Designer Brands Inc (DBI) 2006 Q1 法說會逐字稿

Good afternoon.

Welcome to the Retail Ventures, Inc. first-quarter results call. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn the call over to Mr. Jim McGrady so that (technical difficulty) begin the call.

Thank you.

With me on the phone is Heywood Wilansky, our CEO.

Again, good afternoon, everybody, and welcome to our discussion of RVI's first-quarter fiscal 2006 operating results.

Before I begin, I would like to restate to 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 those 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 fiscal year ended January 28, 2006 and the Form 10-Q that we will be filing for the period ended April 29, 2006 -- also, 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 we take no obligation -- or assume no obligation to update any such forward-looking statements.

As you know, today, we announced a first-quarter net loss of $59.6 million or $1.45 per diluted share.

This is compared to a net loss of 11.5 million or $0.32 per share on a diluted basis in the prior year.

The first quarter includes this year a non-cash accounting adjustment of $59.4 million of expense related to the modification and the issuance of the warrants last year.

No tax benefit has been recognized in connection with this charge.

If we were to adjust for this charge through our P&L, our non-GAAP net loss would be $200,000, and we would have a flat earnings per share to report.

Total sales for the first quarter increased $41.5 million or 6.1% to 721.5 million from $680 million last year.

Comp store sales for the quarter increased 3.5%, and were positive in each business segment.

Comp sales by segment were Value City, 2.5%;

DSW 4.2; and Filene's Basement, 4.6.

The increase in comparable store sales at Value City is comprised of increases in men's, women's, jewelry, and shoes of 10.5%, 12.1%, 3.6%, and 7.1%, respectively.

There were decreases in the comparables sales of nonapparel hardlines and children's of 11.4% and 10% respectively.

DSW sales were $316.5 million, a 12.3% increase in the quarter, which includes a net increase of 27 stores and 10 nonaffiliated leased shoe departments.

The merchandise categories of men's, women's, athletics, and accessories had increases of 1.7, 5.5, 3.2, and 3.1%, respectively.

Filene's Basement sales increased 4.4% for the quarter to $90.6 million.

This includes a net decrease of one store over the prior-year period and a comparable store sales increase, as I mentioned earlier, of 4.6%.

The merchandise categories of men's, ladies, children's, and jewelry had comparable sales increases of 4.5, 1.1, 9.7, and 0.3%, respectively.

Total gross profit in the quarter increased $22.2 million to 290.6 million.

In the first quarter gross profit as a percentage of sales increased 80 basis points to 40.3% from the previous year's quarter of 39.5%.

The increase in the overall gross margin is attributable to positive comparable margin results at the Value City and Filene's Basement segments.

Gross profit as a percent of sales by segment were -- Value City, 38.3;

DSW, 43.5; and Filene's Basement, 35.9.

Value City's overall margin rate increase is attributable to improved initial markups and departments converted to the new merchandising strategy that focuses on a larger presentation of brand-name merchandise, a timely seasonal presentation, and better assortments at compelling prices.

The segment also incurred fewer markdowns related to merchandise changes as compared to the prior year's comparable quarter.

At DSW, the gross profit increased 14.6 million to 137.6 million during this quarter.

The decrease in rate as a percentage of sales at DSW it attributable to the increased markdowns partially offset by an increased initial markup and a reduction in the internal shrink accrual rate compared to the prior period.

Filene's Basement gross profit increased by $4.6 million, which is attributable to increased IMUs and a decrease in markdowns from the prior year's rate due to reduced fall clearance merchandise that we carried over and some markdowns in the previous year.

SG&A for the first quarter ended April 29 -- for the comparable quarters decreased by $1.8 million to 277.5 million, and as a percentage of sales decreased from 41.1% to 38.5%.

The 27 new DSW stores and 10 new nonaffiliated leased shoe departments added approximately $6.4 million and $300,000 respectively to our SG&A line, while the one new Filene's Basement store that we have not yet opened had preopening costs of about $600,000 in the first quarter.

Preopening costs decreased by a total of about $1.3 million during the quarter, compared with the three months of last year.

Also, you may recall during the three months ended April 30, 2005, we recorded a $6.5 million charge related to the theft of credit card and other purchase information from a portion of our DSW customers.

Value City and Filene's Basement improvements in SG&A as a percentage of sales is primarily a result of fixed costs and occupancy and salaries being leveraged against the improved current period sales.

Preopening costs decreased in Filene's Basement by approximately $700,000 during the first quarter of 2006 compared with the prior year.

SG&A as a percent of sales by division was -- Value City, 41.7;

DSW, 34.7;

Filene's Basement, 42.5.

As you also note, as we discussed earlier, we recognized non-cash expense of 59.4 million in the first quarter, representing the change in the fair value of the conversion and term loan warrants.

This change has been classified as a decrease to the Value City operating profit.

Operating profit by division for the first quarter -- Value City was a negative $69 million.

If adjusting for the $59 million of warrant expenses that's in there, that was a negative $9.6 million.

DSW was 27.9 million, and Filene's Basement was a negative 3.6.

If we take a look at these numbers and compare them to the prior year, Value City's operating loss was 16.7 million;

DSW was a profit of 15.1 million; and Filene's Basement was negative 7.8 million.

As we take a look at our interest expense line for the quarter, it decreased by $7.1 million to 2.5 million.

The decrease is due primarily to a decrease of 165.5 million in average borrowings during the three months compared to the three months of the last year, and a decrease in our weighted average borrowing rate of approximately 1.6%.

Our effective tax rate for the first quarter of 2006 was a negative 12.4% as compared to 39.9% through the three months of last year.

The negative tax rate reflects the impact of the change in fair value on the mark-to-market accounting for the warrants, which are again, not tax-deductible.

Turning to our balance sheet, inventory totaled $541.7 million at the end of the first quarter compared to 541.6 million at the same time last year.

Net working capital was 289.9 million compared to 247.8 million in the prior year.

Our current ratios were 1.1 and 1.61 respectively for the two years.

Adjusting for the warrant liability included in current liabilities, working capital would have been $410.8 million with a current ratio of 1.92.

Net cash used for capital expenditures was approximately $6.9 million this year, while depreciation and amortization for the year totaled $13.8 million.

During this year, capital expenditures, including non-cash additions, included $1.9 million for new stores, $7 million for improvements in existing stores, $500,000 for office and warehousing, and $1.6 million for IT equipment and upgrades with new systems.

The primary decrease in capital expenditures is due to the decrease in new store openings during the three-month period of this year compared with the three months of last year.

EBITDA in the first quarter was a negative $35.7 million versus a positive $5 million last year.

Again, if we were to adjust for the warrant charge, EBITDA for the quarter would have been $23.7 million positive.

Consolidated availability under a secured revolving credit facility at the end of the quarter was $220.1 million.

Presently, our current consolidated availability is $196 million, which is comprised of $61 million under the RVI revolver, and $135 million for the DSW revolver.

That concludes the review of the first quarter.

As we look forward to the balance of fiscal 2006, we are confirming our previous estimates that we believe comp store sales at Value City and Filene's 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 expense reductions that we're implementing throughout the organizations.

We would expect to see SG&A to decline somewhere in the 50 to 75 basis point range at Value City, and see a small improvement at Filene's Basement.

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 this at this point in time, because it is very difficult to make an estimation of the change in the value of the warrants.

And also, as I pointed out, that change in value very heavily influences our tax rate.

As another matter, in mid-May we filed a registration statement for the issue of mandatory exchangeable notes.

These are also known as PIES.

This filing is presently under review by the SEC, and we are awaiting comments, if any.

The PIES will be exchangeable into DSW shares presently owned by RVI.

Details of the filings are on the EDGAR website for RVI.

We do not expect the issuance of the note to be accretive to operations in fiscal 2006; however, we do expect a positive impact in all future periods.

Tomorrow, we will be filing our first-quarter 2006 Form 10-Q.

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

Thank you.

Hello, everybody.

First of all, I guess we're going to try to figure out when we do these calls how to maybe have an hour between when we release our release and the actual call to give you more time to kind of peruse it in advance.

I apologize for the shortness of the time period you had to get up to speed.

I want to expand a little bit on what Jim had to say -- although, frankly, Jim has talked a lot about the things I would normally talk about.

And at DSW, they had their earnings call yesterday.

We're not going to really talk much about them.

They have had their call, and it was quite a positive reaction to the result that they had achieved.

In Value City, we're actually pretty pleased with what is going on.

And as I told everyone in the past, we're going to try to be more specific about what is happening on a family-of-business basis to give you an idea of what is working based upon the change in strategy and the implementation of that.

So for the first quarter in Value City, they had a 2.5% comp overall, which was I think quite pleasing to most people who had thought we would do worse than that.

But the important things to look at are what happened on a family-of-business basis.

So in the men's business, men's picked up over 10% comp for the first quarter.

And that is a significant number.

And some of the breakdown -- some of the highlights -- in men's basics, socks and underwear -- they picked up 2.5% -- not a particularly exciting area.

Pants and jeans and shorts were kind of flat for the first quarter.

But sport shirts were up 16%.

That is where the fashion starts to come in.

Mid shirts, a lot of fashion -- that picked up 40%.

Young men's, also a fashion area, picked up 15%.

Big and tall -- we have tried to become more fashionable in big and tall areas.

They were up 17%.

Dress shirts, ties, and accessories, kind of a 3% increase -- not very exciting.

And in men's clothing, which includes suits and outerwear, a 20% increase for the first quarter.

So a very good performance on the men's business, which started turning around last October, and is continuing in that vein.

In the ladies' accessory business, that area picked up over 26% on a comp basis in the first quarter.

So a continuation of a very hot trend, and it has been trending that way for at least six months.

And we're very positive and pleased with what happened there.

Part of the change in that business related to the change-out of fixturing to better present accessories, to make the handbag department look much more appetizing to the customer.

And they seem to really respond to it.

In ladies' apparel, another big area for us, we picked up over 12% comp for the first quarter.

And some of the highlights in ladies' apparel -- in swimwear, we picked up 20% in the quarter.

In ladies' suits and dresses, we picked up 6%.

In juniors, we picked up just about 10% on a comp basis.

In misses' tops, which included both blouses and knitwear, we picked up about 20%.

And related separates and also active sports, we picked up 19% comp.

In large sizes -- women's sizes, we picked up only 2% comp -- that business not as fashion driven currently for us as we would like it to be.

And in better sportswear, all the better goods we put into the store, we picked up about 30% comp in the first quarter.

So again, a very strong reaction.

In intimate apparel, we still haven't figured that out.

We dropped 11% comp for the first quarter.

We're not happy with it; still working on it, and we anticipate that we will be right for fall and still have lots of things to do there.

In kids, we dropped 10% comp.

And kids we have had a problem with for a long period of time.

The difference here though is that in kids, the gross margin was up around 800 basis points over the previous year.

So last year, while we did much more business, we gave it away.

We have actually made the margin dollars in kids doing a lot less business, as we try to get that business healthy on a go-forward basis, and we're anxious to look at the back-to-school period to see if we have made the progress we expect to make.

The home store dropped a little less than 9% comp.

A lot of that has to do with the businesses we jettisoned in August of last year.

We have talked with about -- we have given up about $60 million in businesses that no longer exist in the Company, about half in fall of 2005, half in spring of 2006.

We've only got about a $1 million overlap in August and September to get past.

And then we are kind of free and clear against the businesses we have given up.

And as we remix the home businesses, in the -- what we call BCM, which included the business we gave up, that area dropped 35% comp.

But domestics, textiles, we'll be changing the inventory mix to a better quality, more focused assortment that picked up over 1% in the first quarter.

Housewares dropped 3%.

They had some business pieces that they have given up.

And in seasonal, which included summer furniture and products of that category, we picked up 15% in the quarter.

In towels, where we were able to attract the key guy from Bed, Bath & Beyond to join us, he has made difference already.

Towels went from a negative to a plus 1% comp for the quarter.

And in -- what I call home decor and giftware, an area of growth for us that we're putting a lot of money behind on a go-forward basis we picked up 11% comp, as well as in flooring, which included both area rugs and hard flooring, we picked up 10% comp as well.

In general merchandise, which included a lot of the goods we gave up, we dropped 99%, and that hints why the home business looks as bad as it does.

We think that when you get to August, you're going to start to see positive comps there.

Footwear had a positive comp of 7% for the quarter.

And jewelry and cosmetics combined picked up 10% in the quarter.

So a lot of positives in the areas we have attacked.

Nothing has changed from what we have thought about.

We still have three businesses to fix -- home, kids, and intimate apparel.

We think home is right starting in August.

We hope kids is right for the back-to-school period.

And intimate apparel we're still working on.

In other elements there, when you look at it, we have Value City stores broken up into 24 markets.

And in the first quarter, we had six negative comps and 18 positive comps on a by-market basis.

That is a big change from where we had been where we had a dominant number of markets being negative.

And the ones that are negative were negative 1, negative 1, negative 2, negative 1, negative 1.

So again, pretty close to at least a breakeven in the bad markets as we have it currently, and of course, a lot of positive markets -- telling us that the things we're doing for the most part are working.

The game plan we talked about a year ago and six months ago and three months ago -- we haven't changed a thing.

It's the same game plan.

We're comfortable with the direction we have picked to be moving Value City into the kind of the midtier, lower midtier level.

We're getting a very strong response on the areas we have actually touched and fixed for the most part.

And we're looking forward to a very strong fall season once home anniversaries, all the give-ups that we have started a year ago.

Interesting thing is in our clubs and credit card business -- in 2004, we took 145,000 applications.

In 2005, we took 378,000 credit card applications.

And typically, in 2004, the approval rate was down around 40%.

And as we attract a slightly better class of customers, the word gets out, the product mix has changed.

In 2005, year-to-date for the first quarter, they took 82,000 applications and had an approval of 44,000.

In 2006, we've taken 100,000 applications and we have had 54,000 approved.

So both 2005 and 2006, the approval rate -- back over 50%; this year so far, 54%, and that is a big improvement in approval rates on a historical basis.

The other thing that we did to try to drive the business was created a loyalty club called V Plus.

And if you -- anyone signs up, there is no turndown on it.

And if you're a club member, you get five mailings a year -- one a quarter and one for your birthday.

Last year, we had no members of this club until October, when we started this up.

This year, now, we have just passed the one millionth signup.

So we now have 1 million members of the V Plus club, and they get a mailer a quarter plus one on their birthday.

And what we have had so far as we've gotten more into it is the quarterly mailers -- we're getting around a 12% response to the offering in that mailer -- a very healthy response on that.

The birthday mailer we're getting between 15 and 18% response, so even a better return on that direct-mail opportunity that we're doing.

So we think as we continue to sign up more members, we will get more and more people used to shopping with us more frequently, they will take the offers, they will come into the store, and kind of like DSW, start to become a much bigger share of our business and be able to help drive our sales.

Actually, the average -- I just kind of looked at this.

The average market basket for the company is somewhere in that $45 range, and the average market basket for the V Plus customer is in the $53 range.

So a pretty healthy increase in market basket, and also an increase of about 12% in units bought at the same time.

So this is a critical [customer] for us to drive our business long term.

We continue to be happy with the new staff we put in place.

We have changed out a significant number of people at Value City.

And they're working well together.

And we're quite happy with it.

And just a brief recap -- we have a new head of ladies', new head of men's, new head of home, a new number two in home, head of visual -- the president, obviously we have changed out the private brand.

The product (indiscernible) person was changed out, the marketing person, the head of stores -- a lot of new people that have been in their jobs for the most part between six months and a year.

And it takes a while for that to gel, and we're just getting to that point now where everyone is gelling together.

So we are very comfortable and positive with what we have done from that piece of it.

Value City, as I said, we're going to evaluate Value City's results once we get past the fall season to understand how many stores respond to the change in direction and merchandise mix.

Do we have stores that need to be closed or not, we'll learn more about that come January as we get through the fall season.

And we're open to looking at the results and doing the right thing based upon those results.

Filene's Basement continues to be on a good roll.

They had 4.6 [in] comp increases in the first quarter.

Accessories were about 2%.

Kids was 14%.

The intimate apparel was 4%.

Home was negative 1%.

Men's was around 4.

Retail stock -- we told everyone we were going to kind of try to hold that flat -- actually, it was flat for the quarter.

Bridal, which we have continued to drive, was up 13% for the quarter.

Ladies apparel is up about 2.5; footwear, 6; costume jewelry, over 6%; and cosmetics, over 5%.

Some of the highlights in those numbers -- in men's, men's clothing, men's suits were up about 5%.

Sportcoats up 10% -- again, this whole dress-up thing, whether it be at Filene's Basement or at Value City -- both companies seem to be growing well in that category.

Dress shirts were plus one; basics, plus 2; activewear, plus 5; young men's, plus 59% -- a huge increase in young men's product -- really probably a crossover into what we call the lower level of men's collections.

And that customer is kind of trading over.

And then, lastly, in designer sportswear for men, it's up 17%.

In ladies, where the highlights -- dresses are plus 8.

And that is the first time we have had big increases in dresses in a long time.

We actually have a new associate buyer handling that for us.

And that seems to be working well.

Juniors was plus 12; ladies' knitwear, plus 13; ladies' swimwear, plus 12, so it's good in both companies, and better collections -- the premier part of our business, up 10% on a comp basis at Filene's Basement.

We are staying the course there.

We're comfortable with the direction of Filene's Basement.

We have announced that we're opening five new stores this fall and five next year.

I believe we signed leases on four out of the five.

The fifth is about to happen.

And that includes a brand-new store opening September 12 on Newbury Street in downtown Boston.

That will be a real eye opener and a shocker for the consumers.

We are also opening at Hunt Valley in Baltimore.

We're opening at Harvard Park in Cleveland.

We're -- trying to think of the other place -- the one that we haven't signed is actually in Long Island.

We're working on that.

And we think that that is quite confident that that will happen as well.

And then we have worked on a number of new stores for next year in some real prime, A+ locations.

So Filene's Basement -- you know, it's got to get to $600 million in volume in order to get to an operating margin that makes sense.

We think that the run rate at the end of 2007 with the new stores plus normalized comps of plus 3% between now and then will get us to a run rate of around $600 million and will get us into that pocket.

So without further ado, I would put this back to Russ to open this up to any questions that people might have.

Russ?

(OPERATOR INSTRUCTIONS).

David Mann, Johnson Rice.

Congratulations on getting back to breakeven in the first quarter.

It has been a while.

I guess my first question, Heywood, would be going to your comment on the store portfolio -- just some of the performance by markets.

When you look at those six markets where you saw recovery, but perhaps not as strong as the other 18, can you see some common thread there, number one?

And number two, are they responding in a way that you feel good that you may not have too many problems from the fall that you're going to have to deal with?

David, there's nothing common about them.

The only thing that I haven't analyzed, and probably should look at it is how much of the businesses we gave up, what proportion to the total store were those stores -- were they out of proportion versus the chain average?

And that is the only thing that might make them somewhat (technical difficulty).

And how many stores are we talking about in those six markets?

We had 77 positive comps, and we had 36 negative comps, including stores that were between zero and minus 1, and most of the 36 that were negative were between zero and minus 1.

That's great.

Do you have any new data on your customer in terms of -- is your advertising attracting more of a -- what you'd call the midtier customer?

Or is your -- maybe more historical customer just comfortable buying the brands at the prices you're offering?

Well, you know, we don't have good data at the moment.

We have a lot of anecdotal data.

But I would tell you that we've tried some things that were out of character for us to test.

One of the things we did is on the home side in electronics, we put in some $2,000 TVs.

Now, Value City never sold TVs above $300.

And, of course, high quality, good value -- but still a $2,000 purchase price -- and very, very good reaction; selling through very, very well.

That tells us that that customer is seeing a "wow" factor in the home store and coming in for it.

And we hope that will continue.

In the softlines part of the business, we continue to see average prices going up.

Ladies' average prices continued to go up about 15%.

So clearly, that is a change.

The rest of it is anecdotal -- feedback from the stores, people we talk to when we go into the stores to visit, and just a ton of positive comments back about the quality of the mix as compared to what may have existed 18 months and two years and three years ago.

Okay.

And then one last question, if I could -- when you look at the gross margin improvement you had in the quarter, it is definitely better than the kind of guidance you're giving for the rest of the year for just the Value City and Filene's Basement businesses.

Given that you have had some pretty good traction on sales, and you have probably very good visibility on initial markup, can you reconcile perhaps the conservatism on the gross margin guidance versus what you just released?

Well, we've said 50 basis points on a combined basis.

Value City for the first quarter was up 60 basis points -- 38.3 from 37.7.

Filene's Basement was up 3.7%, from 32.2 to 35.9.

The 32.2, I think, was abnormally low last year in the first quarter.

And so therefore, some of it may have been a little makeup.

Clearly, they might have normalized it more like 34 last year.

So you may look at it as a 3.7% improvement.

We're looking at it like as a 2% improvement, and a 2% improvement in the 600s -- there's a little wiggle room in there, but let us get through another quarter before we start to take it to the bank.

[Adam Kimora], [Intra Capital].

Two quick questions.

One is, can you talk a little bit about the use of proceeds that we're thinking with the PIES and what the opportunities are in terms of debt paydown, that sort of thing?

And my second question is we're a decent chunk or at least a third of the way through the next quarter.

Can you just give us a sense of whether or not all these positive trends are continuing?

They're continuing.

Basement is doing a touch better, Value City doing a touch worse, perhaps, but a lot of room still to go in the quarter.

You've got all of Father's Day and July summer selling ahead of us.

In terms of the proceeds of the PIE, I will take a quick shot at it, and then, Jim, you will finish it up.

I think there were several likely uses of the proceeds.

First of all, to pay on the $50 million tranche, which is currently at 10%.

The early projections are that the PIES might price out in the low sixes.

So that gives us some benefit there.

And also, the current revolver actually is higher than that as well.

So you save some money on the revolver as well.

The second piece of it is that upon the completion of this, it kind of frees us up from a financial responsibility, accountability to the holders of the tranches, so we are able to be more flexible and do what we need or want to do -- takes away some of their approval rights.

And then thirdly, it also gives us more liquidity, which continues to keep the [fact] community more comfortable with us so that we don't have any issues on that side as well.

It is Jim.

Actually, a lot of the pricing and things like that are to be determined when we actually get through the SEC review and get towards pricing.

So a lot of those things are still kind of to be determined.

I think that -- once we get there, that definitely, we're going to pay down $49.5 million of that $50 million nonconvertible loan that we have outstanding, and then the rest of it -- we will apply the proceeds to debt and other corporate issues that we've got here.

At this time, there are no further questions.

Great.

Thank you, everybody.

Again, I appreciate you listening in, and we hope to speak with you real soon.

Thank you.

Thank you.

This call has been concluded.