Designer Brands Inc (DBI) 0 Q0 法說會逐字稿

Hello and welcome to the fourth-quarter and year-end operating results conference call for Retail Ventures Inc.

(OPERATOR INSTRUCTIONS).

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

Go ahead, please.

Thank you, Eric, and good afternoon, everybody.

Today's call will review the fourth-quarter and year-end operating results for Retail Ventures.

The earnings release went out earlier today, and the way the format will work today is that we are going to have Jim McGrady review the results, and then I believe we will just take questions at that point in time from the audience.

So without further ado, here is Jim McGrady, our Chief Financial Officer, to review the results for fourth quarter and for year-end.

Jim?

Okay, thank you, Heywood, and again good afternoon, everybody.

As always, we will have (inaudible) before proceeding.

I would like to restate for you the Company's policy with respect to forward-looking information pursuant to the Private Securities Litigation Reform Act of 1995.

Statements made in the course of this call that are not purely historical such statements regarding the Company's or management's intentions, expectations or projections of the future are forward-looking statements.

Actual results could materially differ from those forward-looking statements.

Again, factors that could cause or contribute to such differences include but are not limited to the factors and the risks that are discussed in the Company's Form 10-K for the period ended February 3, 2007 and the soon to be filed fiscal 2008 Form 10-K, plus the other reports filed from time to time by the Company with the Securities and Exchange Commission.

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

Okay.

I think as everybody is probably aware, on January 23 we announced that we had disposed of 81% of our ownership interest in the Value City Department Store operations to VCHI Acquisitions.

Just as a reminder, everybody, the results of the operations for Value City Department Stores during the period was controlled by RVI are reported as discontinued operations in our financial statements, along with the loss on the transaction, which is about $90 million.

Today we announced our fourth-quarter net loss of $125.7 million or about 2.59 per share on a diluted basis.

This compares to a net loss of $35.9 million or $0.76 per share on a diluted basis for the prior year's quarter.

The loss from continuing operations for the quarter was $9 million or $0.19 again on a diluted basis compared to a loss from continuing operations of $40.6 million or $0.86 per share on a diluted basis last year.

For the fiscal year, we are reporting a net income of $51.4 million or $0.91 per share on a diluted basis compared to the prior year's net loss of $150.9 million or $3.35 on a diluted basis.

The income from continuing operations for the year ended February 2, 2008 was $202.1 million or $3.56 a share on a diluted basis.

The loss from continuing operations of $128.6 million or $2.85 per share diluted was reported in the prior year.

For the fourth quarter and year-to-date periods, we recognized again as we have in the past year and the past couple of years a non-cash reduction of expense related to the changes in the fair value of the conversion warrants, term loan warrants and the conversion feature of the PIES, which is the debt that we issued about a year -- a little over a year ago.

The expense was about $19.5 million and $248.2 million for the year -- excuse me, for the quarter and for the year this year.

In the press release, we have provided a reconciliation of the non-GAAP income from continuing operations.

So you can see what the effect of that -- those adjustments for the warrants and everything was.

I will not go through that at this point in time, but it is available in the press release.

Total sales for the fourth quarter decreased $6.9 million or about 1.5% to $452 million from $458.9 million last year.

The comparable store sales for the quarter decreased about .10%, and by segment that quarterly decrease was DSW was a negative 1.7 and Filene's Basement was a positive 4.8.

On a year-to-date, we were 0.8 negative at DSW and 3.6 positive at Filene's Basement for an overall 0.3 positive.

Again, these numbers are also included in today's press release.

DSW sales grew about $332.5 million overall, which is a 1 point increase in the quarter, and that includes a net increase of 36 new stores, plus 12 nonaffiliated lease shoe department and 6 Filene's Basement shoe departments.

The merchandise categories of men's, women's and athletics had comparable sales decreases of 0.7%, 2.6% and 9.7% respectively, while our accessories division at DSW had an increase of 5.7%.

The Filene's Basement sales decreased 8% in the quarter to $119.5 million, and that includes a net increase of five new stores.

The merchandise categories of home, jewelry and children's had comparable sales decreases of 3.6%, 24.5 and 1.6% respectively.

The men's and accessories categories had comparable sales increases of 8.9% and 19.1% respectively.

Noting that big decrease in the jewelry department, you may know that earlier in the year we did transfer most of the operations of the jewelry to the lease department with an unaffiliated third party.

And most of that is now recognized through lease department income, so we would expect to see a sales decline of about that on a comparable basis.

As we take a look at our margin, total gross margin for the fourth quarter decreased $14.7 million to $170 million.

In the fourth quarter, gross profit as a percentage of sales decreased 260 basis points to 37.6% in the previous year's 40.2%.

The decrease in gross profit comprises a decline of DSW of $8.5 million and at Filene's Basement of $6.2 million.

For the quarter gross profit as a percent of sales was 38.7% at DSW and 34.7% at Filene's Basement.

DSW's gross profit for the quarter as a percent of sales decreased from 41.7% to 38.7% as I noted earlier.

The decrease is attributable to increased markdowns, partially offset by an additional higher markup on some of the goods.

Filene's Basement gross profit in the quarter as a percentage of the net sales decreased from 36.7% to 34.7% and is attributable to increased markdowns due in part to clearance merchandise that we were selling at the downtown Boston store, but again we did have improvement in the initial markup for that operating unit.

For the year-to-date period, total gross profit increased $42.1 million to $751 million and as a percentage of sales decreased 140 basis points to 40.1%.

Our total selling and general administrative expenses for the quarter increased by $11.6 million to $172.6 million and as a percentage of sales was 38.2%.

For the year-to-date period, SG&A increased $80.1 million to $694.1 million or 37.1% of sales.

As we take a look at our operating profit by the operating segments for the quarter, DSW was $972,000 positive; Filene's Basement was a negative of about $1.9 million.

There is a $19.5 million profit at what we call the corporate division which is primarily the warrants, the change in fair value of the warrants and converts and futures like that.

The net is $18.6 million.

If we adjust for those derivatives that come out of there, the overall operating profit -- we would have an overall operating loss of about 0.9 -- $900,000, excuse me.

And again, if we take a look at the prior year quarter, that would have been somewhere around $26.2 million.

As we take a look at our interest expense, we see that it was $1.9 million for the fourth quarter compared to $300,000 worth of income for the quarter last year.

For the year net interest expense was $3.1 million.

This was about a $900,000 increase from the prior year.

The increase is primarily due to the increased average borrowings during fiscal 2007.

As an offset, interest income rose $3.2 million to $10.5 million, and this is primarily due to the investments that are held at the DSW segment.

Our tax rate is somewhat unusual for the quarter.

I think it is probably better just to look at it for the year.

Again, the derivatives of that valuation adjustment that is in there has had a very, very significant impact on the rate, as well as some valuation allowances that we have taken on some state and local deferred taxes.

As we turn to our balance sheet, our total inventory was $339.0 million at year-end, and that compared to $328.6 million last year, which is about a 3.3% increase, which really kind of keeps pace with the store growth that we have out there.

Our net working capital was $295.9 million as compared to $274.4 million for the prior year.

The current ratios were 1.98 and 1.45 respectively, and if we were to adjust for the change in the value of the derivatives and everything like that, the working capital would have been $338.1 million with the current ratio of 2.3 just as kind of a valuation method that you might want to take a look at.

Net cash used for capital expenditures was approximately $118.9 million during the year, and while depreciation and amortization totaled about $40.8 million compared to about $33.1 million last year.

During the fiscal '07, we spent our money on about $52.4 million in new store capital expenditures, $9.4 million for improvements to existing stores, $15.9 million for office and warehousing and about $26.3 million related to the startup of the DSW e-commerce channel.

We also had about $14.9 million that we expanded for IT equipment upgrades and new systems.

Our EBITDA from continuing operations during the fourth quarter was $31.9 million versus a negative $31.5 million for last year.

Again, as always, adjusting for the warrant expense and income that is running through the statements for each of those years, it would have been $12.4 million at a positive 33.7 for the prior year.

As you can see, those adjustments are pretty significant as we go through the year.

The availability under our secured revolving credit facilities was $161.3 million.

That is for both DSW and the Filene's Basement facility combined.

On a consolidated basis, the outstanding lines of credit totaled approximately $3.4 million and about $15.7 million for DSW.

Our current consolidated availability is $162 million, which is comprised of $22 million of availability under the Filene's Basement revolver and $140 million for the DSW revolver.

That concludes the historical review of operations for the quarter and some of the highlights for the year.

Again, a lot of these -- a lot of these comparisons are in the press release.

At this time we are not going to provide a fiscal 2008 outlook, and we are going to wait until we are able to get some guidance from DSW and work through some of the Value City shared service expenses that we are going to allocate to them.

At this time I think, Eric, we will open up the lines for questions.

(OPERATOR INSTRUCTIONS).

Adam Comora, EnTrust Capital.

Good to hear you guys on a call again.

A couple of quick questions.

The first is on the balance sheet, what it looks like post the Value City transaction.

I'm trying to understand just looking at these discontinued liabilities and that sort of thing.

I guess starting on the cash side, it seems like it looks like there's $100 million on the balance sheet at RVI corporate.

If I take out the 130 or so at DSW, it seems like RVI corporate has something -- ex-DSW -- has something like 40 to $50 million of cash.

That is right.

It is actually at this point in time I think it is about $44 million.

Can you guys still hear me?

Yes, did you hear my response?

I did.

Thank you.

There was just some static.

It was $45 million in cash.

Now if I look at the liabilities at RVI, now that Value City has gone away, it looks like on the balance sheet here there is approximately $150 million or so of debt, and I assume the PIES are -- let's see, it looks like there is 150 -- $158 million of debt.

Is that all the debt that is left at RVI corporate and included in that is something like $135 million of PIES?

Actually the PIES amount is $143 million 750, and the balance of the debt that is out there is related to the revolving credit facility of Filene's Basement plus a very, very, very small piece of debt that is related to the old term loan facility that was -- it is about $250,000.

So all of the other debt is basically gone.

So the next time we see a balance sheet, which will be -- have the Value City effective transaction in it, we should see something like $40 million of cash and, you know, 15 to $20 million of debt ex the PIES, which I guess given the current stock price of DSW can be satisfied with $5.5 million shares at your discretion.

Well, on the PIES you mean?

Yes.

Yes, it is at our discretion, and it is about 5.5 million shares.

That actually is not -- does not come due until I think it is 2011.

I think it is July or August of 2011.

Okay.

Okay.

Adam, I'm having a hard time hearing you if you are speaking.

Yes, I was going to say I will let somebody else ask a question.

I will get back into the queue.

Sam Kidston, North & Webster.

Just a couple -- first, a housekeeping question.

What were the cash taxes for the year?

Cash taxes paid?

Yes.

I will have to look that one up.

While you're looking that one up, could you just give us an update on the -- (technical difficulty)--

I lost you.

Say it again again.

Okay.

Eric, are you still with us?

Eric?

David Mann.

Thank you.

David, before you ask your question, if I could, I just want to -- I could not hear Sam, and I'm not sure he heard me respond.

But cash taxes paid were $35.5 million in fiscal 2007.

So I apologize for interrupting you, David.

How are you doing?

Very well.

Congratulations on the exit from Value City.

Thank you.

I know you all worked hard on that.

Along those lines, are you able to give us any color on or at least put together some what Value City looks like now since you still have at least some ownership there, and it does impact you and DSW in terms of the shared services.

How many stores are they operating, how is business going there, what are the prospects?

I can give you some of the operating details.

I think it is a fair assessment to say that they are in the process of going through a very hard and deep evaluation of each and every one of the stores to find out its potential and exactly how it is going to fit into their marketing mold.

In their merchandise presentation to date, I think that they have actually closed eight stores.

They do have an expectation to close some more, but really most of the stores that they are going to close were part of that Burlington transaction that was previously announced.

So with that, at this point in time, they continue to operate somewhere in the area of about 90 stores, 90 to 92 stores.

And as far as what their sales are and everything like that, I'm not going to comment on that.

But they have got off to what I will consider to be a slow start as far as being able to remerchandise the stores and establish relationships with some of the vendors that we had previously used in the Value City operations.

But it certainly appears like as though they have picked up the pace.

The merchandise is starting to flow through into the stores.

They have reduced significantly the inventory levels in the stores, and I think that they have done that with a mind in for a new merchandising concept that perhaps they are going to establish in the stores.

Great.

In terms of the shared services, can you give us some sort of timetable and at least a quick overview of what is going on there so we can assess how that will impact you and DSW?

Yes.

Certain of the shared services processes have been transferred to DSW at this point in time, and I think that they have announced that.

Certain finance functions have been transferred.

BTS was transferred to -- or the IT function was transferred probably a little over a year ago.

It might have been a little bit longer than that actually.

Human resources have been transferred to DSW at this point in time.

So the process is working.

What we need to do is really be able to sit back and have the new Value City entity tell us exactly what services they are going to need on a go forward basis, so we can sit back and make the adequate provisions to either provide the service or to make cuts where necessary if they are not going to utilize a service that we believe that they are going to take from us on a go forward basis.

As far as the timing of this is concerned, I think the contract that we have with them is pretty specific on how the cost of this work and the longer period of time they wait, the more -- I will call it the more significant the cost becomes to them on what they can expect to pay for the services that we are providing.

We are presently talking with them.

We meaning myself and some of the people at DSW that are now involved in the shared services, and we're going through the process of establishing a budget in shared services and actually helping them with some of the -- you know the background processes where they might not need to have perhaps the level of service that they had historically received, and I think they are going to accept that decline.

So all that being said, David, I actually think it is probably going to be at least a couple of more months before we have something that we can publicly announce and say we have come to an agreement with everybody on how this is going to be.

I think internally between the two companies that we will be able to do that on a much quicker timetable.

I actually probably hope to have at least an agreement of understanding sometime within the next 30 days.

And within that agreement then, any of the costs that are affiliated with Value City, at least you know what those costs will be.

It is just a matter that they may be subject for cuts in the future?

That is correct, yes.

I have got you.

One last line of questions.

On Filene's Basement it looks like the 2007 numbers that you might have had negative EBITDA.

Can you quantify what that number was?

If it was negative, then how do we -- how are you going to adjust that, or how do you get that to where it is not going to be a drain on your cash resources?

It was a negative EBITDA there at the Basement.

I I don't have that right here in front of me.

But what I can say is that the basement, if you remember right, we closed the downtown Boston store this year, and we took some pretty significant markdowns on our inventory as we liquidated through there.

We also took -- excuse me, while I think about this -- we took that.

We are receiving monthly income from that as we go forward here, and I think we're going to break even overall.

As a matter-of-fact, I'm certain that we're going to break even overall on what we're going to receive as far as a cash basis.

But unfortunately the way the accounting rules have worked out, we are going to have to amortize that receipt over the remaining life of that lease, which is going to take us out through the 2020.

And it is just one of those things.

We also had some other adjustments there.

We have a couple of stores that we actually took a charge on for 144 valuation that have not performed to expectation.

We took a store closing charge there for the downtown Boston store as well, and we also had to accelerate some depreciation that went through there.

And these are pretty significant events or income impacts that have affected Filene's Basement.

There is approximately -- those as a group are probably close to about $8 million that affected the Basement.

But I will call that there were unusual things that happened to an entity during the period of time.

Not pleasant things but they were unusual.

So I think as we -- but I think each one of them is going to have a positive impact as we go forward.

So that is the bright side.

In 2008 what is the CapEx you plan for the Company?

Do you plan to open many stores, or have you put that on hold?

In 2008, David, we are opening one store.

It will be our first store in Florida in the Aventura area currently projected to open in October, and we are expanding one store, which is our downtown Washington D.C.

store on Connecticut Avenue, and that expansion is expected to be in operation sometime in June.

We are looking at other things, but we have no other commitments out there in 2008.

In 2009, of course, we have a large commitment to reopen a downtown store, which we have stated would reopen in April of 2009, and we are comfortable that we will hit that date perhaps better than that but not worse than that.

And a lot of our efforts with that are really dedicated to opening Aventura and focusing on the reopening of downtown Boston, which as you know is about a 15% store for us and is a significant hurt to our Company when it is closed, and the reopening is a big task for a Company of our size and would require our attention.

So we're trying not to get too many other distractions going until we reopen that store in April of '09.

Michael Rosenthal, QVT Financial.

Heywood, could you maybe talk a little bit about the performance of Filene's these days?

(multiple speakers)

Be careful what we say, Michael, because we have not reported -- since we are reporting quarterly yet, we cannot be specific on numbers.

But I would chart this outline for you in terms of my expectation.

In 2007 we finished our fifth consecutive year of comps in the 3% or better range.

2008, my anticipation is to be consistent with that track record.

In 2007 we took some margin hits on excess inventory, and in 2008 we feel -- I feel certainly comfortable we will have comp store improvement over last year and margin percentage improvement over last year.

And I would say that when we report our first quarter, which is happening I guess in about six weeks or so, several weeks, that the first quarter should indicate that we are on track with what we have outlined for the year.

That sounds quite positive.

Well, and I keep hearing tough business around with comp increases and margin decreases that I think are worse than that around on average, and I think we're performing at the better piece of the peer group at this point.

Could you just describe I guess the positioning of the store and why it would be in a position to outperform in this environment?

Well, you know, first of all, if you look at the comp sales increases from the companies that have reported, you see that some of the off-price players have outperformed what I call the traditional department store type players pretty significantly.

I think in the month of March, T.J.'s had a positive comp, and Ross Stores had a breakeven comp.

And then you look at the Penney's and Kohl's of the world, and you see some pretty dramatic decreases.

While Federated did not report -- they are reporting their sales quarterly -- we all hear the same things, and my sense is that their performance was not very good as well on a comp store basis, particularly in the Northeast division, which is kind of where we are headquartered.

So I think that there is something to be said for the fact that when things are tough, people are more careful on how they spend their money.

They may be shopping less, but then they are more selective in where they shop and that there may be some transference from the department store or what we will call the more typical full-price stores into the off-price channel.

And then within the off-price channel, I think we have positioned ourselves somewhat uniquely as being the higher quality off-price player, which lets us stand a little bit apart from the other significant players in that area, that segment.

So I think we're able to continue to be differentiated from the other off-price players, and the department store customer I think is pretty comfortable shopping in our store environment with a merchandise presentation that is more akin to a department store, but again with prices that are significantly different than the department stores.

I see.

I guess just lastly, sorry, I lost my train of thought.

Adam Comora, EnTrust Capital.

A quick follow-up.

Do you guys have a sense for whether or not we generated an NOL, or there is an NOL that resides now at RVI Corporate from all the Value City transactions?

Yes, there is.

Any sense of the size of it?

It is a little bit hard to tell with all the evaluation allowances that we have put on it as we go through here.

But it is around $100 million.

It is a little bit over that.

Around $100 million?

Right.

Alright.

So now that Value City is gone, basically we have a company that has net cash on the balance sheet to the tune of about $20 million, an NOL 22.5 million shares of DSW if I adjust for the PIES and Filene's Basement.

Correct.

Okay, I'm still trying to figure out why that is still worth negative money.

Thanks a lot.

Okay.

Sam Kidston, North & Webster.

Sorry my phone went dead in the middle of my question there.

Just two quick other ones.

One is, in terms of the warrants outstanding, is that still approximately 9.7 million total warrants?

No, the total warrants that are outstanding they are convertible into RVI are 12.7 million, and it is about 8.3 million of convertibles and about 4.4 in the term warrants.

In the term.

And those are all at 450?

Yes, they are.

Okay.

And then just to follow-up on the last question or train of thought, any thoughts of simplifying the structure further now that Value City is out?

Clearly the market does not even give us the value of our DSW per RVI.

Yes, pretty -- I agree with that statement.

Unfortunately I have to agree with it.

But at this point in time, we are taking a look and, as Heywood stated, really the objective right now is to focus upon the existing store base at Filene's Basement.

As far as simplifying the corporate structure further, if I want to read into your question what I think you might be asking, obviously we could not answer a question like that if we knew.

But at this point in time, our basis -- our focus right now is going to be on making the existing Filene's Basement stores profitable and to take what actions are necessary there to get that to happen.

And additionally at DSW, we're taking a hard look at opening up their e-commerce business.

We're pretty excited about that again.

They are planning to open up a pretty significant number of stores in the upcoming year and have got a lot of commitments in place already to do so.

So at this point in time, there is really no focus on what I want to call narrowing the corporate structure at this point in time.

We're taking a real hard look again at expenses and working close with Value City in an effort to make sure that we can provide the services at a -- and I will say this with a minimum number of people and expenditures that we have, while at the same time making sure that we give a quality service to everybody that follows the operating businesses that we have.

Yes, we are clearly looking at whatever eliminations or duplications or redundancies that can be achieved over the next few months as we go through this whole process.

There are no further questions at this time.

Well, in that case, thank everybody for listening, and we will talk to you later.

Thank you, everybody.

Thank you.

Goodnight.

Thank you.

This call has been concluded.