Designer Brands Inc (DBI) 2007 Q4 法說會逐字稿

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

My name is Shawn and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, 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 quarter and year ended February 2, 2008.

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.

With that, I will turn it over to Doug.

Thanks, Leslie.

Good morning, everyone.

This morning, we announced our financial results for the fourth quarter and the full year of 2007.

These results fell short of our expectations due in part to a more difficult economic environment, which negatively impacted our results.

As previously released, net sales for the fourth quarter increased 1% to $332.5 million.

Same store sales decreased 1.7% for the comparable 13-week period versus an increase of 1% last year.

For the year, net sales increased 10% to $1.4 billion and same store sales decreased 0.8% for the comparable 52-week period versus an increase of 2.5% last year.

Gross profit for the fourth quarter decreased 520 basis points, due mainly to an increase in markdowns.

As anticipated, occupancy expense deleveraged to last year due to the unfavorable comparison of the 53rd week in 2007 and the increased expense associated with the additional 102 Stein Mart stores.

During the quarter, we also took a $1.6 million charge associated with the impairment of assets in an underperforming store and the severance for associates related to the decrease of shoe processing for Value City department stores.

For the year, gross profit decreased 230 basis points to 26.3%.

The merchandise margin rate, which is gross profit margins excluding occupancy charges and warehouse expenses, decreased 160 basis points due to markdowns related to clearing end-of-season merchandise and a strategic decision to permanently decrease clearance inventory below historical levels.

Clearance units per store were down over 20% at year-end.

SG&A increased 190 basis points in the quarter due to the same store sales decline and the unfavorable comparison to last year where we had a one-time benefit from the reversal of our loyalty accrual.

For the year, SG&A rate decreased 20 basis points to 20.5% of sales due to a reduction of our 2007 bonus expense.

DSW did not award any performance bonuses in 2007.

This reduction was partially offset by the $8 million investment for the development of our e-commerce channel.

For the year, the net result was a 210 basis point reduction in the operating income rate to 5.8% of sales.

Net income for the year was $53.8 million compared with net income of $65.5 million for last year, and diluted earnings per share were $1.21 compared with $1.48 a year ago, an 18% decrease.

In 2007, our capital expenditures were approximately $100 million and reflects our resolve to invest in future growth.

We invested approximately $40 million into new and remodeled stores.

We invested another $37 million into our IT infrastructure and our e-commerce channel that we expect to launch in the first half of this year.

After this significant investment, we remain with over $130 million in cash and short-term investments with no debt.

Now to 2008.

Given the uncertainty of the current economic climate and declining consumer confidence, we are not providing annual EPS guidance at this time.

We are limiting our outlook to the first half of the year and can tell you we expect negative comparable store sales for the first half of 2008 and earnings performance for the first half is significantly below the first half of last year.

However, even in a challenging environment, we will continue our investment in future growth by opening at least 30 stores, launching our e-commerce channel and continuing our investment into our systems infrastructure in 2008.

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

Thank you, Doug.

2007 did not meet our expectations as customers' shopping behavior made the assessment and reaction to selling patterns more challenging.

In addition, lackluster innovation of product compromised the amount of fresh fashion to the consumer.

Having said this, let me share with you how we are responding and what tactical actions we are taking that support the current retail environment, as well as our business model and our long-term strategy for DSW.

While DSW has always been a value proposition and we are confident that our unique business model will allow us to continue to increase marketshare in 2008, we are also scrutinizing aspects of our merchandise assortment that will emphasize our DSW foundation of selection, convenience and value.

First, sharper pricing and showing a deeper value to the consumer on commodity items is key.

One of the ways we will accomplish this is through taking advantage of additional in-season opportunistic buys.

Our inventory position is one of liquidity and our business model allows for much flexibility in buying.

The combination of these two allows us to take advantage of opportunity buys while at the same time protecting us from risk.

Next, we're focusing and editing our vendor offering and our assortments to ensure that we have what customers want.

This will satisfy her desire for the latest trends and best brands while at the same time making us more important to our core vendor partner.

This will create win-win growth and profit for both of us as we look toward the future.

We were pleased with the results of our Q4 strategy to extend the regular price selling season on transitional items, such as pumps and boots as customers reacted to buy now/wear now trends.

2007 was a record year for boots in DSW with higher AUR and gross margin in this category at record levels.

In addition, while it is a small piece of business in Q4, a more robust strategy in sandals for (inaudible) and fashion stores exceeded our expectations and provided us with invaluable insight into early trend reads and an indication into what customers across the country will respond to this spring.

The remainder of the category had negative comps in Q4.

Specifically, in the casual area, we were disappointed with our young attitude results as the flat trend and vulcanized trend continued to slow and a dominant fashion trend has yet to emerge from the market.

Some of this business has shifted into young attitude [trust] where we did see strong, positive comps.

For spring, I'm encouraged by the product offering I'm seeing.

There is excitement in footwear as color, prints, natural bottoms and flat sandals have all emerged as important must-haves.

There is a good synergy between footwear trends and ready-to-wear in dresses and skirts putting us in a good position to capitalize on our core business.

As we move into 2008, we are closely monitoring trends, remaining flexible and managing our inventory cautiously.

With our fashion-right assortment and our value proposition, we believe this environment represents an opportunity for DSW to become more relevant than ever to our customer and continue to capture marketshare.

With that, I will turn it over to Peter.

Thank you, Debbie.

2007 was a difficult year at DSW.

We fell short of our expectations, ending the year with negative comps and earnings below last year.

Like many retailers, we felt the effects of a difficult economic environment.

Despite these pressures, we remain committed to our long-term growth strategy by investing in the future even in tough times.

We hold ourselves accountable for the factors within our control and we will continue to address business improvements through improved execution and smart management of inventory, expenses and customer traffic.

As we enter 2008, it seems likely that we will continue to face a challenging economic environment.

As a result, we will remain focused on improving our current performance while remaining true to our long-term strategies for growth.

These include disciplined inventory management, delivering a remarkable customer experience, and continuing to grow marketshare.

I would like to share how we will position ourselves in 2008.

Number one, disciplined inventory management.

Our 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 towards current fashion than clearance, we've consistently positioned the business for upside while mitigating downside risk.

We ended the year with inventory down on a cost-per-foot basis, and clearance at the lowest level ever.

As we enter 2008, inventory levels will be appropriate, providing a reasonable level of protection against continued comp store weakness.

Number two, remarkable shopping experience.

We remain committed to offering our customer a remarkable shopping experience.

This idea permeates all we do from our remarkable locations, store design, execution of the service model, loyalty program and more.

We continue to grow our presence in top markets and in the best retail locations around the country.

This year, we opened 37 stores in new and existing markets.

The overall real estate strategy continues to perform as expected.

2007 new stores are trending to superior sales per foot to the chain average and delivering targeted profitability rates.

We ended this year with 63 stores that incorporate elements of the new design and now have five remodels where we are reading sales lift to inform our capital planning decisions.

Initial indications are positive and customer comments have been incredibly favorable.

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

Last fall, we launched our new service model.

We're beginning to see it delivered with consistency across all stores.

This service model is about providing customer engagement that is defined by the terms passionate, friendly, helpful and real, fellow show lovers who are enablers, who love shoes and want to talk to customers about them.

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

Improved retention rates and increased enrollments are driving member growth.

Last year, we gained 1.3 million new members, bringing our total to 8.5 million members.

We understand the power of this important asset and continue to nurture and improve the relationship we have with these loyal members.

We're on track to launch e-commerce during the first half of 2008.

We understand the multichannel customers represent significant growth potential for DSW and we are excited by the prospect of combining e-commerce with our successful and growing loyalty program.

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

Number 3, gaining marketshare.

Year-to-date sales increased $126 million over last year, up $144 million on a 52 to 52-week basis.

Although our comps store result for the year was negative, we continue to increase marketshare due to new store growth at DSW and expansion in the Stein Mart lease business.

In 2008, we will open at least 30 new stores and launch our new e-commerce channel.

So look forward to another year of significant marketshare growth.

We continue to make good progress against our long-term growth strategy despite short-term business challenges and operating in a more challenging general economic environment.

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 will turn it back over to Leslie to introduce Q&A.

Okay, now to the Q&A.

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

You are welcome, of course, to get back into queue in the same manner as you did originally.

Shawn, could you now please instruct the callers how to indicate a question?

(OPERATOR INSTRUCTIONS).

John Shanley, Susquehanna International.

Thank you, and good morning, everybody.

Pete, you had previously indicated on the last conference call that product margins would be impacted in the fourth quarter based on taking some heavy markdowns, which you obviously did.

Has this -- and that was all intended to keep the first quarter pretty clean and basically with fresh merchandise and so on.

Has that policy changed at all?

Are you basically feeling that the promotional environment is going to likely continue into the first quarter, and that is the real reason for the reluctance to give us any guidance in terms of EPS results moving into '08?

Thanks, John.

Yes, I think it's more about just matching the inventory to the sales trend, and clearly, in the fourth quarter, we were unable to do that, and we always focus on managing inventory first, knowing that opening seasons clean is really the key to having the opportunity to change a trend and we are going to continue to monitor sales trends and make appropriate adjustments to inventory.

It is less f-- for us, as you know, we're an everyday value model.

It is less about promotion.

We do leverage our loyalty program with benefits that come with the program such as gift with purchase, etc.

Basically, we stick with our value price proposition, as Debbie noted in the conference earlier comments.

And at the end of the season, we clean up whatever is left, and that is what we saw in the fourth quarter.

Okay, fair enough.

Debbie, we just got a new 30% off spring promotional flyer.

Is this an anniversary and existing promotion and are you -- is there any concern now that some of the spring merchandise that you have in the stores may not be moving as quickly as planned and therefore you are doing some early promotion?

Yes, hi, John.

First of all, this is not anniversarying anything that we did last year, and as we said before, we remain committed to our value proposition.

We are pleased with some of the trends that we've started to see emerge as I mentioned to you -- the color, the prints, the natural bottoms and the flat sandals.

As has been said many times before, traffic, obviously, is a concern to all of us, and what we were doing here is we are testing this concept to see if we can address traffic and also drive some regular price -- some additional regular price.

Yes, John, we're glad you got the e-mail.

That is a 30% off e-mail I believe you got -- 30% off one regular priced item.

Our clearance product has been moving very well, and the weather was cold going into Easter.

We wanted to give our best customers, which apparently we've got you selected as one, the opportunity to come in and get a deal on a regular priced item and hopefully when you go redeem that, which we're hoping you will, you will buy a couple of units.

I see.

So it is more of a promotional or just stimulating store traffic, is that correct, rather than the clearance?

Yes, it's targeted.

It's very targeted.

There might be 40,000 people that respond in the course of a few weeks, so it's not a massive, broad thing.

I see.

Okay.

Thanks a lot.

David Mann, Johnson Rice.

Yes, thank you.

As it pertains to your first-half guidance, I guess I can understand why the first quarter should be down significantly, but when you look at the second quarter, you had a pretty big gross margin decline last year.

So are you trying to tell us that both quarters should be down a lot?

How should we start thinking about both the sales and margins in the first two quarters?

It's a combination of sales, margins, as well as some expenses.

We don't anticipate, as we said in the script, that the e-commerce channel will be up and running until the first half, but later part of this half.

There are additional expenses we are incurring until that opens.

Margins will be difficult given the fact that we have negative comps and although we measured our inventory and kept it conservative moving into it, we have to be prepared that it may not be appropriate enough given what the sales trends might be.

So David, I know that may not answer your question particularly, but I can take another question if you would like.

I guess the core of the question is you did have a big drop in the second quarter in gross margin, so even with that, you are still cautious about the second quarter?

Is that reasonable?

Yes.

Okay, and then just one other quick question.

You talked about stepping up your opportunistic buying of commodity items.

Can you just refresh our memory on what percentage of the inventory might commodity goods represent that you can perhaps target with this promotional or sharper pricing?

Yes, David, this is Debbie.

There are really two ways I would like to answer that.

First of all, we do have -- there has always been a focus towards supporting key commodity items and I talk about those as big key items.

That focus has not changed.

That is consistent.

It continues to move forward.

I think there is an opportunity to take advantage of more of the in-season, off-price opportunities than we ever have before.

As you know, that is becoming a smaller component of our business as we continue to do in-line and product development toward make-ups and that has become the bigger portion of our business.

What I'm going to be doing is I'm going to start adding in a little bit more of the in-season opportunistic buys, so that I can put some more deeply valued prices offered to the customer on the floor.

Is that already in the stores or how quickly can that ramp up?

Well, David, we are buying in-season opportunities all the time, but as these lists come available from the market, which they have already started to become available this season, we will take advantage of those opportunities as they become available.

Great, thank you.

Jeff Black, Lehman Brothers.

Thanks, good morning, everybody.

Doug, on merchandise inventories, where did they come in for the year?

Virtually flat to last year on a cost per-square-foot basis and clearance inventory levels were down over 20%.

Units were down 20% per store last year.

So what's just the balance sheet number?

What is the line item merchandise inventory on the balance sheet?

We haven't put a balance sheet out and the main reason we didn't was just because there are some -- a small percentage of our cash and short-term investments that may get reclassified to long term.

I would say less than 10% of that.

So at this stage, we didn't release a balance sheet, but on a cost per-square-foot basis, as I said, it is flat to last year.

And then since you brought it up, of the $130 million in cash, how much of that is short-term investments and are you talking about auction rate securities that need to be reclassified and what is the impact of that?

Yes, of the $130 million, virtually it is all cash or treasuries, and there is a portion of that -- as I mentioned, about approximate 10% of that is in auction rate securities that we will find out over the next couple of weeks whether those will be classified as short term or long term.

So when are we getting the balance sheet, do you think?

In the next couple of weeks when that happens?

With the 10-K, correct.

And then any comments on operating cash for the year?

Where did that come in?

Well, the cash flow from operations or the free cash flow was about $70 million, but the total cash difference -- from the year-end cash and short-term investments was $170 million last year, and it is close to $130 million this year.

Okay, and on the CapEx for '08, what are you guys still planning?

Is it closer to $80 million than $100 million?

How should we look at that?

It's actually right in between there.

About $90 million is what we are expecting.

And then finally, on the e-commerce, you're going to start selling in the second half, I presume.

Is that third quarter and what kind of sales targets should we anticipate from the investments?

Well, we are not necessarily planning those sales targets directly or communicating those right now because, Jeff, there are two angles to it.

One is that it could be coming additional sales in the stores and there could be sales online, but we do see this collectively as being an incremental move for us.

But as we've always said, zappos.com out there doing close to $1 billion is a really high number.

We don't nearly expect it to be that, but a lot of the other dotcom retailers have sales in the $20 million range, $40 million range, and at some point in its first 12 months of operations, we would like to hope and think it could break even in its first 12 months of operations as far as a P&L impact.

Right now, we are not giving specific sales numbers for that channel in particular.

And then I will just take one more, Doug.

On the Stein Mart business, what did that -- how did that impact the quarter just in terms of EPS?

I know you gave the sales number I think.

Yes, it's incremental, but again it's geography that screws it up mostly because there is about a 30 basis point negative impact on our gross profit for the quarter because those charges pay for the Stein Mart business.

Our share of their expenses is charged to gross profit and there are virtually no expenses there.

So the additional stores were definitely incremental and we're pleased with that business.

They are struggling a bit, but we're confident that that was a good thing for us to take on those additional stores.

Okay, fair enough.

Thanks a lot.

Patrick McKeever, MKM Partners.

Thank you.

Just with regard to the first-half 2008 guidance, what are the macro factors that play into your cautious guidance on the first half?

What are some of the things that you are most concerned about?

And then, secondly, as we think about same store sales and the guidance, the negative guidance for the first half of the year, should we be thinking more in terms of traffic taking a hit or ticket or a combination?

Thanks.

Yes, we may all weigh in on this.

My comments would be on the macro factors.

Clearly it is traffic and to the second part of your question, we're just seeing that slow down and obviously, for the last six or seven months, we have just seen a steady decline in consumer confidence, which kind of boils in all the external factors that are going on out there.

To be a five-year low and by other factors, people are suggesting it might go even lower.

So we have just got to believe that -- we hope it gets better, but we can't expect it to get better, so we have to plan our business cautiously.

Obviously, the opening of our dotcom business is another factor that we have to see how it goes when we open and that will make it a little more clear and we're still in the process of finalizing the switchover of shared services and figuring out the impact of that with the change in the Value City ownership.

Okay, and then -- thank you.

On -- I don't know if you will answer this or not, but your same store sales decreased 1.7% in the fourth quarter and you're guiding for negative comps in the first half of the year.

Has business slowed from the first quarter or is this just more caution on what might be to come over the next few months?

We are not going to give any detail towards the current performance of 2008.

Okay, all right.

Well, thanks anyway.

Thank you.

Heather Boksen, Sidoti & Company.

Good morning, everyone.

The last time we -- I guess it's a two-part question here.

One, are you guys planning any special promotions around the time everybody starts receiving these tax rebate checks?

And two, last time these checks were mailed out, did you guys see any notable change in -- notable pickup in sales?

This is Peter, Heather.

Basically, nothing special around the tax rebate checks.

I think what we focus on is our most valuable and critical asset, our loyalty program.

So it is more of a one-to-one marketing approach and it's about giving -- understanding what groups of consumers, clusters of consumers, what will induce them to incremental behavior and providing them benefits that create that behavior.

As John Shanley mentioned earlier, one of those is to simply say early in the season, 30% off one regular priced item and I think in about a week or two, it is a gift with purchase for select members and so on.

So really we hope that there is a positive benefit from the tax rebate checks for all retail and we will wait and see, but we're not doing anything specifically targeting that because it really wouldn't fit the overall promotional strategy or brand position for DSW.

Okay.

Last time though that these checks got mailed out, did you see any notable impact to your sales?

We really don't have any information around that.

Okay, and one just quick housekeeping question.

You said the $90 million in CapEx per '08, how much of that is stores, how much of that is IT or anything else?

Stores is $45 million to $50 million of it.

All right, thank you.

Jeff Mintz, Wedbush Morgan.

Thanks very much.

Obviously, 2008 is looking like it's going to be a difficult year, but if we look a little further out, do you still feel that kind of the long-term goals that you've laid out for a 10% operating margin, do you still think that is achievable over time?

Yes, we absolutely do.

Clearly not in the short term because of what we are facing, but as we look back at our business over the past couple years, there are certain quarters where we hit that 30/20/10 mark that we've always wanted to achieve.

Obviously, we want to do that for four straight quarters, but margin improvement is where we are going to get this business to lead to that double-digit operating income and we believe, even though we're investing into the short term for future growth in IT and our dotcom business, that in the long term we certainly see this as a double-digit operating income business.

Okay, great.

And then on -- you mentioned the shared services agreement and the impact on SG&A.

Do you have any sense of just how we should think about the quarters of SG&A?

In the past, the third quarter tended to be a lot higher and in 2007, that wasn't the case.

The quarters were roughly even.

How should we be thinking about '08?

Should we look for roughly even SG&A across the quarters?

Generally yes, but remember last year, we had some -- we did have some adjustments, one-timers.

In the third quarter for example we will reduce that bonus accrual, so there will be some odd comparisons to last year, but generally that rate should be the same throughout the year.

The one difference becoming when the DSW.com business launches, we will have sales going against the expenses that we have inherent in our business, but until that launches, obviously, it will be more pressure on SG&A because there will be no sales yet in that channel.

Okay, thanks very much.

Roxanne Meyer, Oppenheimer.

Great, good morning.

First, as it relates to merchandise, you mentioned categories that so far seem to be doing well.

I'm wondering if you could talk to what categories you think you may be overexposed to.

And also just following up on -- you had mentioned the second part of your strategy.

Was that your editing your vendor offering?

If you could give a little bit more color as to what you're doing there.

Thanks.

Yes, this is Debbie.

So in regards to your first question, there is really no category right now that I feel that we have liability -- inventory liability against right now.

According to our spring strategy that we articulated earlier, the things that we articulated that we expected performance out of are hitting their mark, which is the color, the prints, the natural bottoms and the flat sandals.

Our core business, as you know, is dress shoes, and I'm pleased with our dress shoe performance up and to this time.

So there really isn't anything that I see today that I am feeling uncomfortable with.

I just want to go back and reference it.

The traffic issue obviously is a concern to all of us and that, to me, would be the most overriding reason why we wouldn't be able to sell through as much as perhaps we would have originally anticipated.

And the next part of your question was the vendor offerings.

I think it's very, very important that we continue, as we always do, to identify who the key volume and profit players are within our business model and continue to put an accountability on our vendor partners to continue to perform to the expectations that both of us need to deliver on.

So as we continue to evaluate those brands or those items that do not perform, we weed those out and I would tell you that this year in my mind, I'm marching to two words.

That is focus and edit.

So we will be very finely focused on our core businesses and we will edit out those items, businesses, categories that are not performing to expectation to help us continue to make our short and long-term objectives.

Thanks, Debbie, for that clarity.

Are you able at this point to talk to maybe the percent of your vendor base that maybe you're dropping or changing around?

No, I'm not.

I am just telling you that it's an ongoing process and it's something that I am looking at each and every week.

The other advantage here is that you want to be more important to your big key vendor partner, and you want to reward those people that are performing well and then you need to weed out those ones that are not.

So it's an ongoing process for me and something that I am looking at right now.

Okay, great.

And then I just want to -- I'm just curious why, given the environment, you've chosen to stick to your store opening plans and maybe why you didn't maybe choose to open a few -- fewer stores this year?

Yes, this is Peter, Roxanne.

We absolutely discussed why should we or shouldn't we continue with our plans, and the simple answer, which is a good one, is that, first of all, our balance sheet is strong, and we are not running a negative cash flow business, and the store -- the new stores provide the highest return on capital of any investment we can make.

We are very pleased with the returns, and new stores, also many of the past stores.

So it seems like just the best use of our cash is to invest it in stores and we are trying to be very careful that we don't outgrow or we don't get too -- that we don't start compromising our standards that we've developed over the past few years and take bad sites because just trying to move top line with new units.

Also, this environment -- for those who have cash and have a strong operating model on new units, this is -- this can be an advantageous time.

Being the first in a new center or taking over space from someone who had to vacate, there is a lot of opportunities out there.

So we're hoping that the situation provides us with some opportunistic -- opportunities in the market.

So the short answer to recap is that it is simply the new units are positive cash flow very quickly and it's smart to do that to pay for things like infrastructure investments, etc.

Okay, thank you very much for that detail and best of luck.

Sam Poser, Sterne Agee.

Good morning.

Just a couple questions.

Could you tell us what your total square footage was at the end of the year, please?

Sure, it 6.6 million feet for DSW Inc.

and for DSW stores, 5.8 million.

Thank you.

And can you talk about -- are you narrowing the assortments and going deeper as part of this strategy?

Hi, Sam.

It's Debbie.

It's a blend.

First of all, there has always been a focus on maximizing key fashion items, and that will be a continued focus in this business as we continue to identify the big items that customers want.

So I would just tell you that is an ongoing thing, and to the degree that we can identify more of those big items, that actually bodes well for the business.

I think the most challenging thing we've seen over the last six months, Sam, has been customers have been kind of fickle about what they've wanted.

When we go back -- and every single week we study by SKU what the customer is voting on and what is she trying to tell us and I tell you, the degree of differentiation between two items that are frightfully similar, they like one and they don't like the other, it is a mystery to me.

What we try to do every season when we build our assortments is what are the key must-haves by category and looks that the customers want.

So we will continue to march to that merchandising strategy.

And then one last thing.

Doug, I spoke with you some time ago regarding -- I guess you converted to JDA, but there have been some issues with some of the I guess the server power or so on that you may have to support all those systems.

The systems investment in the CapEx that you're -- looks like you are going to use this year, how far along are you to where you need to be now as far as getting everything up and running to be able to really work the systems as needed?

Okay, let me just address the other question real quick by the way, Sam.

The end of period -- end-of-year square footage was 6.1 million feet for DSW stores.

We gave you an average of 5.8 million, the average for the year.

So it 6.1 million at the year-end.

I didn't know exactly which question you asked.

As far as the IT is concerned, we are in the very early stages of fixing our infrastructure.

We break down our spend into designing, building and running the systems and right now, we are focusing most of our attention and dollars onto running and creating the infrastructure, the foundation of our business to then start to start adding those systems that can improve the operational performance of the business.

But right now, it is focused on the infrastructure and the foundation of IT and we are in the first quarter of that game right now.

So that game -- when do you foresee the game ending?

Well, it's always a continuous improvement, but I would say throughout this year, we are going to be significantly better at the end of this year than we were last year and we will be even more improved at the end of 2008.

So it is a progressive thing.

I can't say we will ever be done, but it's certainly something that we see that we will be spending, as we already said, in 2008 and into 2009.

Thank you.

I have another question, but I will get back in.

Thanks.

[Richard Lenhart], [Opus Capital].

Good morning.

Thank you.

Two questions.

Any geographic -- major geographic differences as you look out among the comp store performance?

And what kind of drag are you seeing in your comp stores from the Stein Mart stores?

We don't have any negative impact from the Stein Mart stores.

That is really not a concern, but as far as the fourth-quarter comp performance, I guess out in the West was the best and the central part of the United States was the lowest, but the range of that is about three percentage points.

Okay.

Great, thank you.

[Bret Hickerson], [Nacomus Capital].

Good morning.

Can you guys hear me?

I was just wondering on the whole change of ownership in value City, refresh my memory, on your Q3 call, did you give any kind of color about what the delta -- what the increase to your SG&A might be from that '07 to '08?

If you didn't, could you now?

We are still in the middle of that.

We are operating good faith, negotiating how that change should happen and no, we didn't say anything, but we do expect there to be some increase related to that.

But at this stage, we can't frame that up.

And then is it something that gets ratcheted back down after you guys can kind of digest it in '09?

I guess at least as a percentage of revenue, it probably gets ratcheted back down because you kind of take more full ownership of your own overhead and then lever it over the next couple of years.

Is that the plan?

That is the plan and the expectation, yes.

Okay.

And then lastly, is there any change in mix or performance?

We don't talk about it much, but on the men's side of the business versus the women's side of the business?

No, nothing significant.

The men's strategy continues to take hold and we start to see more and more positive results.

There is a little bit less of a mix in the young men's business because I think we moved a little bit fast on that.

The place that we're seeing the strategy really take hold is in the casual area and we're pleased with the results there.

And so Debbie, would you say that men's is actually maybe comping a little better than women's?

That's about the same right now.

Okay.

Thanks, you guys.

Jeff Mintz.

Thanks very much.

We've been hearing a lot about costs increasing in China and I'm wondering if you have started to see any impact of that from your vendors?

Yes, this is Debbie.

What I would tell you as an overriding comment is we are committed as a company to providing a compelling value to our customer and we will make adjustments as needed.

We are hearing from the marketplace, and we are just starting to get the prices in now for third quarter, we are hearing anywhere from about a 5% to 15% increase.

Obviously, we are pushing back and even the vendor community is trying to protect as much of that as possible and mitigate the risk around that.

But we continue to march to our strategy, which is to offer compelling value to the consumer.

Okay.

But in the context of that strategy, I assume you will be attempting to protect margins against whatever increases do come through?

Definitely.

Okay, thanks.

You're welcome.

John Zolidis, Buckingham Research.

Hi, good morning.

A couple of things.

First, could year-over-year -- number one, can you talk about the difference in the actual fourth-quarter performance versus what was implied in the previous guidance, especially in light of the fact that comps came in line with your guidance?

And then number two, you've talked a lot about getting the inventories in shape and protecting merchandise margins.

I would assume that you would agree that even in a negative comping environment if the inventory is properly positioned, you could actually seen merchandise margins stabilize or improve.

Is there any sense in which that could happen at some point during 2008?

And then lastly, number three, I understand you don't want to give any parameters around the shared services.

You have talked offline in the past about the incremental expense being about $6 million to $8 million.

Should we believe that that is no longer valid?

And then on the e-commerce, you gave us very detailed information in terms of the incremental expected for e-commerce back in 2007.

Can you please tell us what kind of expenses are incremental for e-commerce in 2008?

Thanks.

Okay, I will take the first one.

Peter will take the second and we will see if we can get you on the third and fourth.

First, as it relates to the guidance and the actual results, our comps were negative 1.7.

That was inherently to the low end of our range because we said zero to negative one for the year, which acquitted to a plus two or down two, so for the fourth quarter, we were down 1.7 versus an inherent negative two guidance for the fourth quarter.

So we finished on the low end of that range.

But also as we looked at our winter sale and how aggressively we had to be to move the inventory, for example, we ran the winter sale 19 days this year versus seven days last year.

We had to be aggressive to move the inventory to make sure we started the season clean in inventory and we believe we're at that goal.

So that is how I would frame up the difference from our expectations and what actually came out.

Peter, do you want to take the second question?

Sure.

On inventories, I would say, sure, we do hope that there is -- that merchandise margins could stabilize or improve this year.

However -- especially up against last year's second and fourth quarter.

However, we're reluctant to make any commitment to that given the uncertainty of the external environment.

If it was just us, maybe we could be more sure at this stage of the game.

I think the whole idea is that by trimming -- sliming down the environment -- the inventories and keeping them lean and staying agile and open, you should be able to improve on last year.

However, right now, we are still unsure about what the sales trend will be and we are just trying to stay on top of it.

And back to the shared service question, John, the way it got framed up was -- I will give you the facts as it relates to 2007.

The charges that RVI gave to DSW for services provided in 2007 are approximately $9 million.

That includes finance, risk management, human resources, and a variety of other things.

In 2007, though, we also charged back to them approximately $18 million, which is mostly related to our IT.

The reason we can't be more specific at this stage is because we are still figuring out how those services will be provided to all of the entities involved, and how that should be appropriately shared, and the entities involved would include Value City and would include RVI, Filene's Basement and DSW.

So we are in the middle of that stage, and based on those historical numbers of us charging them 18 and them charging us 9, that can start to frame up with the total dollars that are moving around at least historically.

And your modeling would be similar to ours as we figured out what that impact would be to DSW go-forward.

The final question you had was regarding DSW.com and, yes, we spent about $8 million in 2007 related to that channel getting up and started.

The fourth-quarter spending for that business was approximately $3 million, and that is basically a fixed expense.

The expenses related to that business as it gets up and running and the sales start to come in, the expenses will go up, but they will be paid for to some degree by sales.

So I would assume that there is at least a $3 million spend in that business as a non-variable cost until it got up and running, and then the variable costs start to be added.

Okay, so just to summarize a couple of those answers to make sure I understand them.

First, with regard to the fourth-quarter miss, it looks like comps were at the low end of plan but basically markdowns were greater than you had estimated.

Yes.

And then second, with regard to the inventories and the merchandise margins, you are trying to get the inventories down, but you are not confident that you have them low enough to avoid further merchandise margin erosion.

Well, it is more like we are not -- we are not clear on what the sales trend will be, so we want to stay conservative with our view at this time.

Okay, and then for the eCommerce, we should be looking about $12 million for the full year prior to the expenses associated with actually operating the site?

That would be fair.

Some of those expenses would start to go down, because the development expenses, it will be up and running, so that should start to go down throughout the year.

So that should tail off, so I think the $12 million might be a little high.

But for the first quarter, the $3 million would be the assumption.

Okay, so there are still some front-end loaded kind of development costs in the first half?

Until it gets up and running, yes.

Okay, all right.

Thanks a lot.

Good luck.

Hopefully get the environment going in the right direction here.

Sam Poser.

One last thing.

Debbie, with the systems evolving, do you have the visibility and the technical wherewithal to be able to, let's say, just get the right shoes in the right place at the right time as effectively as you need to to execute as well against the goals that you have at this time?

Yes, Sam, we have the same systems today as we have in the early years of DSW and we continue to look forward to even more improvements in those systems, but having said that, we have the capability that we need right now to be able to read the results on a weekly basis, to make informed buying decisions.

We have information -- some very good, solid information from our planning allocation partners that help inform the allocation of that merchandise.

So I would tell you we have right now what we need to be able to get the job done, yes.

Thank you very much and success.

Ladies and gentlemen, this concludes our Q&A session.

I would like to turn the call back over to management for closing remarks.

Okay, thank you very much for joining us today.

As always, please feel free to follow up with us with a call to our home offices.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.