Designer Brands Inc (DBI) 2008 Q2 法說會逐字稿

Hello, and welcome to the Retail Venture second quarter conference call.

As a reminder, all lines will be in 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.

Thank you, Lil.

Good afternoon, everybody.

Before we get started, I wanted to make a couple of statements that I think might answer some questions that you probably would ask, and we will kind of get that out of the way, before we go into Jim McGrady's detailed analysis of the financial results, and then my comments post that, relative to specific businesses and stores.

And the first question I think that we might get relates to myself, in terms of the public announcement that I was going to leave as of January 31, 2009.

I just wanted to deal with that subject first.

When I was appointed the CEO of Retail Ventures it was a $3.1 billion company, and I was compensated at that level commensurate with the responsibilities of a $3.1 billion public company.

Since that time period, we have had a public offering of DSW, and more recently the sale of Value City, and the corporation now has an operating division really of about $500 million, consisting primarily of Filene's Basement.

It makes no sense for the corporation to continue to compensate the CEO, in this case myself, as if it were a $3.1 billion corporation, and it makes no sense to me personally to accept less, so I will continue to give my best efforts to the end of my current contract, which is January 31, 2009, and then I am going to move on.

We think that you might have a question relative to succession of what happens once I leave, and I can only tell you that we are working on that, and that we have very strong leadership, both at the corporate and at the division level, to handle any of the financial or merchandising responsibilities, and as we conclude our assessment of the correct action to take, then we will make that public, and then the third thing might be questions you might have, dealing with Filene's Basement beyond the second half of 2008, and we will speak, Jim and I, to what we have planned for 2008, but we are not going to provide projections beyond 2008 at this time.

So without any further adieu, I am going to go introduce Jim McGrady, who will walk you through our financial update.

Jim?

Thanks, Heywood.

Good evening, everybody.

And again as always before proceeding, I would like to remind you of our policy regarding forward-looking information, pursuant to the Private Securities Litigation Reform Act of 1995, that all statements made in the course of this call that are not purely historical, such as statements regarding our Company's or management's intentions, expectations or projections of the future are forward-looking statements, and actual results could materially differ from those forward-looking statements.

We encourage you to read the Risk Factors, and the disclosure that we have made in our annual filing on Form 10-K, as well as the periodic filings we make with the SEC.

Also as you all are aware, in January of 2008, we disposed of an 81% ownership in the Value City operations, and the activities related to the disposition of the Value City operations during the periods presented in the 2008 portion of this discussion, are presented as Discontinued Operations.

Proceeding on, today we announced the second quarter net income of $17.7 million, or $0.36 per share, on both basic and diluted computations, compared to our prior year net income of $106.2 million, or $1.81 per share on a diluted basis.

Income from Continuing Operations for the quarter were $7.2 million, or $0.15 per share, compared to income from Continuing Operations of $115.6 million, or $2.40 per share in the prior year, and that is actually $1.97 on a diluted basis last year.

In the second quarter of this year we recognized a non-cash benefit of $16.7 million, representing the change in the fair value of our warrants and the conversion feature of the PIES.

Adjusting for these non-cash expense reductions, the second quarter 2008 non-GAAP net income loss from Continuing Operations is $9.5 million, and $0.19 per diluted share, and that information is included in the press release that we have just sent out at 4:00 today.

Total sales for the second quarter were $459.8 million, up 4.8 million, or a 1% decrease from last year's $464.6 million level.

Comparable store sales for the quarter decreased 5.1%.

By segment, comparable store sales were 6.9% negative at DSW, and Filene's Basement was positive 1.4%.

DSW net sales were $357.2 million for the three-month period, and $8.5 million, or a 2.4% increase over the comparable period of last year.

DSW decrease in comps was primarily a result of the changing and challenging economic environment that we are facing today, as are all retail companies.

In addition, the decrease was also impacted by a reduction in price promotional events in the DSW stores.

This reduction in those type of events resulted in an increase in the average unit retail, but was offset by reductions in customer traffic and conversion rates.

For the second quarter of 2008, DSW comp sales decreased in womens by 6.8%, mens by 5.1, accessories by 14.6, and the athletic category was down 9.1%.

Filene's Basement net sales were $102.6 million for the three months ending August 2008.

This was an 11.5% decline over the comparable period of last year.

Filene's Basement had an increase in comp store sales of 1.4 %.

For the second quarter of 2008, Filene's Basement comparable store sales increased in mens, womens, and accessories by 0.7 , 1.7, and 8.7% respectively.

Comp store sales related to off-season purchased merchandise increased 23.2%, and this represents about 2.8% of the comparable store sales total.

Total gross profit in the second quarter increased 22.7 million to $199.3 million.

In the second quarter, gross profit as a percent of sales increased 530 basis points to 43.3% from the previous year's quarter of 38%.

The increase is comprised of increases at DSW of 25.3 million, and a slight decline at Filene's Basement of 2.6 million.

DSW's gross profit for the quarter as a percent of sales again increased from 38.2% to 44.4%.

The gross profit for the second quarter of fiscal 2008 increased at DSW as a percent of sales, compared to last year, due to decreased markdowns as a percentage of sales.

The decreased markdowns was as I mentioned earlier, a result of reduced price promotional events, plus improved inventory management.

Filene's Basement gross profit for the quarter again as a percent of sales, increased from 37.3% last year to 39.6% this year in the second quarter.

The increase as a percent of sales is due to an increase in the IMU, and a decrease in markdowns.

Our total Selling, General & Administrative expenses for the quarter increased by $24 million to $195.7 million, and as a percent of sales were 42.6% compared to 36.9% last year.

DSW's SG&A expense for the quarter increased $15.9 million, and increased as a percent of sales to 39.7%.

The increase in SG&A as a percent of sales was primarily the result of some expenses encountered as part of the transition services to Value City, and other factors that contributed to this included deleveraging store occupancy expense, and increase in expenses related to DSW.Com, and an increase in other home office expenses.

Filene's Basement SG&A expenses increased $8.1 million, and increased as a percent of sales to 54.4%.

This SG&A expense increase includes an asset impairment charge of $8.1 million in the second quarter of 2008.

SG&A as a percent by division was again 39.7 at DSW, 54.4 at Filene's Basement, and 42.6% overall.

Our second quarter operating profit of $22.1 million was comprised of $17.7 million at DSW, $16.7 million at what we consider the corporate level, and an operating loss of $12.3 million at Filene's Basement.

Adjusting for the operating profit impact on warrants and PIES, the non-GAAP operating profit is $5.3 million in 2008, compared to $6.3 million last year.

Interest expense net was $3.2 million for the second quarter compared to $200,000 interest expense net for the second quarter in '07.

The increased interest is due primarily to increased average borrowings during the three months ended August 2008, compared to the three months ended last year.

Interest income decreased $2 million in the second quarter of 2008 over the same time period last year, primarily due to the replacement of short-term investments with lower risk and lower yielding money-market funds and other investments.

The effective tax rate for the three months ended August 2, 2008 was 40.7%, compared to 9.8% for the three months ended last year.

This tax rate reflects the change in the fair market value on the mark-to-market accounting for the warrants.

This again as I remind you is not tax deductible, and we also have a reduction in the valuation allowance on all state and net deferred tax assets.

As we turn to our balance sheet, our inventory totaled $ 372.5 million at the end of the second quarter compared to $339.3 million last year.

This is an increase of about 9.8%.

Net working capital at the end of the second quarter of this year was $341.4 million, compared to $295.9 million at year-end last year.

Current ratios were 2.22% and 1.98% respectively.

Net cash used for Capital Expenditures was approximately $43.6 million year-to-date, while depreciation and amortization for the year totaled $22.8 million, this is in contrast to about $19.3 million during the same period last year.

During this fiscal 2008 Capital Expenditures incurred of $45.4 million included, $20 million for new stores, $6.6 million for improvements in existing stores, $2.2 million for office and warehousing, $3.4 million related to DSW.Com, and $13.2 million for Information Technology upgrades and new systems.

EBITDA from Continuing Operations in the second quarter was $31.1 million, versus $141.5 million during the last year's second quarter, and please remember as you are taking a look at this to adjust for that warrant impact and the PIES impact to gains and losses that are in there.

The availability under our secured revolving credit facilities at the end of the second quarter of '08 was $147.7 million.

The current as of last Friday, availability is approximately $157, million which is comprised of $22 million under the Filene's Basement revolver, and $135 million under the DSW revolver.

That concludes a review of the first quarter operations, and I think as we take a look around the corner for the balance of the year, we expect that Filene's Basement comparable store sales will continue to be in the low-single positive, single digit positive range.

We do look for some improvement margin as a percent to sales at Filene's Basement, as we see again some improved margins and reduced markdowns, and overall, we do believe that our SG&A expense as a percent of sales at RVI is going to increase, and this is a result of some new store openings, the deleveraging of certain expenses, and the impact of the disposition of Value City, which has historically absorbed some of the fixed operating costs.

During the second quarter, we also signed a shared service agreement with DSW, and I think that that has been filed in any case, so if anybody has any questions as a result of reading that, I will try my best to answer those as we continue on through the call.

At this time, I would like to turn the call back to

Thank you, Jim, and I just would like to start off with just clarifying some of the Filene's Basement information as best we can.

DSW held their own call and I am sure you all got that information from them previously.

So at Filene's Basement for the second quarter on a four-wall comp sales basis, and I am just going to go through this one more time, we leased out our fine jewelry business in November, mid-November of last year, and since that time, there has been a significant difference in the run rate of our comp store sales on a segment basis which we report, and on a four-wall basis which I tend to clarify during these quarterly earnings updates.

So in the second quarter, on a four-wall basis including fine jewelry this year and last year, and all of the other businesses combined, on a four-wall basis Filene's Basement picked up 3.68% for the quarter.

In the first quarter, Filene's Basement picked up 2% on the same four-wall basis, and for the six months, they are ahead 2.85% on a four-wall comp store basis, and if you remember, I have said that all along that Filene's Basement would be traveling at around a 3% four-wall comp sales basis, and they are running pretty close at that 2.85%, just a tad short of that.

Some of the businesses that have been unusually affected for the Basement in the ladies ready-to-wear business, which has been difficult across America for most companies, Filene's Basement is no different, however, contemporary sportswear is ahead over 20%, and that is primarily out of the California market.

Active wear has been quite good, it is double digits ahead, and then juniors, all in juniors which includes young contemporary is part of that business is also ahead, in the neighborhood of 10% on a four-wall comp basis.

Intimate apparel, the bra business is ahead just shy of 10%.

The fashion accessory business, which includes sunglasses and scarves and the beachwear, and things of that nature, is ahead about 14% for the second quarter, and ladies handbags is ahead for the second quarter over 12%.

That includes handbags and small leather goods, driven by among other things the designer hand bag business which has been quite good.

On the mens side of the business, which has also been quite difficult, we have a few bright lights.

Mens neckwear is ahead almost 20% for the second quarter.

Mens basics, socks, underwear is ahead about 4%, and then the basic business that is actually pretty good, and the rest of mens is really pretty mixed.

Total mens business is only up about 1% comps.

Total ready-to-wear business is also on a comp basis only up about 1.5%.

In our home business, we have exited a number of businesses over the course of 2008, and the businesses that we have stayed in, which are primarily luggage and domestics has done very well.

Domestics is ahead over 4% comp for the second quarter, and luggage, our luggage business is ahead well in excess of 20% on a comp basis.

As I said before, juniors was ahead just about 10% for the total.

The footwear business which has been pretty difficult around America in many different segments including DSW, at Filene's Basement is ahead about 1% for the season, and the cosmetics business is ahead over 8% comps, so when you take that all together, it is a second quarter comp increase of 3.68% on a four-wall basis, and it is an improvement against the first quarter, which was 2%, so that is I think pretty positive, and at the same time you heard Jim talk about the margin improvement to 39.6% for the second quarter, so not only are we doing more comp sales business, but the margins continue to get better.

In terms of the stores, we have had a few stores that have had pretty good business trends, and they really have been headquartered into both New York and New England.

Those two regions have had a pretty good comp sales increase in total, and the rest of the stores are kind of all plus or minus a couple of percent, with New York and New England really leading the way, and dragging the rest of the flat sales up to that 3.68% that we talked about previously.

As we look ahead for Fall of 2008 we have said all along that we expected that run rate to be somewhat consistent with what we have done in the first half.

We have had a number of years in a row of about a 3% comp sales increase on a four-wall basis, and that continues to be the trend, and the good news really in this whole thing is that we are able to do this while improving our margins, and we would suspect that we will continue to have margin improvement through the third and fourth quarter, as we have for the first and second quarter.

A lot of that margin improvement is driven off of a revitalized permanent markdown system, which is more reliant on taking permanent markdowns deep and timely, as opposed to waiting until the end of each quarter for significant POS activity.

And that seems to be working pretty well for us in all segments of the business, when we started this in the second quarter of 2008 and we will continue to refine it, we are getting better at it, but we feel pretty good about the early returns on that change in methodology for pricing.

Other than that, I think really at this point we are prepared to turn the call back over to Lil, to take any questions that anyone might have for Jim and myself.

Lil?

Absolutely.

(OPERATOR INSTRUCTIONS).

Our first question is from David Mann.

Go ahead, please, David.

Yes, thank you.

Good afternoon, guys.

A couple questions.

The store impairment that you took, can you talk a little bit more about that charge, which store or stores, and does it seem to be fairly sizeable?

Yes, it was actually four stores that we took that charge on, David, and as a result of doing the analysis under the Accounting Rules for 144, and I am going to have to say that most of the stores, well all of the stores that we took the charge on were some of the newer stores, that unfortunately haven't performed to expectations yet at this point in time.

We do hope to see some improvement in that as we go down the road with them.

We definitely are challenged by that, and that is what we are going to focus on here very intensely as we look around the corner here to 2009, but it is four stores, and they averaged probably just around $2 million each in the impairment calculation.

Okay.

And when we X that out of the operating loss at the Basement , it looks like even though you had decent four-wall comps, and decent gross margin, you did have a higher operating loss excluding that impairment.

Can you just talk about some of the issues going on

Right.

Well I think again, one of the issues is obviously that the new stores have not, even absent that charge, they have not continued to perform to the extent that we want them to.

We also have a downtown Boston store that is closed during this period, that we were receiving some sales volume out of that last year at this point in time, as we wound down the Operations there, so it is really a combination of a couple of factors that are impacting this, and as we are seeing the sales, the fixed cost as without that sales volume de leverage at some of these stores that we are having to take impairment charges on.

To add to that the downtown Boston store for the first six months was open last year, and it was earning money that was reportable on a P&L basis.

Under our current arrangement, we are getting some cash flow from the landlord to help offset the cash flow we would have had, but we are not allowed to take that as P&L in a season, that really gets amortized over the life of the lease which really is de minimus on a yearly basis, so those numbers are somewhat skewed differently until the downtown store reopens.

But the cash flow that you are getting is not de minimus, correct?

No.

We believe that the cash flow is enough to cover the operating income that we would have received from that store on an annual basis.

Okay.

That is helpful.

And then just a more general question, in terms of the merchandise availability.

Some of your larger competitors have talked about what a great environment it is.

Can you just give a sense on what you are seeing, in terms of availability, brands, and types of brands, and the pricing environment?

Well we won't go into specific brands, David, but I would say that in the better through designer world, there is a significant amount of opportunity for off-price to purchases this season, off-price purchases at deep discount for pack away for the next season.

We were able to, I will talk about two in particular, in terms of designer.

We were able to purchase a significant quantity of the probably the most famous female designer out of Italy, whose last name begins with A, I won't tell you what it is, and that product is first on to go out to the stores the first week in October.

At the same time, we were able to also purchase probably the leading mens manufacturer whose name starts with a B, out of Italy as well.

Again, deep discounts so we were able to price it very attractively and still make full margin on that, and that product is first going out to the stores now.

We have had very very good early reaction to our European designer product, we have been able to acquire at really strong price points yet still at full margin.

In the domestic market, there's no shortage of products, David in almost any category, just a question of negotiating strong prices, and I am not getting over extended, because even with strong prices, clearly the business is not going to be as buoyant as it might be if the economy was in better shape.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

If we don't have any more questions at this time --

Our next question comes from Marcelo de Sousa.

Please go ahead.

Oh, sorry about that.

This is Marcelo, good afternoon.

Could you please give me an update on the downtown Boston store?

Is the opening still for next Spring?

No.

All right, so Marcelo, here is what is going on.

We don't control the construction.

That's being handled by [Vernato] and their partner in this project which is [Galle].

The last information we have and it keeps changing, is that their construction is slightly delayed, and that it looks like at best, we would open for the fourth quarter of 2009, or at worst the first quarter of 2010.

Between now and then from a cash point of view, where it was being compensated at a level equal to what we would have had had we been open, but that still would not be reportable as a net income during this time period.

Okay.

Can I ask another question?

Surely.

What is the impact of the shared service agreement that you expect for the coming quarters?

Well I think that that impact is really going to be determined as we get more down the road, to see what is going to happen with the Value City operations, and their ability to absorb the shared services costs, that are going to be allocated to them.

I think that it is also going to be an impact to how we see what we are going to shake out, as far as expenses and everything like that, some of the efficiencies that we might be able to accomplish within our own organization.

If Value City does take over some of their services in the finance area and Human Resource areas, and things like that, on a long term basis, I hope that really we are looking at something that is not too meaningful.

But I would have to say that I do believe that as I said in my presentation, that we do believe that the SG&A expense, there is going to be some impact from this, because I don't believe that Value City is going to be able to absorb all of the expenses that they have historically.

Okay, thank you.

I really not putting a fence around any dollar amounts, or expectations like that.

Okay, thank you.

Our next question comes from David Mann.

Go ahead, please.

Yes, just a follow-up on that question.

Can you clarify somewhat what the cost that was absorbed in the current quarter for the service cost?

Is that able to be broken out?

Actually, there wasn't much that was absorbed in the current quarter by them.

They absorbed the first quarter costs that we billed to them, but at this point in time due to some of the accounting policies on the way revenue recognition has to be, David, we were not able to bill some of these services to them at this point in time, so the costs that they absorbed through the second quarter was not much.

And remind me how much might it have been in the first quarter?

Well there was a cap actually put on it at $2.2 million in the first quarter.

And the amount that would have been billed to them, or would have liked to have been billed?

Can you give a sense on what range that might have been?

It would probably have been, I am going to say it could be as much as $1 million more during that quarter.

A total of 1 million, or 3.2?

3.2 in total.

Okay, that is helpful, and just generally can you give a sense on what in terms of Value City's operations, how many stores do you think they are operating right now?

You're going to have to reach out to them.

I can't answer that question, and I would just be guessing if I did.

Very good.

Thank you.

Sure.

We have no further questions.

All right, with that, I would like to conclude the call, and say thank you to everybody, and we look forward to speaking with you again next quarter and this period.

Thanks.

Thank you.

Bye-bye.

Good evening.

Thank you.

This call has been concluded.