Designer Brands Inc (DBI) 2005 Q3 法說會逐字稿

Good afternoon.

Welcome to the RVI third-quarter earnings release conference call.

As a reminder, all lines will be on listen-only mode, and we will conduct a Q&A session at the end of the call. (Operator Instructions).

Today's presenters are Heywood Wilansky and Jim McGrady.

At this time, I'd like to turn the call over to Jim McGrady so that we may begin.

Jim?

Good afternoon and welcome to RVI's discussion of the third-quarter fiscal 2005 operating results.

Before proceeding as always, I'd like to restate for you the Company's policy with respect to forward-looking information pursuant to the Private Securities Litigation 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, projections of the future are forward-looking statements.

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

Factors that could cause or contribute to such differences include but are not to the factors and risks discussed in the Company's Annual Report on Form 10-K for the year ended January 29, 2005, the S1 that was filed for DSW, Inc. and the other reports we file from time to time 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.

Again, today as you are aware, we announced the third-quarter net income of $54.2 million or $0.88 per share on a diluted basis.

This is compared to a net loss last year of $1.3 million or $0.04 per share on a diluted basis again.

For the 9 months and the year-to-date period, we are reporting a net loss of $72.8 million dollars compared to a prior-year net loss of 2.5 million.

The net loss per share for each respective period is $1.90 and $0.07.

The third quarter in the year-to-date periods include non-cash accounting adjustments of $64.8 million in income and $31.1 million in expense respectively related to the modification and instruments of the warrants pursuant to FAS 133.

If you remember, we discussed this at the end of the second-quarter conference call.

Total sales for the third quarter increased $46.4 million or about 6.6% to $746.1 million from $699.7 million.

Comparable store sales for the quarter increased 1%.

By segment, as we reported earlier, the Value City stores decreased by 1% for the quarter, DSW increased 3.5% for the quarter, Filene's Basement was positive 2.1.

Again, overall, we were positive 1%.

Value City's comp store sales decreased primarily due to declines in customer traffic.

The apparel and hardlines area had declines in the quarter and men's -- excuse me.

Our apparel categories in men's and children's also had decreases of 0.6 and 8.5%.

Ladies had an increase of 6.6%, and jewelry and shoes had increases over the last year of 7.8% and 6% respectively.

DSW sales were $302 million, which is a 15.2% increase in a quarter, which includes a net increase of 30 stores, 7 non-affiliated Lee Shoe departments and 2 Filene's Basement Lee Shoe departments.

This also includes a recategorization of two DSW/Filene's Basement combination stores, and this is consistent with the (indiscernible) practice we adopted earlier in the year.

Filene's Basement sales increased about 13.4% to $102.2 million, and this includes a net increase of two stores and the quarterly comp store sales increase I talked about a little bit earlier.

The merchandise categories of men's, ladies' and children's had comp sales increases of 3.5, 1.2 and 25.5% respectively.

The jewelry category had an increase of 15.7%, which was driven by watches and costume jewelry.

Also, the home goods area increased 2.8%.

Total gross profit increased $3.7 million to $283.7 million.

In the third quarter, gross profit as a percentage of sales decreased approximately 200 basis points -- year's quarter, which was 40%.

The decline in gross profit is comprised of a decrease in the Value City and DSW segments.

By segment, our margin was at Value City Department Stores, 35.4%;

DSW was 41.8%;

Filene's Basement was 35.6%.

And again, that total was 38%.

Value City's gross profit decreased about $14.3 million from the comparable period of 2004, and this is attributable to lower initial markups, a result of the planned shift in inventory strategy towards more brand-name merchandise, better assortments, and at compelling prices.

Value City also had some additional markdowns within the quarter related to increased point-of-sales discounts on clearance merchandise and initial price reductions for permanent markdowns.

At DSW, the gross profit increased $12.4 million to 126.4 million in the third quarter of fiscal '05.

The decrease in rate as a percentage of sales at DSW is primarily attributable to increased markdowns, which was caused by higher average retail unit on items in clearance and additional markdowns in the accessory category.

These negative factors were partially offset by an increase in initial markups.

Filene's Basement gross profit increased by $5.6 million.

This is attributable to new stores offset by increased markdowns in the ready-wear categories in slow-moving spring, domestic, and certain imported stock categories.

During the quarter, the initial markup remained comparable to that of the prior year.

Our total SG&A expense for the comparative quarters increased by $16.4 million to $290.4 million and as a percentage of sales decreased from 39.2% to 38.9%.

The 30 new DSW stores, 7 new of non-affiliated Lee Shoe departments added approximately $7.8 million and $300,000 respectively to our SG&A expenses, while the two new Filene's Basement stores added approximately 1.4 million.

Additionally as you may recall earlier this year, we reported a $6.5 million charge related to the theft of credit card and other purchase information from a portion of our DSW customers.

SG&A expense for the third quarter by division was as follows.

Value City Department Stores was at 42.7, DSW was at 36, Filene's Basement at 37, and our total was 38.9.

Again, as you will see on the statement of operations, RVI recognized non-cash income of about $64.8 million in the third quarter, representing the change in market value of the conversion and term loan warrants.

Our interest expense for the quarter decreased $6.7 million to $3.2 million. dollars.

This is primarily due to the decrease of $253 million in average borrowings during the 3 months, and it's also we saw a decrease in our average borrowing rate of approximately 0.6%.

Also as you remember, we used the proceeds from the DSW IPO to repay the term loans, part of the convertible debt, and a good piece of our revolving credit facility.

The effective tax rate for the 3 months was a negative 3.2% compared to 32.5% for the 3 months last year.

This reflects the negative impact and the change in the clear value on the mark-to-market accounting for the term loan warrants and conversion warrants that are included for book income but not for tax.

As we take a look at our balance sheet, inventory totaled $617.9 million at October 29, '05 versus $584 million last year.

This is an increase of approximately 5.7%.

The total increase includes approximately $21.2 million for the 30 new DSW stores and approximately $1.4 million for the new Lee's departments.

Our net working capital October 29th was 323.5 million compared to 279.3 million last year.

Current ratios were 1.6 and 1.7 respectively.

Adjusting for the warrant viability included in current liabilities, working capital would have been $372 million with a current ratio of 1.8.

Net cash used for capital expenditures was approximately (technical difficulty). -- hours in the prior year.

During fiscal '05, capital expenditures including non-cash additions included $9.5 million for new stores, $16 million for improvements in existing stores and $11.4 million for information technology equipment upgrades and new systems.

EBITDA in the third quarter was 70 million versus $22.1 million for last year's quarter.

Consolidated availability under our secured revolving credit facility at October 29th was $250.4 million.

Outstanding letters of credit totaled approximately $17.5 million at that time.

That really concludes the review of our third quarter of operations.

Looking to 2006 what we would see here for next fiscal year, we believe that again our comps at Value City and Filene's Basement will be in the low single-digit range, and we do expect to see a margin improvement in both of those divisions of approximately 50 basis points.

We also expect to see leverage from our sales improvements and also expense reductions that we are implementing throughout the organization, and we would expect to see Value City's SG&A decline somewhere in the 75 to 100 basis point range and be a flat-to-small improvement at Filene's Basement.

The operating profit for Value City and Filene's Basement on a combined basis is expected to be somewhere in the area of a negative 1% to a positive 1%.

I won't go any further than that at this point in time because it's very difficult.

Because it's very difficult to make an estimation of the change in the value of the warrants and also our tax rate that is very, very heavily influenced by the change in the value of our warrants.

Some other information that I want to notify you about is that (technical difficulty) -- which does not change the previous-reported statement of operations.

The adjustment will increase other non-current liabilities by approximately $22.8 million with a corresponding reduction in equity.

Again, this amendment is non-cash; it does not change RVI's previously-reported statement of operations and it has no impact whatsoever on DSW.

Additionally, beginning in the first quarter of 2006, we will begin to report comparable store sales on a quarterly basis.

This is similar to the change that DSW just announced, and we believe that it will provide consistency in reporting for the two organizations.

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

Thank you, Jim.

I want to spend just a few minutes talking about the progress we've made versus the outlined strategy that we've talked about in the past.

First of all, we'll talk about Filene's Basement for a moment.

The Basement is well on its way to executing the continued strategy of trying to be the high-end, off-price player.

Their comp business is quite good.

November was quite good.

Early December is also quite good; although, it's quite early in the month.

The manufacturing community continues to support them in their endeavors, and we see nothing to change from a strategic point of view.

And we expect to have a consistent comps certainly in the 2 to 3% range on a go-forward basis, and that's what we've been accomplishing year to date at this point through the end of November of this year.

So the real question then is, what do we do with Value City?

The Basement has a strategic initiative that we are comfortable with.

Results would seem to indicate that it's working the way we intended.

And that over time as the base of business gets bigger there, they will move to operating profitability as we open more stores and get a bigger topline base to run our SG&A against.

Value City was a different story, and we announced I guess early in this year a continuing initiative to move Value City from what we call the lowest-tier, off-price player to more of a mid-tier, off-price player competing with the likes of a TJ Maxx or a Marshalls and to some degree a cull to the Pennys for the mid-tier customer offering a great branded product at outstanding prices in a more comfortable shopping environment than they had done in the past.

We spent a small amount of capital to upgrade some of the softline fixturing over the course of 2005 to give us a better understanding of what we could accomplish with a better presentation of merchandise in addition to the change in merchandise mix.

The beginnings of a significant private-label business that will give us both exclusivity and also additional marketing opportunities and additional business opportunities.

We said that we would have improved ladies' business by the third quarter of 2005.

We thought we might have improved men's business (technical difficulty) -- third quarter (technical difficulty) -- and that the children's business wouldn't really get resurrected until the spring of 2006.

In addition, we gave up or exited businesses totaling close to $60 million in the home world, and we felt that we would not have increased sales in the home business until we anniversaried that strategic decision probably around August 1st of next year, perhaps a touch sooner.

And we exited businesses that we felt were not in line with trying to execute a mid-tier strategy, which included toilet paper and cleaning supplies and drugstore buyouts and things of that nature.

While we did a significant amount of business on it, it really pointed itself towards the lowest consumer that we had attracted.

We wanted to move off of that, and so it would be more to a mid-tier player.

So what happened?

When we look at -- I'm really going to be talking about season-to-date businesses from August 1st through the end of November and what happened.

First of all, the total business for the season to date is comping at a negative five-tenths of 1% through the end of November.

Now within that number, we have a softlines business that now is comping at positive 3% for the fall season, and that would include certain numbers.

The men's business is comping seasons today at almost plus 2, and they had a big increase in November of over 7% comps so that's really taking hold.

In ladies' accessories and in hosiery, they are ahead over 19% for the season with an increase of over 30% in the month of November.

In ladies' apparel for the season, they have an increase of over 8% on a comp basis.

Yet in the month of November, we had increase that was approaching 12% for the month of November.

In intimate apparel, we have a comp increase of one-tenth of 1%.

By the month of November, it was comping at over 10% positively.

In children's, we have a negative 4.7% comp increase going for the season; although, November was positive 7.7%.

I'm still holding with my opinion that children's really doesn't get fixed to speak until sometime in the first quarter of 2006, and some of the increase in the children's business had resulted in maybe markdowns to try to clear the inventory to get ready for 2006.

So those are all positive.

The total softlines business really has shown a lot of life, particularly as we get into the October/November time period as we've gotten more and more of our inventories in line with what we're trying to accomplish.

However, in the home business, where we said we would have significant decreases until we had (indiscernible) ourselves, we've accomplished that as well.

With the seasons, they decrease of about 12% and November at about 17% decrease.

Those decreases may not be as severe as 17 on a go-forward basis, but they'll be severe until we anniversary the exiting of the businesses that we've talked about exiting.

So by and large, the consumers voted that the change in merchandise mix in softlines; the entry into the private-label business, which we've been very successful with so far using brands such as Leslie Fay that we own the trademark on, has been well-received by the consumer.

The fixture change-out that we spent maybe 2 to $2.5 million in fixture upgrades across the 100 and some odd stores could get a light increase in fixture presentation in the softlines businesses -- has really worked well.

And the feedback that we are getting back from our consumers is very positive.

How do we know what else is happening?

In terms of charge accounts, the penetration of new charge accounts, last year we had applications for new charge accounts around 100,000.

So far, see that they would take it over 300,000 charge account applications, indicating store consumer interest in trying to become part of our family.

So all signs point to go.

We are very comfortable with the entry into 2006, so we just got to keep working on changing out the home business and following the strategy of increased branded and private-label softlines merchandise.

So with that, Jim, we could take any questions that people might have.

(Operator Instructions).

David Mann, Johnson Rice.

Jim or Heywood, can you talk a little bit about how you expect the mix changes you've done to affect the gross margin in the fourth quarter and in '06?

Well, in 2006, we expect to see as Jim said at least a 50 base improvement in gross margin at Value City, and we are quite comfortable with his estimate.

Okay.

In terms of the success that you're having on the softlines side, is that occurring across the store base?

Or are there still some stores that are sort of pulling up the rear that need to be addressed in some other way?

Well, there's always a few stores that are pulling up the rear.

But by and large, the softlines improvement is pretty consistent across the overwhelming majority of the stores, and we'll still be looking at selected stores at the end of the year to examine their performance and to understand what stores we'd like to exit and how we exit them.

But to this point, we have not finalized that analysis and we still got another 5 weeks or so to understand what the impact is on the change of mix on all the stores.

You alluded to the fact I guess that you're going through some review of expenses.

Can you give an idea of what kind of cuts you're already doing, what areas?

Are any of them at the store level?

There are some at the store level.

A lot of these have already been put in place.

We just haven't seen the impact of them yet on the year.

They started late in the third quarter.

Also, we'll see a lot of efficiencies once our JDA system is in place.

We hope to see a better planning and allocation process take hold for us.

Probably at the end of the second quarter, the actual system will be in sometime around the end of the fiscal year.

But again, it will take a little bit of time to get the history caught up with it and everything like that, so the information is comparable.

But we expect to see that; we expect to see some efficiencies come out of some cross-docking projects that will be put into place at the warehouse.

Again, we continue to review line by line our expenses throughout the entire organization.

One last thing.

When we charted oh maybe 8, 10 months ago what we thought we would want to accomplish and what we might expect if things were going pretty well, and almost exactly what we had hoped would happen is happening.

So we're pretty pleased, particularly as we see the October/November results come in and the reaction as we've gotten the inventories fully in place in a lot of these areas.

Absolutely.

Turning the ship has taken some time, but you're definitely accomplishing a lot of that.

Jim, on the expense reduction, is the bulk of next year's leverage just going to come from the expense reductions?

So the cuts are about 10 million?

I think it will -- the expense reductions will come from two places.

I mean the leverage will come from an increased sales base.

So as a percent, the sale won't improve on our fixed costs right there.

But again, I do expect to see some cross reductions of about the area that you just mentioned there.

Okay.

Then one last question.

Can either of you talk about any specific metric on the advertising?

You have upped that; it seems to be more effective.

Any other data on how that is helping to drive traffic?

Well, here's what's going on.

We've increased our spend -- some might say overspend -- on electronic media during this fall season to get the message out.

We have made the decision that we needed to continue to do that for 2006.

We'll probably be able to pull back from that level in 2007 and beyond.

But we want to keep pounding on the message that we're different than we have been; we're different products and different opportunities for consumers to buy.

So we'll probably spend a similar amount of marketing media dollars in 2006 than we end up spending in 2005.

It's a little high, but we definitely see increases when we run the electronic media on the Thursdays, Fridays, and Saturdays of the business.

Newspaper readership is certainly down across America.

We use newspaper inserts on Sundays.

So the Sundays, Mondays, and Tuesdays are usually a little tougher for us and the weekends are a little better for us.

Over time, we'll try to shift some dollars from one to the other as we get a chance to do that.

But we're still hitting the branding message out there, and that takes some time.

You need some consistency.

(Operator Instructions).

All right, Dawn, if there is no more questions at this point in time, I'd like to thank everybody for dialing in and being with us.

I wish everybody a happy holidays, and we'll be around.

Thank you again.

Thank you.

This call has been concluded.