Designer Brands Inc (DBI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 DSW Incorporated earnings conference call.

I'll be your coordinator for today.

(Operator Instructions).

We'll be facilitating a question-and-answer session toward the end of this call.

I'd now like to turn the presentation over to your host for today's call, Ms.

Leslie Neville, Director of Investor Relations.

Please proceed, ma'am.

Thank you, and good afternoon.

Welcome to DSW's first quarter 2009 earnings conference call.

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

Earlier today, we issued a press release detailing the results of operations for the quarter ended May 2, 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.

Now, as you may know, this is our first call with our new CEO, Mike MacDonald.

Mike just joined us four weeks ago and we couldn't be happier to have him with us.

So, our procedure today will start with Doug, will who will give us an overview of the financial results.

And then turn it over to Mike to talk about what he has seen at DSW in his short time here.

Debbie Ferree, who has always been an integral part of our conference calls, is here with us today of course.

And she will be available to answer your questions during the Q&A.

So, with that, I will turn it over to Doug.

Thanks, Leslie.

Good afternoon, everyone.

We will begin with the financial performance for the first quarter and then update our outlook for 2009.

Net sales for the first quarter increased 5.3% to $385.8 million.

Same-store sales decreased 4.7% for the comparable period versus a decrease of 5.4% last year.

Despite the negative comps, total sales increased nearly $20 million because of an increase of 34 new stores over last year and the addition of the DSW.com channel, that was not publicly launched until June of last year.

The negative comp was driven primarily by a drop in units per transaction, while traffic and conversion were relatively flat.

As you know, we have been running television advertising throughout the year.

We believe the incremental spend on the TV campaign is generating a lift in sales through increased traffic.

We also believe we have attracted new customers, as evidenced by the increased enrollments in our DSW rewards loyalty program.

Based on these results, we expect to continue our increase in advertising spend to last year for the balance of 2009.

The merchandise margin rate for the quarter increased 120 basis points over last year to 43.6%, mainly due to a favorable markdown rate as we benefited from fewer clearance markdowns in the quarter.

The gross profit rate increased 70 basis points to 27.2%, as merchandise margin improvement more than offset the increase in occupancy expense related to the negative comp.

As expected, the SG&A rate increased 200 basis points in the quarter to 24.1%, due mainly to the planned increase spend in marketing and IT.

The net result was a 130 basis points decrease in the operating income rate to 3.1% of sales.

Net income for the quarter was $7.1 million, compared with net income of $10.3 million last year.

And the diluted earnings per share were $0.16, compared with $0.23 last year.

Throughout this difficult economic period, our objective has been to maintain our strong balance sheet and the first quarter was no exception.

Our inventories at the end of the first quarter were down approximately 3% on a cost per square foot basis.

While this is slightly inconsistent with our previous trend of being down entering the quarter, on a level that is more in line with the expected comp decline, it is due to accelerated receipts to support merchandise strategies, including a large opportunistic buy that is designed to drive traffic in the second quarter and into the fall season.

We invested approximately $8 million in capital in the first quarter into five new stores and our IT initiatives.

Our cash flow from operations more than covered these investments and we ended the first quarter with $164 million of cash and short-term investments and no debt.

Looking forward to the remainder of 2009, let me first remind you of our key assumptions for the year that we outlined in our previous conference call.

First, our store comp expectations for the year remain in the negative mid-single digits, which is in line with the trends we saw in the first quarter.

We expect our merchandise margin rate to increase in 2009.

However, please note that we do not expect increases in merchandise margin rate in the second or third quarter, as last year's rates were near historical highs of over 44%.

With the negative comps, our SG&A rate will increase as we increase our spend on television, marketing and IT.

We will decrease capital expenditures to less than $35 million, from $81 million in 2008, mostly due to the decrease in store openings from 41 to approximately 10 stores.

Finally, we expect the economic and retail environment to continue to be difficult in the months ahead and consequently, we are managing the business conservatively.

Given these assumptions, we expect the annual 2009 diluted earnings per share to be approximately $0.30 to $0.35.

With that, I will turn it over to Mike.

Thanks, Doug.

Good afternoon, everyone.

As you heard, today is my one-month anniversary with DSW.

The first 30 days have been quite good and I'm definitely starting to feel at home here.

The entire DSW team has been very welcoming to me and that has obviously made my transition much easier.

The high energy and passion this team has for the business is really very encouraging and in fact, inspiring.

In short, I'm thrilled to be here and anxious to contribute.

During my first month, I've spent much of my time getting to know as many people in the Company as I can.

I've also visited several stores and watched to see how we interact with our customers and listened to our store managers as they've described their opportunities and their challenges.

I've also studied recent customer research to see how our customers are feeling about us.

What I've learned through that process is that the fundamentals of the DSW Company are quite strong.

The key attributes of our business model, assortment, brands, value and convenience; uniquely position DSW in the marketplace and are particularly well suited to customer demands in today's economy.

The emotional connection we have with our customers is really incredible.

It's like nothing I've ever seen before in my 30 plus years in retail.

And finally, as you all know, we enjoy an exceptionally strong balance sheet and that too is pretty rare in retail today.

Having said all of that, it's always possible for companies to take their game to another level and that's what we'll be focused on.

It's my intention to evaluate all aspects of the DSW business and to ensure that our efforts are aligned with those priorities that will provide the best platform to grow both market share and profitability.

It's not been lost on me that DSW has now recorded seven consecutive quarters of negative same-store sales growth.

Improving our top line trend is DSW's single most important objective.

Now, I realize that's not a terribly earth shaking statement and I suppose you could make that same statement for most retailers but it's true.

There are limits to how much margin expansion and expense reduction a Company can accomplish.

So really, the only way to ensure long-term profit growth is through top line growth.

So let me share with you my beliefs, after a total of 30 days on the job, as to what are DSW's top 10 opportunities to improve its sales trends.

I should mention, however, that unlike David Letterman, I have not put these opportunities in any particular order.

Here we go.

First, is our size initiative.

Today, we have very little insight into the differing size profiles of our customers in each of our markets.

Beginning later this fall, we'll begin to develop that understanding.

As that database of purchased information builds, we'll be able to replenish stocks more effectively and allocate initial orders more intelligently.

Second, is growing underpenetrated segments of our business.

Today, men's represents only 15% of our business and accessories represents less than 5% of the business.

Simply put, we need to be known for more than just women's shoes.

We can grow both men's and accessories faster than the total through improved assortments, improved in-store presentations and by communicating more effectively with our customers.

Our third opportunity to grow sales is by utilizing our rewards database more effectively to stimulate demand and to serve our customers better and more personally.

We recently added a Vice President level executive to head up this CRM effort.

I believe, over time, this initiative can both improve the productivity of our marketing spend and drive additional sales.

Our fourth sales opportunity is to strongly evaluate our new store format and clearly define what we believe to be the optimal prototype for future stores.

Over the last few years, we've changed numerous attributes of the new stores.

These include store size, location, decor, the service model we give to our customers, and several other factors.

Through this process, we've learned a great deal.

We now need to synthesize that learning into firm direction to guide new store development for the longer term.

The fifth sales opportunity is to implement the equivalent of, what I call, a stock locator system.

Right now, when a customer can't find her size in a wanted shoe style, we call nearby stores to see if they have that shoe in stock.

This takes time at both ends of the phone and it's not a terribly efficient process.

Ideally, we should have an online system that identifies size availability by location, including at our dot com fulfillment center.

Such a locator system would improve efficiency and increase the chances of completing the sale.

The sixth opportunity for sales growth is by expanding our leased business.

As you know we currently have three leased relationships but we have the capacity to do more.

And it seems to me there are a number of companies who could use our expertise in the shoe business to enhance their own businesses.

The seventh sales growth opportunity is by improving our dot com Website in terms of both search capability and ease of checkout.

These two relatively simple improvements can reduce our abandon rate and improve our conversion ratio.

The eighth sales opportunity also relates to the dot com channel.

The concept is to use the dot com channel to offer sizes that fall outside of our normal size range.

From my previous business experience, I know that large size footwear is becoming a larger portion of the total footwear market.

I also know that customers in certain parts of the country need smaller sizes and narrow widths.

Carrying these extreme sizes in all stores can create excess markdowns but satisfying this need through the dot com channel can provide a viable and more profitable alternative.

No pun intended but this is a very big idea that will require the cooperation of our key resources and it may ultimately be a role that our private brand product can fulfill.

The ninth sales opportunity is to use the dot com channel to generate more incremental sales from customers in geographies not currently served by DSW stores.

As you know, we're just about to annualize the introduction of DSW.com.

While we are doing a significant volume through this channel, I believe much of it is sales to existing customers.

I don't mean to downplay this business because I know that multi-channel customers are typically much more productive than single channel shoppers.

However, we really need to drive additional awareness of the DSW brand in markets that are not currently served by DSW.

This can both drive additional dot com business and can provide better insight into potential new store sites.

The tenth and final sales growth opportunity is to get everyone in the Company aligned around the objectives to drive top line sales.

I'm not saying that we don't already have that mindset but we can become even more laser focused on it.

My job to make sure that we do.

So, there you have it.

Those are my top 10 ideas to grow sales.

I don't yet know if they're all possible and I certainly can't estimate their priority or their timing.

But those are the ideas I want to concentrate on to confirm their potential.

Thus far, I've focused almost all of my remarks on sales, while not even mentioning margin and expenses.

I want you to know that I believe we also have opportunities to both expand margins and reduce expenses.

Specifically, we can expand our margins by pursuing our initiatives already underway in the areas of size enablement, purchasing inventory on an FOB basis, increasing our private brand penetration, and assortment planning.

Although the benefits from this last assortment planning initiative are likely to be a couple of years out.

In addition, I believe we must find additional ways to pay for the expenses associated with our strategic initiatives and by developing a more low cost operator expense mentality.

This is an important objective but I really don't want to mislead you.

It's not so much about reducing our existing expenses, as it is about containing future expense growth when our top line growth kicks in.

And that fact underscores why top line sales growth is our number one objective.

Let me conclude my remarks by saying that we have a unique business model, a loyal customer base and an engaged management team.

Those elements combine to form a wonderful platform on which we can grow DSW sales and its profitability.

I'm extremely excited to be a part of the DSW team and I look forward to contributing to its future success.

And with that, I'll turn it back over to Leslie.

Now, onto the question and answers.

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

You, of course, are more than welcome to get back in the queue in the same manner as you did originally for an additional question.

At this time, operator, could you please instruct how the callers can indicate a question?

(Operator Instructions).

Our first question is from Jeff Black of Barclays Capital.

Please proceed, sir.

Okay, thanks.

And thanks, Mike, for those thoughts on sales and expenses and good luck.

A couple of questions.

First, on the opportunistic purchase, it looks like inventory came in pretty in which line with sales trends, so we would think the guidance is pretty conservative that you laid out.

Is there anything to note about the opportunistic buy, what is it, what are the margin characteristics?

Does this mean we're going to be running a fairly heavy sale in 2Q?

Any light on that would be helpful.

Thanks.

As far as the opportunistic buy, I can tell you, Jeff, that first, the product just delivered, so it's in our warehouse right now.

We are sorting through it.

As with most opportunistic buys, and Debbie may want to weigh in with her history here, it's just saying they have to sort through it.

It's a little abnormal to the normal process.

So, there's some work to be done.

I would expect some of this product to start getting out there in the second quarter but some of it is fall product.

And I don't think we're ready to explain exactly what it is to much detail, other than it's a very recognizable name.

And it probably won't go to all stores because probably not all stores can sell this type of product.

But it will certainly go into doors that we believe it can and should help us through the second quarter and third and fourth quarter.

So, Debbie, do you have any more color to that?

Jeff, this is Debbie.

It's a fairly large Italian buy.

The goods are beautiful, the quality is phenomenal.

We got it at a very, very deeply discounted price for goods basically to come right out of the factory.

So, it's going to take us awhile because, as you know, some of these buys, they have many, many SKU's.

So we figure it's going to take us a few months to work to be able to make sure that the allocation is appropriate.

We'll realize some but not much sales at the end of second quarter.

Most all the sales will come in the back half of the year.

And I can take it, this is in the women's shoe area, the Italian buy?

It's both men's and women's but it's predominantly women's and it also includes some accessories.

Okay, thanks.

Good luck.

Thanks.

Thank you.

Our next question comes from the line of Chris Svezia from Susquehanna Financial.

Please proceed.

Good afternoon, ladies and gentlemen.

And, Mike, welcome aboard there.

One question, I was interested in the top 10 when you went through.

Just on the men's and assortments and accessories, I just wondering what your thought process in terms of timing, maybe?

What initiatives maybe you've put in place to sort of take advantage of that?

I always thought that that was an opportunity.

So I'm just curious, what you put in place to take advantage that and what maybe the timing to maybe expand men's and accessories is?

Okay.

Thanks, Chris.

Well, what I'd say is that what I've done so far is listen a lot and hopefully, learn some and identify some early thoughts as to what the opportunities might be.

But as I mentioned, I don't know their priority yet or their timing.

What I would say about men's is, that I understand this Company used to enjoy upwards of a 20% penetration of that category to the total.

So, it's not an objective that isn't already -- hasn't already been achieved in the past.

And in terms of accessories and handbags, that's really a pretty small business right now and it's a natural extension of what we do.

As to how big that could be and over what period of time, I'm certainly not ready to say that.

Okay.

And then, another question here.

I don't know how much you can talk to this.

But just on Filene's Basement and what's going on there, I would assume, kind of given your thought process and the numbers that you gave, $0.35 to $0.30 in earnings, the end result of Filene's Basement, which seems undetermined at the moment.

But the shared services piece, which you get reimbursed for, is that -- if you can add it all, how does that unfold if there's new ownership in Filene's Basement?

Do you guys still get reimbursement for shared services or is that null and void and is that in your thought process in terms of your guidance?

Yes, we basically incorporated it.

And, Chris, I could barely hear you, so I hope I got all the parts of your question.

But we've incorporated that into our guidance.

Obviously, there's several scenario that is could play out.

I think even following the news where there's a couple of chains that might be interested in that.

And it will depend on what chain, how much of -- in this case, it would be transitional services they would need to complete the transaction and bring it within their own house?

So, our objective since we went public was not to be a permanent player in the shared service business.

So we look forward to that ultimate end.

But the best situation would be that we could planfully exit from that responsibility and not have a quick exit like we experienced with Value City last year.

So again, there's several scenarios.

We've incorporated the various scenarios and probabilities of those into our guidance.

So, we believe we've got a fence around it, if you will.

And believe that we'll know some more things as the bankruptcy court moves forward in June.

Okay.

Doug, have you gotten reimbursed thus far, quarter-to-date or year-to-date for shared services from them?

Prior to their bankruptcy, we did.

All right.

Thank you.

Thank you.

Our next question comes from the line of Patrick Mckeever from Mkm Partners.

Please proceed, sir.

Hi, everyone.

Just wondering how much benefit you saw on the expense side from some of the head count reduction you had last year in the back half of the year?

I would imagine that was a positive to SG&A in the quarter?

Right.

There was some of the benefit, mostly in our home office and overhead.

Really, we'll start to see the biggest part that far benefit come through in the -- as we look at the entire year.

Our total overhead will actually be down about 5% or 6% but obviously, we've offset that with increases in our marketing and IT spend.

Is the incremental television advertising, is that still set for $15 million?

Approximately, but as Mike mentioned in the call, there's still some expectation that we can adjust as we see necessary.

We're just really into the first quarter of this and reading it all the time.

We'll continue to see an increase.

Whether it's that full amount or not, maybe more or maybe less but certainly, we'll be reading it to see what kind of benefit it gives us as well.

Okay.

And then, just a quick second one.

Wondering, if you could comment on the promotional environment?

Are you seeing any easing with regards to the department stores, just promotional pricing and couponing and that sort of thing?

This is Debbie.

I'll take that question.

I'm really seeing the same levels, maybe even a little bit more aggressive than I have in the past from the department stores and we're responding to that very well.

As you know, our value proposition is strong.

We're balancing it with a balance of in-line great value opportunistic buys; in line products, where we do makeup.

So we're passing on some pretty deeply discounted value to the customer today.

And I think that we're well-positioned to provide great value up against those competitors.

Thank you very much.

Thank you.

Our next question will come from the line of Heather Boksen from Sidoti and Company.

Please proceed, ma'am.

Good afternoon.

I was just wondering with regards to the guidance, if you could give us any more detail as to where you see SG&A spend coming out for this year?

Obviously, it was up 15% in the first quarter.

Should we expect it to trend similarly through the remainder of the year?

Will we see any cost saving from the head count reductions towards the end?

What should we be looking for?

Well, obviously, we expect deleveraging throughout the year but the deleveraging that we're seeing in the first quarter will probably -- again assuming the sales aren't dramatically different by quarter, the biggest deleveraging would be in the first quarter and the least deleveraging would be in the fourth quarter.

And that's really, generally, the best direction I can give right now.

Again, depending how we play out some of the timing of our marketing spend and the timing of some of our IT initiative spending.

But generally, that's the direction you should see as the year progresses.

All right, that's fair enough.

And, Debbie, fair to say this opportunistic inventory buy, sounds like it would be towards the high-end of your price points that you offer?

No, it's really across the board.

All right.

Thank you.

Fair enough.

And thank you.

Our next question comes from the line of John Zolidis from Buckingham Research.

Please proceed, sir.

Hi, good afternoon.

Was wondering if you could talk a little bit about where you ultimately believe the operating margin for this business should be?

And I ask that in the context of looking back in the past, we had kind of mid, maybe even close to high single-digit operating margin.

But a lot has changed since then, in terms of adding IT infrastructure, higher depreciation spending, lost shared services revenue from Value City and Filene's, as well as the revenues that were lost.

And you'd open up a lot of new stores and remodeled stores and spent a lot on the stores since that time.

So, as we potentially see a recovery in sales, where should the profitability for this business be?

Okay.

This is Mike.

I understand that at some point in time a year or so ago, two years ago, there was a 30-20-10 thought process here, in terms of margin expense and operating profit.

I don't yet know whether that's going to be our ultimate target, so I'm not ready to really answer that question, John.

It's certainly got to be north of where we are right now.

And as you know, the last sales dollar or the next sales dollar is your most profitable sales dollar because you've already paid for all your fixed expenses.

And as your sales velocity increases, the chance for margin expansion gets greater, too.

So, that's why we're so focused on driving additional sales.

I mentioned some of the initiatives that we think can lead to sales growth.

I think the other thing that's kind of exciting about DSW and frankly, one of the things that attracted me, is that they have both the wherewithal and the desire to go forward with several strategic initiatives, at a time when just about everybody else in the world is pulling back.

And what I mean by that is, our courageous decision to go forward and try and grow market share through our marketing spend.

And then, all of our initiatives in terms of buy, in terms of enterprise planning, assortment planning, FOB sourcing.

So, these all have required, to one degree or another, an amount of incremental investment.

And the neat thing about DSW, is we've got tons of cash on the balance sheet and no debt.

That gives us the potential to be aggressive in a time when everyone else is pulling back.

So I haven't answered your question.

I understand that.

I don't have an answer yet but I know that our next dollar of sales will be our most profitable one.

And that's what we're focusing on.

And that's why I really don't plan to significantly curtail any of the strategic initiatives that can grow our market share, so that when we get out of this cycle and we come out on the other side, we're a bigger winner and we take advantage of the people who don't make it.

John?

Yes, okay, I thought I was cut off, sorry.

Thanks for the candor and good luck with your new position at DSW.

And I'm looking forward to meeting you.

Thank you.

And thank you, sir.

And our next question will come from the line of David Mann from Johnson Rice.

Please proceed, sir.

Yes, good afternoon.

Mike, welcome.

First question I had was really just to clarify the earlier question, but I think it was Chris, about how you're treating the Basement interaction in your guidance?

Are we to assume that you're taking sort of the worst case scenario; assuming no shared services and the loss of lease departments?

And if not, can you just characterize what you are assuming?

Well David, we are -- there's a lot of different scenarios that could play out.

And the probabilities are pretty wide because of the different partners that might be involved and how the acquisition of the assets might turn out.

How they might run the stores.

So there's several different scenarios.

We haven't necessarily taken the most conservative but we do have realistic expectations, we believe, for shared service reimbursement.

To that end, depending on who, if anyone, acquires them, might determine how long or how much we'll get paid, depending on what their capabilities are.

So we've tried to take, again, all of those probabilities into consideration, weight them appropriately and we believe our range covers those different scenarios.

Okay.

Great.

And then, Mike, you talked, on one of your sales items, about a real estate prototype.

I'm curious what your comments or thoughts would be on the other side of that equation?

The store base, the idea that you have a disparate group of stores, whether you see an opportunity to either close some stores, relocate?

Or in concert with maybe Doug on an answer on this, what's the opportunity for rent reduction?

Okay.

Well, I'll start and let Doug chime in.

I think, number one, closing stores is something that every retailer looks at on a regular basis, every single year.

And although, I haven't been through that process yet here at DSW, I am sure it's one we'll undertake.

Relocation, you sort of look at that in tandem as your leases come up for renewal.

And I'm sure we'll do that as well.

And I know we're looking at a you couple of situations right now.

In terms of rent reductions, we are being opportunistic whenever we have the points of leverage, to exercise those points of leverage in our favor.

And there are several situations where we are pursuing those opportunities as well.

And if I could just ask, it sounds like you're talking about a couple of here or several there, so it doesn't sound like there's a broad opportunity in terms of reconfiguring the existing real estate base.

Would that be correct?

Well, that's true when you talk about a reconfiguration, I'm assuming you're talking about a remodel of sorts?

Well, one of the biggest criticisms, I think, is that some of your stores are too big, some of them may not be the best locations, some of the legacy stores.

And so, especially in light of what Mike has said about developing a prototype, the question is how quickly -- it would be great, obviously, in the future that have you this prototype but you still have a couple of hundred stores that far disparate look, that wouldn't benefit from that prototype.

I think if we start analyzing the different components of the new store design, there are several that we could employ throughout the fleet, if necessary, because they're not that terribly expensive.

So it could be part of the design; how we operate it; whether the runs go East and West or North and South; how we market it; the assortment issues in different markets.

Obviously, the size of the store is not that easy to change but on the sites that we've selected.

will really be a go-forward opportunity if we learn something there.

So we've done remodels.

We've done refreshes.

We've done a lot of different versions but I think we have enough now to really get a good understanding what pays us back and what doesn't.

And some of those we could employ but it won't be a dramatic change, we don't think, in necessarily changing or moving a store down the road or closing it.

But really more subtle changes, such as how it looks, how we operate it or things like that.

Okay.

David?

Yes.

Almost regardless of what the new prototype looks like, it's not going to dictate wholesale changes in the existing store base.

I think I can say that pretty clearly.

Okay.

It may dictate some additional opportunities but it's not like we're going to suddenly wake up and say, all of those stores that are making money, now we don't want any more because they don't look like the new store prototype.

We're going to chuck and jive and go forward and evolve.

Great.

That's very helpful.

Thank you.

And thank you.

Our next question will come from the line of Dana Walker from Kalmar Investments.

Please proceed.

Good afternoon and welcome aboard.

When you look at the information systems or the merchandising systems that you intend to implement over the next year, can you talk about the hurdles to so doing and what types of execution risks there might be in implementing those?

And perhaps, would you elaborate on your belief that any benefits from assortment planning would be several years out?

Sure.

Well, it's a good question.

I think there has been some pretty significant infrastructure put in place over the last few years and the Company has spent significant sums of money doing that.

I know we've upgraded our store platform to enable us to do -- or to create a lot more functionality at store level.

We've also upgraded our environment here in the home office.

And all of that infrastructure investment has really provided a platform for us to now pursue things like size, things -- and I believe, it will give us the platform to pursue ideas like stock locator, which is one of the ones I mentioned.

We do have a lot of initiatives underway and I am looking to see whether we can get all of the projects done in the timeframe that has been spelled out because -- and it gets to your question about execution risk.

One of the things I've seen in my career, is that when you lay a bunch of projects end-to-end-to-end, you don't leave yourself any flexibility to absorb any surprises that inevitably happen, as you're executing these systems.

And the second thing you have the risk of doing is burning out either the users or the technologists, as you pursue those system improvements.

So one of the things I want to develop a stronger point of view about is the pace with which we implement those systemic changes.

As to assortment planning, again, we've got some of the infrastructure in place.

The next step is to put in an enterprise planning system and then to put in assortment planning after that.

And I think that takes us to 2011 before we begin to reap the benefits of that.

And beyond that, I don't know what other thoughts you have.

I'm a simple man who gives my wife the credit card and then she goes and plans her own assortment, as to what goes into the shoe closet.

But can you describe for the layman what you would intend to achieve through your assortment planning spending?

Sure.

Any assortment planning tool helps you to understand your customer's demand on a by market and even by location basis.

And that could be related to fashion preference, price point preference, end use mix, meaning dress or casual or evening.

So, you really understand what your customer likes on a by location basis.

And you build your assortment on a bottoms up basis, in a way that hopefully reflects those differing customer demands by location.

So, that's a layman's way of explaining what assortment planning is all about.

And how pervasive would that type of functionality be amongst your peer group, if it's not something that you have presently?

I don't honestly know the answer to that question.

So, I'll defer to anyone else around the table.

We don't have a full answer as it relates to the shoe business.

A lot of other retailers have something like it.

Some smaller shoe retailers have it, smaller boxes I would tell you.

Again, to the level or comparison that we have, I'm sure there is variations to that.

And we'll have to do homework before we start releasing other competitors out there.

But I don't think this necessarily gives us a strong competitive edge but it does give us an operational edge to operate our business better than we have in the past.

Yes, and if it's of any interest to you, my prior employer was engaged in exactly the same initiative.

Very well.

Thank you.

And thank you.

Our next question will come from the line of Robert Wiegand from new Salem Investment.

Please proceed, sir.

Good afternoon.

I'm not sure if you can comment on this.

But now that Retail Ventures has sold Filene's and Value City, it's basically a holding company for the investment in DSW.

So obviously, there's some corporate synergies to be had there to just basically combine the holding company and the investment.

Do you see a transaction happening at any time in the future?

And I appreciate your intro because as you expected, we have always not commented on Retail Venture's strategies and focused on the DSW commentary.

And even if we knew, we wouldn't be commenting on that right now.

Okay.

So aside from that, is there something that you might know of that would prevent Retail Ventures from selling DSW stock on the open market?

Again, we can't comment on that and I'm sorry.

Okay.

Thank you.

All right and thank you, sir.

Our next question will come from the line of Raymond Jones from Ragen Mackenzie.

Please proceed, sir.

Good afternoon, everyone.

This is a question for Doug.

Could you update us on the statistics for the loyalty program, its growth during the quarter and then as a percentage of sales?

Sure.

As I mentioned in the script, we continue to add even more enrollment and the amount of engaged members.

Those that shopped in the last 24 months grew from 10.4 million at the end of the fiscal year, to the end of the quarter being up over 11 million.

So we're pleased with that.

And the penetration of those rewards members has grown to over 80%.

And then, a question for Mike on the stock locator system.

In your assessment, how far away, time-wise, do you think the Company is from a Companywide system that would enable that?

Is that a year's process or is that something that is currently capable in the point of sale system, it's just a matter of bringing a software type solution online?

Yes, well, I can tell you for sure right now, we don't have the capability of doing it.

So, it's not like we can just go flip a switch.

And I don't honestly know how long it would take to do that.

My sense of it is, that it's kind of a medium-sized effort.

But the other thing and again, I tried to mention this in my comments, is that I don't know where all of these individual opportunities fit in a priority order but that's what we're going to try and figure out.

Thank you.

Thank you.

Our next question will come from the line of John Zolidis from Buckingham Research.

Please proceed, sir.

Hi, three clean up, type, modeling questions.

One, can you give us the lease department store revenue in the quarter?

Two, the depreciation?

And three, the selling square footage end of the quarter?

Thanks.

Sure, depreciation was $11 million.

Leased sales were $41.7 million.

And the square footage for DSW stores ended at $6.82 million.

Thanks a lot.

Thank you, sir.

Our next question will come from Dana Walker from Kalmar Investments.

Please proceed.

When you talked about your loyalty program having grown sequentially by over 0.5 million people and it having 80% plus penetration, I'm curious whether you believe that the loyalty program is playing the right role in your business as a newcomer?

If 80% plus of your transactions are coming from people that have a card, does that mean that the responsibilities of membership are too low?

Or that if the year-over-year counts within the loyalty program is up meaningfully, whether there's enough activity going on within the loyalty group?

Okay.

Well, let me try part of that.

I think our value proposition that we show on the selling floor every day is that we are significantly discounted versus the traditional, call it, department store competition, their ticketed price.

And we are at or below their sale price on an every day basis.

So the trick to belonging to the DSW rewards program is that, through a variety of mechanisms, both automatic and discretionary on our part, we give our customers an extra incentive for being loyal to us and dedicating a greater percentage of their total footwear and accessory purchases at DSW.

So I think the value proposition is compelling and I think it fits in with our total pricing architecture.

Now, I wasn't sure that I understood the last part of your question about activity.

I don't have the numbers in front of me, being new to your story.

But if you went from 10.4 million to 11 million plus, I am going to suppose that a year ago, your loyalty count was probably 8 million or 9 million.

So the number of people within your loyalty group is up 20% to 30%, let's say year-over-year.

And yet your sales are up modestly.

The thought I'm trying to provoke is, if people are part of a loyalty group and yet they're not very active, what does that mean?

And I suppose you've all but admitted that there's more you would like to be able to do with the people that are part of your rewards program to spur behavior.

Right.

And I think that we have that opportunity as we develop a richer data database to understand whether they're a clearance shopper, they're a new arrival shopper.

Whether they're a women's purchase shopper but they aren't a men's purchase shopper.

Whether they like our handbags.

Whether they like our handbags once they hit clearance.

So I think the principle of DSW rewards is twofold.

One, it's to give us the mechanism to deliver that additional value to the customer and also to, from time to time, giving them even deeper discounts on a basis that we determine.

The other, I would say equally important, part is to understand what they're buying.

And that almost is worth as much or more than just the promotional handle that we get out of DSW rewards.

So, I hear your question.

I think one of the reasons we've achieved such a high penetration is because we've made it so darn simple for a customer to sign up for DSW rewards.

And it's a compelling opportunity for them.

And our associates at the store level have learned to support the program in a very rigorous and disciplined and every time way.

And so, I feel like it's a smashing success both -- from all perspectives.

I love the program.

I think other retailers would kill for our program.

Let me ask a second question, which is unrelated.

Several months ago you were, as a Company, reluctant to provide annual guidance, which you are less reluctant to do today.

Can you describe why you're less reluctant today than you were then?

Well, and actually, I would check our history a little bit.

We last year at the end of the fiscal year, we did not give guidance but at the end of the first quarter, we gave guidance.

So we've been giving annual guidance since we went public but given the uncertainty that was in front of us, there were a couple of quarters we did not give annual guidance.

And that was generally at the end of the fiscal year for this year and last year.

And quite honestly, the reason that we did not at that point, there was just too many uncertainties that we just held off for a quarter.

And then, gave guidance again as soon as we had some more clarity.

Doug, thank you.

Thank you.

Our next question will come from the line of Heather Boksen from Sidoti and Company.

Please proceed, ma'am.

One quick follow-up, kind of housekeeping question.

I was wondering if you can quantify now, in this earnings guidance, what the year-over-year impact is of Filene's and the shared services?

As we mentioned in an earlier question, that we've considered that in our guidance.

We have not necessarily considered the extremely conservative or extremely aggressive.

We believe we've considered all probabilities, the various scenarios.

And again, we believe our range considers those probabilities.

Okay.

Can you quantify what that possibility is?

Well, we know it was less impact than last year because, as we've mentioned to several people and at the latest conference, that last year we generated about $5 million from our shoe business with Filene's Basement and about $4 million from our shared service business -- I'm sorry, yes, from our shared service revenue.

We did not expect that this year in 2009.

We did expect some but that would be the maximum impact to year-over-year, assuming we got zero.

And again, they were open for the first quarter.

For the most part, they paid their shared service bills until they went bankrupt.

So we basically, have a quarter of the business in.

And obviously, these next three quarters are a little less certain.

All right.

What does the shared services impact with Retail Ventures?

We provide them financial reporting and some HR and payroll services, which is pretty minimal.

All right.

Thanks.

And thank you.

Our next question will come from the line of David Mann from Johnson Rice.

Please proceed, sir.

Yes, thank you.

Doug, a couple of housekeeping for you.

Can you give a sense on how big the opportunistic inventory buy was and also give us a sense on what dot com revenues were in the first quarter?

The opportunistic buy, I would tell you that it's incorporated into our change per square foot that we said it was down 3%.

Without this opportunistic buy, it would be down 4%, 4.5%.

So we can follow up with you and help you calculate that through but that should get you pretty close.

And as far as the dot com business, we're trying to look at this channel as a part of the DSW store segment.

So, I would tell you that it's pretty much on trend that we saw going through the fourth quarter.

But again, we don't know what the anniversary trend of that is because it hasn't been open a full year yet.

So, it's pretty much on the trend that we were seeing coming out of the fourth quarter.

Okay.

And then, in terms of generally the trend throughout the quarter, I think back on the -- and you commented that February, you were generally a little pleased.

Can you just give us a sense on how that went through the quarter?

And then, also maybe Debbie, can you give a sense on what the early sandal trend in sales have been in some of your southern markets?

Well and as you know, with our history of our business, on a monthly basis as the weather changes, if it was a warm February, which we had a couple warm weeks and that we look at March and April combined.

A lot of volatility in there.

So I can't tell you there was a megatrend within the quarter.

But in general, I would say, the performance of the business was pretty stable from a comp basis through the first three months.

And the second question was?

The second was for Debbie about the sandal trends and some of the early trend in some of the southern markets?

Yes, overall, we've been very pleased with the sandal performance.

As you'll remember, we talked about distorting inventories in the sandals for this entire quarter.

The seasonal business of boots for that February into March time period.

And we were pleased with both of those trends.

So, sandals has done very well for us.

We, like many other retailers that you've been hearing from, have seen a little bit of softness in the southeast and the West Coast.

But overall, we are exceeding our total expectations in the sandal business so far.

Should we read into that that generally in May, the trend has been similar to the first quarter?

I can't really comment on that, David.

Sorry.

Thank you.

And thank you, sir.

At this time, we have no additional questions, so I'll turn the call back over to Leslie for final remarks.

Okay.

Thank you, very much, for joining us today.

As always, we will be taking follow-up calls here at our home office.

And have a great afternoon.

Thank you.

And thanks, ladies and gentlemen.

This concludes today's presentation.

You may now disconnect.

Enjoy your day.