Designer Brands Inc (DBI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 DSW Inc.

earnings conference call.

I'll be your coordinator for today.

At this time all participants are in a listen only mode.

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

(OPERATOR INSTRUCTIONS) I'd now like to turn the call over to Ms.

Leslie Neville, Director, Investor Relations.

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 quarter ended November 3, 2007.

Before we proceed, please note that various remarks we make about the 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 as a result of various important factors, including those listed in today's press release and in our public filings with the SEC.

So, with that, I will turn it over to Doug.

Thanks, Leslie.

Good morning, everyone.

Today I will provide detail on some of the significant factors that impacted our financial performance in the third quarter of fiscal 2007 and review our targets for the remainder of the year.

As previously released net sales for the quarter increased 11% to $367 million.

Same-store sales decreased 3% for the comparable 13 week period versus an increase of 2.6% last year.

Same-store sales for the year-to-date period decreased 0.5% compared to an increase of 3% last year.

Our average unit retail increased during -- due mainly to our clean inventory position entering the quarter; however like many retailers we experienced a significant decrease in traffic particularly in the month of September.

Gross profit rate for the quarter decreased 70 basis points to 29.0%; however, as expected the merchandise margin rate which is margin excluding occupancy charges and warehouse expenses increased 30 basis points.

The decrease in gross profit was due equally to increased occupancy expense associated with the 102 additional Stein Mart stores added in January and the deleverage of DSW occupancy resulting from the negative comp store sales in the quarter.

Selling, general and administrative costs or SG&A decreased 250 basis points during the quarter to 19.6% of sales due in part to the relaunch of our loyalty program last year and a reduction of our 2007 bonus accrual.

These gains offset a 40 basis point deleverage for the development of our eCommerce channel.

The net impact of gross margin and SG&A performance was a 190 basis point increase in our operating income rate for the quarter to 9.5% of sales.

Overall, net income for the quarter was $22.4 million compared with net income of $16 million for last year.

Diluted earnings per share were $0.51 compared with $0.36 a year ago, a 40% increase over third quarter last year.

To support our long term growth we invested $30 million in capital expenditures during the third quarter.

Approximately half was for new and remodeled stores with the balance primarily for IT infrastructure and our eCommerce business.

Our cash and short-term investments balance at the end of the quarter was $141 million.

Before looking forward to the balance of the year we believe it's important to briefly revisit last years results.

The fourth quarter of 2006 benefited from two significant items.

The addition of a 53rd week and the reduction of the DSW Rewards accrual.

The fourth quarter of 2007 is negatively impacted by the calendar shift of volume that benefited the third quarter.

That said based on current trends we're estimated diluted annual earnings per share to be in the range of $1.24 to $1.29 and annual comps of flat to down 1%.

The 2007 estimate includes $8.5 million of expense related to the development of the eCommerce channel which equates to approximately $0.13 a share.

While we will not provide earnings guidance for next year at this time we can say that we are appropriately cautious on our outlook.

However, even in a challenging environment we expect to open at least 30 stores, launch our eCommerce channel, continue our investment into our systems infrastructure and deliver earnings growth in 2008.

Now, I will turn it over to Debbie for her comments and the merchandise results.

Thank you, Doug.

Third quarter comps were below expectations with the miss being driven primarily by weather sensitive businesses, soft traffic in the month of September and a weakening of demand in the mens area and in women's junior casuals; however, tight inventory management controls allowed us to deliver improved gross margin rates.

Our promotional cadence in Q2 brought us into Q3 with clean inventories and clearance levels at historical lows.

Our boots and more traffic driving event in October exceeded our regular price selling expectations thus increasing overall margin performance.

These strategies have put us in a good inventory position as we head into Q4 and the Winter sale to be held at the end of December.

We expect that we will end the season clean and be in a good position to start Spring of '08.

At the department level, we had had a miss in mens and women's.

While athletic and accessories had positive comps.

Across the departments we are seeing a shift toward more classic, cleaned up looks.

This resulted in some of the softness we saw in the young attitude areas.

We are positioning inventories to take advantage of this trend going forward.

Unseasonably warm weather softened demand in higher AUR categories such as boots while we saw double digit positive comps in casual sandals and positive performance in athletic s once again driven by the fashion component.

Our strategy to support casual sandals with fresh receipts in the appropriate markets exceeded both our sales and margin expectations.

We are pleased with what we have seen in the boot category in Q4.

The AUR is more than $3.50 higher than last year and we expect to end the season in a clean inventory position.

The women's casual area had strong comps in comfort and missy flats; however total casual comps did not meet expectations as demand softened in the junior area, specifically in flats and vulcanized.

We have taken steps to address under performing categories here and expect inventory to be on target for Spring.

While the total women's dress area had negative comps in Q3, we saw positive comps in the young attitude area driven by round toes and Mary Jane's.

The classic dress area delivered flat comps for the quarter with the trend toward cleaned up classic looks we feel strongly about this area as we head into Spring.

In the mens area, we were pleased with double digit comps and traditional core men's dress and casual and we'll continue to fund these businesses.

However, we experienced a lack of demand in young mens product and have reduced inventories here through the remainder of the season.

While men's boots did not meet expectations being a weather sensitive business, we tightly managed the inventory and are in a good position going forward.

The highlight in the women's accessories area was the strong double digit comp performance in small leather goods and fashion hats.

The cold weather goods got off to a slower start but we have seen it pick up in the recent weeks and will manage inventories through the Fall as needed.

Collectively, our leased divisions had flat comps.

Increased promotional activities by our leased partners contributed to an increase in markdowns for the third quarter.

Inventories are in line here for the remainder of the season.

As we head into Spring, we feel good about our balanced assortment offering of fashion versus core and our position to maximize opportunities.

Early indications are that this will be a strong season for dress shoes and color will be important, and now I'd like to turn it over to Peter.

Thank you, Debbie.

Based on our forecast for fiscal 2007, DSW will not achieve full year earnings growth over the prior year.

This was a first for us as a public Company, and we are disappointed with this outcome.

While we continue to see significant improvement in execution in many areas across the business, in aggregate, our execution fell short during a particularly difficult retail environment.

Like other retailers, our team gathers each week to review the prior week results, make adjustments and improve our understanding of the customer.

Consistent with prior seasons, we don't allow the discussion to be dominated by external factors such as weather or the retail environment.

While we're very aware of the external factors, our focus continues to be on controlling the controllables.

By holding ourselves accountable for the factors within our control, we continue to learn from both our successes and disappointments.

I'd like to share with you some of our key learnings which appropriately align with elements of our growth strategy.

Number one, lower targeted clearance inventory levels did not hurt sales and they improved gross margin during third quarter.

The semi-annual sale event helped us to manage to targeted clearance levels.

By entering seasons, with inventories positioned flat or down, faster expected turns and content mixed more toward current fashion than clearance, we consistently position the business for upside while mitigating downside risk.

This can be seen in the third quarter, despite running negative comps and missing our original third quarter plan, we delivered good margins and entered fourth quarter with inventory basically flat to last year.

This refinement will continue in the fourth quarter with our Winter sale event.

Our outlook incorporates a realistic view of sales trends and the markdowns required to ensure the best possible inventory position entering 2008.

Like the beginning of third quarter 2007, we are targeting a reduction in inventory over last year.

Inventory levels will be appropriate providing a reasonable level of protection against continued comp store weakness.

Number two, the power of our loyalty program.

By every measure our loyalty program continues to strengthen and improve.

We are growing the DSW Rewards program faster than our store growth and rolling 40,000 to 50,000 new members each week.

Improved retention rates and increased enrollments are driving member growth.

Reactivation, new member welcome, gift with purchase, bonus point promotions, and member e-mail contacts generated significant incremental sales that contributed to our third quarter sales total.

Number three, better new store staging and planning.

New real estate development is dominated by the lifestyle center format.

We are pleased that we have become the tenant of choice, a tenant of choice for these lifestyle centers with our new store design and smaller footprint.

Like many other retailers we are experiencing initial sales shortfalls to plan in some of these new centers.

In many circumstances we are among the first tenants to open with as much of 70% of the remaining tenants under construction for several months.

While this does not impact our comp store performance it does contribute to our shortfall to plan.

We have addressed this in our new store process and plan go forward.

The overall real estate strategy continues to perform as expected.

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

Number four, better management of fashion distortions.

While we experienced significant double digit comps in areas of fashion distortion such as flats and vulcanized product, our inventories are planned for even higher sales.

While our Spring plan supports fashion distortions, as it should, we have limited distortions to our inventory investment leaving more room to chase trends in season.

Number five, customers love the new store design.

We'll end this year with 35 stores in the new Easton design format including five remodels where we are reading sales lift to inform our capital planning decisions.

Initial indications are good but premature.

Customer comments have been incredibly favorable.

We will be conducting formal customer research over the next six months to better understand the impact of the new design.

Number six, customers are beginning to experience the new service model.

This Summer, we rolled out our new service model and we're beginning to see it deliver with consistency across all stores.

This service model is about providing customer engagement that is passionate, friendly, helpful, and real.

Fellow shoe lovers who are enablers for our customers, by focusing on service instead of sales our associates are viewed as partners, fellow shoe lovers, not just salespeople whose motives are tied to personal gain.

This behavior shift is no small task when you consider that we're asking almost 9,000 associates to deliver it.

We expect to see consistent delivery of the service model in the near future.

Number seven, market share.

Although our comp store results for the first nine months of 2007 have been lackluster, we continue to increase market share due to new store growth at DSW and expansion of the Stein Mart leased business.

Third quarter to date sales increased $123 million over last year.

Finally, we are on track to launch eCommerce during the first half of 2008.

We understand that multi-channel customers represent significant growth potential for DSW and we are excited by the prospect of combining eCommerce with our successful and growing loyalty program.

We'll provide more color around what we're planning and specifics around timing as the launch approaches.

We continue to make significant progress against our long term growth strategy despite short-term execution challenges and operating in a more challenging environment.

We fully appreciate that strategy without execution has no value.

We will continue to proceed cautiously in this uncertain environment while controlling the factors that will strengthen our capability and lead to long term shareholder value.

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

Thank you.

Could you now please instruct the callers how to indicate a question?

Yes.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Christopher from Susquehanna International Group.

Please proceed.

Good morning, everyone.

A couple of questions.

I guess first, Debbie, for you.

Just given the shifts in the merchandise strategy particularly with the Juniors and vulcanized and the mens boots is that factored into your thought process for the fourth quarter and do you anticipate given the strong performance in Q3 on the merchandise margins, do you anticipate that merchandise margin to continue to increase in Q4 given your comfort level with regard to inventory?

Well, let me just address the first part of your question.

First of all, some of the inherent weakness in some of the categories in Q3 I think we'll continue to see that into Q4, specifically in the casual area around flats.

Flats is still comping very positively but let me just clarify that in Q1 and Q2, sales were outpacing inventory significantly.

In Q3, the inventory started to outpace sales in flats into Q3 and I think will continue into Q4.

What we've done to offset that in Q4 is there's some other categories that are starting to emerge that are starting to offset that inherent weakness in some of the old flat business, and that is more in the comfort flat business so we think that there should be a balance going into Q4 that should be able to offset any inherent weakness in the margin coming out of the casual category.

So yes that has been factored into the thought process for Q4.

Okay and then just in terms of sort of key products as you look to 2008, you kind of threw a lot of things out there in terms of what's working for you now and obviously flats as you anniversary the numbers going into next year.

Any key categories?

Is it shifting, you mentioned the dress business.

Is it continuing to shift in that direction or do you anticipate still casual being a strong component to the business going to Spring of 08?

For Spring of '08, I see a distortion into the dress shoe category but it's not as significant of a distortion as what we saw this year, building the flat category so there will be, I have down trended some of the casual business and have moved that into the dress business, but right now, I just have to tell you that I've not seen for the Spring season any major item or category that was as strong as what flats was for us this year, so I'm hopeful that getting into the marketplace that we'll be able to recognize a bigger distortion than what I've seen so far, but right now, they 're just moderate distortions and flats will continue but we will continue to manage that in a different way.

It will go into missy comfort flats and we will also make sure that we tighten up the SKU offering to the consumer and also make sure that we keep open to buy liquidity in case we see any further down tick in the flat category.

That's helpful and the last question I have is just for Doug.

Just on the -- in the third quarter, the operating expense line, in terms of SG&A was certainly pretty impressive.

I was just wondering maybe you can just quantify to some degree with the relaunch of the loyalty program and the reduction in bonuses.

How much that was in the period just because it looks pretty significant in terms of decline for the third quarter given all the growth initiatives and investments in IT, just wonder if you could add some clarity to that and maybe how we should look at that for Q4?

Yes, the Q3 items are really kind of one-timers as it relates to the third quarter.

As we already said in the script, the loyalty program launched last year was about $4 million and the reduction of our bonus accrual is an impact comparable to last year of roughly $7 million.

So, those two items account for the major points of the decrease in SG&A.

Okay, and some of that should be offset going into fourth quarter?

In other words it should work the opposite way in fourth quarter?

On the rewards accrual, yes.

We benefited the fourth quarter last year of about $0.08 in the reversal of that accrual but the bonus is already accounted for.

Thank you very much.

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

Please proceed.

Yes, thank you.

On the lease departments, I know you changed a little bit some of the offering in the Stein Mart stores.

Can you just give an update on how that went for you?

Yes.

What we did is we evaluated the brand and price point architecture of the product we were putting into Stein Mart and we actually shifted a little bit out of the core merchandise into fashion merchandise.

The customer response on that in terms of sell-throughs per week was very very favorable, so I guess what I would tell you is we moved from being a predominantly core classic middle of the road kind of an offering to a blend between fashion and core, and the results were very very positive.

Okay, great.

And Debbie, in the mens business, it seems to have been tougher for you for a little while now.

Can you just give a sense on what you think you can do to improve that and how committed you are to maintaining the same square footage devoted to that department?

Okay, well, first I think we should probably, David, back up a couple of quarters and remember that I articulated that the place that we were struggling the most was finding the right inventory levels and sales levels for the traditional dress and casual component of the business.

We have steadied that in the water now.

That seems that we found our level, the right blend between dress and casual traditional and the inventory levels to support that.

The strategy behind that was to reduce SKU count and be in stock on core items and key vendors so that the male consumer that was coming in to buy core product would be able to find his size.

We've been able to do that and in this third quarter earnings release, that's why I reported that the men's dress and casual we've actually had a good double digit comps there and that was because of the strategy that I just explained.

The place that continues to be a challenge for us and we just need to find what the right level is, is in the young men's piece and that's the young men's fashion piece.

We continue to revise our sales based on customer response and our inventory levels.

I still don't think we have found the low there.

I think we're close to that, David, but I don't think we're there yet.

Every other category though, was strong for us in men's and the big drop that we took third quarter was specifically in two areas--young men's and in the seasonal boot category.

So I'm feeling very good about where the core of our business is right now that we've got that managed, we've got the right SKU count inventory levels and we're just waiting to continue to find out about the young men's area.

Okay, great.

And then one last question, just regional differences that you're seeing in your business, even including through November?

Are there big distortions there especially with the concerns about Florida and California?

There's no significant or notable differences, David.

Okay, thank you.

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

Please proceed.

Good morning, everybody.

Good morning.

I guess a couple of questions, Peter or Doug or Debbie, whoever wants to take it, on the inventory, you outlined in your points one and four, Peter, that you were looking at some limited distortion and getting more comfortable at clearance levels but there's been a tremendous amount of gross margin risk, we think, in 2Q and what's probably going to be apparent in 4Q.

Is there a sense that most of this is fashion misses and just not getting the kind of reads that you got last year in some of these categories?

Or alternatively, is there a sense that you guys could do more with lower levels of inventory?

When you talk about lower distortion, are we really talking about just taking the in store inventory levels down?

Do we think we need to do that?

Thanks.

Thanks, Jeff.

I'll take a crack at this and I think you hit on it.

Inventories obviously involve a lot of different things.

In terms of what's happening in the second and fourth quarter of 2007 in terms of that markdowns that we're taking, really, what it ends up being is, what we've determined is that during the peak seasons, first quarter and third quarter, you really need to focus on selling full price.

The customer is oriented towards that and we take marks, we have a clearance rotation that's continuous all the time and the reality is adding to that rotation or taking promotional markdowns, the customer doesn't really bite on that until it's time to buy sale.

And so what we've done is we've given ourselves this weapon, if you will, in the semi-annual sale where we can move through large chunks of inventory, generate significant regular price sales, introduce the customer to the next seasons fashion and we feel that this is really the best way to move through inventory and the result is that we're entering seasons cleaner.

We're seeing, what you're seeing is a shift versus our history of markdowns probably from third quarter to second quarter from first quarter to fourth as we accelerate clearance through these sale events and we think this is a pretty smart weapon to have whether you're beating your sales plan or missing your sales plan.

To comment on distortions, there's really just I think group learning that we had.

Being a fashion business, you have to make distortions.

If you aren't making distortions, you miss fashion trends, and I think the team has been very good at looking around corners and matching these distortions to what customers desires are.

I think the level of inventory that you've put behind a distortion is always a gamble, especially when you're talking about across many categories in the case of flats, it was across many categories and it was a significant increase to the prior year, so basically, what we're trying to do is be more, even more deliberate about that process.

So Debbie has mentioned that probably the distortions on flats were -- flats are still selling.

I mean obviously we're running like 50, 60% comps in flats but we have more inventory than that.

There will be more flats in the business obviously for Spring.

I think it's going to be a soft -- it won't be a increase in inventory in Spring for flats.

It will probably be a decrease.

But the new distortions are more around dress shoes and those distortions we're saying are going to be a little bit more conservative going into the season and we're positioning the opportunity through back ups and other things to chase the trend, should the trend be stronger than our inventory investment.

So that might be more detail than you were looking for, but I hope that answered your question.

No, we always love detail.

And on the open to buy, I mean how much -- can we infer that inventory is going to be down at a level lower than sales to end the year here, and what kind of open to buy are you keeping relative to the past levels, relative to last year and the year prior when we move into next year?

Thanks.

Well, in terms, I'm going to answer the inventory levels.

This business has a -- for a shoe business, it has a very good turn.

I think in store we're turning units four times a year.

We think this business can turn 5, 5.5 times a year in store and we're seeing that with the smaller format stores.

It's a practical reality that if you can do the same sales in a 15,000 square foot store that you did in a 25,000 square foot store, you're turning faster.

So what that means is we have -- theres not a lot of concern that we enter each season with inventory positioned flat or down in an expectation of mid single digit comps off of that inventory, and the way we're doing that, there's a few levels.

First level is we're pulling inventory out of the total system.

In other words inventory that's not in the stores, our distribution center becomes more efficient every year, the flow of product becomes more efficient.

I think taking inventory out of the system and managing flow to meet demand is really what we're talking about.

In store capacities, you're not going to see a decrease in the inventory in our stores.

We've established capacity targets that we think are appropriate for the sales and we're managing the business to those capacities.

And we monitor that weekly by store.

So I guess I could tell you that going into first quarter, our intention is to be flat or down in inventory.

Our intention in clearance is to be even lighter than last year.

I think what we've done is we've proven to ourselves that our historical levels of clearance can be low -- are probably high compared to what they can be and it doesn't hurt sales, because there's always that concern.

Clearance speaks to our opening price point customer, and in effect it's our opening price point offering and so it's important to always maintain some level of clearance but I think what we're discovering is what perhaps the appropriate level is and we're committed to entering first quarter with less than last year.

Great, good luck, guys.

Thanks a lot.

Thanks.

Your next question comes from the line of Roxanne Meyer from CIBC.

Please proceed.

Thanks, good morning.

Just a few questions.

First a housekeeping question.

Can you give us the store count on square footage as of the end of the quarter?

Sure.

The square footage for DSW, 5.99 million square feet.

Okay, great.

And then in terms of some of the merchandise call-outs the areas that weren't as strong, young mens and young women's, have you noticed those particular areas as being a challenging spot for the whole, throughout '07 and is there something going on there in the competitive landscape that you think makes those categories increasingly tougher or is the weakness there just a reflection of the distortions that you just happened to go with this year?

This is Debbie, I'll take that question.

First of all, let's just look at the junior area in general.

The junior category actually was very very strong in Q1 and Q2.

Going into Q3 is where we started to see a little bit of softening and specifically that was around junior flats and junior vulcanized.

In all the years in retailing, I've never really seen a category start to decelerate in sales as aggressively as it did in the middle of Q3.

Q1 and Q2 sales outpacing inventory.

Q3 inventory started to outpace sales, so it was strong in the beginning half of the year and then started to decelerate a little bit toward the third quarter.

I think what caused that is there was so much novelty and fashion in the industry and we weren't the only ones to have it.

I think probably everyone is going through these discussions today that the trend, how the customer is shopping and what she's shopping for actually we started to see a shift in that in the middle to the end of Q3.

That was what I addressed in the earnings comment around the return to more cleaned up classic styles, so I think there was probably so much fashion in the industry and we all reaped the benefits and the rewards of that in sales and margin in the first half and that started to change in the middle of the third quarter so I think we're just going to keep our eye on that.

It doesn't mean that the junior business goes away.

It just means that you have to watch it.

You have to manage it.

Tighten up your SKU count, tighten up your inventory levels, and wait for the next item to emerge from the market, which we've not seen that happen yet, so we're holding the inventory levels there very very tight.

There is some good news though in terms of how customers are shifting into what they're buying and that is into the more cleaned up classic look.

We will take advantage of that Q4 and moving into Spring of 2008 in the classic dress area and also in classic missy flats.

So, there's a little bit of good news there to offset what we've just experienced but the thing that is a little challenging to us all right now is there hasn't been a big category or a big item that has emerged yet that would show that it drove significant volume for the Spring season.

Still have a few more shoe shows to go through though so we're hoping to see that.

Great.

Thanks so much for that color.

It was really helpful.

Do you feel at this point, then, going into Spring that the amount of novelty products you have is appropriately downsized or that there's still some risk there?

No, I feel we have addressed anything that was a risk.

Okay, great.

And then just to follow-up on a prior question regarding Q4.

I guess I just, can you please provide some additional clarity around your expectations for gross margin?

Because on one hand it sounds like you're fairly comfortable with your inventory levels going into Q4; however, your guidance implies, I mean, a 1% operating margin so I guess I'm having a hard time understanding how to get there.

Well, obviously, we have some inventory we're going to have to deal with from the shortfall in sales, but it should be noted that in the second quarter, we ran the sandal sales sandal and more and the Summer sale for the fourth quarter this year, we're just anticipating the winter sale and a lot is going to depend on how we liquidate the merchandise throughout the quarter.

So, we're being cautious in the top line volume and again, we know the inventory target we have to get to, so we're going to have to be as aggressive as necessary to get to that target.

Yes, I'd like to offer, this is Peter also, keep in mind that we're expecting to miss our internal plan for sales in the fourth quarter, and so that creates even though we've been agile with inventories and deliveries, that creates the need to take additional markdowns in the fourth quarter as well, even if the comp result is, say equal or better than third quarter, we're still going to miss our plan and there will be inventories to be dealt with.

Also, I think I suggested in the discussion earlier that we're targeting lower levels of clearance entering first quarter than we had last year, so that would mean accelerating some markdowns into our sale in fourth quarter so that's part of the story.

Okay, thank you very much.

That's helpful and best of luck.

Thank you.

And Roxanne, I failed to answer the other part of your question.

We had 250 stores at the end of the quarter.

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

Please proceed.

Good morning.

You guys, you kind of just touched on my question but just for some additional clarity if you could speak to either promotional cadence for fourth quarter.

Sounds like aside from maybe the scale of some of the markdowns it should differ from what we've seen in previous years with, or what we saw last year with just the after Christmas sale; is that correct?

This is Peter again.

I want to speak to the promotional cadence.

This will be the third semi-annual sale event that we will have executed and a year ago, the first one was explosive.

It had exactly the kind of top line expectation we were hoping for, it met that expectation; however, we lacked in our systems and process the precision on pricing, so quite frankly, we gave away a lot of, we gave away more shoes at a lower price than we think we should have had to but it's what we were capable of then.

The second sale that we did at the end of the Spring was more precise in terms of pricing but I think we had a bigger obstacle to overcome with the shortfalls in sales in the first half of the year, so this sale, we have high expectations that like the last two, the first one was very good.

The second one was better.

We believe this one will be even better.

It may culminate more in margin that we won't be -- we've got greater precision in pricing, we've got greater execution at the store level in terms of pricing goods, so our expectation is that the event will be successful and it will help us move through goods better.

The balance of the promotional cadence for the quarter, again, being footwear, we aren't a gift destination; however, we do feed off this natural traffic that's out there in the fourth quarter.

We've experienced some really good success with our loyalty customers by providing them benefits that we promised we would give them when we relaunched the program, opportunities to earn bonus points, et cetera, and that's really where the -- since it's 70% of our sales that's where the promotional cadence is really directed, and those efforts typically do not generate markdowns.

What they generate is accelerated reward certificates because they're accumulating points faster and a reward certificate is relatively inexpensive relative to the average dollar sale that accompanies it and it is sort of a bounce back because it gives people a reason to visit us.

So that's kind of the overview of the promotional strategy.

I don't know if Doug wants to give any color on fourth quarter?

No, other than what we said before regarding the difference between second quarter and fourth I think we've covered it.

Thanks, guys.

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

Please proceed.

Hi, good morning.

Good morning.

A question, if I look back at 2006 and I look at the quarterly variability in earnings per share and earnings growth, it was pretty fairly consistent throughout the year and then as we moved into 2007, there's been enormous volatility in your earnings and in your margins on a year-over-year basis and what I'm wondering is when we look into 2008, given that 2007 volatility was partially caused by changes related to the 52 week versus 53 calendar, should we expect that earnings growth and margins should look more consistent or is the business going to just continue to be extremely volatile?

Thank you.

Well, I'd like Doug to take this, because he spent a lot of time looking at it but I wanted to offer this, that we give annual guidance and I know that leaves some question around what the we're thinking by quarter.

I have to tell you that we expected the first and the third quarters to be the big earnings quarters this year because we understand the underlying details around last year and what our plans are for this year.

So I'd say internally it doesn't appear volatile because it's what we were planning.

In terms of missing our expectations on sales, that causes additional markdowns before the end of the season and that adds, that accentuates the natural pattern that we understand, so I think, I just wanted to share that with you because the word "volatility" suggests that, and I don't want anyone to think that we're the ones surprised.

I understand why our investors on the Street might be because they are not privy to internal expectations by quarter.

So Doug, why don't you?

Well, and to add-on and John you probably caught out the 53rd week shift benefiting the first and third as we said at the beginning of the year but I think it's also important to remind people on the Q3 and Q4 impact.

Remember we had the, of last year, that we had the marketing expense associated in the third quarter last year which makes our increase look better in the third quarter this year, as well as, remember the rewards reversal in the fourth quarter last year benefited us about $0.08 in that fourth quarter.

It was a $0.04 expense in the third and $0.08 of benefit in the fourth.

So that adds to the volatility as well and then you add to the top line this year where we had negative 3% comps roughly in the first and third quarters.

That's going to add to some things that makes those comparisons a little difficult.

So we understand it looks up and down but some of that, as Peter already, mentioned was anticipated.

Okay, just trying to get some clarity here, I believe at the beginning of the year, you guys talked about the second quarter and the fourth quarter being flattish on a year-over-year basis due to the 53rd week shift.

Now we're looking at $0.05 to $0.10 in the fourth quarter versus $0.37 last year, and I really would like it if you would answer my question about fiscal '08.

Are we going to have this extreme volatility continue in the earnings on a quarterly basis or should the year-over-year changes in earnings and margins be more consistent?

Thank you.

We're not going to give a lot of color on 2008 but you would expect that the, as Peter said, that the margin opportunities are going to be in the first and third quarter taking advantage of the regular price.

So I think we're going to see maybe if we have better top line performance, better comps in the first and third quarters that would mean higher highs and obviously if we don't have to liquidate inventory off those first and third, the lows won't be as low.

So by taking advantage of those first and third quarter margin opportunities, you should see some ups and downs, but the baseline sales is going to dictate most of it, so I hope that gives you some clarity.

We're not trying to evade the question but it's like predicting the future by quarter and that gets to be a little difficult, but hopefully you're understanding the cadence of the business a little bit and we won't have those calendar shifts and rewards reversals, those kind of things disrupting the cadence either.

I think it's also worth adding that this year, not only did we change the cadence in terms of utilizing sale events.

We also pulled markdowns, compared to our history, pulled markdowns from trailing quarters into those quarters, so we kind of took it on both sides.

If you miss your sales plan in first quarter that increases your markdowns in second and if you're taking -- if you want to enter third cleaner than you ever have historically, you're pulling markdowns from third historically and we're doing the same thing in fourth.

So I think this is the right direction for the business because getting markdowns behind you quicker is a good thing but it does create the optic that you're observing and I think we're expecting, to use your words, we're expecting less volatility if we hit our plan.

Great.

That's helpful, thank you.

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

Hottovy from Next Generation Equity Research.

Please proceed.

Good morning, everyone.

Just a couple quick ones hopefully here.

First of all just in terms of the Winter sale.

Are you guys looking at any more incremental advertising expense associated with the sale?

And correct me if I'm wrong but I thought it was about $1 million last year for it.

Is there anything different we should be looking at in our model?

We've looked at what is most effective and what's interesting is we did a test with television last year at Christmas and honestly, it did not give us the result we were looking for.

So we're going back to the old faithful, e-mails, direct mail, and voice mail actually, which is something that's an emerging thing.

Those are showing very good response rates and it is focused on our loyalty customer.

The other marketing -- so it's not very expensive to be honest , and the other really impactful marketing that we're doing is a big red sign in front of the store that says, "Up to 80% Off", we found that to be very impactful to the non-loyalty customers and the natural traffic during the sale period.

So I wouldn't expect, I'm not sure, I don't want to speak to an expectation of what marketing costs will be in the fourth quarter but I can tell you that's what we're

So associated with the sales can be lower than last year?

The marketing spend in total total will be roughly flat as a rate to sales.

Okay.

Second question I had just had to do with the new format stores and if you could give us a little bit more color in terms of the sales per square foot, where that's tracking compared to the rest of the store base?

Well, I mean, I'm probably going to sound like I'm repeating stuff we've said in the past because this story hasn't changed much.

With the chain at about 215, $217 a foot in that range, the first year a store opens, historically it would be at 80% of that number, which would put it about $170 a foot.

Our new stores are opening North of that Company average number.

So that's a significant, I mean if you just do the math it sure feels like 30 to 40% better sales productivity, and that story continues.

We've looked at 54, the last 54 stores that we opened which include 2006 and we kind of chunked it up to how many of these stores are hitting the ball out of the park.

How many are maybe soft but we can explain why they're going to get better such as the comment earlier on lifestyle centers and being the first guy open in a lifestyle center and putting shoes on the feet of all the construction workers which is something we're not going to allow to happen in the future, and I think we're very satisfied that the majority of our stores are meeting our expectation.

So the productivity numbers and the four wall profits are right on track.

Okay, that was helpful.

Just my final question, just can you give us any sense as to how long the eCommerce development costs are going to last into '08 and just a sense as to how long that's going to continue to drag on the SG&A line?

As we mentioned in the call, the eCommerce channel should be up in the first half of the year.

So the development cost will basically be extinct so to speak because we'll have volume to offset those.

So I would say into the first half of the year, where there will be no sales but just expenses for the people that we've got on board to open it up and then hopefully have some top line volume to offset those and certainly decrease the impact on the bottom line.

Okay, good luck with everything.

Thank you.

Your next question comes from the line of [Jay Stahl] from DSW.

Hi, this is Jay Stahl from Morgan Stanley.

Just had a question on gross margin.

You guys have been really helpful giving really great color on the details of SG&A.

Just wanted to hopefully understand a little bit more about what might be going on in 4Q for gross margin.

Let's just say, just for conversation sake it accelerates by 400 basis points.

What part of that would be from occupancy and what the part would be from inventory?

Jay, nice to meet you first of all.

I'm sorry, some of the call broke up a little bit.

You've made an assumption and I didn't catch the number I'm sorry.

Oh, I'm sorry.

I was saying let's just for conversation sake, let's say gross margin decelerates by 400 basis points in 4Q so that was the the number that I used.

So you're making that assumption.

Well, the occupancy is going to have some significant deleverage this quarter because we had 14 weeks versus 13, so in your example of 400, at least half of that would be using your example would be, using your example, would be occupancy deleverage because we have less sales.

I see.

So I hope that helps a little bit.

So I guess my follow-up question and that does help and I appreciate it.

So my follow-up question is, is it mostly just from not having the extra week or is there, because the lifestyle centers are what I assume higher occupancy rate, is there any extra deleveraging factor going on from the fact you're moving into more expensive real estate?

Primarily the extra week.

Primarily the extra week.

Okay, great and then one more question if that's okay.

And then one more question if that's okay.

With the inventory, was there any change to the inventory reserves in third quarter and do you expect maybe any in fourth quarter?

There's changes every quarter to the inventory reserves but that reserve number is really just an identification of the clearance balance from quarter to quarter, so we can talk to you about that off line as far as the accounting support on that, but not really noteworthy as far as this audience.

Okay, great.

Thanks so much for your help.

Thank you.

Your next question comes from the line of Brad Leonard from BML Capital.

Please proceed.

Hi, thanks for taking my call.

Quick housekeeping question.

The eCommerce, did you guys say $8.5 million expenses for the year?

Yes.

Okay, and so how much of that has been expensed year-to-date?

All but about $3.5 million, so $5 million.

$3.5 million is going to get to Q4?

$5 million to date and another $3.5 million we expect in the fourth quarter.

Okay.

I guess, I mean, if I look at Q4, I mean to talk about a 1 or 2% operating margin, that is the worst Q4 you guys have had in a long long time, and to help me understand this, from last call, when things were still, you guys were pretty adamant about sticking to your guns and the $1.60 something a share and inventories were clean going into Q3, is this basically sales are below plan, instead of comping 0 to 3 up, you're going to be comping slightly down and you had to blow through a bunch of merchandise and the gross margins are just basically taking a hit in Q2 and Q4?

Is that to sum it up reasonably?

Absolutely, yes.

There are no further questions at this time.

I'd like to turn the call back over to Ms.

Leslie Neville for closing remarks.

Okay, thank you for joining us this morning.

As always, if you have follow-up questions, feel free to give us a call here at our home offices.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.