Designer Brands Inc (DBI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2010 DSW Incorporated earnings conference call.

My name is Chanel and I will be your coordinator for today.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

Leslie Neville, Director of Investor Relations.

Please proceed.

Thank you and good morning.

Welcome to DSW's first quarter 2010 earnings conference call.

With me today in Columbus are Mike McDonald 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 ended May 1st, 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.

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

Thanks, Leslie.

Good morning everyone.

We will begin with the financial performance for the first quarter, and then we'll discuss our current outlook for the remainder of again.

Net sales for the first quarter increased 17% to $449.5 million.

Same store sales increased 16.2% for the comparable period versus a decrease of 4.7% a year ago.

By segment, our comps for our DSW business, which includes DSW.com, were up 18%, and our comps for our leased business were up 2%.

The merchandise margin rate for the first quarter increased 270 basis points to 46.3%, compared to last year's 43.6%, driven by significant regular price selling throughout the quarter.

The occupancy expense rate decreased significantly due to the positive comp in the quarter and the reduction of non-rent related expenses in DSW stores, and the fact that we had fewer Filene's basement stores versus last year.

The combination of the significant increase in merchandise margin and an overall decrease in occupancy expense resulted in a gross profit rate increase of 560 basis points to 32.8%.

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

Despite a significant increase in accrued incentive compensation expense compared to last year, the SG&A rate decreased 220 basis points to 21.9% in the quarter, due to the increased sales and an overall concerted effort to control expenses.

Operating income for the first quarter was $49.1 million or 10.9% of sales, compared to $12.1 million a year ago.

This is the highest operating income rate for any quarter in our history as a public Company.

Net income for the quarter was $30.2 million, compared with $7.1 million last year, and the diluted earnings per share were $0.67, compared with $0.16 a year ago.

Now for the balance sheet.

Capital expenditures in the quarter were approximately $9 million and are estimated to be approximately $50 million for the year, primarily for new stores, remodels and investment in IT.

And finally, we ended the quarter with cash and short-term investments of $294 million, and no debt.

Overall our first quarter performance exceeded our expectations.

As a result, we increased our annual comp and EPS guidance four weeks ago on April 27th.

Today we are reiterating our annual guidance for 2010.

Here again are the key assumptions.

Our comp expectation for the year is an increase of approximately 6 to 8%, and we still expect to open 10 new stores in the year with five already opened in the first quarter.

Given these assumptions, we are reiterating our estimated annual diluted earnings per share of $1.65 to $1.75.

I will remind you that we expect the year-over-year earnings increase to occur in the first six months of the year, which recognizes the challenging comparisons for both sales growth and margins in the second half last year.

With that I will turn it over to Mike.

Thank you, Doug and good morning everyone.

As you might have guessed, we were quite pleased with our Q1 sales and profit performance.

Any time you grow comp sales by 16% and you quadruple your profits, you've had a pretty good quarter.

As you will recall, when we turned the corner on the new fiscal year, there was some question as to whether we would be able to sustain our strong sales performance from the fall of 2009 into 2010.

That concern was based on the understanding that about two-thirds of our comp sales dollar increase in the fall of 2009 came from the boot category.

Given the diminished importance of boots in the spring it was a reasonable question to ask whether our strong sales trend was sustainable.

Fortunately, we were able to not only sustain our sales trend, we actually saw an acceleration in that trend.

We achieved double-digit comp sales increases in each of the major footwear categories of women's, men's and athletic, and in accessories as well.

Within women's footwear, the sandal category was particularly strong.

We supported this segment by distorting our inventory, focusing on key items, and through in-store signing that called out our dominant head quarters position in sandals.

Within men's footwear, we benefited from efforts that began last fall to achieve better fashion and price point balance in the assortment.

Men's also benefited from the expansion of the size replenishment system.

Because the men's area by its nature has more core items that are carried for a full season or even on a year-round basis, we chose it as the place we wanted to expand our new replenishment capability first.

I'm happy to report that this system is working as it was intended, and we continue to expand the number of styles that we put on to that system.

In the athletic footwear category, the driver of the business was toning.

When you take into account all of the styles from the various brands that participate in this toning revolution, it accounts for over 15% of our athletic volume, and between 2.5 and 3% of our total sales volume.

In accessories, we were pleased that we were able to incrementalize the business at a double-digit rate on top of very strong growth in this category last year.

In terms of store performance, our sales gains were very even across all regions of the country.

Within the four walls of our stores, our 16% comp increase came from increases in customer traffic, customer conversion, and in average unit retails.

The higher AUR performance reflects a healthier mix of regular versus clearance sales, which translated into significant margin improvement.

We were particularly pleased with our increase in customer conversion.

Because we believe it's reflective of the breadth and balance of our assortments, the depth of our in-stock positions, and the quality of execution and engagement at store level.

These are all important priorities for DSW, and it appears our efforts are working.

Our customer conversion rate has now increased three quarters in a row.

We were also pleased with how our merchants were able to chase productive receipts to feed our sales trend in the first quarter.

We didn't plan for a 16% comp increase, so our buyers had to work with our vendor partners to secure additional merchandise receipts in the right styles to deliver this outstanding sales result.

We ended the quarter with a 2% increase in inventory on a cost per square foot basis, and we feel comfortable with that level of inventory ownership.

We're also delighted with the progress we're making in the DSW.com channel.

It's clear that we're scoring points with customers who don't live close to a DSW store, with customers who like to take advantage of both the store and the dot-com channels, and with customers who like to use the site to preshop before making their in-store purchases.

In the second quarter, we'll implement changes to our dot-com site that will make our customers' online shopping experience simpler and more efficient.

We expect to be making both operational and assortment enhancements on an ongoing basis, so that we're continuously reading and adjusting to our customers' preferences.

Our DSW rewards base continues to grow.

We now have over 14 million members, and they accounted for approximately 86% of our sales in the first quarter.

And we continued to get better at precision marketing.

Instead of fitting customers into promotions, we're now trying to fit our promotions to match our customers' behavior and preferences.

In the systems area, we have size replenishment up and running and we continue to add styles.

We intend to implement a stock locator system in Q4 of this year.

A new size optimization system will allow us to identify size profiles by store that we can use to create case packs that match those size profiles.

Work on this size optimization system will begin at the end of this year, and complete in 2011.

And we'll begin to work on the new assortment planning system after we implement size optimization.

We would like to wave a magic wand and have all of these advanced systems capabilities implemented at once but we need to be careful not to create process change more rapidly than the organization has the capacity to absorb it.

During the first quarter we opened five new stores and we're very pleased with their performance to date.

We plan to open another five new stores in the fall half of the year.

As you may recall, we now only open stores in the March, April time period or in the September, October time period, when we have our fullest and freshest assortments on the floor.

We also plan to remodel up to 30 stores by the end of the 2010 fiscal year.

As we said before, DSW is exceptionally well-positioned to compete in the adult footwear space.

Our combination of a breath-taking assortment, an every day discount pricing approach and our simple and convenient shopping experience is compelling.

The current economic environment has created an even keener customer emphasis on value and time efficiency and we excel on delivering on both of these customer choice factors, so we appreciate your attention and your interest in DSW and I'll now turn it back to Leslie.

Okay, now to the question-and-answer.

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

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

Chanel, could you please instruct the callers how to indicate a question?

Will do.

Thank you.

(Operator instructions).

We'll pause for a moment to compile a list.

Your first question comes from the line of Chris Svezia of Susquehanna Financial.

Good morning, everyone.

And great job.

I guess the first question is how are you guys thinking about planning inventory in the second half of the year, given that you've been due to be short inventory for several quarters so far, so I'm just trying to get a sense of how you're thinking about it and I guess more specifically, Debbie, I guess for you, from a -- if you could talk more specifically about like category, either men's, women's, the athletic business, maybe boots or toning, just more specifically about that, what's going on and how you're planning the business.

Good morning, Chris.

So we had a strong first quarter as you heard in most all categories.

Most all the categories had double-digit comp increases.

And it was fairly consistent across all the subclassifications as well.

The only place that we've seen just a moderate softening right now, I think it is weather-related, is in the sandal area.

And so that's the only place that -- I'm not concerned about it but I'm just anxious for the weather to turn for us.

I look at the same kind of results that we saw in first quarter, as really continuing through second quarter.

So I really don't see any big differences in our business as far as that is concerned.

As far as inventories are concerned, we're going to continue to plan them as aggressively as we have before, conservatively, I should say, as we have before, and continue to chase those opportunities as they become available.

So I really don't see our n our inventory levels changing too much from the way they are right now and the only thing, like I said in business, would be to watch the sandal business.

Okay.

So I guess there's nothing -- nothing really stands out, whether it's the boot business towards the back half of the year, some business you might have missed, or the casual business, that you might have shifted inventory out of last year to do more in boots, can you talk maybe a little more specifically about that?

As far as the back half is concerned, as you know we have some pretty strong comps in the boot category.

We're looking to -- they were very strong both in comps and in margin, and we're looking to at least anniversary that and in some cases improve it.

So I think that the boot business is going to be good on the back half.

We are seeing a bit of a shift into the casual business, specifically in the men's area and the women's casual business is also strong.

But I really don't see our business behaving too much differently than it did last year.

And I think also one thing you need to keep in mind is when you take a look at the inventory levels as we cross Q2 into Q3, what we're trying to do is position ourselves a little bit more strongly than we did last year in the boot category, so you're going to see a little bit of an increase in receipts as we cross Q2 into Q3 in boot inventory as we prepare for that transitional time period in boots.

Okay.

Thank you.

If I could ask just one quick last just follow-up here.

I guess my question is this.

I know you've got difficult comp comparisons and I know the margin was outstanding and you chased product but just I guess given what you've seen so far as you've gone into the first quarter and the outperformance in the business, and you think about opportunities in some of these categories, whether it's boots or casual, the toning business, what's going on in men's, your accessory business, you've got better systems in place, so I'm just kind of curious, is there an inflection point where maybe you realize you're either just being too conservative or you'll wait to see how it plays out and you'll go from there.

So I'm trying to pick your brain on that.

Okay.

Chris, this is Doug.

And I understand your perspective and we have similar thoughts as well.

But just to give you a little mathematical perspective on how we're looking at it, if you look at the first quarter where we did a 16% comp and that was on top of a negative 5 a year ago which is a two year comp of plus 11.

Our guidance of 6 to 8% comp for the year compared to a 3% comp last year gives us a two year comp of 10 to 11%.

We really have to give that perspective and it's just as you called out in the beginning of your question, it is a very difficult comparison, not just on the sales side but also on the margin side where our gross margin percentage in the second half last year, the fall season, was 350 basis points higher than our previous high before.

So it was a very high water mark for us and we have to be very pragmatic as we move into the fall season.

Okay.

Thank you and best of luck.

Thanks.

Your next question comes from the line of Jeff Black of Barclays Capital.

Yes, thanks.

Just to follow up on that, Doug.

On the expense line, can you tell us what new initiatives you're using to control expenses and is there anything that shifted out of Q1 into the back half?

And then could you also address whether the sales lift we've seen in the past few quarters, if you look at your whole store base, has that benefited most of the stores where you are?

And specifically talking about those 2005 class of stores, are those getting any better or is there something we need to do at some point to either remodel those to lower square footage or remove them from the store base all together?

Thanks.

Sure.

First, on the expense side, it's across the board.

I think once Mike started, we increased our expense culture and some of the comments that we said about occupancy, the changes that we're seeing there, favorable changes we're seeing there include reduction of maintenance expenses with the new contract we negotiated.

It includes rent negotiations that we're doing or utility examinations that we're seeing favorability on, so little things like that by themselves may not show up too much but when you put them all together they make a big impact on the bottom line.

Our store organization has done a great job managing the increasing sales and have really leveraged those expenses.

But as far as shifting expenses out, really not a big change compared to last year.

Marketing may be a little bit more back loaded perhaps on an overall expense but not significantly.

The one calendarization issue that we have to recognize and we mentioned it in the script is that the accrued incentive compensation will appear to be more front loaded this year because most of that accrual increase in the second half as the business accelerated in the back half of the year.

As far as the improvement by class of stores, as we mentioned we have 30 remodels that we are planning or up to 30 remodels we're planning this year, so we're looking at some of those but those are more aesthetic and not really store sizing.

Counts are coming throughout each year of store, but the most improvements are coming out from those stores that are just a few years old and we think that's some of the recognition we're finally getting in those stores that opened a couple years ago.

By and large there's no major plans to do size reduction or anything like that in any particular store.

Great.

Thank you.

Good luck.

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

Thank you.

Good morning, great job.

If I could follow up on Jeff's question, I think you had a group of stores that you've taken the clearance wall out and also maybe adjusted the aisle direction.

Can you give us an update at this point how some of the performance of that sort of layout reformat has gone?

Yes, sure.

I think we affected 11 stores and in nine of the stores or in two of the stores we did both the realignment of the fixtures and we eliminated the clearance wall.

In all 11 of the stores we eliminated the clearance wall.

And we read those results in the first quarter and taken together as a group, we were able to discern a low single digit comp increment from those stores.

So it's not the transformational experience that we might have expected, but it's a measurable increment that we're getting from that work.

So we're in the process of identifying of that class of stores that has the fixture layout that goes from side to side versus front to back and also has the clearance walls, which of them we want to incorporate into our remodel program going forward.

I think we're going to be probably selective about that.

The way we're picking our stores for remodel is really based on productivity, wear and tear and our perspective on where we can generate the biggest return.

And one of the other things we want to accomplish in our remodel program is to over the next couple of three years, fully convert ourselves off of corrugated fixtures into the slider fixtures that we have in most of our stores.

Mike, that's very helpful.

And then Doug, if I could ask you a question sort of to reconcile guidance.

If you're talking about the second -- or most -- nearly all of the gains year-over-year from the annual guidance to occur in the first half, seems like you've achieved more than that in the first quarter, implying the second quarter might be a down quarter.

Which given Debbie's comments about some of the trends continuing, plus your two-year stack comp trend, would suggest you're still expecting strong comps in the second quarter.

Could you sort of reconcile that, what we should be thinking, if there's anything unusual in the second quarter or are you being somewhat conservative given how things have gone?

I think, David, one assumption I think you made in the question was we expect the second quarter to be down.

That's not necessarily our expectation.

Our first half, our first six months we do expect to have earnings increases.

It's really the back half where we go up against the plus 9% and a plus 13% comps.

In the second quarter we're comparing ourselves against a negative 3% comp.

So while our performance was pretty good last year in the second quarter, we believe there's probably margin upside as well as expense leverage that is still to be had in that particular quarter.

Just the comparison difficulties becomes very apparent in the third and fourth quarter of this year.

Great.

Thank you.

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

Good morning.

Just I know you said on the call that you had double-digit comp growth in all the categories but within the athletic, can you -- would that tell us what that would have been up without the toning?

Yes.

It actually would have been a small single digit decrease in comp, excluding toning.

So toning is one of the biggest drivers in that area right now.

And how are you planning the toning business for the back half of the year?

We actually see toning as really being on the front end of the growth curve right now.

So where the toning is representative of about 15% of the athletic business, we see it increasing from here.

Remember that last year in third and fourth quarter, this toning revolution was just starting to get under way and the inventory levels were not in place yet.

So it wasn't until the end of fourth quarter, beginning of first this year, that we were really in a pretty good position in toning inventory.

The one important thing to call out is up to this point in time, and I think I said this on the last call, I did not think that toning was cannibalizing anything else in our business right now.

And that still holds true to this day.

As you look forward with some of the new product that manufacturers are delivering, I'm thinking that it could start to cannibalize some of the casual business, because of the toning product is really coming down, it's more low profile now, it's not on those high bottoms, and I think it may cut into some of the other athletic categories, could be walking or court and may get into some of the black and brown business in casual.

So we're not seeing that right now, but I'm going to watch it very carefully because I think it might happen.

But it's still on the upswing for us.

All right.

And just one quick follow-up, if I may, then.

If toning is still on the upswing and you're looking to I think by your own words at least anniversary the boot comps and margins in the back half of the year, if the boot business is looking like it's going to be strong, where is the weakness in the back half that would cause earnings to be down year-over-year, despite the tough comparisons?

By category, they look strong in a lot of different categories.

Obviously there's pieces, we talked about the big ones.

But one thing we have to consider is that the traffic that we're going to see, the average unit retails that we're going to recognize, because remember it's not just about sales but also our earnings expectations, is that we had very low inventories going into the second half laugh year.

We recognized extremely high good improvements in average unit retail and we don't expect to anniversary those as well.

So the traffic increases, the average unit retail increases, are also weighing in on us as our units per transaction has continued to decline which gives us some perspective that the consumer is a little bit more disciplined than she was a few years ago.

We have to consider all of those.

It really comes down to the comparison of those comps and margin rates we achieved in the second half.

That's helpful.

Thank you.

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

This is Jody Ann speaking on behalf of John.

I just had a quick housekeeping question.

What was your square footage and D&A during the first quarter?

I'm sorry, we didn't hear you completely.

I think you asked about square footage?

Yes.

Okay.

The square footage at the end of the quarter was 6.94 million square feet.

And I'm sorry, D&A?

Yes.

Was $11.8 million.

Okay.

Now, for the back half of the year, what kind of comp do you need to just break even or leverage on your expenses?

We can probably still leverage on a slightly positive comp in the second half, because of some of the initiatives we have in our home office, our overhead expenses are actually going to be less in dollars to last year, so if we had a slightly positive comp we would expect to leverage expenses.

Thank you.

(Operator Instructions).

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

Yes, thank you.

Can you quantify somewhat how much the bonus increase was in the second quarter.

About $5 million.

And we'll see maybe $3 million to $4 million increase in the second quarter.

But also see similar favorability to that number in the second half.

So whereas we had $5 million increase and a $3 million increase in the first and second quarter, we'll see similar reductions to that in the third and fourth quarter.

Okay.

And then as you're going into the second quarter, I understand that you're comfortable with your inventory level.

In terms of the components of inventory, specifically clearance, how do you feel about that?

Yes, David, this is Debbie.

Actually, where we sit right now, our units per average store are only slightly higher than last year and significantly under where we planned them to be in an average store.

So right now, I'm pleased with the penetration we have of clearance.

And my goal is to manage this level as we continue throughout the year.

And then one last question.

Can you give us a sense on the product inflation trends you're seeing from your most recent buying?

So David, in the spring season, our average unit cost was down to last year, AUT was down and our AUR was up.

What we're seeing happening in the fall season is costs are up slightly, low single digit increase.

That translates to AUT and if we continue at the same rate in regular price selling that we're getting, that will translate into a higher AUR.

So we're seeing moderate price increases right now.

From everything I've heard from the market and that I've been reading, I think we can continue to see those prices go up.

We'll be able to leverage that to a certain degree with the size of our buys and the size of our big items, but there is no question, both the materials and labor there are going to be some pretty dramatic price increases, I think at the end of this year, into the beginning of 2011.

Thank you.

You're welcome.

There are no further questions.

I would now like to turn the call back over to Leslie Neville.

Thank you very much for joining us this morning.

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

Thank you.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.