Designer Brands Inc (DBI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third quarter 2009 DSW Incorporated earnings conference call.

At this time all participants are in listen only mode.

Later we will conduct a question and answer session.

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

I would now like to turn the conference over to your host for today's call, Ms Leslie Neville, Director of Investor Relations.

Thank you and good morning.

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

With me today in Columbus are Mike MacDonald , our CEO, Deborah Ferree, Vice Chair Person and Chief Merchandising Officer and Doug Probst, our CFO.

Before we proceed please note that earlier this morning we issued a press release detailing the results of operations for the quarter ended October 31, 2009.

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.

So with that, I will turn it over to Doug

Thanks, Leslie.

Good morning everyone.

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

Net sales for the third quarter increased 14% to $444.6 million.

Same-store sales increased 8.7% to the comparable period versus the decrease of 4.1% last year.

By segment our comps for our DSW business were up 9.8% while our lease business comps were down 1.5%.

The merchandise margin rate for the third quarter increased 220 basis points to 46.3% compared to last years 44.1% as we experienced significant regular price sell-through throughout the quarter.

Occupancy expense rates decreased due to the positive comps and an increased focus on negotiating rent concessions from landlords.

The improvement in merchandise margin and occupancy expense combined with leveraging in our distribution and fulfillment centers resulted in a gross profit rate increase of 520 basis points to a record high of 33.1%.

The SG&a rate increased to 23.0% in the quarter; however excluding the increase in the year-to-date bonus accrual the SG&A rate decreased 160 basis points to last year due to the increased sales, excellent execution in our stores and marketing departments, and an overall concerted effort to control expenses.

The net result was a 470 basis point increase in the operating income rate to 10.1% of sales.

Net income for the quarter more than doubled to $26.6 million compared with net income of $13.2 million last year and the diluted earnings per share were $0.60 compared with $0.30 a year ago.

At the end of the third quarter inventories were down approximately 10% on a cost per square foot basis with over half of the decrease coming out of the distribution center.

While inventories are a little lower than we anticipated due to the increase in sales, we are comfortable with our in store inventory position and will continue to plan inventories conservatively throughout the fourth quarter and into 2010.

We invested approximately $4 million of capital into the third quarter into new stores and our IT initiatives and we increased our cash and short-term investments by $87 million in the quarter to $266 million and no debt.

Looking forward to the remainder of 2009 we have built the following assumptions into our annual guidance base on our performance in the first three quarters.

Our comp expectation for the year is approximately 1%.

Based on improving merchandise margins and occupancy rates, we now expect an annual gross profit rate of approximately 28% and despite the increased sales and improved focus on controlling expenses, we still expect our annual SG&A rate to increase over last year to account for our investments in marketing and IT as well as pay outs on our incentive compensation plan.

Given these assumptions we are raising our estimate for 2009 annual earnings to a range of $0.90 to $1 per diluted share.

With that I will turn it over to Mike.

Thanks, Doug.

Good morning, everyone.

I'll start by adding some color on our performance in the third quarter and then touch on the progress we're making on some of our strategic initiatives.

The big turnaround that we experienced in the third quarter was driven by increased footsteps coming through our doors.

For the quarter our traffic in comp stores increased quite dramatically.

This factor was the key driver to the significant reversal in sales trends from a comp store sales decline in the second quarter to an almost 9% comp increase in the third quarter.

I think there were three things that lead to this improvement in traffic.

Briefly, those three things were an improved external environment, the fit of the DSW formula with the consumer psyche right now and the strength of our execution in the quarter.

With respect to the environment, we were fortunate to have a friendly weather pattern in the quarter.

It was generally cool and that helped us drive early selling in the boot category.

As the economic environment, while the economic fundamentals remained weak, the financial markets have rebounded.

Despite government statistics to the contrary, I believe that market recovery has positively affected the consumers outlook.

In addition, the shoe category appears to have benefited disproportionately.

New shoes not only dress up an old outfit, they also lift ones spirits or at least that's what some of our tweeting customers have told us.

Finally, the comp store sales performance of a number of retailers showed improvement in recent months and some of the multi-category players have specifically mentioned the shoe category as one of their strongest businesses, so for all of those reasons, we do think the environment was more favorable to us in the third quarter.

Although the consumer may be feeling a bit more optimistic, she is also more savvy than ever.

She has two very scarce resources that she wants to use as efficiently as possible.

Those two resources are her time and her money.

That mind set really fits perfectly with the DSW formula.

We have a breath taking assortment of shoes in terms of style and brands and price points.

Our discount pricing structure provides almost irresistible values on an every day basis and our assisted open sell format translates into a very simple, convenient and efficient shopping experience for our customers.

It's a powerful formula that is especially right in today's environment.

The third element that drove traffic and sales in the third quarter was our execution, specifically in the areas of marketing, merchandising, and store operations.

In terms of marketing, our talking shoes TV campaign was quite memorable.

Whether you liked it or you didn't, it certainly caught your attention and drove awareness of the DSW brand.

We also integrated our marketing efforts for DSW stores and dsw.

com and that approach benefited both channels.

In the third quarter we used our precision marketing techniques to both stretch our budget dollars and increase customer response.

DSW rewards members accounted for 85% of third quarter sales.

In the merchandising area, we demonstrated our nimbleness in the third quarter.

At the out set of the quarter, we were forecasting a negative comp store sales performance for purposes of expense control.

For receipt control purposes, our merchants were planning for a flat comp performance, but they had cancelable backup orders in place for key items.

That buying approach afforded us both downside protection and upside opportunity.

As the quarter unfolded they were able to take those orders in and feed the improving sales trends.

Of course the big driver of that sales trend was women's boots, which was up on a comp store basis almost 50% for the quarter.

We intentionally distorted this category in terms of both floor space and inventory investment.

As a result, the assortment of boots that we provided for our customers was second to none and the style editing process our merchants employed in order to create the floor capacity for the additional boot inventory, was very effective and the reason I say that is because we also experienced comp store sales increases in the balance of women's footwear, in mens footwear, in athletic footwear, and in accessories.

The additional traffic and sales volume in the quarter provided a real challenge for our stores group but they really rose to meet that challenge.

They did a particularly good job of processing freight shipments timely and filling in key styles during the day on weekends and big days.

They also executed our unique selling model very well through their passionate, friendly, helpful and real interactions with our customers.

Let me also comment briefly on our dsw.

com business.

As you know, we view this business as being very intertwined with our stores business.

Many of our stores customers also use the dot com channel for their shopping and buying convenience.

We are continuing to make improvements for the site mechanics and to our dot com assortments and we were quite pleased with the progress and results from the dot com channel in the quarter.

Now let me talk a little bit about progress we've made on some of our longer term strategic initiatives.

In the systems area, we turned down our size replenishment system in the third quarter.

This system allows us to reorder styles by size by store based on actual selling.

At this point we only have a few skews in the mens area up on the system, but we are already improving our in stock ratio pretty dramatically in these styles.

We will gradually add additional categories to this system and we expect that ultimately about 25% of our entire footwear assortment will be up on this system.

In terms of our merchandising strategy, we said we want to increase our penetration of key items.

That is, items we can carry in most stores and that we can sell in very large quantities.

Key items allow us to provide fashion leadership to our customers and they can also improve our profitability by virtue of more advantageous costing.

I don't intend to share specific statistics with you today, but I can tell you that our third quarter success in women's boots was accelerated by the number of key items we got behind and were able to fill back into as the sales trends materialized.

Another initiative we have under way is to make our customers shopping experience even more convenient and efficient.

Two weeks ago we opened a replacement store in Rochester, New York.

The design of this store reflects many new elements that we believe will translate into a better shopping experience for our customers.

These elements include a neutral color palette, a North style fixture arrangement, an open view to the clearance area in the back, the inclusion of many more mirrors, overhead navigational signing, and category signing on the end caps.

We also recently rolled out a big deal signing package to all stores that highlights the best values throughout the store.

We believe these types of changes can make our stores even easier to shop.

In Summary, we're making progress on the implementation of our strategies, all of which are designed to support the three key elements of the DSW brand experience, namely a breath taking assortment, irresistible value and simple convenience.

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

Okay, now is the question and answer session.

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

That way we'll have a better chance to get to each questioner, but please remember you're welcome to get back in the queue as many times as you would like.

At this point, could you please instruct the callers how to indicate a question?

Yes.

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

Hi, good morning.

Thanks.

Nice quarter, everybody.

Talk a little bit about the comp guidance, what you saw in October versus the two cold weather months and what's happening so far in November, have we seen a slowdown in trend?

It would just seem you have the potential to post some higher comps, and also talk about inventory levels.

Do you think we're a little too lean here, is there an ability to chase and build into a slightly better comp if in fact that's what kind of trends we're getting?

Thanks.

Hi, Jeff.

As far as the comp projections obviously it's been a little difficult to project comps.

We came in on October 15th and said 6% to 8% comps for the third quarter and we came in higher than that.

I can tell you the last couple weeks of October were very, very good, beyond our expectations and the third quarter performance was ahistorical in that we didn't have any kind of historical performance that showed this kind of lift in our business so it has been a little difficult to project.

Business has remained somewhat strong, but all things considered, inventory trends, traffic trends, average unit retail, a lot of things came up with our 1% guidance for the year.

Again, a lot of factors go into that.

We think it's our best estimate at this point and that's what we're coming up with right now with about 10 weeks to go.

As far as the inventory positions, we're comfortable with where they are.

As I mentioned in the script, they've been a little lighter than we anticipated given the increased sales, but we still believe we have enough to do the business and we're pleased with the in store positions.

Great.

Thanks, good luck.

Your next question comes from the line of line of Chris Svezia of TSW.

It's Chris Svezia from Susquehanna.

Congratulations everyone, great job.

Debbie, a question for you.

Just on the boot category and the success you've had there, can you maybe just talk about what else is going on, what else you see happening, and any thoughts as to how important and impactful it becomes to your fourth quarter relative to your third quarter and relative ASPs in that category and then I have a follow-up question.

Yes, Chris.

Let me just tell you that the third quarter performance in boots was about 20% of our total and that was significantly more than last year which was about 14.5%, so in terms of penetration that's where boots came in.

What does fourth quarter mean relative to third quarter?

Fourth quarter should mean about a 30% penetration in boots versus about 25% penetration last year at the same time, so boots continues to be a very meaningful category.

However, as Mike and Doug spoke on the earnings call, many other categories are performing very well, so we're seeing a significant comp increases in most all of our other categories and that goes from fashion to classic, whether it's dress shoes or casual.

In terms of the selling price, the AUR of boots we're about flat to last year, what is most notable to talk about is the content of the AUR and the AUTs in boots.

So in the junior area, the average unit retail actually went down a little bit and that was deliberate so that we could really hone in on some really big trendy items and get behind them and really maximize the increase in the AUR in the boot area actually came from our intensification around some temporary and better and are increased at sell-through at regular price, so does that answer your question about boots?

It does, and I assume this potentially as your past experiences indicate, it continues somewhat into the first quarter as well, I think we saw that last year and subsequent years.

Is that a fair assessment?

Yes, Chris, I actually think that boots is a 12 month a year business right now, but you're going to see an increase over what you did last year in boot penetration in first quarter for 2010 versus 2009.

I think there is an element to the boot business that just continues.

Remember also on our last earnings call we talked about what we used first quarter for.

We not only make sure that the inventory is correct because we feel as though those are the product results, but we use it as a testing ground for new items so that we can test out early and see what the big ideas and the new looks are going to be for the fall season and that's the other thing we do in fourth quarter that proves very very profitable for us last year.

Thank you very much.

I'll get back into queue.

Appreciate it.

You're welcome.

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

Yes, good morning.

Let me add my congratulations.

Thank you.

Doug, can you talk about when we look into the fourth quarter sort of the sustainability of this kind of increase in merchandise margin and also can you highlight for us what we should be thinking about incremental bonus in the fourth quarter as well?

As far as the margins if you'll recall last year, we were disappointed with our 39% merchandise margins for last year and we do believe we can improve upon that, but it is the fourth quarter, it is a period of time that we use to make sure we're clearing out inventory that we don't want to carry forward into the spring season.

But the 46% margins that we had in the third quarter were a record high and it will be difficult to assume that sort of improvement, but given our inventory positions if we start to beat the sales number again, you can expect that the merchandise margins will go up as well but not to the levels that we had saw in the third quarter.

So improvement to last year but not an improvement to third quarter.

And on the bonus side of things, we're all caught up year-to-date.

We're caught up to accruing for the appropriate bonus.

You can probably do the math, but the impact in that third quarter was about a $9 million impact to last year and there will be a little bit of unfavorability, but we've built that into our guidance for fourth quarter and there shouldn't be a lot more that we'll have to raise our expense projection on.

And then in terms of your clearance levels going into Q4, where do you stand on that?

We're really comfortable with our clearance position.

We've always said it would be around 5,000 units in store and going into the fourth quarter that's about exactly where we were.

Very good, thank you.

Your next question comes from the line of Mike Shrekgast of Longacre.

Can you just comment on the effectiveness, or what you perceive the effectiveness has been of your advertising this year and how you think how you're looking at Q4 based on this advertising that you're doing more so this year versus last year?

I'll take that.

I think as I mentioned in my script, I think the TV campaign was quite impactful.

We definitely saw traffic on our dot com site spike when we ran the TV commercials and by the way, those TV commercials will continue running in at least some markets through the end of November.

So, we saw the spike in dot com traffic which oftentimes increases traffic into our stores and we also saw an incremental lift in store business from the TV campaign.

The other thing that was pretty gratifying was the success and responsiveness to what we call precision marketing, but essentially it's customer relationship marketing and it's really getting to know your customers and what things they want to buy and what things they don't want to buy, what things they will respond to and what they won't respond to, and really taking a micro approach to looking at how they shop, so we were pretty pleased with that as well.

The other indicator that we're getting some pretty good increased awareness was data that we got from national surveys on unaided awareness of the DSW brand and from the first half of the year to reading we took after the, I think it was in late October, we had about a, I think we went up about 75% in terms of unaided awareness of the DSW brand as reflected in a statement that that's where they would go to shop for shoes next time.

So, we're pretty pleased with the impact of our intensified marketing efforts this year and we went into 2009 with some questions, but a committment to significantly increase our marketing spend and I think that based on the results we're seeing, we're likely to continue to spend as a percent to sales at that higher level going forward.

Okay, thank you.

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

Hi, great quarter.

Thanks.

A question on kind of a longer term outlook.

In the fourth quarter it looks like you're setting yourselves up to have slightly better than expected, or much better than expected results depending on how the sales fall out, but that is one of the smallest quarters or the smallest quarter of the year at least from a profit standpoint.

Historically has there been any relationship between the performance of the boots in the fall season and the sandal business in the spring season?

Is there anything that we can draw any conclusion we can draw about the potential performance of sandals and spring related goods based on what happened to the third quarter?

Thank you.

Yes, hi, John.

This is Debby.

I'll take that question.

First of all, you have a unique advantage in the boot business that you don't have in the sandal business and that is that boots can really sell 12 months a year, and while we do feel that weather had a positive impact in third quarter, we'll also tell you that the change in ready-to-wear and wardrobe change really brought a strong sell-through in the fashion area of our business as well, so we don't think that's going to stop.

We think that that continues through fourth quarter.

As I said, I think that the penetration will increase in fourth quarter.

I think you're going to see out of the norm results in the first quarter in boots as well because this trend just seems to continue, so you have the opportunity to sell this category of goods 12 months a year.

Sandals however has a little bit different perspective around that and that is to sell sandals you really need warm weather, so you really don't have the same benefits around sand all business that you do in boots.

Having said that, we feel very strongly about the sandal business for spring of 2010 because of the content shift and change relative to what we saw last year, so there's a lot of freshness and newness coming into the assortments, but still you need weather to be able to drive those sales.

Thanks for the answer.

(Operator Instructions) Your next question comes from the line of Chris Svezia, TSW.

I just have two or three follow-up questions if I could.

I guess to focus on the inventories for a second.

Being down as much as you are and maybe, Doug if you could just clarify it between the distribution center and what's in stores, you made a comment there.

Can you clarify that?

I'm curious what categories you're weak and whether or not vendors have the ability to still support your ability to chase product and chase inventory, and then I have a follow-up question after that.

Sure.

We mentioned in the script that it was down 10% on a cost per square foot basis and over half was through the distribution center, so as sales ramped up, we had the ability to accelerate some of the inventories through the distribution center and if you compared this year to last year the big difference, or at least half of that difference, over half of that difference was due to the fact that we had less units of inventory in our distribution center.

So, if you subtract that maybe inventories at cost per square foot in the store are down around 4% and that's a comfortable position for us.

Obviously we've proved in the third quarter if it starts to ramp up we can chase that and make sure we have enough inventory to support the demand, so from a total quantity I hope that gives you some clarity.

Debbie can speak to the mix perhaps.

Yes, what I would tell you is that it's really important that the merchants take a position and take a stand on what they think the strong big trend key items are going to be for the season so we spent a disproportionate amount of time really looking at what were going to be the big big drivers for that category.

We put cancelled back ups in place, so we were able to chase about half of that increase through our cancelled back ups, the acceleration of those back ups that was a good selling item, cancel those that didn't work and then we actually had a remarkable affect on working with our core vendors to be able to chase the balance of those sales, so we were able to find what we wanted.

That isn't always going to be the case and so I would tell you that I still believe that it's more in the planning up front and taking those positions on the big items, putting your stake in the ground and making sure that you support those and depending not as much on chasing on the back half, but our increase allowed us to be able to do that, so it's a blend.

Okay.

And Debbie, just from a product perspective, anything that you see, a lot of talk on the fitness and toning category.

What are you doing in that category as well at DSW?

Sure.

Well, I believe that this whole line I kind of coin it as the toning revolution.

I think it's big and I think it's here to stay and frankly I'm glad there's something this exciting that has popped up as a big idea in the shoe industry because we always need a couple of these every single year.

So the position we've taken is we started with our key partner, Sketchers, and everybody has the shape-ups program and we tested that late in Q2, early in Q3 and saw some very, very promising results and positioned ourselves, once again, and planned our inventory at a level to where we position ourselves to be in a very strong position for fourth quarter going into first quarter.

So, that is where we've taken the majority stake in the toning product.

We are, however, testing product from other athletic resources in a good, better, best, price point so we'll test everything from a $39 all the way up to $79 price point in addition to the $100 Sketchers shape-up that's out there right now.

Some of the early results from these test items have proved very promising so now we're going back to take a look at how big we think those can be as well.

Even having said that, I think you're really looking at 2%, maybe 3% of your total business, the total DSW business being in this toning product where I think it's going to be driven off of a couple of key items and some assortment I think that it's still only going to be 2% to 3% of the business right now with the results that we have, but we are taking a position in it.

We're positioning ourselves with our core vendors, we're getting them to help get us cancel back ups in this case thing hits and it hits big we'll be in a position to maximize it.

Okay, very helpful and last question is just for Doug.

Cash at year-end?

You're at 265 now.

Does that, just given your inventory, does that continue to build as you go into the fourth quarter off of that number?

Not significantly because we still start to build up our inventories going into the spring season, so traditionally we have a little bit of a decline in the cash balance going through the fourth quarter, but it won't be significant declines.

Okay, best of luck.

Thank you very much.

Thanks.

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

Good morning.

Good morning.

Could you address given the return to better results, how this makes you feel about new store activity and then what type of progress you've made on the new store model, advertising, look, dollar spend, and productivity?

Sure.

One, one quarter is one quarter, Dana, so I think we need to show some consistency of performance.

We're pleased with the third quarter.

We just have to make it a repeatable performance.

In terms of new stores, we do believe that we can get to a store base of 400 over time.

We have spent considerable time identifying on a very precise basis where those remaining 80 or 90 stores should be located, not just in terms of market, but site specific.

So we know where we want to go and the question of when those specific site opportunities become available.

If you were looking for some guidance on how many stores we'll be opening next year we think right now the best guess is about 10.

As you mentioned, we did have a new store task force that was studying our store openings from 2007 and 2008 and evaluating what things we could do to make those stores more successful because we were somewhat disappointed with their performance against their pro forma sales and profitability projections, and we have applied a number of those learnings to our store openings thus far in 2009, and the performance of our 2009 stores is significantly better versus pro forma and our 2007 and 2008 as well.

I mentioned in my script that with the opening of our replacement store in Rochester, we affected many of the physical changes in the store that we think will make those stores more successful going forward and we're going to have to monitor the results of several of the stores that we affect those changes in before we decide that that's the store prototype going forward, but it's a long way of saying that we want to grow, we want to grow intelligently, we want to grow with the right situation.

That's why we've been so precise in terms of mapping out where we want to put new stores.

We want to apply the learning from some of our less successful store openings in recent years and it looks like that learning is paying off by virtue of the performance of our 2009 stores.

Happy to hear the better results.

If you believe that 400 or thereabouts defines your boundaries, how many of your existing mix would you say you would like to re-site to better take advantage of limited counts opportunity?

I don't have that number right handy, Dana.

It's an ongoing process that is relevant at the time you have an opportunity to exercise some leverage with your existing landlord or with potential future landlords.

I just don't have, I can't hazard a guess on that right now.

I would not say it is more like a 10% kind of number than it is a 20% or 30% kind of number.

I'm sure the organization is energized by what's going on and we're pleased to see it.

Thank you.

Thanks.

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

Yes, thank you.

A couple follow-ups.

On that big picture type of question, when you look at your historical operating margin, obviously in third quarter you sort of bested what you've done in this quarter.

Give us a sense on your comfort level and getting back to anywhere in the 6% to 8% operating margin level.

Well, I think in the longer term, obviously we've done 10% once before back in the first quarter of 2007, so to Mike's point, one quarter does not make a complete change in our model, but I can tell you that we do see that number, that operating income rate start to increase but it will take some time.

Over the next couple years we expect it to get higher and higher as we continue to improve the operations of the business, but the one key element of that model of course is the comp number, and obviously with some even though single digit comps over the next couple years, we could be in that 6% to 7% range reasonably.

But again, we have to get a clearer outlook on the economic and consumer environment before we we're too confident to predict that kind of rate, but clearly with some improved comps we've shown the ability to deliver some good operating income results and again with the environment getting better, we're pretty confident it's going to continue to rise that operating income rate.

And then in terms of lease departments, one thing I definitely noted in let's say the Stein Mart stores, is they didn't have much of a boot assortment so can you just talk about the ability to improve the assortments there as well as the near term and long term profitability of the leased businesses?

Well we have a good team in the leased business absolutely, and we've been looking at each of those businesses, Filene's Basement, Gordmans, Stein Mart and even a Frugal Fannie store we have and really focusing on the merchandise that's appropriate for those chains and they are all a little bit different and I think the increased focus on that has enabled us to improve not necessarily just the sales, but also the margin rates associated with each of those businesses.

So, I think when we go back and examine the 2009 year, despite the fact that in a good quarter the lease business was down 1.5%, margins were significantly better, the expenses have been contained, in fact reduced and the profits have actually improved.

So, despite the issue that each of those businesses maybe dealing with we're very comfortable with their inventory positions, how they're a sorted and how we're doing business with those guys and to remind you, we extended the contract with each of those businesses and we plan to be in those businesses and grow those businesses for years to come.

And one thing I might add is just emphasize what Doug said, is the right answer for DSW stores may not be the right answer for Stein Mart stores, for Gordmans stores, for Filene's Basement stores.

Hopefully what we're doing is a service to our leased accounts is we're assorting those businesses in the proper balance according to customer preference in those markets.

So, I think probably a long way of saying if you have a more mature customer base, they may not buy boots quite as frequently as a younger customer base would.

Thank you, good luck in the holidays.

Thank you.

Thank you.

Ladies and gentlemen, that concludes the Q & A session.

I would like to turn the call back over to your host, Ms Leslie Neville.

Thank you for joining us today.

As usual we will be taking calls all day today, at our home office and have a great day.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.