Designer Brands Inc (DBI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 DSW Incorporated earnings conference call.

My name is Dan and I'll be your operator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms.

Leslie Neville, Director of Investor Relations.

Please proceed.

Good morning.

With me today in Columbus, are Debbie Ferree, our Vice Chairman and Chief Merchandising Officer, Peter Horvath, our President, and Doug Probst, our CFO.

Earlier today we issued a press release detailing the results of operations for the second quarter ended August 4, 2007.

Before we proceed, please note that various remarks we make about future expectations, plans, and prospects of the Company constitute forward-looking statements.

The actual results may differ materially from those indicated by these forward-looking statements of the result of various important factors including those listed in today's press release and in our public filings with the SEC.

With that, I will turn it over to Doug.

Thanks, Leslie.

Good morning, everyone.

As previously released, net sales for the second quarter increased 16% to $349 million.

Same-store sales increased 5.9% versus an increase of 2.2% for the same period last year.

Our gross margin rate for the quarter decreased 490 basis points to 23.3% due to significant promotional activity aimed at clearing seasonal merchandise.

As we stated on our first quarter call, our goal was to aggressively manage inventory to enter third quarter in a clean inventory position.

Contributing to the declining gross margin rate was our leased business segment which is directly associated with the 102 Stein Mart locations added last January.

Selling, general and administrative costs, or SG&A, increased 40 basis points during the quarter over last year to 20.9% of sales, primarily due to an increase in marketing to support the end of season summer sale and the planned investments to support our IT and e-commerce initiatives.

The net impact of the gross margin and SG&A performance was a 530 basis point decrease in our operating income rate for the quarter, 2.4% of sales.

Overall, net income was $6.5 compared with the net income of $15.3 million for last year.

Diluted earnings per share were $0.15 compared with $0.35 a year ago.

Inventory compared to last year's second quarter was flat on a cost per square foot basis.

More importantly, our level of clearance inventory was approximately half of the amount of last year and last quarter, putting us in a full-price forward-facing inventory position heading into the fall selling season.

Capital expenditures for the quarter were $20 million and cash and short-term investments remained flat for the quarter at $175 million.

Now looking forward to the balance of the year.

As we stated in the last two quarters, we plan to invest in various long-term strategic initiatives that will benefit us as early as next year, including adding associates in the planning and allocation organization, improving our information system, remodeling stores, accelerating our store growth and developing an e-commerce channel.

These investments will be made throughout the year.

Our capital expenditures will approximate $100 million in 2007 to support these initiatives, an increase from our original estimate of $80 million.

This is the result in part of our increased plan to open at least five additional new stores, bringing our estimate to at least 35 new stores in 2007.

The remainder [as far] as planned investments in IT and e-commerce as we remain committed to making investments in the future growth of the business.

Specifically, our e-commerce initiative is expected to account for approximately $8 million in SG&A and 25 to $30 million in capital expenditures for this year.

Although aggressive inventory management negatively impacted the gross margin for the quarter, we are prepared to deliver on our annual earnings target based on our inventory position and our expectation for increased merchandise margins for the back half of the year.

Therefore, we are maintaining our fiscal 2007 annual diluted earnings per share estimate of $1.63 to $1.68 on 0 to 3% comps.

Now, I will turn it over to Debbie for her comments on the merchandise (inaudible).

Thank you, Doug.

Our focus for Q2 was three-fold.

Firstly maximizing categories that were strong Q1 double and triple-digit performers such as juniors and all the women's categories, fashion athletics, women's casuals and beach sandals.

Secondly, aggressive inventory management around slow, seasonal performers, such as dress sandals.

And lastly, to position third quarter inventories cleaner and crisper than prior year.

The promotional second quarter, including our first summer sale, was successful on all levels.

Comps were strong and the inventories going into third quarter are significantly more forward facing than last year.

The category level as we look to fall, we are pleased with our assortment in dress shoes and are getting positive reads from the overriding themes of material interest, including patent menswear suede and reptile.

Customer is responding well to the new fall colors such as brown, gray, and all the metallics.

We are pleased with the performance in our seasonal departments as well.

Our strategy to bring in fresh receipts in flip-flops (inaudible) back-to-school and to continue our basic sandal program at regular price drove strong comps in this category.

This has continued into Q3.

Boots have also had a good strong start with inventories positioned earlier than last year.

Cold weather, specifically shearling (inaudible), booties and basics are already performing well.

DSW offers the most comprehensive boot assortment of any retailer in the industry.

Team's knowledge and experience in satisfying customer expectation and their ability to quickly read and react to the business we believe makes us the industry leader in this category.

Missy and junior flats continues to perform strongly, also.

We received (inaudible) will be important to continuing to drive this area as we go through the fall season.

The introduction of new contemporary styles in the comfort arena are re-energizing this category, which had become very stale in the industry.

Adjustments in inventory to reinvest in core traditional men's dress and casual looks have also paid off as we experience positive, single-digit increases on the quarter.

The men's and women fashion athletic categories also continue to dominate the athletic performance inventories positioned to capitalize on this trend for Q3.

We feel confident that our work around inventory management and content has positioned us to maximize business in all of the critical fall categories and trends.

Now I will turn it over to Peter for his comments.

Thank you, Debbie.

As we stated on our first quarter call, we are committed to entering third quarter in a strong inventory position, both in terms of quantity and content.

The numbers support that we have achieved that goal.

Inventory on a cost per foot basis is essentially flat to last year with units down 8%.

Clearance units per store are at half of last year.

We believe that our decision to accelerate seasonal clearance ahead of historical levels has allowed us to offer our customers the freshest, most fashion-forward assortment in the marketplace.

We've taken the right step to position the business for a successful third quarter and year.

Despite the earnings results, we found the second quarter to be encouraging on many levels.

We were pleased with how our customer reacted to our promotional events, leading to strong comps and double-digit increases in transactions per store.

In addition, the team demonstrated superb agility and collaboration in our tactical adjustments to the business.

Now, I'd like to address our progress in real estate and the store environment.

We continue to raise the bar and bring the customer a remarkable experience.

I am pleased to share with you that we'll be opening an additional five new DSW stores this year, bringing our estimated total to at least 35 for the year.

New stores are trending to superior sales per foot to the chain average and delivering the desired profitability rate.

Our new store design is resonating well with customers.

We will end the year with 36 stores in our new store design through a combination of new stores and remodel.

For now on, all new stores will incorporate the new design.

We continue to see excellent progress from our real estate, legal, store construction, and store design teams, which have driven improved speed and efficiency with each new opening.

We recent rolled out our new service model.

Our goal is to give the customer remarkable service experience.

We have now implemented a full training program for store associates to learn to engage the customer and partner with her in her shopping experience.

Our associates will be coconspirators who love shoes, are passionate about them and looking to unleash the passion of our customers.

We continue to see excellent progress in our loyalty program, DSW Rewards.

DSW Rewards now has over 8 million members.

Since the relaunch of the program last year enrollment and retention metrics have continued to trend up.

During the second quarter, we leverage our loyal customer base predominantly through e-mail contact to drive transactions, traffic, comps, and new customers to the store.

Our strong loyalty program leads us to a brief comment on e-commerce.

In 2008, we will be launching a remarkable online experience that leverages millions of loyal customers across a multi-channel DSW experience.

We have invested in top industry talent and technology so stay tuned, we'll have more to say before the end of this year.

Our theme across all facets of the customer's experience is simple: Be remarkable.

If we are remarkable, our customers will do our marketing for us.

Our customers have already proven to us time and time again that the most powerful marketing a brand can hope for is customer testimonial based on remarkable experiences.

The results of our efforts over the past quarter has given us every chance to win for the year.

We have positioned the business to maximize fall selling, greatly improved margins in the back half and deliver on our earnings targets for the year.

We'll continue to balance short-term goals and strategic investments that will strengthen our capability and lead to long-term shareholder value.

With that, I'll turn it back over to Leslie to introduce Q&A.

Now on to the Q&A.

Please limit yourself to one question and one follow-up on the first round.

You will be placed in a listen-only mode after your follow-up and this way we will have a better chance to get to each questioner.

You're welcome to get back in the queue in the same manner you did originally.

Dan, could you please indicate how the callers can ask a question?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Zolidis from Buckingham Research.

Please proceed.

Hi, good morning.

Morning.

Hi.

I was wondering if you guys could talk a little bit about how the year has played out so far relative to the Company's internal expectations?

And the reason I ask this is when we see a miss to consensus estimates, even though, acknowledging, of course, that there wasn't any guidance, it certainly raises the question about results in further future quarters.

So if you could talk a little bit about the first and second quarter where as I remember the first quarter came in better than expected low comps.

Why should we feel confident about the full-year earnings projections at this point?

What are you seeing in your business relative to your expectations when you started the year?

And can you just give us some additional comfort that we're still on track relative to where you were hoping we would be at this point when we started the year?

Thanks.

Sure.

And thanks for the question, John.

And all of us are chomping at the bit to respond to that, I think, so I'll start and Peter or Debbie may jump in, as well.

As far as the plan, obviously in the first quarter we didn't intend to do negative 3.5% comps.

That was the biggest piece of the surprise that we had to deal with and we talked about that in the first quarter.

Our strategy coming right out of that first quarter was to adjust the inventories and get our inventories in the position we needed them to be to be in a place to get to that third quarter target that we needed to be.

It's an important selling season for us, September-October time frame.

So obviously the surprise to our original plan was that negative comp in the first quarter and we adjusted accordingly in the second quarter.

The reason you should have confidence is the reason we have confidence to reiterate our guidance is because of that inventory position.

As you heard about in the script, not only are the inventories positioned well in total, but the clearance inventory positioning is significantly less than it has been either last quarter or last year.

So that positioning gives us that confidence.

And, again, we're confident that the double-digit transactions that we drove, yes, it was driven by sales announcements, but it really had something to say about the ability to attract and communicate with our customers and we believe that's going to benefit us as well in the second half.

I guess the only thing I'd say is that [I'd] say something pretty obvious, which is as being retailers, we know that you can't predict the future perfectly and we build plans that lead to guidance but we also have scenarios that provide upside to that.

So there's a lot of flexibility in our planning.

And I think what you've seen, and actually we've experienced this in all of our prior quarters, it doesn't always play out exactly how we plan it.

But the audibles, if you will, the tactical adjustments are built into our tool kit and we use them as we see necessary.

That's what you've seen so far this year that we've been able to reach into our tool kit and be able to use those tools to maintain guidance.

Okay.

Just let me make sure I have clarification and then I'll let some other analysts ask questions.

But the first quarter was lower than expected with the comps and in the second quarter we realigned the inventory.

But when we look at the results in the context of the full-year, it doesn't, I didn't get the impression that the first half played out in line or better than your original expectations.

So could you just speak to that and talk about for the full-year guidance why the second half, are you raising the guidance for the second half relative to your original expectations or are we really on track and the second half is more important so what went by in the first half isn't as significant?

John, we focus on the year.

Again, to repeat Peter a little bit, yes, we have a budget by quarter, budget by month, and even down to the week level.

Certainly we don't hit those all the time, but our focus is to hit that annual target.

And yes, first half was certainly different than we had planned but again, we focus on that year and still have the confidence to hit that.

I'm not trying to evade your question, but that really is our focus of this business is to focus on that annual target and we hit some peaks and valleys and have to adjust the business accordingly.

I'll reiterate that we're not backing off our original planned investment for the future growth, which is why we reiterated that.

Not once have we talked about making dramatic changes to that plan for the longer-term investments because we know that would be shortsighted.

We're maintaining our guidance as well as staying with those investments.

Thank you.

Your next question comes from the line of John Shanley from Susquehanna International.

Please proceed.

Thank you and good morning.

Morning.

Either Peter or Debbie.

I'm looking at the gross margin which was down almost 500 basis points quarter-over-quarter.

And I assume that a good deal of that was due to product margin declines due to the heavy promotional activity to clear out some excess sandal inventory and other products.

Is that a fair assessment?

Yes, it is, John.

Okay.

But we noticed that inventories are still up 16% at the end of the quarter versus where they were at the end of the prior year.

Did you get rid of all of that excess inventory or is there still more that is going to have to be flushed in the third quarter?

John, this is Peter.

Yes, we have half as much clearance inventory as we did last year.

And that means not only did we take care of any inventory backup in the first half, we went beyond that because we're constantly trying to push the assortment -- the inventory to be better for the customer every quarter, we want to turn faster every year.

And we saw this as a great opportunity to position inventories in a better place than they've ever been.

The only thing that we just need to wait for the customer to tell us is content, how's the content.

But in terms of position and quantity and aging of inventory, we've never been in a better position going into the third quarter.

Peter, what is that 16% increase?

Is it new product that you're bringing in that basically you're going to have more depth on?

I'm just kind of confused as to why the inventory levels went up so much.

You are adding new stores but still on the base of stores that you have that seems like a very large ramp-up in terms of inventory on hand.

We can reconcile that for you, specifically, John, but I think the two things you have to consider is yes, you've already talked about the new stores, but, as well, remember we have those 102 Stein Mart locations, too, that we didn't have last year so that's going to boost our inventory.

And remember, on a cost per square foot basis, inventories are flat relative to last year.

We can reconcile those pieces, too, but there are a couple components there.

As part of this thing you had mentioned at the end of the first quarter conference call that you expected the liquidation of the inventory of sandals to impact results by about 130 basis points.

Did it come in at that level or was it more or less than what your expectations were at the end of the first quarter?

There was a bigger impact, bigger negative impact on that margin, yes.

Can you share that with us?

Specifically towards sandals, I can't right now.

Okay.

All right.

I'll come back in queue in a minute.

Thanks.

Your next question comes from the line of Dorothy Lakner from CIBC World Markets.

Please proceed.

Thanks.

Good morning, everyone.

Morning.

Morning.

I wondered if you could give us a little help on the second half of the year.

Firstly is and keeping in mind I think you usually talk about October being the most important month in the third quarter, but we are at the end of August, I wondered if you could share anything about August with us that would give us, I guess, greater comfort going into this quarter?

And then just how should we look at the third quarter and the fourth quarter given that we're probably adding another $0.15 to the back half of the year to end up in the same place that we are now.

How should we, you know, is the third quarter the more important one?

Is that where the bulk of the earnings should be expected to come?

And then, just help us out a little bit with gross margin and SG&A levels how should we look at those in the second half?

Dorothy, I'll take a crack at that.

First of all, August is obviously a part of our annual guidance update so those results have not (inaudible) offset or changed that estimate so we're incorporating that into our thoughts.

In September and October is really the months that are big for us.

Remember, we use the phrase Septober of combining that because depending on when it starts to get cool is the week or the month that starts to get impacted by that fall selling season.

So the September-October time frame is the main period for us to get not only good sales but good reads on what has been selling.

So trying to stay away from quarterly guidance, obviously, the third quarter is bigger sales volume for us, always has been.

But we have to respond, again, managing to the year of what's selling and what's not selling and making those adjustments along the way.

Third quarter is always our biggest selling period and we expect that again this year.

And try to think of the other components of your questions but that's generally our perspective.

Well, so it's the bigger sales volume is in the third quarter.

Is that where we should expect to see the biggest impact from cleaner inventories and therefore better gross margin?

Generally, that's the equation, yes.

Okay.

Okay.

Thanks.

I'll get back in the queue.

Okay.

Your next question comes from the line of Jeff Black from Lehman Brothers.

Please proceed.

Hey, guys.

I think there's just still a lot of confusion, Doug and Debbie, about what happened in 2Q.

I mean how much of this was due to a fashion miss?

How much bad inventory was there and where specifically was it and what gives you any confidence, as everyone's talking about, that we have decent inventory going into the back half?

And on the full-price selling, Doug, are you getting, do you have the ability to get full-price selling?

Are you seeing that in your business right now and that's what what's giving you a little bit of confidence or do you think we're in this mode, as a lot of our other retailers, where to generate any kind of traffic, you're going to have to continue to layer on the sales promotions?

And what level of promotions are really baked into your full back half guidance?

Are we seeing minimal promotions versus last year?

Same level et cetera?

Thanks.

I'll start.

Well, first as a couple examples.

Last year during the four-day Labor Day weekend, we ran a significant clearance sale.

We almost called it a mini winter sale because of how big it was.

We did not run that this year although that drove comps last year, it was mainly to drive inventory.

And that's an indication that our full-price selling gave us confidence that we didn't have to run that this year.

Also, and I'll let Debbie speak to some of the merchandise components, but starting the quarter as we did with clearance inventories down as much as they were to last year and the first quarter, by definition we have to have full-price selling because there wasn't a lot of clearance left over and we didn't have promotional activity so far this year or this second half.

Those sales and store lack of promotions should give you that confidence that we are relying on regular price selling because there's just not the clearance inventory to sell and we haven't been running the promotions in the store like last year so far in the second half.

Debbie, you want to speak about the?

Sure.

Jeff, it's Debbie.

First of all, if you go back to Q1, you'll remember that the large part of the drop was in seasonal merchandise.

Partially due to the weather and partially due to just the fact that the sandal, the dress sandal piece, as you'll remember, slowed down significantly from where it was trending over the last 18 months.

Having recognized that, our team aggressively managed that inventory, that seasonal inventory, as we moved through Q2 recognizing that we did not want to convert into third quarter with that kind of merchandise.

But every single week we managed to the performance expectations and performance of the seasonal category.

So we addressed through cancellations and reorders of good merchandise through Q1, recognized in Q2 that we did not want to go into Q3 with the kind of inventories and content of the inventories in sandals that we had, and we made a strategic decision to liquidate that inventory and liquidate it earlier than we had ever done before.

So we did, as you heard in the conference call, accelerate some of the markdowns that we typically would have taken in third quarter into second quarter so that we would come out in a stronger position in clearance merchandise and more forward-facing merchandise for fall.

Now, having said that, without telling you exactly what's going on for the fall season, where we felt strongly about our fall business was in the boot category, was in the flat category, and in fashion athletics.

Our inventories are positioned very strongly there, and I'm very happy to report that we're getting better than expected sellthroughs in these categories that we have positioned the forward-facing merchandise in.

So I'm very confident going forward that we have the inventory content in the right places and we should -- I'm hoping to see other results from that.

Okay.

Great.

Good luck, guys.

Thanks.

Your next question comes from the line of Sam Poser from Sterne, Agee.

Please proceed.

Good morning.

I just have a question about you mentioned that you're putting a lot of money into your IT and systems, and has there been any major changes sort of in the way you go about your business?

Are you leaving more goods to more open to buy available to chase goods this fall as you're transitioned different than it was a year ago as far as content?

I'm hearing a lot about a lot of buy now, wear now activity going on and so on.

If you could just sort of address that, I'd appreciate it.

In terms of the changing the content or buy now wear now, I'd say there's nothing dramatically different in our model so we haven't made those changes.

In terms of the IT investment, it's an ongoing process to upgrade our system and infrastructure to support the growth, which we're a high-growth company and that puts strain on resources.

In addition, I think the other item that Doug called out was the investment in e-commerce that I think previously we haven't shared.

It's a significant investment, and obviously there's no sales associated with e-commerce in 2007 so we're making the investments where we see fit.

Back to the merchandise, supply chain continues to be an opportunity for us but we haven't yet made significant changes to our process.

So we're continuing as we have in the past in terms of the process and the focus right now is really around merchandising decisions around fashion that Debbie shared with you.

Okay.

And then you didn't really mention any women's.

You mentioned boots and flats but are there any other big women's trends that you're seeing?

And if Q3, if Q3, can you, are you going to deleverage if you go negative comp in Q3?

Let me speak to some of the things we're seeing for Q3 and then Doug is looking up some notes right now to answer the second part of your question.

Thank you.

The things that we talked about earlier that I felt very strongly about for fall are materializing and specifically, boots is starting off with a good strong comp this quarter and the indications are that it will be a strong category in the industry.

The thing that I found a little bit different from this year to last year is the whole shearling, that whole cold weather category is performing much earlier this year than ever before and that is a, it's kind of an anomaly, a surprise to me because it is very hot outside, and last year, you saw fashion booties take off a little bit earlier than the prior.

This year, it's exactly the opposite.

So while I feel very strongly about the boot category, the way that the customer is buying is a little bit different this year than we expected just in terms of timing.

In the casual category, if you'll remember what was driving that was the flat category and we're still experiencing very strong comps in casual flats and I really don't see that letting up at all.

There's no indication that that's letting up.

In the dress category, all the materials we talked about, it's not so much buy now wear now, as it is about buying freshness and not buying anything that's the same or stale from last year.

So everything that we talked about that would drive the fall season is actually materializing right now and it's performing either at or above my expectations.

And are you leaving extra dollars on the side to really chase down those key items?

Always.

The biggest challenge is how quickly can the market get you back into things because as you well know, very few manufacturers stock merchandise anymore.

But we always have open to buy liquidity so that we're very agile with how we react to business.

To follow-up on your other question, first of all, remind you that we had 0 to 3% comps for the year that we said in the script.

And obviously with 1% in the first half, that tells you that the second half we expect to be somewhere between that 0 to 3 as well.

To remind the folks on the third and fourth quarters last year, remember we did a relaunch of that loyalty program which was over $3 million of investment to recontact those customers to change the program.

So that type of spending that we had in marketing will not occur this year.

And also going into the fourth quarter, we had two benefits to us one being the 53rd week, which added about $0.04 to our bottom line as well as the reversal of the outstanding liability we had for the old rewards program which also generated $0.04 to us.

So as you're looking at the model or the expectations, it's important to remember that we had that $0.08 of one-time benefit in the fourth quarter which makes the comparisons a little difficult on the base business.

All right.

I'll get back on.

Thank you.

Your next question comes from the line of David Mann from Johnson Rice.

Please proceed.

Yes, thank you.

Good morning.

Doug, in talking about the markdowns you took in the second quarter, can you quantify how much of the gross margin hit was due to the acceleration of markdowns from the third quarter to the second quarter?

That's pretty judgmental to say but I can tell you that our inventory clearance being half of what it was, it wasn't a terrible position last year at this time but we went to half of that so it was pretty significant.

I can't really scope it out to say exactly how much because we took some judgment on some product a little earlier than last year because we want to make sure we're bringing in the items that are turning and not hanging around for waiting for to get better because generally they don't.

I don't know, Debbie, if you want to add any more to that.

So it's a change in thinking a little bit, but certainly it was accelerated from last year.

And again, the clearance example that we had in the Labor Day last year that we're not doing this year is another indication of that.

But in terms of the second quarter gross margin, can you give maybe on a bigger picture how much, you know, when you look at the components, how much did IMU change versus the markdown change?

We actually had some improvements in IMU and that was offset by the incremental markdown so whereas we may have had about 100 basis points of improvement in IMU, again, the remainder is the reduction in the lease department for one, that 40 basis point impact we've had all year long from having those additional Stein Mart stores all getting charged to the occupancies.

There's about 40 basis points there and the remainder is that the markdown impact that we had in the second quarter.

And would you talk about, you know, what, a half of the markdowns come from an acceleration since you didn't run that Labor Day promotion or would it be less than that?

How should we think about that?

That's probably a fair estimate, David.

Okay.

Just looking back at the calendar shift as it's gone on throughout the year, can you just sort of review what you thought happened in Q2 and how that will affect the back half again?

Yes, our original expectation was the first and third quarters were benefiting about $10 million in the first quarter and $7 million in the third quarter of shifting of favorable weeks into those first and third quarters and out of the second and fourth.

So second quarter was impacted negatively by about that $10 million as well as fourth quarter will be impacted negatively about $7 million.

Okay.

There are also some minor shifts for some tax-free weeks in Florida and Texas but that was less than $1 million which will actually benefit the third quarter.

And then on the store opening acceleration, can you give us an idea as to when the stores are going to open?

All your openings in the back half, when those additional openings will hit and how those additional openings would impact your original guidance.

I think you talked about the potential for that hurting you if they open late in the year.

Our expectation is that the third quarter we'll open more stores in the quarter than we ever have before, which would mean it would be more than 14 stores in the third quarter.

Originally our budget had anticipated opening the stores more equally throughout the year but I would say if we opened 15 in the third quarter most of those would be later in the quarter and then the balance of the openings would be coming into the fourth quarter, which as you alluded to, is not necessarily an earnings improver but still be opening in November and December to round out that 35-store opening.

But just to be clear, the additional openings, the impact of that is already thought about in that guidance that you're reconfirming?

Yes.

Okay.

Great.

Thank you.

Your next question comes from the line of Susan Sansbury from Miller Tabak.

Please proceed.

Hi, yes.

Thanks.

Two questions.

First with respect to the e-commerce initiative.

Now that you've talked about how much it's going to cost you, how much of the annual expense has already been booked, if you will?

Okay.

You want to answer your second question too?

Well, let's do one at a time.

Okay.

About of the $8 million that we plan to spend in the first half, we spent about $2.5 million.

Okay.

So the bulk is still to be spent in the second half?

Right.

And that's for the SG&A.

As far as the capital expenditures, that equally will be spent a little bit more tilted to the back half.

But of the $30 million perhaps that we'll spend about $8 million has already been spent in the first half.

Okay.

Second question is we sort of slided over the lease departments.

You mentioned in your prepared remarks that they penalized second quarter results.

Can you provide us with a little bit more detail?

Sure.

And what the expectations, whether the expectations for the year have changed and if so, in what direction and the reasons why?

Sure.

There's actually three components as it relates to the lease departments.

One is the 102 Stein Mart stores that we added has that negative impact on gross margin because all the charges that we write checks to are 20% fee roughly that we pay to our lease departments gets charged to gross margins, specifically occupancy.

So that's going to hurt us all year long as it relates to a gross margin rate comparison and that's about 40 basis points every quarter.

The second piece is the fact that when we started, we opened those new stores, they were virtually clean when we opened them in the beginning of the fiscal year.

And right now, we're catching up on those markdowns and making sure they're clean going into the third quarter and the second half.

The third piece, which Debbie will speak to, is the overall performance in those lease businesses has been a little soft and Debbie can add some more commentary there.

Yes.

I think you always have to include a content discussion when you talk about the under performance of any department and I will tell you that I think from a content point of view, that first and second quarter, we were a little bit stale.

And I'm not talking aged merchandise, I'm just talking about having not enough fashion on the floor as we should have.

And so I think that in large part, some of the comp performance has been due to the product just not being correct in those stores.

We've made major adjustments for the third quarter and I'm happy to report to you right now we're starting to see some major increases in benefits in those inventory adjustments that we've made.

We've taken a more fashion-forward position, not so staid and traditional as we had in the past.

You also have to remember that the additional 102 Stein Marts stores we picked up were some of the best stores that the Stein Mart organization has and that required us to take a different point of view, a much more aggressive fashion point of view than we had with the other stores.

So we're making those corrections now, we're seeing good results from the strategic decisions we've made.

Okay.

I have two more little ones.

Can you tell me, Doug, how many stores you did open in the, what quarter we just report, second quarter and what the square footage was?

Sure.

We opened six stores in the second quarter, 14 year-to-date, and the square footage at the end of the quarter was 5.76 million for DSW stores.

Okay.

And can we -- the final question is can we talk a little bit in more detail about this full-price to off-price ratio in the second quarter and how you expect that to pan out in the second half?

This is Peter.

I just I think we have to make a clarification because around here when we talk full-price, we're talking about the regular price that's offered, the first price that is offered.

Right.

That I think you've heard Debbie call in the past, she labels it as every day value and I think that's consistent.

In terms of the ratio because we have less, we have half as much clearance as we did a year ago, we're probably well over 90% regular price.

And that's what the customer is seeing today in our assortment and that's what they're responding to and that was absolutely the plan.

That was the plan?

What was the ratio last year?

Well, again, and I don't want to get specific on numbers, it seems like we get too specific you guys will use then against us the next time.

But basically, I think the business we tipped -- we used to target 15% of total and sometimes it'll run to 20.

We're well under 10.

Okay.

I'll get back in the queue.

Thanks ever so much.

Your next question comes from the line of R.J.

Hottovy from Next Generation Equity.

Please proceed.

Good morning, everyone.

Morning.

Just a couple housekeeping questions, really.

First of all, I just wanted to know just if you can give us an impact of the clearance sale on the comp number, what kind of benefit you saw and if you could help us out with that?

Second of all, if you could give us the additional marketing spend, I seem to recall there was about $1 million in the quarter in additional marketing for the sale.

And then, I guess lastly, just if we could get an actual number as to the new format stores what the running of the sales per square foot basis there?

Okay.

The first couple, as far as the, let's see, the marketing spend, we had a lot more contact last year, or than last year.

In fact, we contacted over 32 million people this year as opposed to roughly about 7.5 million last year.

Now that sounds like a big expense, but fortunately a lot of those were e-mails, which were at a low cost.

So while we were, we increased our marketing impact, the cost was not that much more significant.

It was built around the summer sales.

It was originally planned as we entered the year just like the winter sale.

As far as what the trend would have been, we've looked at this a lot of different ways including examining what the competitors, how they perform both in the first and second quarter and then how we perform when we were not on promotion.

And although we were on promotion almost 10 weeks of the 13 weeks of the quarter, the three weeks we were not promotional our transactions and our comps were down about what it was in the first quarter.

So down about 3 to 4%.

So if you, there might be some shifting in volume out of those weeks because we were running this promotional event but we'd like to think based on the other competitor's performances in the shoe businesses that that negative 3 may have been another performance that we would have had had we not run the promotional activity.

So we had that in our sights as we were continuing to plan and adjust our tactics during second quarter because we anticipated a negative comp if we didn't do anything and worse we would have had a bad inventory position.

Fortunately, we hit our targets as it relates to inventory, but obviously we had to be more promotional to get there.

Sorry, I don't remember your third question.

Just in regards to the new format stores, what they're running on a sales per square foot basis.

We still like their performance on a sales per square foot basis both in 2006 and 2007 and I'll tell you that the 2007s are more productive than 2006.

Fair enough.

Good luck going forward.

Thanks.

Your next question comes from the line of Jeff Mintz from Wedbush Morgan.

Please proceed.

Thanks very much.

On the incremental capital expenditures, you took it up from about $80 million to $100 million.

Can you give us some idea of where the incremental spending is going, kind of a breakdown of that?

Sure.

Obviously the five additional stores would account for a piece of that.

So that one's obvious.

The other piece is the e-commerce business is another large piece because our original plans with e-commerce, we actually accelerated some capital expenditures that we originally had planned to outsource some of this cost for fulfillment center and decided instead to invest those dollars ourselves.

It was a better economic decision, but more cash up front.

So those are the two main components the last piece rounding out to some efforts that we're doing in our store systems as well as general IT infrastructure systems.

Okay.

Great.

And then my second question more generally in terms of what you're seeing from the consumer, are you seeing any kind of a slowdown, obviously, we're hearing from a lot of retailers that they are seeing or they feel like they're seeing some kind of a slowdown.

And in particular, are you seeing any difference between the consumer at DSW stores and in the lease departments?

Jeff, I'm going to take a crack at this.

Hopefully we all agree.

But I'll tell you, we're not really seeing a noticeable change.

I think it has a lot to do with the fact that we don't sell necessities.

This is cheap entertainment.

Our price points, I think our average unit retails in the low 40s is just not a make or break decision and our demographic is quite different from the discount demographic.

Our average household income is over $70,000.

So I think we're not seeing a lot.

We don't think that there's any impact from the consumer.

And I think part of it is because we've all agreed psychologically we're not going to worry about external factors, we're going to worry about internal factors.

Now honestly, if we were worried about external factors, we'd probably position inventory about where we positioned it, which is flat to last year.

It gives us lots of flexibility.

It leaves open to buy if there's opportunities in the market or a trend that we want to chase.

So I'd say we aren't seeing anything different from the consumer.

In fact, partly because we're so heavily penetrated in our loyalty base where they represent as much as 67, 70% on any given week, those customers are coming back to us and they're buying regular price from us and when we have opportunities for them to get value, they're coming as well and they're bringing friends.

The trends are very, I think, promising in terms of how consumers are responding to us.

Okay.

Great.

Thanks very much.

Your next question comes from the line of Heather Boksen from Sidoti & Company.

Please proceed.

Hi.

Most of mine have been answered, but a couple quick ones here.

With respect to the Internet business going forward, I know we'll get more details going forward, but it sounds like we can expect some sort of e-commerce component to it?

Is that correct?

Absolutely.

Okay.

And with respect to Cap Ex, I guess, going forward in '08 and beyond, is there a better run rate that we should be using?

I know this $100 million's probably more atypical.

You cut out there for a second but as far as the Cap Ex in '08, we're developing those plans and I would tell you we're still going to be opening at least 30 stores.

Depending on the remodel success, we're doing five this second half, mostly in the fourth quarter, that's going to generate a lot of the projection of how much capital expenditures we make going forward.

Obviously if we see good results, we're going to be having a large appetite to remodel more stores.

Moving forward, too, on the infrastructure side of things, while we'll have most of the e-commerce investment behind us, we know there's opportunities to continually look at the IT infrastructure to build on what we see is a much bigger business down the road here.

Okay.

So some of these IT and infrastructure costs will recur again next year?

As it relates to IT, yes.

Okay.

All right.

Thank you.

Your next question comes from the line of John Zolidis from Buckingham Research.

Please proceed.

Hi.

Good morning.

It looks like I made it back in the queue.

Thank you.

After this call analysts are going to get working on their models and trying to figure out how they can add $0.15 to the back half and if that's reasonable, and I think it's fairly easy for us to understand how there's going to be a gross margin benefit in the third quarter although estimating the magnitude of that benefit is pretty difficult.

And I appreciate all the qualitative comments you've made on sales trends quarter to date, but I guess if you look at DSW and you have to understand analysts are looking at the Company in the context of the entire footwear retailing industry, many of which companies are reporting negative comps, could you consider taking an exception from your normal practice and maybe give us an actual number for what the sales trends are running quarter to date so that we can at least kind of figure out should we be assuming a 1% comp, which is what, I guess, the guidance implies for the back half when we're trying to get to the EPS numbers or can we use something higher than that in the third quarter?

Thank you.

John, we're trying to hold to our resolve for trying not to give any kind of quarterly guidance.

I can only repeat that we built in our annual guidance the result of August to date.

So generally, if that weren't going well, we'd probably be less confident.

We were fortunate to have this call a month after the quarter to get that read.

But I'll also say that the September-October period is our big period so it's a little premature to try to project out even if we did give you August.

Okay.

Great.

Look forward to speaking to you guys soon.

Thanks.

Thank you.

Your next question comes from the line of John Shanley from Susquehanna International.

Please proceed.

Thanks, again.

Just had a quick question, Doug, on the cash position.

It was down $30 million or about 28% quarter-over-quarter.

You didn't buy back shares so can you gives an idea of where the cash went in the second quarter?

Well, actually, John, the cash and short-term investments are at about $175 million, which was about what it was at the end of the first quarter.

And the second quarter this time last year cash and short-term investments were $151 million, so I'm not sure exactly the basis of your question.

But with the additional Cap Ex, we expect the cash balance by the end of the year to be a little bit south of that $175 million.

It is today maybe in the $160 million range.

But obviously we told you where that Cap Ex is going.

Okay.

I was just looking at just purely the cash which showed 174.8 versus 104.3 of the year ago period.

But was it mostly just due to acceleration in some of the Cap Ex in the quarter?

Well, yes, it actually was (inaudible) if you combine the cash and short-term investments you'd see that our cash balances, actually, our total cash and short-term investment balance is up about $24 million.

Okay.

Good enough.

Thanks.

Okay.

Your next question comes from the line of Dorothy Lakner from CIBC World Markets.

Please proceed.

Thanks.

Just a couple of cleanup questions.

One, could you give us the sales impact of the 53rd week last year?

Two, I think, Peter, you mentioned the rewards program was generating about 67% of sales at this point I wondered what it was a year ago.

And then lastly, I just wanted to reconcile the number of new stores in the new prototype.

I think you said 36 by year-end but if you have 35 new stores plus five remodels, I just wondered how the math adds up there?

Thanks.

I'll hit the last question first which is basically when we say at least 35 stores, we're also netting stores that were relocations, if you will, that might have shown up as a closed store and a new store.

For example, the Prestonwood store down in Dallas would have shown up as a closed store.

And then we opened a new store in a better location and it's in the new format.

Okay.

Plus we're counting Easton, which was completed this year.

Right.

As one of the remodels.

We have five remodels that we're rolling out.

Framingham will be the first one October 26th.

We hope now that construction guy just had a heart attack -- but October 26th we're going to open up.

So there's basically six remodels and of the net 35 new stores, 30 of them are in the new format.

Okay.

Okay.

Great.

And the 53rd week was about $18.5 million benefit last year.

Okay.

The penetration, I just want to get to the exact numbers.

I got to find the penetration here.

It is running about 67% now [under] customer of our sales.

I'm hoping someone finds the page because I don't want to quote the wrong number.

I've got a number in my head and I just want to make sure the page matches it.

Okay.

Yes, the second quarter of penetration of reward is just under 67% in the second quarter.

Last year in the second quarter it was about 63.5%

Okay.

That's kind of what I was thinking.

Great.

Thank you.

Your next question comes from the line of Sam Poser from Sterne, Agee.

Please proceed.

Yes.

Thanks for letting me back in.

You said on the Q1 call that you'd generated most of your earnings in the first and third quarters while the second and fourth quarters would remain relatively flat.

Does that still hold for Q4 and it begs the question on how much can you get out of Q3?

Yes it still holds and the Q4 had that $0.08 of benefit that we spoke about earlier so it makes that fourth quarter a little bit higher hill to climb because of that $0.08 benefit from the 53rd week and the reversal of the loyalty liability.

Can you just restate the week 53 EPS impact again, please?

$0.04 on about $18.5 million of sales.

Okay.

And then one last thing.

When you looked out at this year at the end of Q4, did, were you positive about the first half?

Did you see the sandal issues and were things testing okay at that time?

How does that reflect sort of your current outlook into fall and could we, and what have you changed?

I mean was the outlook good there?

Was it, it seems to be pretty good right now but could we face those same issues towards the back half as we did in the second quarter?

Yes, Sam, actually I'd say such is the nature of fashion, all retailers try to do early reads and see what, you know, to confirm that your assumptions for the next season are correct.

And I would say it's like we put our heads back in January last year I'd say that the sandal reads, particularly casual, were encouraging and other things helped us make adjustments early but the one thing we couldn't predict was how cold it was going to be Easter week and the weeks that preceded it and a couple of the weeks that followed it.

So to put that in context, it could be going back to my days in a business that sold sweaters it could be very warm late into September and that might impact consumer, you know, that could very well impact consumer demand.

But what's encouraging is what Debbie has already shared with you which is boots are more about fashion right now than need and that, we love to hear that, because that gives us hope that regardless of what happens with weather, our business is going to be there.

I'd just like to add a little commentary to that.

You know, I always say that fashion is at risk from the minute you buy it and is in, a lot of times, from a selling point of view, an irrational purchase and I say irrational, not rational.

So when you go back and you look at fourth quarter last year, for example, you would never have a planned a first quarter boot business as strongly as what we had, or you would have never planned the receipts to the degree that we could have achieved additional Q1 sales.

So, you know, as you go through the season, you're reading the results of the customer and you're trying to react.

I think when you look at this past first quarter the inventories were positioned well, they were positioned in what the customer was telling us they wanted to buy, but to Peter's point, it was a combination of cold weather, but also that category, that dress sandal category, just stopped dead and I don't think anyone saw that coming.

So what I do think that this team did is it was very agile and it was quick and sharp in recognizing that and addressing those issues as we found them.

But you plan the best you can but sometimes it doesn't always come out the way you thought that it would.

I mean that begs the question based on the comments you made, the comments you just reiterated about Q4 being flat.

That implies about a 70% increase in your earnings for Q3.

Why wouldn't you be more conservative because of the fashion risk and because of the recent results of not living up to the street's expectation?

We're all pausing for thought, here, Sam and I guess we're confident we take in all the factors that, and the trends and the underlying trends and the fall assortment as well as the earnings favorable to last year, whether we spent $3 million marketing, you don't have to spend that this year.

We look at all the components

I don't know if it's a matter of conservative or aggressive or whatever, but we're still confident that that $1.63 to $1.68 is a good achievable target for us.

Certainly, things could go wrong for us as it relates to the fashion and elements that are beyond our control, but all of the factors considered, we believe that is still a good target for DSW in 2007.

Okay.

Thank you very much.

Your next question comes from the line of Jeff Black from Lehman Brothers.

Please proceed.

Yes, thanks.

Just a quickie on the productivity of the new stores this year.

Peter, you've always talked about 230.

Are we still trending in line with that 230?

And based on your confidence it sounds like to begin opening more stores do we think 300 is an achievable target over the next few years?

Thanks.

Yes, you know, the stores, again, every year the group of stores we open gets better, it's just a matter of what you're comparing against.

But currently the stores that we opened this year are, we're forecasting they'll come in just under $250 a foot so we think that's good.

The stores we opened last year are still around company average but, again, there's a blend of new strategy, old strategy stores the further back you go.

So we're still very encouraged and the strategy is to average the chain up to $300 a foot through a combination of opening great new stores, some of which can open at $350, $400 a foot, and also comps.

So we're still committed to that.

That seems like nothing has changed, we remain encouraged.

Okay.

Thank you.

Your next question comes from the line of Susan Sansbury from Miller Tabak.

Please proceed.

Yes.

Thanks.

Going back to the e-commerce initiative [if you got] to breakeven, profitable or lose money next year?

And can you talk to me again about what you see is the top two benefits of having an e-commerce, having an e-commerce capability out there?

What does that tell me about inventory or profitability or turn or what are the key components here?

Well, first of all, I'd say it's too early for us to share our thoughts around how to model it and so we're probably not going to be doing that.

But in terms of the top two benefits, you've got a loyalty program with 8 million members.

The more we can engage with them and exchange information the stronger that program will be and the faster it will grow.

Having the prospect to engage with us online is really important and there's no reason for people to engage with you online if there isn't a prospect of shopping, so we think it is a key element to leveraging what is already and industry-leading loyalty program taking it towards our goal.

You know, we can see 20 million numbers at some point in the future.

The other element is the, basically, it's a great way to replenish sizes in our store.

The more practical side is we are not a replenishment business, we are a push business.

We have many choices and you can substitute the choices, however, with an e-commerce channel, with a superstore, if you will, that we can fulfill to anyone's home, if you see a style that you want and we don't have the size in that store, the next day it could be in your home.

And we see that as a big benefit.

Also, we know that consumers like to preshop online and then make a visit to the store because the experience of trying on shoes and seeing it right there in front of you is very important so we know that it's important to give them the opportunity to shop cross channel.

And there are other businesses that are bricks and clicks such as Victoria's Secret that have had a, they've demonstrated that the cross channel shopper is worth more to your business than a single channel shopper.

So we're encouraged by all that.

Okay.

But I agree with the second point wholeheartedly.

When do you expect to be able to talk to us about how fast this e-commerce business is going to ramp up in terms of incremental top line dollar and ergo P&L?

I'd say either it could be as early as fourth quarter this year or it might be in the first quarter of next year.

That's what we're shooting for and it depends on how the initiative develops and what the launch timing is.

Again, we want to be very deliberate about communicating it, this, you know, to anyone about this so that it enhances the launch.

Do we have a launch date?

We do not.

We're not prepared to share a launch date today bit I think probably by the next call we'll be getting close.

Okay.

Great.

Good luck for the back half of the year.

Thank you.

Your next question comes from the line of David Mann from Johnson Rice.

Please proceed.

Yes.

Thank you.

Can you talk a little bit about the comps that you think are necessary to lever expenses, the operating expenses, in the second half?

Yes, David, fortunately, or unfortunately we have a nice benefit in the second half because we don't have some of the spending that we had, again, with that marketing program in the third quarter last year.

Unfortunately, we don't have that incremental week of sales from the 53rd week.

But looking at the fall (inaudible) for the last six months we can level I said 0 to 3% comps most probably.

Again, the caveat out there is we need to accelerate additional marketing spend to reach our total targets we have to consider that, but right now, we can see some leverage at 1 to 3% comps and that's always been our case as we look at the business on a broader scale over six months or a year.

And when we think about Q3 and Q4 separately, I guess, the calendar benefit in Q3 will make it almost a fairly significant leverage and then Q4 will be a little tougher?

That's right.

Okay.

With the cash balance you have on the balance sheet has there been any discussion with the stock having pulled back about a share repurchase?

There has been no discussion and spending $100 million this year is plenty of capital usage but obviously that's one of the elements we can always consider.

Okay.

Thank you.

At this time I would now like to turn the call over to Leslie Neville for closing remarks.

I want to thank everyone for joining us today and we will be taking your follow-up calls here at our home office this afternoon.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.