Designer Brands Inc (DBI) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to today's DSW Inc.'s second-quarter fiscal 2011 earnings conference call.

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

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions.

As a reminder, today's conference is being recorded and now I would like to turn the conference over to Mr.

Doug Probst of DSW.

Please go ahead.

Thank you and good morning.

Welcome to DSW's second-quarter earnings conference call.

With me today in Columbus are Mike MacDonald, CEO and Debbie Ferree, Vice Chairperson and Chief Merchandising Officer.

Please note that various remarks we make about future expectations, plans and prospects of the Company constitute forward-looking statements.

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.

Earlier this morning, we issued a press release detailing the results of operations for the quarter ended July 30, 2011.

Our reported net income was $139.9 million, or $3.96 per diluted share on 35.4 million weighted average shares outstanding and included a net benefit of $106.2 million related to our merger with Retail Ventures, Inc., which was completed on May 26, 2011.

You can find these items detailed in the condensed consolidated statement of operations and reconciliation of adjusted results attached to our press release issued this morning.

However, given the complexity of the transaction, let me share with you the details of the costs and benefits and the specifics of where they are reflected on our P&L so you have a clear comparison of our operating performance to last year.

The $106.2 million net benefit of the merger breaks down into the following five components.

One, $6.1 million in costs included in SG&A, primarily related to DSW and RVI transaction costs and other RVI operating expenses.

Two, $22.9 million in non-cash expense related to the change in fair value of derivative instruments.

This reflects the change in value of the PIES and warrants.

Three, net interest expense of $5.4 million related to interest on the PIES and deferred financing fees on other RVI debt.

Four, $146.5 million in non-cash income tax benefit related to the reversal of valuation allowance and other merger-related tax items.

And finally, five, a net $5.8 million charge related primarily to the reversal of RVI's noncontrolling interest in DSW.

In total, tax benefit more than offset the other costs and resulted in a combined benefit of $106.2 million.

Importantly, most of the costs incurred as a result of the merger with RVI will go away after this year.

Our share count for purposes of calculating reported EPS changes as a result of weighting RVI and DSW shares pre and post-merger.

The 35.4 million shares outstanding is a result of the averaging of the converted RVI shares from May 1 through May 26, the merger date, and the DSW shares from May 26 through July 30.

As we have said before, our guidance for fiscal 2011 has been based and will continue to be based on adjusted results, excluding any costs or benefits related to the merger with RVI.

Therefore, on an adjusted basis, second-quarter 2011 net income was $33.7 million, or $0.74 per diluted share compared to net income of $23.5 million, or $0.52 per diluted share in the second quarter of 2010, an increase of over 40%.

Now that we have reviewed these items, the remainder of our discussion will refer to our adjusted results.

We are very pleased with our second-quarter performance, which continued the strong growth that we have been experiencing for the past eight quarters.

Net sales were $476.3 million and comparable sales grew 12.3% on top of a 12.0% comp increase last year, which represents a two-year comp of 24.3%.

By segment, our comps for our DSW business, which includes DSW.com, were up 13.0% and our comps for the Leased Business division were up 3.7%.

Our merchandise margin rate for the second quarter was 45.7% and represented a 60 basis point improvement compared to last year.

On a total company basis, we achieved occupancy leverage of 190 basis points for an 11.4% occupancy rate, primarily due to the increased sales.

This was slightly offset by 10 basis points of deleverage in our distribution and fulfillment centers to support our growing size replenishment initiative and this growing DSW.com business.

The net effect was a 240 basis point increase in gross profit of 32.7% of sales.

Our adjusted SG&A rate as a percentage of sales was flat to last year due to increased spend to support our growth initiatives, offsetting fixed cost leverage.

Strong sales growth combined with expansion in gross profit margin resulted in a 44% increase in adjusted operating profit to $55 million, or 11.6% of net sales.

Our adjusted tax rate for the second quarter, which is based on a full-year view, was 39.3%.

One of the benefits of the merger with RVI is that we have the ability to utilize the NOL assumed in the merger.

The utilization of the NOL did not change our effective tax rate, so there will be no impact going forward on our income statement.

That said, going forward, we expect to see higher cash balances as we reduce actual cash tax paid.

As mentioned, adjusted EPS increased 42% to $0.74 per diluted share.

We ended the quarter with a strong balance sheet.

Cash and investments totaled $418 million compared to $305 million last year and inventory was flat on a cost per square foot basis.

Capital expenditures for the quarter were $15.2 million, reflecting one new store opened, various store remodels, business and IT projects.

For the year, we continue to expect capital expenditures of nearly $80 million, which includes an investment in our fulfillment center to further support our growing DSW.com business, as well as nine new stores and additional relocations and remodels.

Now turning to our guidance.

As we have said before, we will continue to present our guidance on an adjusted basis, excluding costs and benefits related to the merger with RVI as we believe this more accurately reflects the ongoing operations of the business.

Based on our strong second-quarter performance, we are raising our annual adjusted diluted earnings per share guidance for fiscal 2011 to a range of $2.70 to $2.85 on 45.3 million shares.

This is an increase to our previous range of $2.65 to $2.80 and compares to 2010 adjusted net income of $107.6 million, or $2.40 per diluted share.

We continue to expect comparable store sales to increase in the mid-single-digit range for the fiscal year, which implies low single digit comparable store sales in the back half of 2011.

In addition, our annual 2011 guidance range assumes flat gross margins for the fall season, reflecting higher sourcing costs and modest deleverage of expenses given the increased marketing and new store expenses in the third quarter.

With that, I will turn the call over to Mike to highlight our second-quarter performance in more detail.

Thanks, Doug and good morning, everyone.

As Doug said, the second quarter was another good one for DSW.

We were pleased with our sales and profit performance and we made further progress on our strategic and operational objectives.

We've now had eight consecutive quarters of very strong comp sales growth.

Over that two-year period, our comps have averaged plus 12%.

We attribute that strong growth to three things -- our unique operating model, our improving execution of that model and the impact of our initiatives.

In terms of our operating model, we believe the combination of a breathtaking assortment of branded product and everyday discount pricing structure and an assisted self-select service approach is resonating with more and more shoppers.

The shopping experience DSW provides to its customers is fun, efficient and usually successful.

During the second quarter, we made progress on some important priorities.

First, we continued to grow sales productivity.

As you have heard us say in the past, we believe sales productivity is the key driver to the profitability of any brick-and-mortar retailer.

On a trailing four-quarter basis, our sales per square foot now totals almost $240.

That compares to just under $200 per square foot in fiscal 2008.

So we have increased sales productivity by more than 20% over that short time period.

Second, we used our spring TV advertising to both build awareness of DSW and to evolve our brand image as a fashion authority.

As a result, customer traffic in stores and to DSW.com increased during the quarter.

In addition, unaided awareness of the DSW brand increased when we measured it following our spring TV campaign.

Third, we did a better job of staying in stock during Q2, which resulted in improved customer conversion rates in both stores and on DSW.com.

And fourth, we expanded our private brand penetration.

Through the first half of the year, our private brands accounted for 9.7% of total sales compared to 6.8% in the first half of 2010.

This penetration increase was driven by growth in our existing brands and the addition of new brands.

In terms of category performance in the DSW segment, our comp sales increase was driven by balanced growth across all major categories of business.

Our largest category, women's footwear, grew by 12% driven by seasonal sandals and fashion footwear.

Men's, which as you know is a strategic growth area, reported a comp increase of 17% reflecting our continuing efforts to upgrade our brands and fashion content.

Athletic footwear had an 8% increase in the quarter, which we were extremely pleased with.

Explosive growth in lightweight and technical athletic footwear more than offset declines in the toning classifications.

In accessories, which includes handbag, small leather goods, hosiery and fashion accessories, grew by 23%.

The big driver of that increase was casual hosiery and fashion accessories.

Regionally, our sales growth was very balanced, ranging from 10% to 13% in all geographic regions.

During the quarter, we opened one new store, which makes a total of eight stores opened so far in 2011.

We are pleased with early results from these newly opened stores.

We are on track to open an additional nine stores in the third quarter, including two in smaller markets.

We are also continuing our aggressive program of store remodels and clearance wall removals, which will affect a total of approximately 60 stores this year.

And we will relocate four stores in 2011.

Relocations are typically undertaken to either improve the quality of our locations or to achieve lower store occupancy costs.

In terms of new store growth, we are pleased with our 2010 and '11 results thus far and we have a strong real estate pipeline and are on track to open at least 20 new stores next year.

Our e-commerce sales continued to grow at a fast pace in the second quarter.

This growth was primarily driven by increased site traffic and an expanded assortment, which led to higher conversion.

I also want to mention three new initiatives that we have implemented so far in 2011.

First is our stock locator system that we call Shoephoria.

This system was implemented in the first quarter.

It allows store customers to purchase shoes from our DSW.com site when we don't have their size in stock at the store.

This system is creating additional sales and allowing us to serve our customers better.

The second DSW.com initiative is the launch of our new mobile website in June.

Now when a customer accesses DSW.com from a smartphone, they are automatically redirected to the mobile site.

The mobile site enhances the customer experience with more user-friendly screens that facilitate shopping, checking out, viewing rewards, point balances or finding nearby stores.

Since launching the mobile site, we have seen significant increases in customer traffic from smartphones.

The third initiative I want to mention is the addition of kid's shoes to our website offering.

Kid's shoes is a category that many of our customers have requested in recent years and we were pleased to honor that request beginning July 26.

Obviously, it is very early to evaluate the success of this initiative, but I would say it is so far so good.

Our Leased Business division had another good quarter, posting a plus 3.7% comp store sales increase.

This was our seventh consecutive quarter of positive comps.

We have been working hard to align our merchandise offerings with the merchandise strategies of our host stores and we have applied some of our presentation techniques from the DSW stores channel to the Leased Business division.

We view our Leased Business division as a growth vehicle and are actively seeking new business partners.

Turning to corporate matters, on May 26, we closed our merger with RVI.

This was a significant milestone for the Company.

With the merger complete, we now possess a simplified corporate structure and increased public [float].

In addition, on August 10, following a careful review, we announced that we would settle the PIES debt assumed in the RVI merger with approximately 3.8 million DSW common shares that were already reserved for that purpose.

At the same time, in recognition of our strong cash flow generation, our Board approved a special dividend of $2 per share and an ongoing quarterly dividend of $0.15 per share.

As many of you are aware, we had the opportunity to settle the PIES with either stock or cash.

We determined that redeeming the PIES per shares while simultaneously announcing a special dividend and an ongoing quarterly cash dividend achieved our goals of improving trading liquidity, returning value to all of our shareholders and still positioning our Company for future growth.

As we look ahead, we are optimistic about our business, our brand, our operating model and our initiatives.

We believe it is prudent to plan the back half at a moderate comp increase given that it follows two years of double-digit comp sales gains.

In addition, we would be remiss to look past the increased uncertainties surrounding consumer spending given the recent political, economic and weather-related events.

Also, we have proven our ability to effectively chase improving sales trends in the past, so conservative planning does not prevent us from surpassing our expectations.

I will also remind you of our experience with the last economic downturn at the end of 2008 and the start of 2009.

As you will recall, economic growth was waning, unemployment was rising and the stock market was plummeting.

Once the dust settles, DSW sales took off.

We have seen the benefit from customers who either traded down or traded out of other channels into ours.

I think we have the same opportunity now to achieve further marketshare increases and we are fully prepared to take advantage of that opportunity.

With that, I will turn the call over to the operator to open the line so we can take your questions.

(Operator Instructions).

Chris Svezia, Susquehanna Financial Group.

Good morning, everyone and great job on the quarter.

So I guess I -- you guys sound really good, as usual and I know there is always the concerns about the backdrop.

I guess I am just curious -- I mean you guys are not -- and I know you didn't give any intraquarter view, but I mean it is really basically taking a very conservative view on the back half with regard to your sort of comp forecasts, your sort of margin outlook and I am just curious, given where inventories are, I mean you guys aren't really seeing anything at this point or you're just taking a very conservative approach to the back half at this point.

Is that just sort of how we are taking it?

And obviously the flexibility to chase business if necessary.

Is that fair?

It is, Chris.

Look, we like our positioning entering the fall season.

We think it is very prudent to plan conservatively.

Look at the front page of the Wall Street Journal today, you see the continuing aftermath of Irene.

Look at page three of the Wall Street Journal today, it talks about consumer sentiment.

I mean there is lots of uncertainty out there and one thing this Company has proven is that it is pretty nimble and it can chase business trends that develop.

And so we think going into the back half with great liquidity and a conservative plan, but opportunities to expand should the demand pick up above our expectations, we think that is a beautiful place to be.

And in the past, we have taken those opportunities to not only drive sales, but to expand margins.

So I think it is the right way to plan the business.

And I guess either Doug or Debbie, how do you guys feel about the product.

I guess input costs I think before was low to mid single-digit increases.

I think you felt pretty good about mitigating some of the costs Q3.

Still uncertain about Q4 and I think you are hopeful that if you have product margins kind of flat, that would be great.

I mean how are you thinking about it at this juncture?

So as far as costs are concerned, as we talked about in the second-quarter earnings call and also I will reiterate now, we are seeing about mid single-digit, mid to low single digit cost increases in the business.

I think we have done a good job to try to mitigate those pressures and costs so that the margins come out where we need them to be.

When you look at fourth quarter, we are seeing a bit of an increased acceleration relative to what we saw in the first part of the year and even in third quarter.

So I am anticipating that there will be some increase in cost pressures.

It seems to be around a couple of categories around boots and men's, like I stated in the last earnings call and we are just starting to get the costs in now for the spring season.

It does look like we are starting to see in certain categories a bit of an increase in cost pressures.

Too new to really call out the specifics right now though.

I guess I might add, this is Doug, that Debbie spoke to the mitigating factors.

Well, we are projecting that our margin rates could be flat to last year.

Given our great performance last year, we think that is pretty good, as we have said all year, because those mitigating factors include the size replenishment program, the pre-buy that we did last year, private brand increasing its penetration, managing our luxury products and the number of stores it goes out to.

So a lot of things that offset the cost increases that the merchant team is starting to feel.

So we are pretty pleased with that expectation.

Okay.

Last question I have here and then I will jump off.

But just on the sequential (technical difficulty), was that just all related to the PIES?

I think there is like $134 million that is PIE related.

What about the short-term piece that is like $69 million?

What is that, Doug?

Is that just marked-to-mark or what is that number?

Part of your question got mixed up because we couldn't hear you; you broke up a little bit.

But I think what you are asking is that the mark-to-market is the rest of the charges and that is the number that is generated by the changing stock price.

So if I caught your question completely, the additional costs you are referring to are the mark-to-market charges on the PIES and the warrants that are still outstanding.

No, I guess let me just reiterate real quick.

Specifically on the balance sheet, the debt that is on the balance sheet, can you just tell us what that (technical difficulty)?

Again, you are breaking up, but the debt on the balance sheet will be the debt we are assuming at the merger and that does include the debt we picked up with the RVI merger.

And does all of that go away?

Once we settle the PIES in September.

All right, thank you.

Jeff Black, Citi.

Yes, just a couple of questions related to inventory, I guess, Doug.

What is the unit position here?

I assume some of the increase in inventory is due to cost.

How much?

And then Debbie, on the boots, what are you seeing so far?

What kind of season do we really expect?

Is there enough fashion?

Do we think we have enough fashion to take up price?

And finally back to Doug, on the DC fulfillment stuff that is weighing gross margin a little bit, does that hit increase as we enter the back half, stay the same?

What is going on there?

I will go first.

So as far as boots are concerned, what we called out in Q2 to look for in the back half in boots for this fall season was that there would be enough fashion and that that was going to be also a mix change, a mix shift that actually would benefit the business.

By mix shift I mean more of a distortion towards booties versus boots.

High-shafted boots don't go away, but there was a little bit of an increase in the penetration in the booties versus the boots.

That is proving to check out positively for us.

Overall, I do believe that there is enough fashion in boots to drive the business for the back half.

Early results are positive in what we are seeing so far in terms of some of the new items, new fashion items hitting and also us even starting to reorder some of those items.

So I am relatively pleased with how we plan the back half in boots.

I think the trends that we called out are playing out very nicely and I am actually fairly positive about the back half.

And to the other follow-up questions on the DC [FC] first of all, the second quarter, we had about a 10 basis point deleverage.

That is probably about what we will experience in the second half as well.

Even though the business continues to grow in dotcom, we are starting to anniversary ourselves to a degree.

So a little bit of pressure on the back half.

As far as the mix of units, it is a little bit difficult.

We're looking at our notes here.

It is a little bit difficult to try to report on that period of time at the end of July because you're going through a transition of new deliveries coming in versus the old deliveries that are in the inventory that is there.

So I would say, at the end of July, it is not materially different in units and costs, but again it is a transition period at the end of July.

We will have a little bit more color as we get deeper into the third quarter to give a view on that.

But I would just assume that it is not materially different at the end of July.

Okay, thanks.

Good luck.

Steven Marotta, CL King.

Good morning, everybody.

Regarding the flat inventory per square foot, was there any delivery delays that may have skewed that a bit?

In other words, did you take additional deliveries in early August that may have then resulted in smaller increases on a per square foot basis for inventory?

There were a few million dollars of inventory receipts that flipped from July into August.

(multiple speakers)

Can you quantify that at all how say inventory per square foot is roughly?

Now I know you're reticent to speak intraquarter, but is there any way to quantify that?

Well, you know what, I won't even have that number for another day and a half, so I can't tell you what it is.

My sense is it is probably up slightly.

Okay.

And then as it relates -- again, I understand reticence on speaking intraquarter, as it relates to Irene, can you speak about number of stores impacted, days open impacted, is there -- is it enough to trigger business interruption insurance?

Can you just speak about the storm a bit?

Okay, so we had a total of 67 stores that had their hours curtailed or in some fashion over the weekend and I think on Saturday, we had about eight stores that never opened.

On Sunday, we had almost 40 stores that never opened and yesterday, we had six or seven stores that never opened.

And the total number of stores that were sales-affected is probably a larger number than the 67 whose hours were affected.

And I would say the maximum number of stores affected on a sales basis over the weekend is probably closer to 85 or 90.

And we obviously felt the impact, particularly in those stores, the 67 that I mentioned that had their hours curtailed.

In terms of the total impact, I think we have got to wait.

I think there are residual flooding impacts and of course, then as customers concentrate more on recovering their personal lives, I think they think less about shopping for shoes.

So I think it is going to be a period of days or even weeks until we fully understand the impact.

In terms of BI insurance, a couple things.

The flood insurance, which is probably what will be applicable, is a $100,000 deductible and most of the time that is applied, not on an occurrence basis, but on a location basis, which means that -- since our stores on average do about $15,000 a day in sales, it would be pretty rarefied air for us to get into a $100,000 -- over a $100,000 lost profit from a single store.

So on that score, not a lot of BI coverage we don't believe.

There are however additional provisions in our insurance that would apply.

The deductible on an occurrence basis under certain circumstances and we believe power outages and mandatory evacuation notices meet those conditions.

So we are pursuing insurance coverage for those areas that lost power and had mandatory evacuations because then when you group stores together, you have a better chance of getting over that $100,000 deductible.

Great.

That is very helpful.

Thank you very much.

Claire Gallacher, Capstone Investments.

Great, thank you.

I was curious about what drove the comps during the quarter.

Can you talk maybe traffic versus maybe AUR and kind of the breakdown that you saw in Q2?

Sure, Claire, we can barely hear you, but you asked about the breakdown in comps and we were very pleased to have every component contribute to comp.

Mostly it was traffic being the largest, over half of it.

But conversion was up slightly, our average unit retails were up a little bit, as well as our units per transaction.

So all four components of our comp were positive in the second quarter, but it was still mostly driven by traffic.

Okay, great.

And then just kind of a follow-up on the comp, were there any specific products, maybe sandals or boots or for the fashion component of women's, whatever it is, what helps to get you to that 12% level when you were originally planning for something along the mid-single-digit range?

I will take that question from you.

First of all, I am pleased to report that the comp increases really came from all categories.

So it was a fairly balanced performance.

In women's area, as Mike talked about, a 12% comp came from several different places.

Fashion actually drove it, so the fashion piece of the women's business, that was like up 11% and classic was up 8%.

Within women's, the highlights were the categories we have been talking about in the last couple of earnings calls.

Evening shoes and plain pumps still continuing to drive the women's business.

Sandals also had a very, very nice increase.

So we started strongly in the early part of the season, kind of got a little tough in March and April when the weather was a little bit inclement and then really picked up nicely for us.

So we came out of the season very, very strong with a strong sandal performance.

But the other categories we have actually did well too.

Men's did well both in dress and casual.

Athletic did well as we talked about.

We were able to anniversary and actually beat those toning numbers with the addition of the new categories of technical, lightweight and of course our Nike business.

So it really came across from many different places, which speaks to me about the health of the overall business.

Okay, great.

And then my last question really has to do with just kind of the SG&A spend.

Could you remind us what you are investing in for the second half of the year just to kind of -- the SG&A -- the leverage that you are expecting?

Could you just kind of walk us through that?

Sure.

Well, the leverage we have been getting, of course, in the first half as been on the extremely high comps being about 12% for the full spring season.

So the ability to leverage on lower comps obviously becomes a little bit more challenging.

So it is not necessarily the timing of those investments, more of a comparison as the sales change.

But that said, the investments are mainly focused on IT, the increased or continuing spending there that we have been doing for the past couple years now.

And more from a quarterly perspective, it is important to note that we are probably shifting about $4 million of marketing from the fourth quarter last year into the third quarter of this year.

So although the percentage of sales isn't changing materially for the year or even by the season, putting more marketing dollars in the third quarter puts more pressure on that SG&A rate.

Last year, we had the Miss America Pageant and some other things pushed into the fourth quarter.

This year, we are putting more marketing dollars closer to where we believe the bigger sales are coming.

So that is why we are seeing that calendarized shift as well.

But it is the same story, investing into our growth mainly through IT, but other elements of the business, whether it is dotcom or stores or other areas where we need to invest to continue the growth, but it is primarily focused on IT.

Okay, great.

That's very helpful.

Thanks so much.

(Operator Instructions).

Jeff Van Sinderen, B.

Riley.

Good morning.

And let me add my congratulations as well.

Any sense you can give us on the monthly sales progression?

I know you guys don't really break that out, but just any sense of how the sales kind of trended throughout the quarter?

And then also any sense you can give us on the sales progression over the last six weeks?

I know you are not necessarily all a back-to-school destination, but any sense there outside of the anomalies of the Irene storm?

I will just comment on that.

Thank you for understanding that we don't necessarily comment throughout the quarter because there is a lot of shifts and patterns weather-related or whatever.

But I will tell you that every month in the second quarter was very strong.

So there wasn't a particular month that contributed more than the other significantly.

Now over the last six weeks, even if we gave that information, August is much smaller than September and October.

I think September and October historically have been over 50% larger than August.

We are not necessarily a back-to-school business, so even if we gave you that information on the last six weeks, it wouldn't be a good thing to extrapolate on.

So traditionally, we have not reported that and even if we did, it would be perhaps misleading.

Same thing goes for February at the time coming into the season, but March and April are the timeframes that really matter.

So hope that helps you a little bit, but that is the information we can share.

Got it.

And then any color you can give us on what you're hearing on off-mall traffic maybe versus what you are hearing on mall traffic?

Is there anything to glean from that?

We have read the same reports that you have and traffic appears to be slowing a little bit outwardly, but again depending how you look at it, you could read into those trends, but we know what our traffic is.

Our traffic has been real strong in the second quarter.

It is a key point of our comp growth.

So we just have to focus on that and continue to drive traffic as best we can.

And we are mostly in strip centers, so hopefully we are a destination sometimes and the in-mall traffic that a lot of people get some benefit from doesn't really affect us that much.

So consumer confidence kind of is the metric that we kind of keep an eye on to see where that trend is going and obviously we all heard that is kind of soft right now, so we have to be cognizant of that.

Got it.

Okay.

And then anything more you can say on the small store format tests so far?

Anything to update there?

Just to clarify that, it is a small-market test, it is not a small store format test.

Stores will be normal-sized stores, but in markets that are less than we would typically -- less populous than we would typically enter.

And there are two of them this fall and we will, as is our practice, we will announce them the day they open.

Okay, fair enough.

I think that is pretty much what I had.

Thanks very much and good luck for this quarter.

Thank you.

Scott Krasik, BB&T Capital Markets.

Good morning, everyone.

Congratulations.

Start with big picture, Doug or Mike.

If you guys are able to exceed your comp outlook for the back half of this year, regarding our models, is this something that we should just sort of ignore the two-year trend, the stack that we look at and just say, look, DSW is in a new phase in terms of the ability to convert customers and take marketshare and you will be able to continue to comp on top of what we view as difficult year-over-years?

It's a really good question, Scott and I had trepidation a year ago when we entered the fall season of 2010 because we were annualizing what was sort of like turning the light switch on the year earlier when the comps suddenly went from negative to double-digit positive.

And we proved an ability over the last four quarters to comp on top of that comp.

But now we are up against another point of inflection and we have got to prove our ability to comp on top of that again and that is why we are taking what we hope is a conservative view to the fall.

So we will just have to see how that plays out, but given that we are another year -- we are into the third year of comp challenges, that is why we are taking a conservative view, not to mention the fact that there is a good deal of uncertainty out there right now.

Whether it is the debt ceiling, which will be debated again in the months to come or it is consumer sentiment or it is confidence or it is unemployment or it is housing or whatever, we have got tons of uncertainty out there.

So that is why we think it is prudent to take a conservative view.

But again, this is another nervous time, just like it was a year ago.

We passed the hurdle a year ago.

We will see if we can pass the hurdle again this year.

And Scott, I guess I would add to that and to that point is that historically the last couple years, for example, fall, the average store has been bigger than the average store volume in the spring, but prior to those last two years, fall used to be smaller than spring.

So we can't just look at the last two years as our history and predictors of the next six months; we have to look at the longer-term history as well and consider that when we make our sales projections.

And my question really didn't have to do with much with the next six months as the next couple of years going forward, but Debbie, how -- are you so confident in your ability to chase inventory if your comps are running better than plan to model the inventory flat or is that more a function of nervousness about the economy and potential decline in traffic?

Maybe talk about your decision to come at this fall with flat to up slightly inventory?

I am always comfortable planning flat to up slight low single digit comps.

This company has always proven their ability to be able to commit to the known must-have items early on in the season, the big items, the key items, core items, big trend items and leave enough money open to be able to chase the business.

We have proven it before.

I don't see any indication that we wouldn't be able to do that again this fall.

There are plenty of goods out in the market.

And Debbie, have you anniversaried the impact from the technical Nike that you brought in?

I think it was last spring.

So I think you are passed that.

Are there any other introductions on the athletic side that could boost the numbers?

The big toning numbers are pretty much behind us, so we are kind of glad we are passed that time.

The new things that we talked about before, which is the technical, the lightweight, they are doing exceptionally well and they continue to trend well.

They saved us in the spring season actually and was part of the reason why we could anniversary those toning numbers.

So they continue to be strong.

We continue to have what I believe is very compelling content for the customer and when we look at the sellthroughs, I'm really happy with what we are getting.

We also have not seen any reason to believe we wouldn't be able to feed into that merchandise if the trend even gets bigger than that.

So I am comfortable that there is enough newness in athletic to sustain some nice increases.

Nice, okay.

And then just lastly, Doug, on the balance sheet, I think we are clear now that the pieces of the debt will go away this year.

Are there any portions of the cash, either in short term or in long term, that would -- that are RVI-related for some reason that would go away or is that how we should look at the cash for year-end?

Actually the balance sheet reflects the cash that we acquired in the merger.

It is not significant and so the balance sheet numbers that I quoted does include the RVI cash for this year and last year, but again it is not significant relative to the DSW cash.

So the 410 or whatever the number was including the long term, that is a number to count on as we go forward as well?

Yes, obviously, we have got to pay the dividend that we declared, but yes that is a number to start with.

Okay, that's great.

Thanks, gentlemen and Debbie.

David Mann, Johnson Rice.

Thank you, good morning.

Great job on the quarter.

A couple of questions.

On the dotcom business, can you elaborate on how that benefited that 13% comp and also did the rate of growth in dotcom accelerate in the second quarter?

I think we don't want to comment on the impact of dotcom because we've made it a practice not to segregate that piece of the business from the other because there is so much cross-shopping.

I think the -- Doug, correct me if I am wrong, but the comp growth in Q2 was relatively comparable to Q1, is that correct?

Yes.

So it was strong in both quarters.

And the growth rate in the first half of the year, how would that have compared to the growth in dotcom last year?

About the same.

Very good.

In terms of the accessory success you had in the men's business since you've called out both of those categories, can you talk about -- I don't know if it is Debbie or Mike -- can you talk about your ability to continue to grow those specific categories?

Where are you in terms of expanding the inventories or some of the other initiatives there?

So in the accessory business, as we have called out, this is a growth category for us and that would span everything from handbags, to hosiery, accessories and small leather goods.

We are underpenetrated in this category, so there is reason to believe, in my opinion, that we have some nice long-term growth ahead of us.

There were many things that contributed to the comps.

The big driver was the casual hosiery area.

As you know, fashion legwear is hot, it was hot last fall.

It was hot this spring and looks like it is going to be hot again for this fall.

Handbag business is something that is a real development opportunity for us as we continue to test out higher price points and increase penetration in our leather versus our nonleather piece of our business.

So the penetration opportunity would suggest that we have some nice business ahead of us in accessories.

And on the men's side, is there still a lot of growth there?

Yes.

We are still underpenetrated to what our high was several years ago.

We are also seeing some nice business there as we talked to you about before.

We have size replenishment in the core product in our business, which is about a third of the business more or less, but where we are seeing some real nice increases coming from is in the contemporary piece of the business as we continue to add more of the fashion element versus the classic, which is what we had always had in the past.

That is what we were known for.

We went and added the fashion contemporary element.

We are seeing some real nice response from our customers there.

So yes, some nice long-term growth out of men's as well.

And then, Mike, one question on the use of cash.

Obviously, you made the decision not to use the cash to retire the PIES and you talked about perhaps some future uses of the cash for growth options.

Can you just talk about so investors can appreciate?

Should we expect the cash to be kept defensively over the near term or would you potentially deploy it whether towards some growth initiatives or anything else in some short order over the next couple of quarters?

Well, we have got all of our options open to us and that was part of the reasoning behind redeeming the PIES with shares so that we could manage the amount of cash that we would have available to do whatever we want to do and we think we have positioned ourselves well.

Having said that, we look at lots of things, but we are very careful shoppers and we have got to make certain that opportunities that present themselves are right strategically for the business, financially for the business and operationally for the business.

And as we have said many times before, we must stay focused on this machine called DSW because we have huge opportunities ahead of us as we pursue systems initiatives, category initiatives, marketing initiatives, precision marketing initiatives as we really utilize the rewards database.

We have so much opportunity ahead of us in our base business that we can't allow new things to distract us.

So we are actively looking at things as they come available, but we have got a pretty strong screen that we put those opportunities through.

Very good, thank you.

Mark Montagna, Avondale Partners.

Hi, I have a question about your Leased divisions.

I know that it was an initiative that you're focused on.

I am wondering if your systems are fully capable of taking on new clients, do you have enough DC space, do you have enough land to expand onto?

And is your -- do you have the website capability to service these clients if they happen to want to be on the Web because really kind of imagining that at some point over the next 12 months, we would perhaps see some sort of announcements related to this?

That's a great question and two good issues and we are addressing both of those as we speak.

The systems capabilities are bringing on a new business as well as the Web portion.

Similar to the DSW business, we have to make sure we focus on our existing lease partners, making sure we are doing the right things in their stores.

But on top of that, we are utilizing this time as we prepare hopefully for a new lease business partner to make sure the systems are in order.

And there is a lot of other IT issues going on as well that we are working on, so we have to make sure this is appropriately prioritized.

But the capability of bringing on a new business efficiently is important and we are working on that.

Again throughout 2011, we have been working on that.

And the dotcom element is clearly a piece that we would like to add as well.

But to Mike's earlier point, we have got to focus on the DSW machine first, but, at the same time, we can add some capability so our lease business partners can have the dotcom channel as well.

So a big opportunity in both, but you called out the exact two points from the infrastructure standpoint that we have been working on during 2011 to prepare for that hopeful addition of a new partner.

So do you feel you will have the capabilities at some point in 2012 to bring somebody else on?

Yes.

Okay.

Can I narrow that down?

Do you think it is closer to the beginning of the year or middle of the year or hard to tell at this point?

It is hard to tell at this point.

Nothing is imminent, but we have a lot of good conversations and the lease business team has done a real nice job taking questions from those potential partners and helping them try to figure out what a nice program might be and we will see how it turns out.

All right.

Well, good luck with the effort.

Thank you.

Patrick McKeever, MKM Partners.

Thank you.

Just wondering what is embedded in your gross margin guidance for the back half of the year from a merchandise margin standpoint.

I mean I am assuming you are expecting merchandise margins to be down in the back half, but can you quantify it and even give us some color by quarter how that might look?

First of all, it's flat.

Hopefully if we hit the target that we talked about, the merchandise margin would be relatively flat, as well as the other components of gross margin.

And that pretty much stays consistent by quarter.

And then in the second quarter, with a 60 basis point improvement in merchandise margin, what were the key pieces of that?

Well, a lot of it has to do with the sales and more sales mean less markdown, so that is a component.

And again, we did not have the cost pressure that we expect in the back half.

As we've said all year long, we knew that those cost pressures would be mainly impacting us in the back half.

And in the first half of the year, the costs weren't nearly as large as they are going forward.

So I hope that helps a little bit.

Sure.

No, it does.

But I guess why haven't you seen more cost pressure on merchandise margin?

It seems as if most footwear retailers have seen a fair bit of cost pressure, but it seems more -- for DSW, this is -- if we see it at all -- well, I'm guessing we will -- but it is going to be more of a second-half type of event.

I mean how do you -- what are the key differences there?

I will take that question.

So yes, we were faced with the same cost pressures that everyone else was.

I think what I would attribute the success to is, first of all, the partnerships that we have with our manufacturers, both of us recognize that we were both facing some pretty big cost increases, the wholesalers and then passing that onto the retailers.

And so we worked with our manufacturers in how we placed product, when we placed products in the factories, the factories that we dealt with, the quantity of big items that we bought.

So in terms of buying our big key items, which typically when you do that, you get a cost benefit there.

In addition to that, the increase of our private brand program helped us mitigate some of the costing pressures we were seeing from the manufacturers.

I don't want to suggest that cost pressures weren't there; they were.

I think the merchants have done a nice job to mitigate those.

I think as you look into third quarter, we are seeing the same kind of partnerships with our manufacturers that we did in the first half.

We are, as we start to get the spring numbers, the spring costs back from the manufacturers, we are seeing some additional cost increases.

So I don't think that this pressure is going to go away anytime soon and it will be incumbent on us to continue to work with our manufacturers to be able to keep the costs down.

Remember what we did as well.

We said we wanted to maintain our retails as closely as we could on commodity fashion items that really drive our business and that we would take those increases on fashion impulse items where price was less of a factor in the purchase decision of the customer versus the impulse item itself.

So we continue with that strategy.

It is continuing to work for us and it is the strategy we'll use going forward.

Got it.

And then just a quick one.

I think you had talked about doing some dedicated advertising marketing in men's.

I am wondering if you have started that or if that is something that we will see in the fall season?

Yes, we've started to selectively do some things in men's.

There really isn't anything conclusive right now that I can really report to you.

We have had some successes, we have had some other things we tried that haven't been quite as successful, but we continue to test the waters to continue to elevate awareness for the men's customer coming into DSW.

I will tell you that I am very pleased with the men's results relative to just the testing approach we have taken in marketing.

I mean we put some men's coverage in our TV commercials, as you know.

We have done selected things in print, but very, very small selected things in e-mail, very small.

I just think that the male consumer is really recognizing that DSW has a relevant assortment that can satisfy a lot of their needs, both classic and fashion.

And I would say that the sales comps are outpacing and exceeding my expectations relative to what little we have really done in marketing so far.

But we will continue to test the waters in men's marketing and see if we can find what that magic formula is.

Sounds great.

Thank you very much.

Chris Svezia, Susquehanna Financial Group.

Just two quick follow-ups.

I guess first just on your clearance inventory just given where your overall inventories are, can you just give us some sense of where that stands right now?

And second question, just related to the size of replenishment, I know that kind of goes live shortly to benefit certainly next year and fourth quarter.

Just give a sense of where you are on that and when you expect to kind of start to go live on that?

Is that late fourth quarter or is that more of first quarter next year?

On replenishment, we are full-bore in replenishment.

This representing 30% of our business.

If you're talking about size optimization --

Yes, sorry.

Okay, so we are working on that now.

Probably implement it around the end of the year and begin to derive benefits next year from size optimization.

In terms of your other question on clearance, our clearance we believe at the end of July was up slightly to last year.

Okay, all right.

Thank you very much.

I appreciate it.

Steve Marotta, CL King.

Thank you for taking my follow-up.

Doug, did I understand earlier you said that historically September volumes are 50% higher than August?

Talking total, yes.

I mean it is a big increase.

September, October I wouldn't hang on that for a particular month, but those months, as we have referred to them as Septober, are generally much larger than August, which was just the reiteration to the fact of why we wouldn't, even if we had a policy to, comment on August performance because it is not very indicative to what September, October generally are.

Okay.

And then could you parse that one more derivative down on the weekend before Labor Day?

I know that you guys are not a back-to-school business, so I am assuming that in the grand scheme of things, one weekend late in a small month is not material to the quarter or is relatively not material to the quarter?

That is a safe assumption and if you use the word relatively, every weekend is important.

I understand, of course, of course.

Okay.

Can you drill down anymore there or do you feel comfortable doing that?

No, it kind of speaks to the same discussion of it.

We get deeper into the September month and into October when the weather starts to cool, that is where we really start to see increasing volumes.

So there is a crescendo as we get deeper into September.

Which spills over to October, which means that both months are relatively similar historically in volumes, hence Septober?

Exactly and again, it really depends on when the weather cools.

So if there is a cold snap sometime in September -- last year, it may have been October -- that is really the indicator, not necessarily the calendar.

Got you.

That's very helpful.

Thank you.

Scott Krasik, BB&T Capital Markets.

Thanks.

Debbie, remind us what percent of sales boots are roughly in Q3, Q4?

I think total boot classification is about 23% of total business.

That is not total footwear, our total business.

Okay.

And then in terms of your latest thinking around boots, you are still thinking that they are going to be up year-over-year?

Yes, I do.

I think there is enough newness and enough new items that have actually hit us to give us an indication if the boot business will be good this year.

We have just come off two really strong solid years of boots.

So I am not going to tell you that the comp increases are going to be what they were in the last two years either on a single year or a two-year comp basis.

But we are seeing positive indications from some early back-to-school fashion receipts that lead me to believe that we are going to have a nice season.

Okay.

And then is there -- I know, Mike, there was an inventory investment around size replenishment.

Is there some type of investment you need for optimization or you just move the parts around?

No, I don't think you should think about it as an incremental investment for size optimization.

Okay, great.

And then any -- (multiple speakers)

Are you talking about an inventory investment or --?

Inventory.

Yes, no, I don't think it's an incremental inventory investment.

Okay.

And then in terms of full planning and allocation, color, size, style, any of the above, that's still going to be implemented in 2012?

Yes, but I think it is going to be an 18-month project that will start in 2012.

Okay, thanks, guys.

At this time, I would like to turn the conference back to management for any additional or closing comments.

Okay, thanks to all of you who participated and are still on the call.

We appreciate your support and I think our team will be available for follow-up calls today.

Thank you.

And that does conclude today's conference.

Thank you for your participation.