Designer Brands Inc (DBI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome the fourth quarter 2009 DSW Inc.

earnings conference calm.

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

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 presentation over to your host for today's call, Ms.

Leslie Neville, Director of Investor Relations.

Please proceed.

Okay.

Thank you and good morning.

Welcome to DSW's fourth quarter and year end 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.

Before we proceed, please note that earlier this morning we issued a press release detailing the results of operations for the quarter and year ended January 30th, 2010.

Various remarks we make about the future expectations, plans, and prospects of the Company constitute forward-looking statements.

The actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those listed in today's press release, and in our public filings with the SEC.

With that, I will turn it over to Doug.

Thanks, Leslie.

Good morning everyone.

We will begin with the financial performance for the fourth quarter, and then for the full year of 2009.

We will then discuss our current outlook for 2010.

Net sales for the fourth quarter increased 16% to $402.6 million.

Same store sales increased 12.9% for the comparable period, versus a decrease of 7.2% a year ago.

By segment, our comps for our DSW business were up 14.1% for the quarter, which was driven by increases in traffic, conversion, and average unit retail.

The comps for our leased business were up 2.7%.

Please note that DSW comp does not include sales for DSW.com.

However, beginning in the first quarter of 2010, we will include DSW.com sales in the DSW segment comp calculation.

The merchandise margin rate for the fourth quarter increased 560 basis points to 44.4%, compared to last year's 38.8%.

Throughout the quarter, we experienced higher regular priced selling and a lower markdown rate on our clearance inventory.

The occupancy expense rate decreased significantly, due to the positive comp in the quarter and a continued focus on negotiating rent concessions from landlords.

The combination of a significant increase in merchandise margin and an overall decrease in occupancy expense resulted in a gross profit rate increase of 860 basis points to 29.2%.

This gross profit rate is the highest we have ever reported for our fourth quarter in our history as a public Company and surpasses our previous high by over 200 basis points.

Regarding SG&A, we are pleased to report that we leveraged expenses for the quarter.

Despite our continued investments into our IT systems and a significant increase to our incentive compensation expense from a year ago, the SG&A rate decreased 110 basis points to 22.9% in the quarter, due to the increased sales and an overall concerted effort to control expenses.

Operating income for the quarter was $25.3 million, or 6.3% of sales, compared to an $11.8 million loss a year ago.

The interest income generated by our investments were offset by a charge for an uncertain tax position resulting in a net interest expense of approximately $0.5 million for the quarter.

Additionally, we took a $1.7 million pretax nonoperating charge in the quarter to fully impair our one remaining auction rate security.

Net income for the quarter was $13.4 million, compared with a net loss of $7.5 million last year, and a diluted earnings per share were $0.30 compared with a loss of $0.17 a year ago.

For the year, we are certainly pleased with our financial performance, especially when compared to 2008 and our initial expectations entering 2009.

As you may recall, at this time last year, we outlined several elements of our plan which were centered around the assumption of a continued difficult economy and maintaining a strong balance sheet.

This strategy enabled us to be well positioned to take advantages of opportunities as they arose and as Mike will discuss in his comments, the opportunities came in the fall season.

More specifically, we planned to reduce store openings and preserve cash, but because we were in a position of financial strength, we significantly increased our investment in IT, and our marketing for future growth.

The results were a 10% increase in sales to $1.6 billion on a same store sales increase of 3.2%, compared to a negative 5.9% a year ago.

Our merchandise margin rate increased 190 basis points to 44.4%, and our gross profit rate increased 330 basis points to 29.2%.

Both are record highs for DSW as a public Company, and by a significant margin.

As expected and planned, our SG&A rate deleveraged approximately 40 basis points to 23.4%.

The net result was a 290 basis point increase in operating income to 5.8% of sales, or $93.5 million, more than double the $42.8 million generated in 2008.

Net income for the year was $54.7 million, compared with net income of $26.9 million last year, and our diluted earnings per share were $1.23 compared to $0.61 a year ago.

Now for the balance sheet.

At the end of the year, inventories were up approximately 7% on a cost per square foot basis, due to exceptionally low inventories in the previous year that were down 14%.

We are comfortable with current in-store inventories as we enter the important spring selling season of March and April.

We invested approximately $22 million of capital into new stores and our IT initiatives during the year, and we recorded approximately $46 million of depreciation expense.

And finally, our cash and short-term investments increased by $133 million in the year, to $289 million, and we still have no debt.

Looking forward to 2010, we have built the following assumptions into our annual guidance.

Our comp expectation for the year is in the low single digit range, which includes sales from DSW.com.

We plan to open about 10 new stores in the year.

We expect our SG&A rate to improve in 2010, but we do not plan to increase our margin rate off the historical record high of 2009.

Given these assumptions, we are estimating 2010 annual earnings per diluted share in the range of $1.35 to $1.45, with all of the increase over last year expected to occur in the first two quarters.

With that, I will turn it over to Mike.

Thanks, Doug.

Good morning, everyone.

As you can tell from Doug's comments, the momentum that we began to feel in the third quarter of 2009 actually accelerated in the fourth quarter.

Rather than focus on the fourth quarter specifically, I think it's more helpful to look at some of the contrasts between our performance in the first or spring half of the year, and our performance in the second half or the fall half of the year.

In the spring, our comp sales were down 4% on a one-year basis, and they were down 10% on a two-year basis.

In the fall, our comps were up 11% on a one-year basis, and up 5% on a two-year basis.

So the turnaround in comp performance from spring to fall was 15 points, regardless of whether you calculate it on a one-year basis or a two-year basis.

In the spring, we experienced comp sales declines in women's, men's and athletic footwear.

In the fall, all three footwear categories had comp sales increases.

Similarly, all geographic store regions were down in the spring, and all had double-digit comp increases in the fall.

In the spring, our operating income was down 30% to the prior year.

In the fall, our operating income improved by over 600% versus the prior year.

This improvement was driven by both strong gross margin dollar growth and meaningful expense improvements in virtually all areas of the business.

I'd like to say that our last dollar of sales is the most profitable one.

That's because all of our fixed expenses are already paid for, so the flow-through rate on that last dollar of sales is three or four times your overall profit rate.

Now, that's a really bad thing when you're missing your sales plan, but it's a really good thing when you're generating additional sales over your plan.

In this past fall season, this flow-through phenomenon was even more exaggerated.

We were continuously chasing additional merchandise receipts to catch up with our accelerating sales trend.

As a result, our inventory turnover accelerated.

Our sell-through rates on regular priced merchandise improved and proportionately fewer shoes found their way into our clearance racks.

All of that led to record merchandise margin rate performance.

At the same time, the increase in variable expenses that flexed up with sales was largely offset by expense reductions in occupancy and in several overhead expense categories.

The combination of these factors led to a flow-through rate that was much greater than what we would expect under normal circumstances.

This was a great lesson for our Company, because it clearly demonstrated the tremendous earnings power that comes with top line sales growth when coupled with prudent inventory control and expense management.

In our last call, I mentioned that the significant mid-year turnaround in our sales trend was a function of both environmental factors and the successful execution of several initiatives.

Our understanding of those causal factors was sharpened, based on our fourth quarter performance.

So let me share with you our current interpretation of what happened.

First, we know that the shoe category generally performed better than overall retail, just based on the reported sales results of other shoe retailers, and the several positive comments about the shoe category made by other multi-category retailers.

We also know that value oriented retailers performed much better than overall retail.

DSW's positioning in the value sector of the shoe category was a combination that gave us a special opportunity to drive strong sales growth.

Second, our distinctive marketing created additional interest in DSW.

We saw evidence of this based on a very significant improvement in customer traffic between spring and fall.

We also saw evidence of it in consumer research that showed unaided awareness of the DSW brand improved from 15% in the spring to 27% in the fall.

Third, our strategy to create category distortion and focus on key items really worked.

In the fall, we had a competitively superior selection of boots, and we identified several styles of boots for which we staged multiple deliveries in order to provide a continuous flow of these key items into our stores.

The result of this strategy was a blow-away boot season.

This category alone accounted for over half of our fall season sales growth.

Fourth, our merchants really chased the business.

As I mentioned on our last call, our initial expectation for fall season sales was a flat comp sales performance.

The rapid ramp-up in our sales trend required that our merchants work aggressively with our vendor partners to locate more supply of the right styles to maximize this trend.

Our buying staff was aggressive, yet disciplined, and the strong relationships we enjoy with our key suppliers really paid off.

Finally, we did a better job of executing at store level.

This was in the areas of both store operations and service.

We think our assisted self select service model provides an optimal shopping experience for our customers, because they get to decide how much or how little assistance they receive.

The evidence of our improved store execution showed up in our customer conversion rate, which improved markedly between spring and fall.

There are a number of other elements that we made progress on in the fall but I think those are the big ones that really contributed to our sales turnaround.

Now, the logical question you might ask is whether the fall season performance is repeatable or if it's just a blip on the screen.

Another question you might ask is whether, like Cinderella, we'll turn into pumpkins around mid-year of 2010 when we anniversary our good numbers.

Internally we've raised these same questions and we've talked about the risk of complacency.

While that risk certainly exists, we do believe we can build on our fall season success for a number of reasons.

First, we remain exceptionally well positioned in the value segment of the fashion footwear space, and it's a great place to be.

Second, we have a number of initiatives that we've only just begun to implement.

I'm talking about size replenishment, precision marketing, key item penetration, private brand growth, increasing offerings in extended sizes and dimensions, growing men's and accessories, providing even stronger values to our customers, and undergoing store remodeling.

Third, we have a number of future systems projects that when implemented, will help us serve our customers even better.

Fourth, at a little over $200 per square foot, we're not even close to maxing out on sales productivity.

We have room to grow.

Fifth, we still have many places to add stores across the country, and our recent success make us an even more desirable tenant.

Sixth, we have an e-commerce business that's less than two years old and represents a source of outside growth for some time to come.

So for all these reasons, and several more, we believe we have the opportunity to use our strong fall season performance as a new base from which we can grow further.

There are risks, however.

I believe the biggest risk is trying to do too much, too soon.

As you can tell, we already have a lengthy list of initiatives under way.

We must remember that we've had just two positive comp quarters out of the last 10.

Our 2009 EPS of $1.23 is still well below our high water mark of $1.48 that we set in 2006, so we have much yet to do.

In my opinion, one of the reasons we were able to do as well as we did in 2009 was our intensified focus on business fundamentals.

We said we were going to return to our roots of assortment and value and convenience, and we did.

We committed to managing inventory and expenses tightly and it worked.

Going forward, we need to make sure we don't get distracted from our main priority, which is continuing to improve the fundamentals of our base business.

That's the attitude and the operating philosophy we're employing as we enter 2010.

Thanks very much for your interest in DSW.

And I'll now turn it back to Leslie.

Now to the question and answers.

Please limit yourself to one question and one follow-up on the first round, but you're more than welcome to get back in the queue in the same manner that you did originally.

Lacey, could you please instruct the callers how they can indicate a question?

Thank you.

(Operator Instructions).

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

Please proceed.

Hi, good morning.

Good morning, John.

Let me ask a question about the guidance.

Low single digit comps for the year, and I believe you said the expected earnings to decline in the back half of the year.

Can you just give us a little bit more color?

You were a little bit into the first quarter, I would assume that comps did not go from being plus 13 to plus low single.

So are you expecting high single digit comps in the first half and then a much more modest increase in the back half and why would earnings decline in the back half of the year.

So a little bit more color on the cadence of earnings that you're expecting as the year unfolds.

Thank you.

Sure.

John, first as you know, we traditionally don't give quarterly guidance, but we did give some color for 2010, just because of the differences that we experienced in 2009.

So maybe to reframe that up, we do expect and as we said in the script, we believe that all of the earnings increase should be coming out of the first six months of the year, the first two quarters, and that's really based upon the fact that we did extremely well in the second half of the year and we have to be realistic.

Also, we have to be realistic on the idea that the low single digit comps that we have during the year will likely be a higher comp in the spring season and a lower comp in the back half, simply because of the comparisons to 2009.

And maybe to the last point, our performance in February regardless of how it was and as you know, we don't give monthly comps, but that's an early time frame to try to extrapolate performance into our important March, April selling period.

So despite our performance in February, we would be a little bit premature to try to extrapolate that performance into the balance of the quarter or even the balance of the season.

Okay.

I don't know if I get a follow-up here, but just in the back half of the year if you can put up slightly positive comps, and you have the stores opening, why wouldn't earnings grow?

Again, another thing we highlighted on the script was our extremely high margin performance.

We were chasing the business all season long effectively, the merchant did a tremendous job of refilling the inventory that was exceeding our original plans.

So the margin performance that we highlighted were records and records by a wide margin.

We have to be realistic in trying to anniversary that performance in the second half.

While we'll try to certainly get there, we have to be realistic on our expectations as we enter the fall season.

Thank you and best of luck for the remainder of the spring season.

Thanks.

And our next question will come from the line of Chris Svezia with Susquehanna Financial Group.

Please proceed.

Good morning, everyone.

Good morning.

I guess I have a product related question here for Debbie.

I guess two-part.

First, how are you thinking about your boot business in the second half, given the strength in boots.

It doesn't seem to probably go away.

So I want to get your thoughts about how you're thinking about that segment of your business, and how you're planning inventories for that business.

Obviously, you were chasing that business all through the second half of last year so I'm just curious how you're planning it and your thoughts about it.

Yes, Chris.

So as we noted, we had a sterling performance in the boot sector, along with many other categories, and how I really think about that is two-fold.

What does the content look like for the back half of 2010?

I'm excited about what I've seen in the market so far.

I think that from a product point of view, there is ammunition there to minimally achieve flat comps in the boot category and possibly an increase.

Remember, we had about a 40% increase in comp in boots in the back half.

How are we planning inventories?

I would say due to the exceptionally strong turnover, I'd plan inventories probably a bit slower, so turns a little bit slower on the back half, just because we had historical high turnovers in that category for 2009.

Okay.

Helpful.

And then if you could talk about I guess the toning business for a moment, in terms of what you're seeing.

I think in the past you talked about being 2 to 3% of your business.

I'm just curious if you would revisit that thought process, just in terms of what you're seeing in your stores at this point.

We're very excited about this category.

As you know, the content of what's out there right now is predominantly around the Skechers brand.

There's a little bit of Reebok, and then there are three or four other brands that are starting to creep in with some toning product, it could be LA Gear, New Balance, Dr.

Scholl's.

All of these products seem to be gaining traction with the customer and their response rate has been very positive.

If you'll remember, this category, Chris, just started to take off with retailers being in a strong inventory position, probably late third quarter into fourth quarter.

So I think we're really in a ramp-up mode with this toning category.

We believe, based on the numbers that we've seen so far from DSW, which certainly does not account for all of the new brands and new products that are currently coming in, that this could be as high as 3% plus penetration to our business, so we're getting exceptionally strong sell-throughs right now.

We're very excited about it.

All right.

I'll get back in the queue.

Thank you.

Thank you.

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

Please proceed.

Thank you.

Good morning, great year.

Question on advertising.

Last year, you ramped it up at seemingly the appropriate time.

Can you talk about your thoughts on how much you're planning on spending this year versus last year, and any changes in campaign that you can elaborate on?

Hi, David.

It's Mike.

Good morning.

We are planning -- I mean, we had success.

We made a big bet in 2009 by ramping up our marketing spend quite substantially and, frankly, it paid off.

It paid off more in the fall than it did in the spring, so the character of our fall TV campaign was much different than the spring, and as you probably noted, we are continuing that same theming on our TV campaign for spring.

So we're pleased with that.

And in terms of how we're thinking about budgeting for marketing, we're budgeting for it on about a flat percent of sales basis, 2010 versus 2009.

Okay.

And then follow-up, can you talk a little bit about the Rochester remodel and any gleanings you can give to us and what are your plans for remodel efforts this year?

Sure.

Well, Rochester, if you look at it in the fourth quarter, each month of the fourth quarter, their business trend improved versus the district and the region and the Company in terms of their trends.

So we're pleased with the sales results of Rochester.

In terms of how we look at that plant physically, we think that we did some things very right, but other things, we're not as happy with.

And we think it may lack a little bit of zip if we're honest with ourselves.

So since then, we've gone back and relooked and created some modifications to that new store prototype that we will be implementing in the back half of 2010.

So long way of saying, we're pleased with the financial results.

We think we've still got some fine-tuning to do on the aesthetic results of Rochester.

Thank you.

And our next question will come from the line of Heather Boksen with Sidoti & Company.

Please proceed.

Good morning.

You said on the call you think there's a lot of places to still add stores.

Opening 10 stores this year, when could we see the expansion pace return to more historical, the 30 store kind of pace?

Well, when we were opening up 30 and 40 stores, we did so with -- I guess we set the target for ourselves, and then we went out and found the store that got us to that target, and as we've said before, we don't want to be in that business.

We want to be in the business of opening up the number of stores that represent great opportunities for us to really knock the cover off the ball.

So we're not going to go after a predetermined number of stores.

I do think 10 is probably at the low end of a range of possible annual store openings, and as I mentioned, I think that with each quarter of good results, we become an even more favored tenant by developers.

So I think the opportunities will increase and we're going to -- but we're going to be just as disciplined as we have been more recently in terms of how many we open.

I think in terms of the total potential store base, if we kept the same 18,000 to 20,000 square foot footprint we're looking at the ability to add probably another 80 stores across the country.

And we've got very specific locations identified.

But it will be a question of when those opportunities arise, and the financial deal that is presented at the time.

The other thing I'd say is, I think that there may be some potential to open up in certain locations stores that have more than an average sales per store potential.

So bigger stores.

And we're looking at that as well.

But we're going to be disciplined.

All right.

Thanks.

And our next question will come from the line of Sam Poser with Sterne Agee.

Please proceed.

Good morning.

I've got two questions.

Number one, can you talk about the progress you're making with the IT and sort of where that is on -- in the flow of getting it where you want it to be?

And number two, given you're chasing business for the entire, in the fourth quarter, especially with boots, how much of the overall demand do you think you captured, and how much did you leave on the table as we look towards the back half of the year?

Okay.

Well, this is Mike.

I'll take the first half and I'll give Debbie the second half of that question.

In terms of IT, we are making progress.

Last year we created what we called size enablement and which means we're capturing sales and on-hand information at the size level by location.

That capability has allowed us to begin the process of bringing up replenishable SKUs on a replenishment system.

Right now, we probably have 10% of our inventory that's on replenishment, and we're gradually adding to that, probably fully implemented, we'd get up to maybe a quarter of our total inventory would be on replenishment, just because so much of our inventory is in and out, because we're in a fashion business, but we will ultimately get to about 25% of our inventory.

I can tell you, based on the early reads, our in-stock position on that 10% of inventory that we've got up on replenishment is much improved versus what it had been prior to replenishment going up.

And the sell-through rates on those SKUs are generally higher than what the rest of our regular priced business sell-through rates are.

So we're pretty pleased with the results we're getting.

We've also implemented the first half of a so-called enterprise planning system, which incorporates consolidated merchandise planning and we will be implementing the second half of that enterprise planning system, which is on the store side later this year.

Another initiative we have under way that we think will get done around the third quarter, end of the third quarter, is a stock locator system, which is a system that will allow us to respond to out of stock situations at a store level.

When a customer wants a given style, but we don't have it in her size, we'll be able to locate that wanted size systemically, and we'll use our dot-com channel as the first line of defense in trying to meet that demand.

Later this year, we'll make progress, probably we'll go in next year on a system called size optimization, which gives us insight into the size profiles by location, which means we can do a better job of allocating by size, by store, going forward.

And then the other big systems initiative that we will undertake in 2011 and begin to reap the benefits in 2012, is an assortment planning system, which fundamentally takes us from a tops-down basis for determining orders that are then exported out by location to a bottoms-up order building process where we determine what the right assortment is by location and then aggregate the various locations to get a consolidated order.

So it's a fundamental change in how we write orders.

So I think we're making good progress.

We've got a ways to go and we're pleased with the financial results that we're achieving as a result of those systems enhancements.

And as to the boot question, I will turn it to Debbie.

May I follow up quickly on that one, though?

Sure.

Are you shipping like 100% of the orders out to the stores originally with the exception of those 10% or the 25 that's coming?

Or are you able to replenish to some degree by size?

Are you planning to replenish to some degree by size across the board and are you still going pre-packs only or how is that working?

It's not just the replenishment items that we're holding back stock on.

One of the things we did very well in the fall season was we focused on key items, and we flowed initial orders to the store and then filled in based on store by store selling.

On really big key items, we also held some stock at the store in the back stockroom, so that we could fill in during the day on high velocity items.

So we are doing some of that, even beyond what's on the replenishment system.

By size, you're able to fill in; correct?

Right.

Yes.

Hey, Sam, this is Debbie.

Hi.

I'll take your question on the potential business opportunity that might have been still left on the table in the back half of fall.

Yes, we did chase specifically the boot category, but there were other categories that we feel that we potentially have some missed business on as well, because as you know, boot boxes are two-times the size of a regular shoe box, so we had to strategically make some decisions when we went into the fall season, what do we plan down, and hopefully turn faster, so that we don't miss the upside business in the other categories.

So we did make a strategic effort to plan down a couple of other categories that I think we could have maximized, had we had more inventory and had we had the space on the floor.

What were those categories?

In the women's area, the women's casual, comfort area is doing exceptionally well.

It has been.

It continues to do well.

Continues to show huge upside growth.

That category did very well for us.

We turned it very well.

But still feel that we left some business on the table.

Even in light of the fact that we had a strong boot season, we still feel that there were some additional boot opportunities that we left on the table.

Not because we couldn't get the inventory, but because, once again, based on the floor, so there were other subclassifications within boots that we feel we have opportunity for that we missed this past year for the 2010 fall period.

In addition to that, as you know, we made some refined assortment corrections in the men's area and we introduced size replenishment.

So there was some additional business in men's that we started to realize in third and fourth quarter, but we will see probably the fruits of that labor this year and into many years to come.

We were just on the front end of the toning revolution, and as I mentioned before, inventories just started to get into an appropriate level at the end of Q3, beginning of Q4.

So we feel that we left some opportunity on the table there in toning as well.

So I think that even though we're excited about the results from the past fall, we still see much opportunity, not only in the boot category, but in many other categories.

Thank you.

Good luck.

Thank you.

And our next question is a follow-up question from the line of Chris Svezia with Susquehanna Financial Group.

Please proceed.

I was wondering if maybe you could just talk about how you're looking at average selling prices in this year, just kind of given how strong fourth quarter was, your conversions, average unit retail, so I'm just curious when you look at your buys and inventories, how we should look at ASPs this year.

Well, I can tell you historically or at least the fourth quarter as I mentioned in the script, we had improvements in average unit retail traffic and conversions.

But we've been having improvements in average unit retail for a couple of reasons all year.

That is driven by the fact that we've been managing the inventories well, we're taking less clearance and even the markdowns that we're taking on that clearance is reduced as well.

Clearly, the boot penetration has an effect on that average unit retail and as we move forward in the 2010 fall, Debbie, you want to pick up on that?

Specifically in boots, Chris, do you want to know AUR?

Well, I'm just I guess if you can just -- I guess more broadly, if you're thinking about what's driving your business, and how you're planning your inventory, how you are potentially looking at average unit retail this year.

I would say that average unit retail should hold pretty consistent to what it was last year.

We had record markdowns, markdown improvement, as we mentioned earlier in the report, and I'm really looking at it as probably we should be able to maintain the AURs this year going forward that we had last year.

Okay.

And Doug, a follow-up for you.

You talked about the merchandise margin rate, looks like some improvement possibly in the first half, but opportunistic in the second half, not putting that into the thought process.

The occupancy cost component to this, I assume you start to leverage on low single digit comp, so that's the opportunity on the gross margin for the year?

I missed a little bit of your question.

Did you mention occupancy?

Right.

Specifically, occupancy costs, how should we be looking at either from a dollar perspective or where you leverage on the occupancy piece?

I think based on some of the work that's being done on going back to our landlords and taking opportunities where they exist, we expect to leverage that occupancy rate into 2010 if we have a positive comp.

That's factored into your guidance, low single digit?

Yes.

The last question I have is just, Debbie, one follow-up with you.

Any early thoughts, puts and takes to in the warmer weather climates, how your sandal and open-toe business has been performing?

We've been in your stores, saw the product, so I'm just kind of curious, early thoughts in terms of what's working, what's going on out there?

Chris, it's really early in the game right now to try to make that call, to be honest with you.

It's very weather-related, and weather hasn't been good to us so far.

But having said that, we are seeing across the board, certain things pop up.

We're starting to see wedges sell.

We're starting to see the naturals, the whole natural trend do very well for us and there's items here and there, but we really haven't had enough selling right now for me to really make a definitive call on anything, to be honest with you.

Okay.

All right.

Thank you and best of luck.

Thanks.

And our next question is a follow-up question from the line of David Mann with Johnson Rice.

Please proceed.

Yes, thank you.

Doug, can you talk a little bit about the e-commerce business, what kind of sales did you achieve last year, profitability, are you there yet, and how should we expect that to grow in 2010?

Sure, I'll give you as much as we're comfortable giving, and I'm not trying to be evasive, but as we've examined this business throughout its -- now its second year, we've realized that there's a lot of cross-channel shopping going on.

We have a lot of customers coming online and going into the store, so it's really difficult to pinpoint the exact impact of dot-com, but as it comes through that channel, we saw it like the rest of our business start to build and as we got deeper into the year, but we also saw our performance in some of the metrics underneath the sales line improve as well.

So we were pleased with the acceleration that it had.

We're seeing how it incorporates into our store business much clearer, and our decision to combine the comp numbers with dot-com is driven by the fact that there is so much cross-benefit from the channel in the stores, that if I were to give you a specific number on what we did in the dot-com channel, that may be a little misleading because it has a much bigger impact than just what comes through that channel.

Again, not trying to be evasive, but really trying to highlight that it is a DSW and dot-com combination look and that's why we're including it in our comps in 2010.

So we're pleased with the performance as it went through the balance of the year.

Then if I could follow up, in terms of an operating margin target over the next several years, you did a great job in doubling the operating margin with the recovery this past year.

I think when you went public, you were talking the 30, 20, 10 metric of a 10% EBIT.

Maybe can you give us a sense on is 10% achievable, or is it something less than that given the makeup of the business now?

What should we be thinking about?

Well, we certainly have started turning it back the right direction, and as I think we highlighted before, that we are certainly not at our high water mark that we achieved back in 2006.

So when we were at almost 8% we can see that again in our realistic future, and it's going to come down to -- we've examined that question again is 30, 20, 10 the correct target.

In the longer term we think so.

It's going to center around productivity and sales per square foot.

We're just barely over $200 again and if we get that up to about $230 we could see that formula starting to come back into sight.

It will also depend on what type of incremental investments we might do to continue the business to grow, obviously.

I mean, the decrease that we saw in operating income rate back in 2007 and 2008 was partly driven by the fact that we had a significant investment in dot-com.

So we are pleased with that.

It was a little painful to absorb during those two years, but we're pleased that we made that investment.

So barring any significant investment, and seeing improvement in productivity per foot, some day we see that still in our sights but it would be a few years away.

Thank you.

And our next question will come from the line of Dana Walker with Kalmar Investments.

Please proceed.

Good morning.

When we use, or when you use the concept of chasing business, can you talk about the implications for not only balance sheet management but the P&L.

I presume when you chase it means you're buying on the fly which means that you're probably having to pay more than you would if you planned it six months earlier and yet of course you're better able to tell what's selling, so maybe your markdown exposure is lower too.

So if you could expand on that.

Dana, I think I'll take that.

It's Debbie, how you doing?

Hi.

So let's just talk a little bit about chasing.

If you have the opportunity -- there's two risks in chasing.

Number one, you have the potential in missing some business because you can't get the kind of goods that you want because you can chase inventories but getting the right inventory in the right brands and the right styles is another thing.

And then number two, being able to get enough of that inventory to really maximize the opportunity in the business.

We kind of positioned ourselves -- and I'm going to give you the boot example, because I think it's the best one.

We put expectations in comps around boots early on in the beginning of the season.

We put a stake in the ground to step outside of historical penetrations when we planned the season.

We were comfortable with that.

Having said that, once we got into the season, the customer voted at a velocity much faster than we had originally anticipated.

So you can cover your inventory needs in two ways.

You can put backups in the system, which we do and we do that with most all of our vendor partners, and that protects you on the down side and on the upside in key items.

Number two, you chase into items that are like what you have on the floor but maybe not identical to what you have on the floor, and that's when vendor relationships really come into play and the merchants really managing the inventory levels of the brands, knowing what brands have and knowing what our needs are.

So chasing actually is a good thing if you can get the goods.

It's a really bad thing if you have specific needs around certain kinds of items, and you can't get it from the market.

It was a little bit of a challenge this past year, as you know, having gone through a very tough economic environment.

Most of the brands, and I would have to agree with them were kind of gun shy on how much inventory they bought over and above what they had valid purchase orders for.

So we did get some of those chased inventories by cancellations from other retailers, but also for some of the inventory that the brands invested in.

So all in all, it really played in our favor very well.

Having said that, we still think that there was probably a little bit more we could have gotten had the inventory been there.

Okay.

And then a thought about clearance and the rewards program.

Undoubtedly, when times are good, when sell-through is good your clearance is going to be less, and yet Mike, as you enter the equation, do you see the Company's clearance relationship or the way clearance has played a role in your business evolving, and same question with rewards, in that rewards undoubtedly gives you an ongoing communication with your customer, and yet I think you were trying to find ways to maximize the profitability of that relationship.

That's a good question, Dana.

And an interesting one, because it's something we've talked about.

As we went through the fall season, we have proportionately less inventories sitting in our clearance racks and we really think that that clearance offering is an important part of our total value offering, and so we were faced with the situation of we didn't need to do a rotation where you take the 30s to 40s and the 40s to 50s and so on.

But we talked about whether we should go ahead and take that rotation, just so that we have heft of ownership in the clearance racks.

So it's not a question that we have fully resolved yet, but it is a high grade problem to have, I would say.

If that's responsive to your question.

It is responsive, and yet it's something of a seat of the pants judgment, I would think, in any given environment.

Say again, Dana.

I'm suspecting that it's responsive and yet I would imagine that any given environment, there's something of a seat of the pants evaluation, as to what to do and how effective it will be, given there's also something else you may have chosen to not do.

Right.

Well, the other thing is, look, we think that we need to increase the value that we offer our customer every day and that's in the runs out on the floor, but it's also in the clearance racks and we're doing a number of things to increase that value equation.

You've seen the big deal stickers in our stores where we call out those items that are generally 40% or more off of the comparative price, and that's working really well for us.

We're generating consistently bigger sell-throughs on those big deal items than anything else.

In the last year, we slightly increased the penetration of our opportunistic buys, our close-out buys that we offer to the customer as a way to supplement some of our clearance offerings as well.

So there are a number of buttons that we can push to drive that value equation even sharper.

But we're very cognizant of it and it's a key part of our strategy.

Similar introspection if you would on rewards.

Rewards?

We added a whole bunch of new rewards members in 2009.

We're now at 13 million.

Those rewards customers represent about 84% of our sales.

So they're a key part of the makeup of our Company.

On the other hand, I am personally unhappy with the degree of defection that we have on an annual basis from those rewards members.

And I think that's really our challenge is to figure out ways to keep new rewards members more engaged, so that they don't become what we call one and dones.

And that kind of analytics, really use analytics to really develop that understanding, and that I would say, is part of the capability we're developing in our marketing area and what we call precision marketing, which is really understanding the behavior of our customers, so that we can be responsive to their needs, and so that we can push their buttons more effectively.

But if you ask me what is the big objective for this company, it's to reduce the level of defection that we have from DSW rewards so that more of them stick with us.

Well done, and thank you for your time.

And our final question is a follow-up question from the line of John Zolidis with Buckingham Research.

Please proceed.

Hi, guys.

Thanks.

One quick follow-up.

One, Debbie, do you still see boots as a year-round business in 2010?

Is that still going to be a meaningful part of the business as we go through the other kind of not traditional boot season?

And then secondly, on the long-term operating margin target, as I recall, back when you did nearly 8%, there was some benefit from shared services and there's been a lot of investment in systems and so on since then.

Looking across footwear retailers, are you aware of other footwear retailers that have ever sustainably had a 10% op margin?

And what do you think is different about DSW that you can get to that target?

Thank you.

Hey, John, I'll go ahead and take the year-round boot question.

The answer is yes, I think that this is a lifestyle shift that we're seeing right now, and I think that it will continue into 2010.

I don't know about 2011.

Boots are seen more as the right footwear covering, rather than they are a functional need.

So you get the function and the fashion in the back half.

You get the fashion component in the front half, which is Q1 and Q2.

And I see that continuing.

Great.

Thank you.

And related to the longer term plan and the historical performance, I know you mentioned the shared services, and while there was some benefit there, I can't say that was significant.

We believed it was a fair allocation of services, and while there was some benefit, I can't say that's a key part of the model of us developing an 8% or 7.9% operating rate that we had in 2006.

So I wouldn't lean on that, it's going to come down to sales margin and overall expenses, and I think as we look forward and a three to five year plan, it's going to require if we get to those kind of levels, sustainable comp growth in the mid single digits or low to mid single digits.

It's going to require margin development, as well the investments we're making in IT and having those start to develop, and increase our margins, and then leverage on our occupancy and other store expenses and other home office expenses which we've already made some headway on.

So there are various components that we could talk about, but clearly it's going to start with the top line, and at the same time, we're not going to go aimlessly at a target because we want to continue to sustain growth in our business for the longer term, and we'll make those investments as we see necessary.

So there are retailers out there, maybe not so much in the last couple years, because of the environment, but there are big box specialty retailers out there that do double-digit operating incomes and that's probably a design that we should keep in our minds for designing this business going forward.

Thanks a lot for that additional detail.

Thank you.

Ladies and gentlemen, this concludes our question and answer portion for today's conference call.

I would now like to turn the call back over to Ms.

Leslie Neville for any closing remarks.

Thank you very much for joining us today.

As always, we will be accepting your follow-up questions today at the home office, and again, thank you.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day everyone.