as far as capital expenditures.

To put in high -- you know, some high-speed [sortation] and do some studies to help even make our -- our systems more efficient and maybe combine a couple of warehouses that we have, something that's under -- under review right now.

I'll let you know where that goes as we get a little bit further doing the road with it.

So I would say that we have made significant improvements in our warehousing and systems work over the past year, without a doubt, very significant improvements.

It is where -- exactly where we would want it to be today?

No.

But I think that we're rapidly getting to a point where we're going to be where we want it to be.

You know, one thing, Lee, I guess it was once upon a time six to eight weeks to get soft lines through the system and now we have a bunch of departments operating at a 14 day or less turn around.

Thank you.

But, Lee, one other thing, if you want to know about what Cerberus' intent is, why don't you just call them and let us know.

Yes.

Okay.

I'll try that.

And we have no other questions at this time.

I'll turn the call back over to our presenters for any addition or closing remarks.

Alright.

Thank you everybody.

I -- I appreciate it.

I will be available all day if anybody wants to -- to give me a call.

I do appreciate your support, I know Heywood says the same with me here.

Absolutely.

And again, thank you everybody, have a good day.

Thank you.

This does conclude today's conference.

We thank you for your participation.