Designer Brands Inc (DBI) 2008 Q1 法說會逐字稿

Hello, and welcome to the Retail Ventures Q1 operating results conference call.

As a reminder, all lines have been will be on listen-only mode, and there will be a Q&A session at the end of the call.

(OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to Mr.

Heywood Wilansky so that we may begin our call.

Please go ahead, Mr.

Wilansky.

Thanks, Lela, and good afternoon, everybody.

The call will focus on first quarter of 2008 in comparison to last year's first quarter of 2007, and the agenda will be that Jim McGrady will walk us through all the financials as it relates to that subject.

I will then come on and kind of talk through how the first quarter sales are relative to Filene's Basement, in terms of stores and regions, what's happening there, and also in terms of business segments and how they're performing, and then I am going to turn it back over to the group for any questions that you may have.

So without further ado, I would like to introduce Jim McGrady, the Chief Financial Officer of Retail Ventures.

Jim?

Thanks, Heywood.

Again, good evening, everybody, and welcome to the discussion.

As always, before proceeding I need to restate the Company's policy with respect to forward-looking information pursuant to the Private Securities Litigation Reform Act of '95.

Statements made in the course of this call that are not purely historical such as 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 the forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, the factors and risks discussed in the Company's Form 10-K for the period February 2, 2008, and other reports filed from time to time by the Company with the SEC.

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.

As we proceed here, and I believe as everybody is aware, on January 23 RVI disposed of an 81% ownership interest in its Value City operations, and as such the results of the Value City operations, and as such, the results of the Value City operations during the quarter ended May 5, 2007 are presented in the operations statement as discontinued operations.

Today we announced first quarter net income of $29.2 million, or $0.56 per share on a diluted basis compared to the prior year quarter net income of $2.7 million, or $0.05 per share.

Income from continuing operations from the quarter was $32.8 million, or $0.63 per diluted share compared to income from continuing operations of $13.1 million, or $0.22 per share on a diluted basis last year.

In the first quarter of '08 we recognized a non-cash expense reduction of $37.2 million representing the change in fair value of conversion warrants, term loan warrants, and a conversion feature of the PIES.

Adjusting for these non-cash expense reductions, the first quarter 2008 non-GAAP net loss from continuing operations is $4.4 million, and this is $0.09 per diluted share.

Total sales for the first quarter were $466.3 million, a $500,000 increase from $465.8 million last year.

Comparable store sales for the quarter decreased 4.3%.

By segment, comparable store sales were down 5.4% at DSW and showed a small decline of 0.2% at Filene's Basement.

DSW net sales were $366.3 million for the three months in '08, a $9.3 million increase over the comparable period.

The 39 DSW store locations that opened subsequent to the first quarter last year, its e-commerce and its e-commerce site added $27.5 million in sales during the first quarter, while the 22 new leased shoe departments added $1.5 million in sales.

These increases were partially offset by the decreases in comp store sales and by a decrease in sales of $1.9 million from the three lease departments and one DSW store that closed in '07.

The decrease in comparable store sales was a result of decreases in traffic, average unit retail, and the number of units in the basket.

For the first quarter of '08, DSW comparable store sales decreased in women's by 5.8%, men's by 3.8%, accessories by 8.1%, and the athletic category declined by 5.7%.

Filene's Basement net sales were $100 million for the three months ended May 3 of '08, an 8.1% decline over the comparable period.

New stores, not in the comparable store base, contributed an additional net sales of $5.3 million during the quarter offset by two closed stores during fiscal '07 resulting in a decrease of about $12.7 million.

This represents approximately 12% of the first quarter '07 net sales.

The categories of men's, end of season, and accessories had comp store sales increases of 1.7%, 26.6%, and 6.6% while women's had a comp store sales decrease of 3.3%.

Total gross profit in the first quarter decreased $6.2 million to $193.2 million and as a percentage of sales decreased 140 basis points to 41.4%.

The decrease in gross profit is comprised of decreases at DSW of $5.1 million and Filene's Basement of $1 million.

DSW's gross profit for the quarter as a percent of sales decreased from 44.9% to 42.4%.

This decrease is primarily attributable to increased markdowns partially offset by an increase in initial markups.

Filene's Basement gross profit as a percentage of net sales increased from 36% to 38.1% and is attributable to improved initial markups and a decrease in markdowns.

Our total SG&A expense for the quarter increased by $13.4 million to $186.1 million, and as a percent of sales was 39.9% compared to 37.1% last year.

DSW's SG&A expense for the quarter increased $15.4 million as a percent of sales to 38.2% primarily as a result of deleveraged store and home office expenses.

Filene's Basement SG&A expenses decreased $2.2 million in the quarter and increased as a percent of sales from 46.1% to 48% as a result of increased occupancy and corporate expenses, partially offset by the decrease in personnel and advertising expense.

Our first quarter operating profit of $45.9 million was comprised of $16 million at DSW, $37.2 million at corporate and an operating loss of $7.3 million at Filene's Basement.

Adjusting for the operating impact of warrants, the PIES, the non-GAAP operating profit is $8.7 million in '08 compared to $28.5 million last year.

Net interest expense was $2.8 million for the first quarter of 2008 compared to $400,000 in the 2007 quarter.

The increase in interest expense is due primarily to increased average borrowings which has partially been offset by a decrease in weighted average borrowing rate of about 0.4 of a percent during this quarter.

Interest income decreased $1.5 million in the first quarter of '08 primarily due to the replacement of short-term investments with lower yielding money market funds.

The effective tax rate for the three months ended May 3, '08, was 15% compared to 46.1% last year.

This tax rate reflects the change in fair value of the mark-to-market accounting for the warrants which are not tax deductible and a reduction in the valuation allowance on all state net deferred tax assets.

As we turn to our balance sheet, inventory totaled $354.1 million at May 3 of '08, compared to $339.3 million at year end.

This is an increase of about 4.4%.

Net working capital at May 3, '08 was $317.3 million compared to $295.9 million at year end.

Current ratios were 2.14 and 1.98 respectively.

If we adjust for the warrant liability included in current liabilities, working capital would have been $341.1 million with a current ratio of 2.34.

Net cash used for capital expenditures was approximately $22.9 million while depreciation and amortization for the quarter totaled $10.8 million compared with $9.4 million in the prior year.

For the -- excuse me, for the quarter capital expenditures of $19.9 million included $9.1 million for new stores, $4 million for improvements in existing stores, $500,000 for office and warehousing, $1.9 million related to DSW's e-commerce channel, and $4.4 million for technology upgrades and new systems excluding DSW e-commerce channel.

EBITDA from continuing operations in the first quarter was $54.1 million versus $44.3 million for last year.

Adjusting for the FAS 133 charge, EBITDA for the first quarter would have been $16.9 million.

Consolidated availability under our secured revolving credit facilities at May 3 was $165.2 million, outstanding letters of credit totaled approximately $3.2 million and $11.9 million for Filene's Basement and DSW respectively.

Our current consolidated availability is approximately $159 million which is comprised of $25 million under the Filene's Basement revolver and $134 million for DSW.

That concludes the historical review of the first quarter operations.

With the uncertainty in the economy, we're cautious about our expectations for the balance of fiscal 2008.

We expect Filene's Basement comparable store sales to be in the low single-digit positive range and DSW comps to be down mid-single digits.

We do look for margin improvement as a percent of sales at Filene's Basement based on improved initial margins combined with reduced markdowns.

Overall SG&A expenses will increase as a percent of sales for RVI as a result of new store openings, the deleveraging of fixed expenses, and the impact of the disposition of Value City which historically absorbs some of the fixed operating costs of RVI.

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

Thank you.

Thank you, Jim.

Just to give some color and maybe expand a little upon Jim's comments about Filene's Basement's business, I first want to start with the first quarter overall which was reported at a negative 0.2 of 1%.

On a full basis that translated for Filene's Basement into a positive 2%, and the reason for the discrepancy has to do with the fact that in the first quarter of 2007 fine jewelry was not a leased business, and in 2008 it is a leased business.

So we don't include sales for the leased business on our sales line, although we do take credit for any of the income that it produces.

So our comp sales are kind of artificially under reported based upon that change over, and it is worth a little over 2% for the total Company swinging from a negative 0.2% to a positive 2%.

In terms of what's happening in the regions in the stores, for the first quarter New England on a comp basis had a very, very strong quarter, and had comp sales that were in the positive north of 10% range.

That was highlighted by very strong sales at our Back Bay store and also very strong sales at our Watertown or Arsenal Mall store which we redid over the course of last year.

So both of those two stores are performing at a very high level.

In the New York region, the total comps were about 2%, and again strong sales in our Fresh Meadows store and in our Union Square store, and we did have a couple of stores that were negative resulting in the 2% comp positive for the New York market.

These comps are on a four-wall basis not including fine jewelry.

Pittsburgh had a good quarter with low single-digit, positive increases.

Chicago as a total region on a comp basis was positive 1% with pretty good sales in both of the downtown stores, State Street and North Michigan Avenue.

Our New Jersey comp store was negative 1% in Jersey Gardens, and if we look at Washington, D.C.

as a region, that was a region that under performed and had small negative comps, I think, around negative 2%, and when you look at what drove it, Washington had really unseasonal weather for the Washington marketplace comparison to history.

It was always colder than it had been the previous year.

On a comp store basis, our Atlanta store has held its own, kind of breaking about even, and you take all of those markets and push them together, and it is about a positive 2% comp.

On some of the new stores that are not part of the comp sales we've had mixed results with some positive and some negative, and we're still, obviously, working on trying to improve the performance of all of those stores.

If you look at the business, some things that are relatively interesting, our ladies hosiery business was pretty good, it had a small positive comp.

Our ladies accessory business had a double-digit comp increase and was very positively affected by product we bought out of Europe.

Our children's business had a small positive comp, and our intimate apparel business had a pretty good sizable mid-level single-digit comp driven by double-digit comps in the bra area.

Our handbag business was pretty good with positive comps in the low single-digits, and our jewelry business you can't really tell, and that's why it is all unclear.

We reported a negative 25% to 30%, but that's without fine jewelry this year versus having part of it in the number last year.

Total jewelry, including fine jewelry, costume jewelry, fashion watches, Sterling silver, were positive double-digit comps at about 12%.

Our comps were driven down by the elimination of certain home products that we're getting out of as a business strategically, and that contributed to a loss in sales of about 1% for the Company for the quarter.

The home businesses that we are staying in, which include luggage and domestics, gourmet food, frames, and candles, and our holiday businesses, had positive comps in the upper single-digits, so that looks pretty promising for the future.

Our men's business in total for the first quarter had small positive comps in the 1% to 2% range driven really more by some of the contemporary sportswear businesses that we're in as opposed to the traditional businesses.

Also men's neckwear had a very strong positive comp performance along with men's basics, underwear and socks as well.

Our bridal business in the first quarter was quite strong.

We run our bridal events typically in the first and third quarters of each year, and the first quarter businesses had major increases and each event was successful compared to the last year event.

On our European business that we buy direct from Europe, what we call our retail stock businesses, both out of Europe and also store stocks out of domestic market in the U.S., we had strong positive comps in the upper double-digits for the quarter.

As you might expect, the ladies business in total was quite difficult with small negative comps in the 3% range, the things that kind of are stand out away from that are the junior business which had double-digit positive comps, and also the contemporary sportswear business in ladies had again double-digit comps against double-digit comps the year before as well.

That's the business we're continuing to exploit and drive and that will continue to grow in our estimation.

The other business that has been quite good and that's on trend and we think will continue to stay very strong for the rest of the year are the dress businesses.

While you may not be able to sell sportswear, dresses are flying out, and they had mid-double-digit comps for the first quarter.

As you might expect with the unseasonable weather, shorts, T-shirts, swim wear, knit tops, all those businesses are under performed based upon, I guess, general economic conditions and also kind of unfavorable unseasonal cool weather versus what has been normalized.

Our shoe business was up about 2% positive comps, and that was pretty healthy, and our cosmetics business had double-digit comp growth as well.

And when you take that altogether and mix it, it comes out to about a 2.1% positive comp on a four-wall basis, and without the jewelry swing it would be a negative 0.2% comp for the quarter.

So with that in mind, I would like to open up the floor to any questions that anybody might have relative to anything Jim or I might have addressed.

Absolutely.

At this time, I would like to open up the call for Q&A.

(OPERATOR INSTRUCTIONS) Our first question comes from Sam Kidston.

Go ahead, please, Sam.

Yes, hi, guys.

Just a couple of quick questions.

Number one is, you guys are giving the full year Filene's Basement comps at around 1 or, sorry, low single digits.

Is that on a formal basis or on a presented basis?

It's on a four-wall basis, Sam, and if you look at the last five years at the Basement, we've been 3% or better, and as I said we're running a little over 2% four-wall basis for the first quarter, and things could change, but right now nothing points to us not continuing the kind of current trend we've established for the year.

Okay.

And could you guys just comment on -- I remember this is probably about a couple of years ago, but there was just some discussion of Filene's Basement getting to around $600 million in sales and then there was the idea you would get to about a 3% operating margin there or something like that?

Whatever happened to that plan?

Well, that was done, Sam, well before we envisioned that we were going to be selling Value City and trying to figure out how to divide up the additional central overhead.

On a four-wall basis, Filene's Basement, if you had to pick a target number for this year, might have sales in the neighborhood of $540 million.

That includes the downtown store being closed, and we made that statement and never realized we were going to have to close the downtown store which was a number of at least $60 million in sales on a four-wall basis.

That combined with this would have put us certainly at the $600 million level, and if we would have been able to divest some of the additional overhead we're going to absorb.

Our margins, I think, would have put us into that operating range, but based upon circumstances we're not going to be there this year.

Right, right.

So if we look forward to 2009, is it safe to say that we're going to have in excess of $600 million of consolidated sales for Filene's Basement?

I think that it is safe to assume if we hit the $540-ish million number, give or take some room this year, and we have on the drawing one new store which opens in we believe in October in Florida.

We have an expanded Connecticut Avenue store in Washington, D.C.

that we believe will be in business in its new size for the fall of 2008.

But we can't yet commit to an opening date for the downtown Boston Store, so I can't tell you we're going to be $600 million or more until I understand the date that the downtown Boston Store reopens.

If you would say that when the downtown Boston Store reopens, would we be annualizing at that number, I think the answer would be, yes.

Okay, okay.

Just, can you update us on the timeline on the downtown Crossing store?

The answer is that it is unclear.

We had hoped to be open sometime between April and September.

We are not running the construction.

The developer is, and like any large major project they always find issues and they're still working on it.

I would say at the earliest it would be in the early fall of 2009.

We had hoped to maybe be in the middle or late second quarter, and I think that that they probably have slipped to that fall date at this point in time, and as we know more, we'll certainly update you.

All right.

Thank you, guys.

Our next question comes from Jill Caruthers.

Go ahead, please, Jill.

Good afternoon.

I was wondering if maybe you could update us on the shared services agreement, any type of timing of when you feel like you'll be able to finalize that agreement?

Sure.

We are still in the discussions with Bay City regarding the future of the shared services agreement, and to a lesser extent with DSW at this point in time.

I think that probably within, I will say, the next three weeks that we should be able to finalize all of those discussions and file the 8-K with what that agreement is going to look like.

Okay.

Good.

Maybe if you could comment on expectations, if you think you'll have positive cash flow this year?

Are you talking about just at Filene's Basement or are you talking about on a consolidated basis?

Filene's Basement.

At Filene's Basement, I look forward to be slightly negative.

Okay.

All right.

Thank you very much.

Our last question comes from Todd Meadow.

Go ahead, please, Todd.

Hi.

I was wondering if you could, I guess, give me some clarity around the transaction that was disclosed in the 13D last night?

Looks like the Schottenstein interests were shuffled around a little bit.

I just couldn't follow sort of the purpose of that transaction and kind of what the end result was.

I think I can give you as I read it.

What appears to have happened, and I haven't really had an opportunity to talk to their counsel in any length regarding this, but apparently what they did is that they dividended the ownership of Retail Ventures out of Schottenstein Stores to what -- an entity called SSCRVI, or whatever that entity was in LLC, and then they dividended it out of there to the individual shareholders of RVISSC LLC.

I believe at the end of the day really what that means is that there is not a change of control at RVI, and that I think it even said, and I know it said in the 13D that Jay is the managing member of that LLC.

So I think it really just gives, as I interpret it, it probably gives a way, it's a tax planning structure.

That's my view of it, if that's really what it is, I am not 100% certain.

Again, I have not talked to their counsel in any great depth about that, but as far as RVI is concerned, there really isn't any major change at this point in time and we don't expect to see that in the future.

Okay.

Thanks.

Our next question comes from [Robert Wiegand.] Go ahead, please, Robert.

Hi, gentlemen, a couple of capital structure questions.

Can you just go over the cash for me?

I believe it is probably around $50 million at the Filene's Basement level, the PIES and debt is probably around $144 million and $25 million, is that correct?

The PIES is $143.75 million, which is the $144 million, yes.

I think there is $32 million outstanding under the revolving credit facility.

The cash that's the approximate number that's at the Filene's Basement RVI entity is about $50 million.

Okay.

And just in respect to the warrants, can you give me approximately how many are outstanding at which strikes?

Yes.

There is $12.7 million that are outstanding at $4.50 a share.

All right?

Then there are approximately -- this is kind of an either or.

You get both, there could be a combination.

There is about $2.7 million of DSW, they are convertible into DSW at $19 a share.

So it is $12.7 million at $4.50 or $2.7 million at $19, correct?

That's correct, yes.

And wasn't there about 150 previously at around $10 for the RVI.

It's $150,000, yes, the new warrant that's outstanding, I apologize, yes, you're correct.

And I'm sorry, just one more on this.

How much of that change just recently in the last maybe three months to six months and where do you anticipate that going in the future?

As far as the warrants or -- ?

Yes, outstanding.

Have people been exercising and selling?

The last exercise was actually back on June 6 of 2007, and there really hasn't been any -- no transaction since then other than the issue of those $150,000 warrants to Value City VCHI which was the acquirer of Value City.

There really hasn't been any activity there whatsoever.

Great.

Thanks.

Good luck with the Filene's Basement.

Thank you.

Our last question comes from Sam Kidston.

Go ahead, please, Sam.

Yes, thanks, guys.

You already answered my question.

Thank you.

Okay.

We have no further questions at this time.

All right.

With that I would like to conclude the call and thanks, everybody, for their participation and please give us a call at your convenience.

Thanks.

Thank you.

Thank you.

This call has been concluded.