Designer Brands Inc (DBI) 2007 Q1 法說會逐字稿

Hello and welcome to the Retail Ventures first quarter operating results conference call.

As a reminder, all lines will be on listen-only mode, and we will conduct a question and answer session at the end of the call.

(OPERATOR INSTRUCTIONS).

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

Sir, you may begin the call.

Thank you, Raoul.

Hello, everybody.

We will now proceed with our presentation but first, because of the Securities Litigation Reform Act, I have to tell you that certain of the matters which we are about to discuss regarding among other things the Company's future performance and our expectations for the future constitute forward-looking statements that are dependent on certain risks and uncertainties.

Such forward-looking statements are not guarantees of future performance, and actual results may differ materially from those of such forward-looking statements.

You can review the risk factors in the section of the Company's annual report on Form 10-K for the fiscal year ended February 3, 2007, for a complete discussion of certain of these risks and uncertainties.

Today, I will personally not be doing a presentation at this time because we are still engaged in the strategic analysis of the Value City Department Store subsidiary which we announced in December of last year.

Jim McGrady will lead us in the review of the financials and at the conclusion Jim and I will try to take questions at that point in time.

So without further delay, Jim, why don't you start with the financials.

Sure.

Thanks, Heywood.

Today we announced the first quarter net income of $2.7 million or $0.06 per share on a basic basis, and a $0.05 per share on a diluted basis.

This is compared to a net loss of $64.9 million or $1.58 per share on both a basic and diluted basis last year.

During the first quarter, we recognized noncash accounting income related to the change in the fair value of derivative instruments totaling about $12.5 million and this compares to the first quarter 2006 quarter noncash accounting charge of $64.8 million.

If we were to adjust for the noncash accounting charge, our operating results would have been what we will call a non-GAAP net loss of $9.8 million and a loss per share on both a basic and diluted basis of $0.21.

Comparable store sales decreased by 5.2% and by segment were down 8.7 at Value City, down 3.6 at DSW, and a plus 1.6 at Filene's Basement.

These numbers are included in today's press release.

Value City's net sales were $288.2 million for the three-months ended May 5, 2007.

This is a $26.2 million decrease over the comparable period in the prior year.

That's about 8.3%.

The decrease in comp sales at Value City is comprised of declines in all major categories.

Men's, women's and children's apparel had declines of 9.1, 5.3 and 16.5 each, and jewelry and hard lines had declining of 15.7 and 5%.

DSW net sales were $357 million which is 12.8% increase over the prior year's first quarter.

From quarter-to-quarter there is a net increase of 26 DSW stores, 8 affiliated lease shoe departments and 116 non-affiliated lease shoe departments.

DSW's comp store sales decreased in women's by 3.9%, men's by 2.8%, and accessories by 1.7.

The athletic category improved 1%.

Filene's Basement net sales increased 20.1% over the prior year's quarters to $108.8 million.

This reflects a net increase of 8 new stores for the quarter-to-quarter comparison.

The merchandise categories of men's and accessories had comp sale increases of 5% and 11.2% respectively.

The women's and jewelry had declines of 1.2 and 11.1 respectively.

Total gross profit increased $13.3 million over the prior year's first quarter to $303.9 million.

In the first quarter, gross profit as a percent of sales remains consistent at 40.3% to the first quarter of 2006.

By segment the gross margin was at Value City 36.3%, DSW 44.9, and Filene's Basement 36% even.

Value City's gross profit decreased $16 million to $104.5 million in the first quarter of '07 from $120.5 million in fiscal '06 first quarter and decreased as a percent of net sales from 38.3% in fiscal 2006.

Approximately, $13 million of the volume decrease is due to decreased overall sales and the balance reflects increased markdowns offset by some higher IMUs that we were able to obtain.

DSW gross profit increased $22.7 million to $160.3 million in the first quarter of fiscal 2007 from $137.6 million in the first quarter of fiscal '06 and increased as a percent of net sales from 43.5%.

The percent to sales improvement includes an increased IMU and a reduction in markdowns as a percent to sales.

Filene's Basement gross profit increased $6.6 million to $39.1 million in the first quarter of '07 and increased slightly as a percent of net sales.

This increase is due to improvements in initial markups offset by increased markdowns on clearance merchandise sold at the downtown Crossing Store location, which as we reported earlier will close later this year for some pretty major renovations.

Selling, general and administrative expenses increased $14.1 million from $277.5 million in the first quarter of '06 to $291.6 million.

As a percent of sales, SG&A expenses were 38.7% for the 2007 first quarter compared to 38.5% last year.

By segment, they were, Value City was 41.2% of sales, DSW 34.9% of sales, and Filene's Basement 46.1% of sales.

Value City's SG&A expense decreased $12.2 million and decreased as a percent of sales in the first quarter of 2007.

The decrease in SG&A expense is partially a result of a $9.1 million decrease in personnel expenses due to the elimination of positions and a reduction in occupancy expense that we were able to obtain during the first quarter.

DSW's SG&A expense increased $14.6 million and increased as a percent of sales in the first quarter of '07.

DSW's SG&A expenses excluding preopening costs for DSW Stores and Lease Shoe Departments opened subsequent to April 29 of '06 were $11.7 million for three-months ended May 5 of '07.

SG&A expenses for the first quarter of fiscal '07 included $1.6 million in preopening costs compared to about $900,000 in the first quarter of '06.

At Filene's Basement, SG&A expenses increased $11.8 million, and increased as a percent of sales for the three-month period.

The increase as a percent of sales reflects preopening, occupancy and personnel expenses.

New store SG&A expenses totaled $5.9 million and preopening costs increased in Filene's Basement by approximately $2.3 million in the first quarter of '07 compared to '06.

The Downtown Crossing Store's SG&A expenses increased $1.9 million due to additional depreciation and severance expense accrued due to the pending store closing that I discussed a little bit earlier.

As we take a look at our net interest expense for the first quarter of 2007, it increased $1 million to $3.5 million.

This increase in flex -- excuse me, reflects a higher average borrowing due to the issuance of the pies in August of 2006.

We also had an increase in interest income during the period due to an increase in cash investments over the same period of last year.

The effective tax rate for the three-months ended May 5, '07, reflects tax expense of $12.9 million or 52.8% effective tax rate compared to a negative 11.1% for the 2006 quarter.

The tax rates reflect the impact of the change in the fair value of warrants and a conversion feature of the pies all of which are including for book income but not tax income.

Additionally, in 2007 we have an increase on the valuation allowance for some certain state deferred income taxes.

As we turn to our balance sheet, inventory totaled $578.5 million in 2007 compared to $545.6 million at last year-end.

Networking capital at May 5, '07, of the $284.6 million and was $274.4 million at the end of last year.

Current ratios at those dates were 1.43 and 1.5 respectively.

Adjusting for the $218.5 million warrant liability included in current liabilities at the end of the first quarter, working capital would have been $503.1 million for the current ratio of 2.14.

Net cash paid for property and equipment was approximately $14.9 million in the first quarter this year compared with $6.9 million in the prior year.

In the first quarter of '07 capital expenditures included $10.1 million for new stores, $1.8 million for improvements in existing stores, $6.8 million related to DSW's Corporate Office expansion, $1.8 million for IT equipment upgrades and new systems, and $4.6 million related to DSW's development of an e-commerce business.

EBITDA in Q1 was $36.7 million compared to a negative $41.1 million last year, again adjusting for the FAS 133 charges, for the warrants and derivatives, EBITDA for the quarter would have been $24.2 million in the first quarter of '07 and $23.7 million for the first quarter of '06.

Our consolidated availability under our secured credit facilities at the end of the first quarter of '07 was $218.5 million and outstanding Letters of Credit totaled approximately 15.1 and $8 million at the end of the first quarter for RVI and DSW, respectively.

Our current consolidated availability is $205.4 million, and this consists of $67.3 million under the RVI revolver and $138.1 million under the DSW revolver.

Just as a subsequent event type of a notice on June 6, last week the Company issued $1.3 million of its warrants to -- of its common shares to service.

They exercised last piece of their convertible warrants.

These shares were issued at an exercise price of $4.50 a share and the aggregate purchase price was approximately $6 million.

In connection with the exercise of these warrants, we will also pay off Services piece of the senior loan agreement which is about $250,000.

That ends the historical review of the first quarter results of operations.

As Heywood indicated, at this time we're not going to provide a fiscal '07 outlook for RVI.

When we do get through the review of strategic alternatives, we'll definitely be coming out with that and update everybody as to our expectations.

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

Thank you, Jim.

At this point, since we're really not prepared to volunteer any other information regarding Value City activities involved in the detailed alternatives.

I think the best thing to do would be to open the floor to questions and we will answer the questions that we can.

So Raoul, if you would like to see if there are any questions out there we would be glad to try to take them.

(OPERATOR INSTRUCTIONS) Our first question is from Mr.

David Mann.

You may proceed with your question.

Good afternoon, Johnson Rice.

Heywood, can we start off talking a little about Filene's Basement?

As you said, you've opened about eight stores in the last year.

Can you give us a sense on how you feel about how they're performing?

On the new stores I would say we have a mixed result.

We've got probably a couple of stores performing below expectations.

One or two performing above and the other four or so kind of in the general neighborhood of what we kind of thought.

I would say overall we probably would say that we're slightly less pleased than we had hoped to be in aggregate.

And yet there are some funny things happening that make us feel more enthused.

Part of the issue for us is developing a system for projecting a site selection and therefore a greater success rate to exceed our expectations.

We've undertaken a significant consumer research project which we're about a month away from getting the feedback on that to help us develop a better sense of attributes to let us be more accurate in the future site selections at that point in time.

The couple stores that are not performing as well.

Is there a common thread for them versus the others?

The common thread is more suburban, less city oriented.

Okay.

You indicated there were things you were enthused about.

What would that be?

Well, there is a store we opened in downtown Baltimore And Baltimore has been an okay market, not the best market, and yet that store has opened up very powerfully and given us a lot of encouragement that that's the home run for us over time.

The city stores like Union Square or Back Bay in downtown, the new store in downtown Boston, those city stores have performed they continue to perform, and actually some cases are accelerating against strong numbers.

So it just tells us that the closer we are to a major metropolitan area in a city environment it seems to work better for us than what might be a more typical, traditional, suburban real estate strategy.

Okay.

Jim, can you talk a little bit about some of the items related to the Boston Store, perhaps quantify the markdowns that you took in the quarter and also the severance and accelerated depreciation?

Do you expect that to continue beyond the first quarter?

Sure, David.

The accelerated depreciation we definitely anticipate that that will continue through the closing period until we get there which is right now I believe sometime in September.

The severance piece we put behind us and we recognize that won't continue on further.

And the markdown piece, yes, I do believe it will-- we will see continued markdowns as we continue to liquidate the inventory in that store and until we really start the process and do the markdowns, I think it is going to be a difficult for a lot of people to want to come to that store in the condition that it may be in right now absent some of these great, great bargains that we're going to set forth for them.

And the amount of the increased markdowns that you attribute to that store?

How much was that in the quarter?

I don't have that right here in front of me, but I would say --

Several million dollars, Jim.

Okay.

Yes.

And then one question I guess general on the Value City situation.

While you can't talk about a timetable, obviously the uncertainty is out there.

How is that affecting your people, your employees, and any other stakeholders in terms of vendors and what have you, perhaps even your customers?

Well, you know --

Are you seeing a loss of employees during this extended time period?

Yes, sure.

It is not wholesale, David.

It is sporadic but clearly until we're able to give a firm answer to our team, that we're going to operate 113 stores, go forward and invest in the business or that we're going to sell 113 stores and have someone else invest in the business or some combination of other options, people probably look over their shoulders.

The key associates that is are helping us where we've taken steps to try to make sure they're going to be with us, but you still lose some folks, and we haven't lost hundreds and hundreds, but we've lost people.

And I imagine that until we are prepared to announce something we'll continue to lose some folks out the door.

That's not what we want to do, but that's what we think is a natural course of events.

Sounds like with your landlords you're able to negotiate some lower rent?

Is that what I heard in the lower occupancy cost?

Actually some of the that lower occupancy costs did come from some of the rents that we did go to renewals that we went to month-to-month basis on.

But there were also some reductions in how we were accounting for some of the (cam) charges and also unfortunately for this one there was a reduction because of lower sales base than our estimate of what we were going to pay as a percent sale on rent.

Okay.

Thank you very much.

Our next question is from Michael Rosenthal.

You may proceed with your question.

I think you at one point said you might consider breaking out the results of Down Crossing just to see the continuing basis of --

I think, Jim, that we have done in that our sales release, and I think the impact in the first quarter was about 1%, Jim.

Right.

I mean on an operating basis or operating income?

No, I don't think we ever said we were going to break it out on an operating income basis.

I think we have provided and will provide when we file the Q some pretty informative information, but to provide individual store operating type of statements and detail like that.

No, the sales is really what we referred to, Michael.

The reality is that that store is targeted to be totally closed by early September, and so it is not that far out that we'll be able to get a pretty clear picture without it at that point in time.

Normally, it is quite profitable.

Can you say if it is profitable now or unprofitable on an operating income basis?

Really on an individual store basis, we just wouldn't talk about an individual store, not at this time, not in detail.

I will say that over the year it is operating performance has deteriorated as it became extremely difficult for customers to be able to access that store.

Right.

It has been a continuing process.

I think you were supposed to get some compensation from the landlord regarding the process.

Has that started yet?

No, it actually hasn't started yet, but over the period of time of the store closing and everything like that, we will be receiving some compensation.

But the loss of -- that's the flagship store, that's the one that people associate with that program markdown that everybody remembers from the fledgling days.

So we're hoping to be able to bring that back, that thought process back and give people more entrenched in what they're missing in Filene's Basement.

Okay.

I know it is difficult to say right now, but is there any way you can give us some sort of timetable on when the review might be complete?

Really at this point in time I can't even address that question, so I would have to say for the record we have no comment on that.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is from Harold [Sidon].

You may proceed with your question.

Good afternoon, gentlemen.

Regarding the breakdown in the Value City's Stores comparable store sales, can you tell us what percentage of the 113 stores had positive comps, if any?

The answer is one we can't tell you because I don't have it at my finger tips.

Two, I guess if we did know we wouldn't tell you but you can be safe to say if that side is decreased there would be few if any.

There were a few but not a lot.

Okay.

Because in past quarters you broken out which part of the base was and when they were negative, what was between say 0 and 1 or 2% and what was greater than 2%?

Right, right.

Unfortunately there was a period of I guess you would call it a quiet period, and we're really not looking to break out significant information regarding Value City other than to say with the negative 8% comp clearly the majority of stores had negative comps.

Okay.

Just kind of to reiterate, with the situation you guys have pulled back on your capital spending even more than you did last year for the Value City operations.

I mean, it is enough to screw-in a light bulb and keep the paint clean, but in terms of coming up with some sort of end game, how much longer do you think the investors are willing to wait for the Company to keep those operating losses going?

I don't know how to answer that.

The process is ongoing until we get to conclusion in any particular direction we're not allowed to comment on it.

You know that.

We know that.

So in terms of how long, I mean the flip answer is the long as it takes.

It is not a good answer.

Clearly, we want to come to a conclusion or answer sooner and not later, and we're working on it.

What seems to be the major roadblock in your estimation?

We really can't comment on questions that are related to that strategic alternative evaluation that were going on.

It is just not appropriate for us to do so at this time.

I apologize.

I mean, it is just not -- we shouldn't do it.

Okay.

I mean back in the fourth quarter when you were on the phone, it seemed related more to a sale than anything else.

And is that still the primary goal?

Our goal is frankly to come up with the best strategic alternative for the Value City operations for our four retail ventures.

That's the goal at the end of the day, and if it takes three-months or 36 months, that's the time period that we'll do it in, but we have to do what's best for everybody, and that's the goal that we're working toward.

The only color I can put on that is that among the options selling 113 store chains is one of several options, and we're exploring all the different options.

Is shutting down the Value City operation still considered one of those options?

I think as Heywood said we're exploring everything, and we really don't -- can't comment on the things that we're doing at this point in time, and to everybody that's on the phone, both Heywood and I do apologize, but that's -- we're not going to address any questions about this valuation we're going through at this time.

Okay.

I am sorry, I feel like I am beating a dead horse so I apologize here.

Keep beating, keep beating.

Do you have any sort of duration of your contract with the investment banks at this point or is that open ended?

There is an ending date to the contract, yes.

Would that be in '07?

It would be, yes.

In the second half?

Pardon?

In the second half or --

It is in '07.

Okay.

Much appreciated.

Thanks for your patience.

I am sorry.

Raoul, any further questions.

We seem to have no questions at this time.

At this point in time, I would like to say thank you to everybody and again sorry we can't address any questions about the Value City strategic alternative that we're evaluating.

But I do appreciate everybody's continued support and patience with us.

As soon as we know, you'll know, as they say.

Right.

Thank you, everybody.

Thank you.

Ladies and gentlemen, this concludes our call.

Have a good day.