Designer Brands Inc (DBI) 2006 Q2 法說會逐字稿

Good morning, everyone and welcome to the Retail Ventures, Inc. second quarter results. [OPERATOR INSTRUCTIONS] Today's presenters are Heywood Wilansky and Jim McGrady.

At this time, I would like to turn the call over to Heywood Wilansky so that we may begin the call.

Heywood?

Thank you, Janiece, and good morning, everyone.

This call this morning will be the second quarter earnings call and Jim McGrady is going lead us through the financial operating results.

And I will comment after Jim on some of the sales trends by business or by region.

And at the conclusion of that we'll talk-- we'll take questions from anyone in the audience.

So Jim, let's get started.

All right.

Thank you, Heywood.

Good morning, everybody, again.

As always, before we start, a little housekeeping.

We need to restate 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 and forward-looking statements, actual results could materially differ from those forward-looking statements.

As always, we encourage everybody to read the risk factors that we have disclosed in our public filings, including our annual report on Form 10-KA, Form 10-Q's, the S1 that was filed by DSW and our other filings.

Any forward-looking statements made during this call are based upon information that is presently available to the Company, and the Company assumes no obligation to update any such forward-looking statements.

That being said, last evening, we announced a second quarter net loss of $16 million or $0.36 per share, compared to a net loss of 157.3 million or $4.03 per share in the prior year's quarter.

For the first six months of this year, we are reporting a net loss of $80.9 million compared to a prior year's net loss of 168.7 million.

On a per share basis, that's $1.88 and $4.49 respectively.

The second quarter and year to date periods include a non-cash charge of 15.3 million and 80.2 million respectively related to the modification and issuance of the warrants, compared to the second quarter number of last year of 137.6 million, and that's the same number for the year to date period as well.

Again, remember, no tax benefit has been recognized in connection with this charge.

If we were to adjust for this non-cash charge, our EPS in the second quarter would have been a $0.02 loss on both the quarter and year to date periods.

That compares to what would have been a $0.50 loss and an $0.83 loss respectively in the prior year's quarter and year to date periods.

Total sales in the second quarter increased $17.8 million or around 2.7% to $684.5 million.

Comparable store sales for the quarter increased 0.6%.

And by business segment, they were negative 2.2% at the Value City Department Stores.

A positive 2.2 at DSW.

Filene's Basement was positive 5.4.

And again, in total we were a positive 0.6%.

Value City's net sales decreased $10.8 million to $290.4 million.

The sales for the comparable stores decreased 2% -- 2.2%, as I said previously, due to declines in customer traffic.

In addition during the second quarter, Value City operated one less store than the previous year.

The decrease in comparable stores of Value City is comprised of decreases in children's, hard lines and intimate apparel of 11.8%, 10% and 10.6% respectively.

Ladies' comp sales increased over the same period of 2005 by 2.7%, while men's improved 1.8%.

DSW sales were $301.3 million, which is a 9.1% increase in the quarter.

This includes an increase to 21 stores and seven non-affiliated leased shoe departments.

The merchandise categories of women's, athletics and accessories had increases of 3.3%, 0.8% and 2.7% respectively.

The men's category decreased by 0.8%.

At Filene's Basement, sales increased $3.5 million or around 3.9% to -- excuse me -- $92.8 million and again the comp sale increase was 5.4%.

During the second quarter, Filene's Basement operated one less store than in the previous year.

The merchandise categories of men's, ladies and children's had comparable sales increases of 8.7%, 3.5% and 29.8% respectively.

Home goods and jewelry comp sales decreased by 3.3% and 1.4% respectively.

The jewelry and children's categories represent 5.9% and 1.9% of total comp sales each.

Total gross profit in the second quarter increased $15.6 million to $275 million.

In the second quarter, gross profit increased, as a percentage of sales, 130 basis points to 40.2% from the previous year's quarter of 38.9%.

The increase in the overall gross margin is attributable to the positive comp margin results in all three segments.

Value City was at 37.9% in the quarter, compared to 36.9 in the the previous year.

DSW was at 43.4, compared to 42.4.

And Filene's Basement was at 36.9 compared to 35.

Value City's overall gross profit increased 100 basis points, as you noted there, from the comparable prior year.

This is attributable to improved mark-up on goods available for sale and a decrease in the mark-down rate.

At DSW, gross profit increased $13.6 million to $130.7 million in the quarter, an increase as a percent of sales from 42.4% to 43.4% this year.

The increase, as a percent of sales, is attributable to an increased IMU and a reduction of markdowns as a percent of sales.

There also contributing in there was a reduction in the internal shrink rate that we previously accrued for.

Filene's Basement gross profit increased by $3 million, which is primarily attributable to the increased IMU and lower markdowns as a percent of sales.

Taking a look at our selling, general and administrative expenses for the second quarter.

Our total expense decreased $700,000 to $264.8 million and as a percent of sales, decreased from 39.8% to 38.7%.

At Value City, our SG&A expense decreased $10.5 million and 2 full points as a percent of sales for the quarter.

And the decrease in expenses is a result of fixed costs that we have leveraged against sales, which is primarily in the occupancy and salaries categories.

In addition, during the quarter, Value City closed the leased warehouse and recorded -- excuse me in the prior year, remember, Value City closed a warehouse and recorded a $2.8 million charge associated with that closing.

Value City also realized a reduction in SG&A totaling $2 million from the settlement of an antitrust deal with a credit card issuer.

That is not related to the DSW credit card reserve that's on the books.

DSW expense increased $10.9 million and increased 0.7 as a percentage of sales for the three months compared to the prior year's quarter.

DSW, SG&A expense, excluding the preopening costs for DSW stores and leased shoe departments not open in the prior year, was $6.3 million for the quarter.

Preopening costs, which are expensed, as you know, as we incur them decreased approximately $500,000 during the three months in 2006, compared with the three months ended July 30, last year.

Advertising expense decreased $2.8 million during this year's quarter compared with the same period in the prior year.

DSW also realized a reduction in SG&A totaling approximately $600,000 from the same antitrust settlement that I talked about a little bit earlier.

There were some increases at the home office and corporate expense compared to the prior year for DSW.

Filene's Basement segment expense, SG&A expenses, decreased $1.1 million, and 2.8% as a percent of sales for the three months of this year.

These SG&A expenses decreased as a percent of sales as a result of fixed costs, primarily in occupancy and salaries, the same we saw in Value City, which are being leveraged against current sales.

As a percent of sales, SG&A in the quarter for Value City Department Stores was 41.7%.

For DSW it was 35.8%.

Filene's Basement 40.6%.

Again, remember, we have recorded a line item in our statement of operations related to the warrant adjustment.

As we turn to our interest expense, interest expense in the quarter decreased by about $8.1 million to 2.3 million.

This decrease is due primarily to the write-off of amortized debt issued costs for term loans, which happened last year, and a decrease in our weighted average borrowing rate of around 1%.

And a decrease of about $91.4 million in average borrowings during the three months of this year compared with the prior year.

Again, interest income increased $2.2 million over the same period last year.

The increase in interest income is primarily due to the increase in DSW's cash and investments over the prior year's periods.

The effective tax rate for the three months ended July 29 was a negative 76.2%, compared to a negative 5.2% in the prior year.

And remember, this is very heavily influenced by the warrant valuation, which we don't recognize any tax benefit for.

As we take a look at our balance sheet.

Total inventories were about $553.2 million at July 29 this year versus around 559.1 million in the prior year.

Net working capital, July 29 this year was $279.7 million, compared to $185 million at the end of last year's fiscal periods.

Current ratios are 1.5 and 1.3 at those dates respectively.

Net cash used for capital expenditures was approximately $19.2 million in the year to date period this year, compared with $21.6 million in the prior year.

While depreciation and amortization for the year totaled $27.8 million, compared with $28.9 million in the prior year.

During fiscal 2006, capital expenditures included $8.1 million for new stores. $7.7 million for improvements in existing stores. $700,000 for office and warehousing.

And $2.7 million for IT equipment upgrades and new systems.

The primary increase in capital expenditures is due to the decrease in new store -- excuse me -- the decrease, I should have said, in CapEx is due to the decrease in new store openings for the six month period this year.

EBITDA in the second quarter was positive $7.1 million, versus a negative $124.4 million in last year's quarter.

Again, you probably want to take an adjustment in there for the warrant charge when you take a look at that.

Availability under our secured revolving credit agreement was $191.7 million per the two agreements that we have.

And outstanding letters of credit totaled approximately $25 million and $21.7 million at this period of time.

Our current consolidated availability is $231.8 million, which is comprised of availability of $100 million under the RVI revolver and $131.4 million for DSW.

That's actually $100.4 million at Value City.

That concludes our historical review of the second quarter.

I'm sure, as most everybody is aware, we did complete the offering of our mandatory exchangeable notes, which were -- came in at about 6 -- a coupon of about 6.625%.

These are known as PIES.

We did do $125 million as the principal amount to date.

The shoe has not been exercised and the aggregate maximum number of shares out of our ownership of DSW that is exchangeable for the PIES is about 4.560 million shares.

Remember, again, the closing of this took place on August 16.

So, a few more days to run on the shoe.

We used the net proceeds to pay down some inter-Company debt.

And subsequently at the end of the day, we repaid $49.5 million of the non-convertible loan, which was outstanding and used the rest to pay down the revolving credit agreement and for internal purposes.

As we take a look forward, we're confirming our previous estimates for fiscal 2006 that comp sales at Value City and Filene's Basement will be in the low single digit range.

And we do expect to see some margin improvements in both of those divisions.

We also expect to see some leverage of our expenses to continue, and that SG&A will decline somewhere around 50 to 75 basis point range at Value City.

And we will see a slight improvement at Filene's Basement.

The non-GAAP operating profit, which excludes the warrant valuation for Value City and Filene's Basement on a combined basis, is expected to be somewhere in the area of flat to negative 1% to total sales.

As usual, I won't go any further than that at this point in time because it's very difficult to make an estimation of the change in the value of the warrants.

And that heavily, as I said, influences the tax rates.

So that's where we generally stop with our estimates as we take a look around the corner for the balance of the year.

As additional information, we will be filing our second quarter 10-Q today.

So, that should be available to everybody a little later this evening.

At this time I will turn the call over to Heywood for some follow-up comments.

Thank you, Jim.

I just want to comment on some of the sales trends at both Value City and at Filene's Basement.

At Value City, with the year to date for the spring season, they were positive 0.2% with soft lines being up 3.3% and hard lines being negative 9.3%.

And as you may all recall, we are anniversarying a number of businesses that we exited in the hard lines area.

And we actually still have a little more of that business to get through in August and September, and starting in October on its de minimus.

Cosmetics was up 94%, as it was a new business that we were going after for the spring season.

Men's was up a little over 6%.

Accessories and hosiery were up about 24%.

Ladies' apparel was up over 7%.

As Jim indicated earlier, intimate apparel and kid's were both down around 11%.

Textiles and domestics were up 1%.

Men's sportswear were up about 3.5%.

Young men's were up over 15%.

Active men's was negative 5.7%.

Big and tall was up about 11%.

And men's clothing and accessories were up about 10%.

Ladies' dresses were up a little over 3%.

Juniors were up about 1%.

Ladies' swimwear for the spring season was up about 25%.

The top and knit category in ladies was up over 11%.

Active and related businesses in ladies were up over 12%.

Large sizes were up about 1.5%.

And the better parts of ladies were up about 13%.

The hard lines businesses, if you took out the discontinued sales, would have been positive 0.4%.

And entertainment would have lead the way there, a little over 10%.

The jewelry business has been kind of close to flat at negative 0.4%.

With positive trends in costume and sterling silver was almost 10% and the watch business also positive at plus 10%.

And really the decrease in jewelry stems from them exiting some of the gift wear businesses that drove their comps to slightly negative.

From a region point of view of Value City, you recognize that we have approximately 24 regions.

And for the spring season, we had 10 positive markets and 14 negative markets.

Of the 113 stores that we operated this year, 58 stores had positive trends to the spring season, 11 stores had trends between flat and negative 0.5%.

Five stores were between negative 0.5% and negative 1%.

For a total of 74 stores between negative 1 and positive.

And the remaining 39 stores were negative over 1%.

For year to date positive plus 0.2%.

When we turn to Filene's Basement.

Filene's Basement picked up for the quarter over 5%.

And some of the highlights.

Ladies' sportswear was up over 4%.

Ladies' dresses were up over 11.

The juniors were up about 11%.

Children's, as Jim said earlier, were a positive almost 30%.

Intimate apparel was positive over 10%.

Our ladies' accessories were positive over 7%.

The home businesses were a negative 3%.

The men's furnishings and clothing business, combined, were up over 8.5%.

And the retail stock businesses were flat.

That's our direct from Europe and high-end store buyout business.

Jewelry was negative a little over 1%.

Footwear was positive 7.5%.

For a grand total of over 5% for the second quarter.

One of the highlights for us is in the contemporary ladies' business, where we have gone after that business and have picked up over 25% for the quarter.

And that's a headline for us.

And also in the junior area, we segmented the business into juniors and better juniors.

And the high end in the juniors is up about 47% for the quarter.

When you look at it on a region basis, New England was up over 2%.

New York and New Jersey was up over 14%.

Washington, D.C., mid-Atlantic, were up about 4%.

Midwest was up close to 4%.

Pittsburgh was negative 15% due to a particular construction issue affecting the access into that center.

Atlanta was positive over 3.

And downtown Boston was negative 1%, due in part to the closing of the Filene's store above us that generated close to half of the traffic for that building.

Total comp of north of 5% for the quarter.

Filene's Basement is confirming that they are opening five new stores for the fall season.

The first of those stores opened last week on time.

That was in Hunt Valley, Maryland, outside of Baltimore.

The second of the five stores to open next Tuesday night and Wednesday.

And that's the store that's in downtown Boston, fronting both Boylston Street and Newbury Street.

And that's on time as well.

The next store to open later in September.

And that will be in Springfield, Pennsylvania, just outside of Philadelphia.

The store after that is in mid-October and that is in Cleveland, in a new market for us.

And the fifth and last new store for this year opens in early November.

And that's in Levitan, New York.

And as of today, they're all currently on time and looking right.

So, without any further ado, I would open the floor up to questions.

Janiece?

Okay. [OPERATOR INSTRUCTIONS] Our first question is from David Mann.

David Mann, you may proceed.

Yes, good morning.

Hi David.

Heywood, the first question goes to the RVI performance -- or excuse me the Value City performance in the quarter.

Can you just talk a little bit, given the negative comps that you had, your ability to see higher gross margins in that division?

Well, the high gross margins are the results of several different factors.

One is the increasing proprietary brand business that we're currently doing that didn't exist to any degree in the past.

And the initial mark-up on those and the sells-through on those have been quite positive.

So, that has an impact on the margin.

The second is the overall IMU continues to grow as we have been able to negotiate better arrangements with manufacturers.

Partly by buying more up front and being able to commit to orders that they can produce in their slower time frame.

And thirdly, better markdown control.

Of being a little smarter about how we use our markdown to clear clearance while generating sales at an appropriate level.

So should we assume that the relative aging of the inventory as you exit the quarter, how would you comment on that relative to last year?

I think the aging at both companies is in quite good shape, and well within any standards that people would look at and both better than previous history.

And so, given the better aging, and it sounds like prospects for better IMU, should we assume that some of this growth margin improvement should continue in the back half?

You know what happens when you assume David.

Yes.

So, we don't want to make any assumptions.

Let's just say that, as of today, it looks good but who knows.

We think that we have done the right things.

We'll find out as we go through the second -- through the third and fourth quarter.

Okay.

Thank you.

I'm not showing any further questions at this time.

All right.

That concludes the call for today.

Thank you, everybody, and have a good day.

Thanks again.

Thank you.

This call has been concluded.