Designer Brands Inc (DBI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the second quarter 2009 DSW Incorporated earnings conference call.

My name is Francis, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

(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, Leslie Neville, Director of Investor Relations.

Please proceed.

Thank you and good morning.

Welcome to DSW's second 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.

Doug will begin the call with a recap of our second quarter financial results, then Mike will review highlights of the second quarter performance and share some details about our plans for the remainder of the year and the longer term.

But before we proceed, please note that earlier this morning we issued a press release detailing the results of operations for the quarter ended August 1st, 2009.

Various remarks that 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.

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

Thanks, Leslie.

Good morning everyone.

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

Net sales for the second quarter increased 3% to $369.5 million.

Same store sales decreased 2.9% for the comparable period, versus a decrease of 6.9% last year.

By segment, our DSW business was down 2.1%, while our lease business comps were negative 9.9%.

As was the case in the previous two quarters, the negative comp was driven primarily by a drop in units per transaction.

Despite the negative comps, total sales increased over $12 million, because of an increase of 32 more stores over last year, including three new stores in the second quarter, and the addition of the DSW.com channel that was not publicly launched until June of last year.

As expected, and as we stated in the first quarter earnings call, the merchandise margin rate for the second quarter decreased 130 basis points from last year, to 43.1%.

As you will recall, the rate for the first quarter this year increased 120 basis points and consequently the merchandise margin rate for the combined six month spring season was virtually flat to last year at 43.4%.

The shift between quarters was due to the timing of clearance markdowns taken to support a sandal sale last year.

The gross profit rate decreased 180 basis points to 26.5%, due to the increase in occupancy expenses related to the negative comp.

The SG&A rate was flat for the quarter, at 23.4%, as our planned increases in marketing, IT, and depreciation were offset by a decrease in store expenses and overhead.

The net result was a 180 basis point decrease in the operating income rate to 3.1% of sales.

Net income for the quarter was $7.6 million compared with net income of $11 million last year and the diluted earnings per share were $0.17 compared with $0.25 a year ago.

Throughout this difficult economic period, our objective has been to maintain our strong balance sheet and we continued that trend into the second quarter.

At the end of the second quarter, inventories were down approximately 12% on a cost per square foot basis.

We are comfortable with this inventory position as we have been building our inventories throughout August to support our fall selling season.

We invested approximately $5 million of capital in the second quarter into new stores and our IT initiative.

Our cash flow from operations more than covered these investments, and we increased our cash and short-term investments to $179 million and no debt.

Looking forward to the remainder of 2009, let me start by reminding you of our key assumptions for the year.

First, we expect the economic and retail environment to remain difficult in the months ahead.

This assumption is built into our annual guidance.

Second, based on sales trends for the first six months, our comp expectations for the year remain in line with our original annual guidance of negative mid single digits.

And third, although we will continue to manage our expenses, we expect our SG&A rate to increase over last year as we increase our marketing spend and our investment in IT.

Given these assumptions and the performance through the second quarter reported today, we are raising our estimated annual diluted earnings per share guidance to $0.37 to $0.45, up from our previous range of $0.30 to $0.35.

With that, I will turn it over to Mike.

Thanks, Doug.

Good morning, everyone.

Let me first add just a couple of comments about the second quarter.

I was somewhat encouraged by the modest improvement in our comp store sales performance, particularly in the DSW segment, where as Doug said, comps declined by only 2.1%.

But as Doug also indicated, we continue to see a pretty challenging external environment for the balance of the year.

Our operating philosophy is to plan sales, inventories and expenses prudently, and then react plus opportunities if and when they materialize.

In terms of category performance, our best business was actually accessories.

This is still a relatively small category, but it is growing quite nicely.

These results were a reflection of our strategy to grow our handbag and small leather goods businesses.

We've invested in inventory and floor space and in fixturing in support of those businesses and it's paying off.

Within the footwear area, the strongest segment was the seasonal category, driven by women's sandals and good early reads in boots.

We also had good results in certain classic product categories like plain pumps and comfort shoes.

Men's business remained soft, pretty consistent with our Q1 performance.

We continue to believe that economic conditions are affecting the men's business more than women's.

As for our lease business segment, our second quarter sales were adversely affected by the disruption surrounding Filene's Basement.

As you know, in late June, Sims acquired most of the assets of Filene's Basement.

Sims also assumed the shoe supply agreement with DSW as a part of that transaction.

It will take some time before that situation is entirely back to normal, but we were pleased by the outcome.

Despite the negative comps in our leased business, we were able to meaningfully expand margins through careful inventory management.

During the second quarter, we celebrated the one year anniversary of the DSW.com business.

Now that we have a full year's worth of dot-com purchase data, we've been able to do some customer level analysis to understand where the business is coming from.

Here are some interesting learnings about our dot-com business.

First, about half of the dot-com customers are new to DSW, and half are existing DSW store shoppers.

Second, we estimate that more than half of the sales recorded through the DSW.com channel is incremental business with the rest being transferred from the store channel.

And third, we believe DSW.com has also stimulated some customers to buy more in the store's channel.

We surmise that this is due to the fact that they can now do their pre-shopping online, before they go into our stores to actually make their purchases.

When you put that all together, that's a pretty good story about dot-com.

And over the course of the first year of operation, we've also learned a great deal about the preferences of the customers who utilize this channel.

We believe that DSW.com has plenty of growth potential as we adjust assortments, promotions and the operating characteristics of the site itself.

Let me now say a few things about what I've been doing for the last few weeks.

You'll recall that on the first quarter earnings call, I had been with DSW about 30 days.

I've now got about 120 days under my belt and I believe I'm developing the deeper understanding of what makes DSW tick and what some of our opportunities are.

That is not to say that the top ten opportunities I discussed on the last call have faded away.

They're all still there but they now fit within a larger strategic context.

Let me explain to you what I mean.

Over the summer, DSW's Senior Leadership Team engaged in its annual strategic plan update process.

This year's process took on additional significance because of my newness to DSW and because of the challenging environment.

It turned out to be a very productive process because we were able to connect a lot of performance data with recent customer research data.

That allowed us to develop some very important themes that will guide us as we take the business forward.

Let me be clear.

We will not be undergoing radical change here at DSW.

In fact, I would say we intend to go back to those foundational roots that served this company so well for so many years.

This company was built on a foundation of three basic principles.

Those principles are, first, a breathtaking assortment of the right brands, prices and style choices of current season, first quality shoes.

Second, irresistible values by virtue of our everyday discount pricing structure, our clearance offerings and our DSW rewards program.

And third, a simple and convenient shopping experience based on well-organized, easy to shop stores, that provide a no pressure assisted open sell shopping environment.

Don't get me wrong.

We still deliver on these three principles today.

However, we also recognize we have an opportunity to increase our focus and improve our execution on these three critically important customer choice factors.

We also believe we can do a better job of more clearly communicating our formula to the customer, so that we get full credit for what we really are and for our truly unique positioning in the market.

As with any strategy, the key to its success is the development of action plans that will turn that strategy into reality.

We already have identified a number of those action plans and will be developing mechanisms and key performance indicators to evaluate our progress against those plans.

I'm sorry to tell you, it's not my intent to divulge to you what those specific action plans are.

But I believe the customer will begin to see evidence of them beginning as early as this fall season.

On my first earnings call when I talked about my top ten ideas to drive sales, I mentioned that the tenth item was getting everyone in the Company aligned around the objective of growing top line sales.

I believe that through our strategic planning process, we've taken an important step towards achieving that objective.

We're still very excited about being part of the DSW team, and even more excited about our future.

So with that, I'll turn the call back over to Leslie.

Okay.

Now for the question and answer, please limit yourself to one question and one followup on the first round.

This way, we'll have a better chance to get to every questioner.

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

Frances, can you please instruct how the callers can indicate a question?

Thank you.

(Operator Instructions).

And our first question comes from the line of Jeff Black with Barclays Capital.

Please proceed.

Hey, thanks.

Good morning, everybody.

I guess just a couple of things first.

On the marketing, is there any indication that the marketing spend is really driving better traffic and could you give us some insight into how the comp fared on the UPT side?

And then on the cost side, looking at the back half, you mentioned you're finding some in-store reductions.

Could you just tell us a little bit more about where you're finding the reductions and how to balance that with the marketing and IT spend.

I mean, is there a chance we see SG&A come down, maybe not in the back half, but as we look out into 2010?

Thanks.

Okay.

Well, let me -- this is Mike.

Let me talk about the marketing spend first of all.

We put most of that incremental marketing spend into television advertising, both in the spring and in the fall.

But we actually haven't been on air since about the middle of May.

I think on the last call, Jeff, we indicated that we believed there was significant incremental sales being generated by virtue of the TV advertising and we thought that the P&L impact of that was slightly positive.

So it was helping us generate market share increases.

In terms of the second quarter, our UPT performance was pretty much consistent with Q1, but again, I can't relate that back to marketing because there really wasn't an incremental marketing spend of any significance in Q1.

We'll be back doing additional TV advertising starting in September and it will be a new campaign and we're excited about the chances for it to drive additional awareness, additional traffic, and maybe even create some buzz in the process.

In terms of the cost side of your question, let me turn that back to Doug.

Jeff, if you're referring to our comments that said our store expenses we leveraged to last year, that was very good work by our field team.

They're working on a lot of different ideas and certainly our goal is to continue to leverage that part of our business operations.

Certainly, though, as we said that we'll still deleverage SG&A for the year, because of our increased spend in marketing and IT.

If that doesn't answer your question, I can take a follow-up.

Will do.

Good luck.

Your next question is from the line of Chris Svezia with Susquehanna.

Please proceed.

Good morning, everyone.

I guess my first question is just broader picture, I guess can you just update us on what you're doing on systems in terms of sizing in store.

I think you're doing a test towards a tail end of the year here and what you're doing on the stocks locator within stores and kind of going between stores, things of that nature.

What's going on on the systems side, what you're working on right now.

Sure.

The first thing we've been working on is size enablement, and the first capability that will give us starting this fourth quarter is to do replenishment at a size level and so we'll be testing a healthy number of SKUs in the fourth quarter, primarily in the men's zone and then expanding that elsewhere.

Phase II of the size project is something we call size optimization.

We've currently got that in the queue for 2010 and what that will allow us to do is to increase our understanding of size needs on a by store basis that we can then translate into more intelligent case packs on orders that even aren't -- that aren't replenished.

So the first part of size enablement gives us that replenishment capability and intelligence that applies to, say, a third of our business, and then the next phase of it, which is 2010, will apply to the other two-thirds of the business.

We've also been working on our planning platforms, both consolidated merchandise planning and store planning and the merchandising planning piece is working well and we are starting the store planning side of that.

In terms of stock locator, that 30 or three months ago, that was an idea.

Today, it is a project that we have just kicked off and we'll be working on but probably not in a meaningful way until, say, first quarter of 2010.

Okay.

All right.

Helpful.

And then I guess my second question is maybe Doug, for you, just on -- can you highlight at all two pieces to this, I guess, number one, the direct to consumer business.

I think in the past, kind of throwing out numbers, roughly I think $60 million or so in annualized revenue.

Anything you learned in terms of conversion, kind of those targets, what you might need to work on?

And secondarily, just store productivity, how that performed during the second quarter?

Sure.

First, on the dot-com business, we're learning all the time and I know we said we just came up on it the first year anniversary from when we publicly launched.

I would say it's been -- the traffic has been decent.

Conversion is our opportunity.

And I think some of the things that we're doing are things that other channels have already done or other dot-com sites have already done.

We just have to execute them into our channel or our dot-com business, such as getting the shopping cart, we have abandonment rate we think we can improve, things like that that -- tried and true measures that we just have to implement into our dot-com business.

As far as the productivity in our stores, I think the highlight within there is that we're starting to see some of our more recent stores, the 2007 stores, start to have better comps than the chain.

That is expected to some degree, based on the maturity curves that we anticipated but obviously with those stores improving, that's going of to help our sales productivity on a per care foot basis.

But still, with the business being down negative comps, obviously we're going to have pressure on that number until we start getting positive comps.

All right.

Thank you.

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

Please proceed.

Congratulations.

Doug, can you go into a little more detail about how you expect the shared services piece and lease department to impact the P&L for the year, versus let's say your previous guidance?

Yeah, actually there hasn't been a huge change in those expectations.

So the reason we were a little uncertain going into this year is because we didn't know how the Filene's Basement transaction was going to turn out.

We now know that I would say the shared services can now be classified as transitioned services, meaning that eventually the services that we're providing to Filene's Basement is actually providing them to Sims, and over the course of time we'll be transitioning services of finance, human resources and finally IT over to them, which we would expect to be done early in 2010.

IT may be the last piece that we transition.

So we anticipated that.

It kind of went according to plan.

And any kind of planful change in that is always the most efficient way to do it, so we don't expect any surprises in that relationship.

Your second question, I can't recall, David.

On the lease department piece, how do you envision that sort of changing versus your previous comments?

Well, again, with three businesses and we don't break them down specifically, but clearly Filene's is a different part of it.

Gorman's and Stein mart we're operating those businesses as best we can and Filene's Basement has Don gone through its difficulties.

As that business starts to steady and Sims gets that operation operating up to 100%, it should be more predictable and we should be able to continue to improve our sales as well as improve our margins and I hope that point wasn't lost during the script, that despite the decreases in sales from the Filene's Basement situation as well as the closing stores of Steinmart, that we were able to with the lease business team improve those margins significantly, to nearly offset that decrease in sales.

In terms of shared service, can you just for housekeeping give us an idea of what you think next year would go away versus this year in terms of the amount?

There wouldn't be much shared service dollars at all.

But how much this year, what would be the compare this year versus next year.

If next year is not that much, how much will this year approximate?

I'm going to have to get back to you on that because there's some difficulties in trying to calculate that number based on what we charge and what we actually got paid for.

As you recall, we provided some shared services that we didn't actually get paid for with the bankruptcies of Value City, et cetera, so I'd like to do some work on that before I answer the question.

Any additional lease department opportunities that might be on the horizon in the short term?

Well, I think if we go back to the basic strategy that we had set up for the leased business, the first was to segment that business and put a General Manager in charge of that to operate the business and focus on that business and improve the results and we think we've done that.

The second phase of that was to determine what the future was going to be with Filene's Basement and we're starting to learn that and we're improving that relationship as it shifts over to Sims.

Once those two pieces are in place, we will start to look as Mike listed in his top ten items for sales growth, for future partnerships.

But those first two phases are kind of under way and we're starting to look on the horizon for opportunities down the road.

So I can't say there's anybody currently that we're pursuing aggressively but certainly we have an appetite for doing that in the near future.

Thank you very much.

Your next question is from the line of Heather Boksen with Sidoti & Company.

Please proceed.

Good morning, guys.

I was just curious if we could get an update on where the loyalty programs operations in the quarter, new sign-ups, I guess also kind of the activity of the current members and just curious if basically if you're still seeing an uptick in the new enrollees.

We continue to sign up new enrollees, I think at the rate of like 90,000 a week.

So we're now up comfortably over 11 million and between 8.5 and 9 million of those are active within the last 12 months and they constituted a share of our total sales that was somewhere north of 80%, which was pretty consistent with our Q1 performance.

And the only other flavor I'd give you on that is that we are now starting to mine that purchase data from our rewards program more effectively, so that instead of using a sledgehammer to market to those customers where every one of them gets the same communication, we're starting to slice and dice it more prescriptively so that we can save money and also be more effective in our marketing to those very important customers.

Got it.

Thanks.

That's what I had.

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

Please proceed.

Hi.

Good morning.

Good morning.

Was wondering if you could talk a little bit more about the SG&A in the quarter.

Looks like total SG&A dollars excluding D&A were down year-over-year with a 9% increase in square footage and that's not consistent with the experience in the first quarter or really what you guys had talked about with the marketing spend going up, et cetera.

And your comments I guess for the back of the year that you still don't expect to leverage SG&A.

So was there any one-time movement of SG&A dollars out of the quarter or is there anything that you're doing differently that I guess is going to continue into the back half that we should know?

So any help that you could give us on SG&A, that would be appreciated.

Thank you.

Sure.

A couple things.

Just to clarify, our SG&A total dollars went up from $83 million to $86 million for the quarter so there was an increase, in case I heard you wrong.

One thing that may be a little different between the first and second quarter, our increase in marketing spend was certainly up in both quarters but as far as the raw dollar increase, the marketing spend was closer to a $6 million increase in the first quarter, and $3 million or so in the second quarter.

That type of comparison is probably a little more even in the third and fourth quarters, but that's probably the one area that's a little different between the first and second.

As we go forward, some of the IT projects and some of the spending will really start to grow more toward the end of the year as those projects start to get more and more involved.

So that's another trend that's underlying in the SG&A dollars that the IT spend relative to last year will start to spread a little bit more as we get toward the end of the year.

So hope that provides a little color.

We can certainly take a follow-up.

Okay.

Just I want to make sure I understand.

Can you give us the D&A.

Because that would be helpful.

And then you said I guess marketing spend even in the third quarter and fourth quarter, not sure what you mean there.

Do you mean that it's going to be up about $3 million year-over-year in each of those quarters?

That's right.

And as far as your depreciation question, in the second quarter depreciation was $11.6 million, versus last year of 8.2.

And in the second half, we expect that to be a similar, we'll have about $24 million in depreciation versus last year's 20.

So the depreciation increase really was all of the SG&A increase year-over-year in the second quarter?

Well, again, we had improvements in store expenses and we had improvements in general overhead but depreciation was certainly a large part of the increase.

Okay.

Thank you.

Sure.

Your next question is a follow-up from the line of Chris Svezia with Susquehanna.

Please proceed.

A couple follow-ups, I guess real quick.

Debbie for you, we talked about product trends, you looked at the back half on testing.

On the boot side, I've been in your stores, there's certainly a lot in them right now.

Just kind of talk about what's working, what's not and maybe talk about from just an average selling price trend, what should we think about as we go into the back half of the year, given how boots might perform.

Yes, Chris.

I'm happy to report that the early indications of the boot distortion that we talked about both at the conference and in the last quarter conference call is working well for us.

There are many early things that are registering very nicely, everything from sport boots to Western, and even some of our key basic items.

So I would tell you that we're very pleased with the early indicators that it's going to be a very sterling boot quarter or boot season for us.

What was your next question?

Just in terms of average selling price, any -- in the back half of the year.

As you know, the boot AURs, AURs and AUTs are significantly higher than the footwear, so that should bode well for us because there was a distortion in this category.

We're seeing a little bit of an increase in AUR over last year and I think that that will continue, nothing significant, though.

Okay.

And then I guess Doug, for you, I think last call you talked about your merchandise margin rate being down in the second and third quarters.

Obviously Q2.

Q3, just given where your inventory is and given how people seem to be shopping the clearance racks more these days, is that still a -- I guess kind of just flush out how we should thing about that merchandise margin rate going to that third quarter, is that still going to be down pretty noticeably in the third quarter?

The main purpose of that comment in the beginning of the year was to remind people that our second and third quarter margin rates were over 44% which is historically very high for us.

Clearly, the second quarter was illustrating that comparison.

You called it out exactly.

The trends of the consumers, buying a little bit more clearance, we have to be cognizant of the fact that there may be pressure on that merchandise margin rate.

Again, the 44% being one comparison issue but also we just have to be realistic on the fact that we may have to be a little bit more promotional and we want to make sure our inventories stay clean.

So we certainly have with our inventory position a good start to where we want to be, to help us improve margins, but we have to be realistic that we have our most important selling season, September and October in front of us, and just being a little cautious right now.

And then just last thing here, just looking further out, when you guys think about store expansion, when you guys sit down and talk to real estate firms about opportunities, just in terms of what you're seeing out there, what's available, and you guys have cash, just curious about from a sort of growth perspective, I know 2010 is out there.

Just how should we think about that?

Is that potentially what you're looking at, an opportunity to start accelerate growth or do you have to wait to see kind of improvements in what consumer trends are, what they're buying, things of that nature, before you're willing to step up a little bit?

I'll take that one.

I think we are seeing lots of real estate become available, not all of it is good, which might be part of the reason that it's available.

The second thing is that we had a new store task force that finished its work earlier this year and they came up with a lot of very clear assessments about the kinds of situations where we thrive and the kinds of situations where we struggle.

And I think we're going to apply that learning going forward and we're going to be selective about the properties that we enter.

So although there may be lots of deals out there, they may not be the right deals at any price for us.

We're going to be selective.

I think that perhaps in the past DSW may have been guilty of identifying a predetermined level of new store expansion and then, you know, they did what was required to you achieve that objective.

So what I what I'd rather do is just say we're going to open as many new stores as what we can justify and we can confidently predict success in.

The Company has proven in the past that it can open physically as many as 40 stores in a given year but I think if you were doing some modeling right now you'd probably model out something closer to what we're going to do this year, which is 10 new stores but we have the ability to go up and it's going to be a function of just how many situations we can find that we're confident will work for us.

Okay.

All right.

Thanks, Mike.

Very helpful.

Thank you.

(Operator Instructions).

Your next question is from the line of Dana Walker with Kalmar Investments.

If you've addressed this, I apologize.

I was a couple minutes late.

If your same store sales were less down in Q2 and yet you were not on TV, and you would hope to have the benefit of TV media in the second half, can you just talk about why you believe your traffic and your outcome was somewhat better in Q2 than it was in the first quarter?

Well, Dana, I think if you looked at our comps on a two-year basis, you would find that our two-year comps are nearly identical between Q1 and Q2.

Just mathematically add them together, it's about down 10, so that's kind of the level that we have included in our guidance going forward.

So it's not really a lot more scientific than that.

I think, if TV works, that represents an upside.

But again, we think we should anticipate more conservatively and then react as cost opportunities happen.

Have you already tested some of the themes that will come out in your new marketing message in September?

No, we haven't.

Will this be --

I will say this, that we think the TV will be interruptive and memorable, but it will also underscore some of the key principles of this business, namely breath-taking assortment.

irresistible value, and simple and convenient shopping experience.

And one final thought.

You've talked about store operating expenses being better controlled.

How are you framing your gross margin and your merchandise margin expectations for the back half in your updated guidance?

Well, and that's what we mentioned in the script, but in case you didn't hear that, I know you said you came on late, we had mentioned that the third quarter comparisons are actually pretty difficult and that's why we reiterated what we said in the beginning of the year as it relates to third quarter, but specifically our merchandise margin, if we could exit this year with a merchandise margin rate that's somewhat flat to last year, we would be fairly satisfied.

But again, we want to leave our opportunities and our positioning very cautious as to what we have to do to make sure we're selling the shoes in this very -- we'll call it different consumer environment that may need a little bit more clearance sales than what we're used to.

We believe our inventories are in a good spot so that's not going to be an issue but we just have to be realistic on the consumer environment for the back half of the year.

Which I presume Q3 is a challenging comparison and Q4 was difficult or is an easier comparison from last year?

I would say -- obviously the third quarter margins traditionally have been higher than the fourth quarter margin and we expect that to be the same in 2009.

One final thought, on seasonality.

The Company more recently has had a tough time in its Q4.

Does Q4 need to be a difficult quarter for you?

Does it need to be a loss quarter?

We obviously have had some quarters where it hasn't been a loss.

With negative comps and with the fourth quarter in the DSW shoe business being our lowest quarter in volume.

So last year our volume in the third quarter was $348 million, and that was the lowest quarter yet again, so I think with negative comps and the lowest volume quarter without a lot of additional stores, unfortunately it looks like the loss that we had in Q4 is something that we're going to be dealing with again in 2009.

But obviously we're looking to mitigate that as much as possible from a lot of different means and that's margin and expenses, and hopefully some positive comps down the road.

Good luck.

At this time, there are no other questions in the queue.

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

Okay.

As always, thank you very much for joining us.

And we will be taking follow-up calls at our home office all day today.

Thank you.

Ladies and gentlemen, thank you all for your participation in today's conference call.

This concludes the presentation and you may now disconnect.