Designer Brands Inc (DBI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the DSW Inc.

Fourth Quarter 2008 earnings conference call.

I'll be your coordinator for today.

At this time all participants are in listen only mode.

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

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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.

Okay, good morning.

With me today in Columbus are Debbie Ferree, our Vice Chairman and Chief Merchandising Officer; and Doug Probst, our CFO.

Earlier today we issued a press release detailing the results of the operations for the quarter ended January 31, 2009.

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'll turn it over to Doug.

Thanks, Leslie.

Good morning everyone.

We will begin with the financial performance for 2008 and follow-up with our outlook for 2009.

Then Debbie will cover our merchandise performance and significant operating strategies.

Throughout our comments we will be sharing with you why DSW is well positioned to navigate through this difficult economic environment and why we believe DSW will emerge from this recession more financially sound with more loyal customers and higher market share.

With that let's begin with the financial performance for the Fourth Quarter.

As previously released, net sales for the Fourth Quarter increased 4.7% to $348.2 million.

Same-store sales decreased 7.2% for the comparable period versus a decrease of 1.7% last year.

Like most retailers, traffic was down in the quarter; however we were pleased to achieve an increase in our selling average unit retail as we did not have to discount as deeply as last year.

Merchandise margin rate for the quarter increased 10 basis points over last year to 38.8% despite a reduction in initial markup and increase in our shrink rate.

However the gross profit rate dropped 130 basis points to 20.6% demanding to an increase in occupancy expenses related to the negative comp and the incremental asset impairment charges.

As expected, the SG&A rate increased 240 basis points in the quarter to 24.0% due mainly to increased depreciation, IT expense and severance charges related to the previously announced workforce reduction.

For the quarter, the net result was a 370 basis point decrease in the operating income rate to an operating loss of 3.4% of sales.

Additionally we took a $1.1 million pre-tax non-operating charge for an impairment related to our auction rate securities portfolio.

At this time we have less than $5 million of these securities remaining on the balance sheet.

Net loss for the quarter was $7.5 million compared with net income of $1.1 million for last year and the diluted loss per share was $0.17 compared with diluted earnings per share of $0.02 a year ago.

For the year, net sales increased 4.1% to $1.46 billion.

Same-store sales decreased 5.9% for the comparable period versus a decrease of 0.8% last year.

Merchandise margin rate for the year was 42.5%, a 100 basis point increase to last year mainly due to a favorable markdown rate as we managed inventory levels in line with comparable store sales declines throughout the year.

The gross profit rate for the year dropped 40 basis points to 25.9% due mainly to an increase in occupancy expense related to the negative comp and fulfillment cost for DSW.com channel.

As expected the SG&A rate increased 250 basis points for the year to 23.0% due mainly to the negative comp, increased depreciation on the 41 new stores open this year, increase in IT spend and the absorption of costs related to the bankruptcy of Value City department stores.

Depreciation expense was approximately $35 million for 2008.

The net result was a 290 basis point decrease in the annual operating income rate to 2.9%of sales.

Net income for the year was $26.9 million compared with net income of $53.8 million for last year and diluted earnings per share were $0.61 compared with $1.21 a year ago.

Regarding the balance sheet, total inventory was down 7% from last year.

Excluding the incremental inventory investment for dotcom, we ended the year with inventory on cost per square foot basis down 16%, although some of the decrease is related to the timing of spring merchandise receipt, we believe we are well positioned with our inventory which is an important factor that will help us combat this challenging retail environment.

Despite the economic climate in 2008, we continue to invest into our business.

Total capital expenditures for the year were $81 million with the addition of new stores, remodels and continued investment into our IT infrastructure.

At the end of the year the square footage for DSW stores was approximately 6.7 million square feet.

We ended 2008 with 298 DSW stores and 377 leased departments.

We have committed to investing into our long term growth while sustaining our cash balance.

In 2008 cash flow from operations exceeded our significant capital expenditures enabling us to end the year with a balance of $156 million in cash and short-term investments and no debt.

Considering the external factors, we are pleased with our performance in 2008.

We increased our cash and short-term investments by over $24 million.

We began the year with a comp guidance of negative mid single digits and we achieved a negative 5.9% comp despite the declining environment throughout the year.

We opened a record 41 new stores.

We launched DSW.com to further build our brand with new and loyal customers.

We continue to invest into our system to develop a strong and sustainable platform for growth.

We diligently managed inventory and increased merchandise margins by 100 basis points and we increased the active DSW Rewards members to over 10 million from 8.6 million a year ago.

Now looking forward to 2009, as the economy has continued to weaken and the retail landscape has become more unpredictable, it's difficult to accurately project results for our business as well as our leased business partners.

Given this uncertainty we are not providing specific EPS guidance for 2009 at this time; however we will outline a number of elements of our financial plan.

Overall, our plans for 2009 assume a continued difficult economy throughout the year and our approach is squarely on maintaining a strong balance sheet.

With this we will be well positioned to respond to the challenges of this environment and take advantage of opportunities as they arise.

First, our store comp expectations are in the negative mid single digits which is in line with trends we saw in the Fourth Quarter; however we expect an increase in net sales in our DSW segment despite the negative comp generated by the annualization of 41 new stores and our eCommerce channel.

We have built our inventory plans around the comp decrease in order to continue to protect merchandise margin.

Next, we will decrease capital expenditures to $35 million from $81 million in 2008 mostly due to the decrease in store openings from 41 to approximately 10 stores and the bulk of our investment in our IT infrastructure and eCommerce being behind us.

The decrease in store openings allows us to preserve cash and puts us in a position of strength to capitalize on real estate opportunities that could be very favorable in this environment.

Third, with the negative comps we will delever SG&A as a percentage of sales as we continue to invest into our IT system, namely size enablement and assortment planning tools that should benefit our margins beginning in 2010.

We will also increase marketing spend to drive traffic which Debbie will talk about in her comments.

Additionally depreciation and amortization expense will increase to approximately $48 million in 2009.

These efforts are designed to put DSW in the best possible position to endure this uncertain economy.

The decisions we have made and will make are from a position of strength and not from weakness or desperation.

We will increase market share, add to our cash position, and maintain flexibility while being able to take advantage of opportunities that present themselves.

Our financial strength and realistic outlook gives us confidence that DSW will emerge from this recession in a position to be stronger and more competitive in the long term.

With that I'll turn it over to Debbie.

Thank you, Doug.

Now that Doug has outlined our financial strength, I would like to continue with the differentiators that make DSW well positioned to endure in these difficult economic times.

First, the DSW business model is more relevant than ever in today's economy.

Value, selection and convenience are the core of our business which is right for today's climate and for the future.

We will continue to make small adjustments as necessary during these tough times and focus on execution.

As a result, we will emerge stronger with increased market share to position us for continued long term growth.

We continue to optimize margin by diligently managing inventory to sales levels, with inventories leaner than ever we are buying better and closer to the time of need.

We enter the year with open to buy liquidity that affords us the opportunity to take advantage of close outs, effectively test and chase new items and surgically place reorders to maximize proven items.

The success of these actions is based upon the quality relationships we have with our vendors and I am proud to say that those partnerships have never been stronger.

DSW was built upon the philosophy of win-win relationships with our vendors.

Our vendor community must continue to succeed and prosper as we have and that philosophy has served us well and strategically positioning these brand relationships for future growth.

As we reported on the last few quarters, there are shifts occurring in the way customers are buying today.

I will begin by outlining those and detail how we are approaching them.

First, customers are continuing to trade down from other channels.

This customer is in search of better brands but now wants them at a compelling value.

We are growing this sector of the business with a focus on expanded assortments as well as adding new brands where appropriate.

This is an area where we will continue to attract and retain new customers and ultimately grow market share.

Second, the core customer is certainly more discriminating in their purchases today and must be motivated to part with their money.

They're looking for good quality investment items they can wear for multiple uses and our model offers this customer the price value equation they're seeking.

Third, the fashion customer is still very motivated by emotional must haves that are not in her closet.

Our product driven merchandise team continues to create assortments that capture relevant trends at price points that these customers want.

To serve this customer, we are aligning with vendors that take fashion risk and offer test and react opportunities which allow us to buy closer to time of need, which is critical to the success of our business.

And finally, there's no question there is a segment of customers that are strictly motivated by price today.

Our model allows us to satisfy those deal seekers by providing them with both new regular price values as well as more deeply discounted items through our regulated clearance system.

Now as Doug mentioned earlier I'd like to detail our marketing strategy for 2009.

We will drive sales traffic and ultimately market share with marketing that capitalizes on our value message.

We will increase marketing spend by $15 million this year mostly on television advertising.

This additional marketing will allow us to be even more aggressive and communicate the value DSW value and assortment proposition and continue to elevate awareness of the brand, ultimately resulting in new customers and increased sales.

Specifically the TV campaign for 2009 Spring has a decidedly value oriented message that portrays customers as a sisterhood of shoe lovers that collectively enjoys getting a deal on brand name shoes.

The campaign spans a 15-week period on national cable and on network TV in our top markets.

The DSW rewards program is one of the most critical components of our success and we continue to enhance the ways in which we connect with our customers.

Our core reward customer continues to demonstrate unprecedented loyalty, even in these economic times.

This program is a tremendous asset for us with over 10 million members that account for over 75% of our sales.

One of our goals in 2008 was to increase the number of weekly sign ups in the stores and I am pleased to report that our stores team has exceeded that goal and adds new members at the rate of over 65,000 per week.

We have a powerful relationship with our rewards customer.

Our customers appreciate the reward certificates they earn.

They enjoy the surprise of offers by gift with purchase and double point shopping days.

Our relationship is enhanced by relevant, targeted communications and a type of promotion that satisfy her passion for shoes.

DSW.com is another opportunity to further our relationship with our customers.

We have not yet reached our one year anniversary and are continuing to fine tune both the customer service experience and the assortments we are learning.

Thus far, we have found that DSW rewards customers clearly use the site as another way to access the DSW brand.

They appreciate the convenience of shopping both channels.

We're also learning the power of the site to introduce new customers to the DSW experience.

We continue to adjust online messages and understand how they drive new customers to shop either online or in store.

From a merchandise standpoint, fashion is the driver of the online business.

This space is flexible, agile, and affords us the opportunity to test new trends and quickly chase them for both channels.

We are excited by what we're seeing and learning and will continue to capitalize on the synergy between the two channels.

Now, I will detail specific merchandising performance in the Fourth Quarter and finally move on to what we expect to see in the Spring.

In Q4, boots out performed the Company as our plan to continue a regular priced boot business paid off.

This included both new items and reorders on proven styles.

In better brands as I mentioned earlier, we continue to see good results as she traded down from other channels.

And finally athletic performed well as our large opportunistic athletic buy in November was successful.

As we move into Spring, overall we don't expect to see many changes in the customers current shopping behavior; however at the department level we're excited about casual sandals as a fashion driver and we will continue to utilize the same strategy in sandals as we took in boots by adjusting inventory levels to better reflect Q2 sales opportunities as customers continue to buy closer to time of need.

Additionally we continue to see a strong reaction to pumps and flats, in new materials, details and colors.

We expect the men's business to under perform to the Company as he is being very conservative in his purchasing right now.

Now I'd like to recap our merchandising and marketing strategies for 2009.

One, drive in store and online traffic through additional marketing spend and relevant communications; Two, maximize strong vendor partnerships to provide the selection the customer wants at a compelling value every day; Three, optimize margin by positioning inventories to match a conservative sales comp; And four, maintain open to buy liquidity to maximize sales opportunities.

Let me conclude by saying DSW is uniquely positioned to appeal to customers in these tough economic times.

When the economy stabilizes we will have gained market share, increased our customer base, furthered our loyalty with existing customers, and continue to cultivate strong vendor relationships to support the additional growth.

We have the right business model to benefit from today's market which will position us to thrive in the future.

With that I'll turn it back over to Leslie.

Now to the Q&A.

Please limit yourself to one question on the first round.

You're welcome to get back in the queue in the same manner you did originally.

Could you please instruct the colors on how to ask a question?

(Operator Instructions) Our first question comes from the line of Jeff Black from Barclays Capital.

Hi, good morning folks.

Good morning.

Doug, on the expense line, just help us understand, I know we've got marketing spend up 15.

It seems like that offsets almost in total the headcount reduction or the annualized benefit from that and we've got some other things, we've got store expenses and bonus accruals if you come down but netting it all out, I mean, what do we look at in terms of just year-over-year growth in G&A this year?

Thanks.

Sure, and Jeff, you already called out some of the points of the increase in marketing spend but remember our depreciation expense is going up as well.

I think we mentioned it's going to be up about $12 million to last year so I think that's the last component maybe that you didn't mention because I think you got them all.

We did have the benefit of the reduction in force.

We took some charges this year but I should see the benefit of that for 2009 so I hope that answers your question and if not we can reload.

Thank you.

Our next question comes from John Zolidis, Buckingham Research.

Hi, good morning.

Good morning.

A question on the gross margin performance in the Fourth Quarter.

I was wondering if you could give us a little bit more detail.

I mean, I believe that we were expecting a bigger improvement in merchandise margins in the Fourth Quarter than what was achieved given the previous year results which were fairly disappointing and what I don't understand is the asset impairment charge that you talked about that's in the occupancy cost, can you talk about the potential for merchandise margins going forward?

You got inventories really light.

Why weren't merchandise margins better in the Fourth Quarter and what's going on with the occupancy?

Thank you.

Sure and we'll give you an overview first in the Fourth Quarter and for everybody's benefit a lot of people are trying to compare the Q4 to Q2 this year.

Certainly our performance in 2007 in those quarters weren't as strong as we wanted to, although Q2 was much worse in '07 than it was in '04 so there was not as favorable comparison in Q4 in 2007 but basically clearance was selling throughout the quarter and we said that and positioned ourselves in clearance to sell even going into the first quarter.

For example, even though inventories at cost per square foot were down 16%, clearance inventory per store was up about 12%, so we see the demand there.

We're continuing to keep a decent or strong balance of the clearance because that's what customers are looking for.

The other piece that makes a little different comparison is the shrink as we mentioned in the call or the script that the shrink was higher as a percent of sales, even though the shrink dollars were basically flat to last year as a percent of sales that was up and that was a charge of about 100 basis points that we took in Fourth Quarter this year that we didn't last year nor in the second quarter, so again, we wanted to make sure our inventory was well positioned.

We didn't have to run promotional clearance sales but we did continue to have good clearance balance and came out with one in the Fourth Quarter.

And Debbie you may want to add some more color there?

I would also tell you that not unlike any quarter there's always a few things that are disappointing and there were a few categories that were disappointing for us.

In the dress category, tailored had continued to underperform for us so we went ahead and took some aggressive hits there.

Also in the opened up category, as you saw the opened up business moved to a big position in boots and boots overperformed significantly for us, so we took some aggressive markdowns in the opened up category, so I would just tell you what we did was respond to customers votes on what was working and not working and those were two categories that we took a little bit deeper hits than probably we normally would have had to have taken or that we had projected to be able to position ourselves to be in a good boot position and maximize that business.

And back to the impairment charges.

The occupancy charge or gross profit is where we take those impairment charges on stores.

Specifically there was three stores we took asset impairment charges of $1.7 million and an additional $700,000 or so that we had related to our new tech refresh that we put into our stores and basically implemented at the end of the year.

So those impairment charges are where that gets charged and that was in total about $2.9 million but certainly about $1.5 million higher than last year and as far as the '09 merchandise margins, we could see improvement again provided that we hit the comps that we're expecting and there's no big surprises in a particular quarter we should expect to have some merchandise margin improvement in 2009.

Thank you.

Your next question comes from the line of Christopher Svezia, Susquehanna International.

Hi.

This is (inaudible) for Christopher.

How are you?

Hi, good.

Wanted to just ask, given that your inventory levels are very clean how are you looking at your promotional and pricing strategy for '09 and how will that differ during the Fourth Quarter?

Thank you.

How will that differ during the Fourth Quarter?

Differ from the Fourth Quarter.

Do you expect to be less promotional because inventories are already so clean in the stores?

Exactly.

Exactly.

I would tell you that we have a pretty consistent pricing strategy.

I think value occurs at all levels, and that's what we're seeing.

We're seeing items that are highly priced sometimes get as strong if not stronger sell-throughs than opening price points so I cannot tell you that there's one consistent pricing equation that we use collectively across the category, we price each item as we feel we need to to be able to get the retail that we think will get the sell-throughs in the margin.

Having said that as we mentioned on our last earnings call, we are going to maintain strong price points around a big key item commodity item.

We feel that that's really important to be able to drive business and to be competitive with those big iconic items that define themselves in each category.

I will also tell you that we will value, we'll add more value to the assortments as we continue to increase the close out piece of our business which we also mentioned on the last earnings call so we're not making any dramatic changes in our pricing policy.

We will go ahead and we'll price each item as we see fit.

I think the biggest change to how we price goods this year is that if you'll remember, we had built those big events last year, year before last, around Summer sale and Winter sale which really started to create some distortion, peaks and valleys in our business which were not good for the business.

We went back to more of a normalized rotation policy this past Fall and are continuing that into the Spring season, so that also has an opportunity for the customer to find even deeper values in the back of the store so there will be more normalized entries in the rotation, more consistency in our performance quarter-over-quarter and that's where the customer will get the value as well.

Thank you.

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

Yes, thank you, good morning.

For the dotcom business with one year now under your belt, can you talk a little bit about how the sales and profitability trended in 2008, give an outlook for how that may improve in 2009 and also can you comment on what you may have projected the cannibalization impact to store same store sales was in '08?

Thank you.

Sure.

Hi, David.

There's obviously a growing channel for us and we do look at it as one segment with DSW stores because we do allow to have returns go back and forth between the channel so a lot of the, it's not material but there is some variability in these numbers as to what channel it came from but with that as a background we continue to see the business grow.

It continues to add penetration every quarter the sales have gotten higher and in the Fourth Quarter it's gotten close to 4 or 5% in the Fourth Quarter the penetration in DSW stores.

So it is a channel that we can see is attracting new customers.

We are constantly turning the dial to make sure we're given the right assortment, the right kind of offers, the right mix of inventory for clearance and the non-clearance items so before it's even first year anniversary it didn't open until April of last year on a soft launch and a hard launch not until June so we're still learning a lot.

We still expect it to grow.

As we said that's going to be part of the component of letting us grow our total sales in the DSW segment because it will be open a full year as well as the 41 stores that we opened as well, so still learning, we're pleased.

We expect it to be a contributor to the total Company in not too long but at this stage we're still learning and trying to continue to grow it.

Thank you.

Your next question comes from Heather Boksen from Sidoti & Company.

Good morning.

I guess a follow-up on some of those gross margin questions from Q4.

I guess it would be helpful, do you know or have in front of you what the gross margin would have been without those asset impairment charges in the Fourth Quarter?

About 40 basis points higher.

All right, thanks.

Thank you.

Your next question comes from the line of Susan Sansbury from Miller Taback.

Hi, yes, good morning.

Going back to the gross margin just a detail here, the severance charge was it equal to what you forecasted, in other words $3 million?

That's the first question.

Sure and just to follow-up on Heather's question to make sure I answered that right is that the 40 basis points would have been instead of a 10 basis point improvement it would have been a 40 basis point improvement because there was some impairment charge in 2007.

As far as the severance charges yes, those are pretty much came in as we expected which was about a $3 million impact and we did have some savings against that as well because we didn't pay the salary but it was close to our expectation.

The second question is I've been away from DSW for awhile and I apologize but could you update us on your shared services agreement with RVI?

Sure.

Has there been any resolution of the ongoing negotiations?

Yes, I can't remember how long it's been, but generally we took over all the shared services in March of last year so now we provide all of the shared services to Filene's Basement as well as retail ventures and to a small part Value City Department Stores last year so that includes finance, includes HR, IT systems, all of that is now provided by DSW to the other entity.

So every year we adjust for the changes in the environment and it's a relationship that we have and foresee continuing.

Okay thanks very much.

Your next question comes from the line of Patrick McKeever, MKM Partners.

Thanks, good morning everyone.

Good morning.

I apologize if I missed this because I joined a little bit late but what would all of the different charges amount to on a per share basis, the asset impairment charges, the severance charges, the Value City payment write-off, just everything together, how much is it on a per share basis?

Well, it depends on what you consider one-time but certainly the severance would be about $0.04 a share, the Value City Department Stores what we didn't collect would be about $0.08 a share.

The impairments all in, for all of the impairments for the year would be about $0.07 a share and then the auction rate securities would be another $0.01 or so.

So again, that's part of the business and we understand it and but certainly if you're looking at as of one-time and you wanted to model off a little differently those would be the ones that I would include in adjusting your model a little bit.

So there $0.20 per share roughly?

If that's what all those added up to, yes.

Okay.

Sounds good.

Can I ask another one?

Sure.

Okay.

And then it sounds like with the comp guidance and some of the general comments you've made about the economy it sounds like the business has continued to trend as it did in the Fourth Quarter, but we did hear from a lot of retailers that February was a good month and some of that was weather driven and I know your business is sensitive to the weather.

I know March is tricky with the Easter shift but I was just wondering if you could provide any kind of color on current trends?

Yes.

Debbie could certainly do it on merchandising trends but as far as the overall trends, yes, February was a warm month and we're very careful not to take that head fake, if you will but if you look at the underlying examples of our, or indexes that are out there such as consumer confidence, that didn't just stay bad.

That got worse throughout the year and it's down to a record low 25 and until we start to see that start to improve where other things like it improve, we're very leary in trying to assume that the consumer is going to be back but as Debbie mentioned in her comments we're well positioned.

With the value orientation out there obviously we're a value chain and we aren't having to redefine ourselves to be that.

That's what we've always been.

So if we get the right assortment and still fashion the value, we believe that the traffic will come into our store, she may not be buying as many pairs of shoes as she did before but certainly as she's looking to buy, she will be checking us out and I think that's evidenced by the fact too with the increase of our loyalty members to increase that from 8.6 million to over 10 million customers.

That's pretty significant and it's not lost on us that we're still attracting more customers which gives us confidence that during this period we may make more friends and be even stronger because we'll have more people to talk to as the economy starts to rebound but the underlying indices right now, we're just not seeing any kind of major improvement on the horizon and we're certainly not going to read a single month, a warm month in that and try to give us any kind of indication that this is a long term rebound here.

Thank you.

Your next question comes from Christopher Svezia, Susquehanna International.

Hi, just as a follow-up could you give us any color on how traffic is trending during the first two months of the quarter and maybe some comment on volume or units per transaction, those metrics?

Yes and we don't get too far into projecting forward but certainly as was mentioned on the last question traffic has not been too bad in the warmer weeks, but the units per transaction is something that we have been noticing a decline in.

Year after year, with our business, the units per transactions have been about 1.5 and that was pretty steady year after year, quarter after quarter.

We have seen that start to slowdown though which again is not surprising given that there's probably more consumer discipline out there as to buying that second pair of shoes so while the index doesn't change much, maybe from 1.5 down to 1.4, that's certainly significant as it impacts comps but the traffic has not been bad relative to some other retailers and we think that's because of our value proposition obviously and the assortment that we offer, so those are probably the underlying trends that we're seeing but we don't want to go too much further into the first quarter until we get a full view of the quarter and Easter starts to pass us.

Thank you.

You have a question from John Zolidis, Buckingham Research.

Hi, just one additional question.

Looking at the items like depreciation which you expect to be up about $13 million and advertising spend which you expect to be up about $15 million, just doing a quick calculation, that together with negative mid single digit comps, ballpark operating margins we should expect those to be down at least 200 basis points in 2009 so was wondering if you could just kind of confirm that's in the ballpark based on your comments and then second, could you just expand a little bit on the philosophy of ramping the marketing spend in this environment?

Why care about market share, is that really important when customers are spending less?

Can you just tell us why you think that's a good place to spend your dollars when certainly customers are being less responsive and spending less?

Thank you.

Sure, I'll take the first question and I'll let Debby comment to the marketing.

Obviously, John, we're not going to get too specific on the modeling as far as how you're looking at the business, but your 200 basis point decline in operating income, I'd encourage you also to remember that we took a reduction in force which we took the charges in 2008 but we should start to see the benefit of that so that will offset some of the increases you called out of marketing and depreciation.

Also we do anticipate being able to deliver an improvement in merchandise margin, again provided we're not surprised at any particular quarter to the negative on comps but again at negative mid single digits we believe we have a realistic perspective on that so should that hit, similar to negative mid single digits we could see another improvement of merchandise margins.

I'd like to address the marketing question.

First of all we think in this economy right now, we have a real opportunity to increase market share at DSW.

As I stated we think we have the right value business model and it plays very well into what the customers needs are right now so what we did is with that premise in mind, we did put an extra $15 million in the marketing and let me just tell you that most of that went into TV, about 70% of that additional spend went into TV but in addition, as we continue to ramp up the number of new reward customers that we get, that program does cost us a little bit more so we put some money into the DSW rewards program as well.

We feel that the content that we have and the strategy that we put together for the Spring this year by increasing the marketing spend will be able to increase sales and increase conversion and address some of those metric indicators we were talking about that we're a little bit worried about that has started to go South on us.

So we feel that it's the right thing to do.

We feel it's a golden opportunity to get out there, increase awareness, get more customers, increase the loyalists in DSW and ultimately result in a stronger model when we come out of the economic situation.

Thank you.

We have a question from the line of Rob Schwartz from Cooper Creek Partners.

I just wanted to follow-up on a few of the earlier questions.

Given the only guidance we have is CapEx and same-store sales guidance, the negative mid single digit same-store sales guidance, can you talk about how you expect it to trend throughout the year given compares are much harder as we get to the December time frame.

Are you banking on things improving in the back half of the Fourth Quarter?

We're not necessarily banking on an improvement but from a comparative standpoint, going up against the negative 7 in the Fourth Quarter might make the comp numbers look a little bit differently but generally we see it as a pretty stable performance throughout the year and not anticipating any kind of improvement in the back half.

Again, optically it might look a little better because of the negative seven that we have in the fourth but generally we see it pretty stable.

Thank you.

Your question comes from David Mann from Johnson Rice.

Yes, if I could ask a couple.

Just piggybacking on the last couple questions, given that you're spending so much on marketing, is there any assumption in the comp for some benefit from that marketing spend?

Yes, David.

We're stating that it's a negative mid single digit.

Obviously that would be lower if we didn't have the marketing spend.

Hopefully it's more than our assumption but clearly we're giving some credit to the fact that the additional spend will drive some sales.

Okay.

And then in terms of your occupancy expense, a lot of retailers are talking about negotiations they've having with their landlords.

Is there any opportunity to see some slowing growth there and if so can you just talk about how you think occupancy expense will trend in terms of percentage growth in '09?

We are pursuing daily the opportunities with our different developers and landlords so yes, will that be a marked improvement in 2009 as far as the charges are concerned?

Maybe not but certainly we're seeing opportunities very frequently and we're taking advantage of those.

Those deals can come out of a number of different ways.

It can help us on new store openings as well so there's a lot of different opportunities within that arena and we're pursuing them very aggressively.

Thank you.

You have a question from Jeff Black from Barclays Capital.

Hi, Doug.

Maybe I missed it but nail down just how much of that gross margin drop was due to the occupancy deleverage and is what you're saying on the merchandise side that you think you can get enough merchandise margin lift to offset the occupancy or we still going to expect some gross margin erosion for the year given current trends?

Thanks.

The occupancy deleverage in the Fourth Quarter was about 100 basis points and was that for about the year as well, so we do not expect, although we expect some merchandise margin improvement in 2009, that may make it a chance even if we get some good occupancy changes that maybe we could squeak out improvement in gross profit but we aren't counting on a significant improvement if we get one.

Thank you.

I would now like to hand the call over to Leslie Neville for closing remarks.

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