Designer Brands Inc (DBI) 2011 Q4 法說會逐字稿

Good morning and welcome to the DSW fourth-quarter and fiscal-year 2011 financial-results conference call.

All participants will be in listen-only mode.

(Operator Instructions) After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions) Please note that various remarks made about the 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 DSW's public filings with the SEC.

This event is being recorded.

I would now like to turn the conference over to Mr.

Doug Probst, CFO of DSW.

Please go ahead, sir.

Thank you and good morning.

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

With me today in Columbus is Mike MacDonald, our CEO, Debbie Ferree, our Vice Chairperson and Chief Merchandising officer is not with us today as she is traveling overseas with members of our supply chain team.

Today I will comment on our results for the fourth quarter and full year of 2011 and provide our guidance for fiscal 2012.

Then Mike will provide more detailed comments on our operating performance.

As a reminder earlier this morning, we issued a press release detailing the results of operations for the quarter and the year-ended January 28, 2012.

Our reported net income for the fourth quarter was $19.4 million which included a net $3.7 million charge in items related to our merger with Retail Ventures which was completed earlier in 2011.

You can find these items detailed in the condensed consolidated statements of operation and reconciliation of adjusted results attached to our press release.

As we've done in prior quarters, we'll first walk you through the details of the cost and benefits associated with the merger and related items and the specifics of where they are reflected on our P&L so that you have a clear comparison of our operating performance to last year.

The $3.7 million in RVI, merger and related items in the fourth quarter breaks down to the following major components.

First, $700,000 in costs included in SG&A primarily related to RVI operating expenses such as pension and legal costs.

Second, $3 million in non-cash benefits related to the change in fair value of the warrants.

Third, $900,000 in non-cash income tax expense due to the merger related tax items.

And fourth, a $5 million after-tax charge related to the guarantees of two leases that DSW inherited in the merger with RVI.

For the fiscal year, our reported net income was $174.8 million which included $38.6 million in net benefits related to the RVI merger.

For the full year, the impact of the merger is due to the following items.

First, $17.3 million in net costs included in SG&A related to the merger transaction and other RVI operating expenses.

Second, $53.9 million in non-cash expense related to the change in fair value of the PIES and warrants.

Third, $10.5 million in interest expense related to interest on the PIES and deferred financing fees on other RVI debt.

Fourth, $145.9 million in non-cash income tax benefits due to the reversal of the valuation allowance on NOLs and other merger related tax items.

Fifth, a net $4.9 million charge related to the two lease guarantees previously mentioned.

And finally, a net $20.7 million charge related to RVI's non-controlling interest in DSW prior to the merger date.

Now that we have reviewed these items, the remainder of our discussion will refer to our adjusted results which reflect the performance of our DSW operations.

We achieved very good results in the fourth quarter, capping off a strong year overall.

Sales for the quarter were $513.7 million and comparable sales grew 5.6% on top of a 14.9% comp increase last year.

This represents a two year comp of 20.5%.

By segment, our comps for our DSW business which includes www.DSW.com were up 5.9% and our comps for the lease business division were up 1.4%.

Our total Company merchandise margin rate was 41.7% for the quarter.

Given the cost pressures in the market, we were pleased to limit the reduction to 15 basis points.

We also ended the fourth quarter in good shape with respect to inventory levels and merchandise mix.

On a total Company basis we achieved occupancy leverage of 50 basis points for an 11% occupancy rate for the quarter, primarily due to the increased sales.

This was slightly offset by 30 basis points of deleverage in our distribution and fulfillment centers to support continued investments in our size replenishment initiative and www.DSW.com business.

Combined with the change in merchandise margin, gross profit was virtually flat to last year.

Our adjusted SG&A rate as a percentage of sales decreased 70 basis points to 21.1% due to leverage in store, marketing, and IT expenses.

This was partially offset by additional spending on pre-opening expense to support some of our larger new stores opening in the first half of 2012.

Our strong sales growth combined with SG&A leverage resulted in a 20% increase in adjusted operating profit to $37.6 million or 7.3% of sales for the fourth quarter.

On an adjusted basis, fourth-quarter 2011 net income increased 25% to $23.1 million or $0.51 per diluted share, compared to adjusted net income of $18.5 million or $0.41 per diluted share in the fourth quarter of 2010.

For the full year 2011, sales increased 11.1% which lead to DSW reaching a milestone of $2 billion in annual sales.

Comparable sales grew 8.3% on top of 13.2% comp increase in 2010 which represents a two-year comp of 21.5%, and increased our top line by over $200 million for the second year in a row.

By segment, our comps for our DSW business which includes www.DSW.com were up 8.6% and our comps for the lease business division were up 5.1%.

Our gross profit rate increased 130 basis points to 32.3%.

We leveraged SG&A to 21.3% and our operating margin increased 150 basis points to 11%.

The net result was a 25% increase in EPS to $3 per diluted share.

The adjusted tax rate for the full year was 39.2%.

As we've said before, one of the benefits of the merger with RVI is that we have the ability to utilize the NOLs assumed in the merger.

This cash benefit, which will be realized over the next two to three years was recognized for P&L purposes as a one-time item in Q2.

We ended 2011 with a strong balance sheet and cash and investments totaling $430 million compared to $391 million last year, even as we returned approximately $100 million in cash to shareholders in the form of special and regular dividends and continued to invest for growth.

At year-end, inventory for DSW stores increased 2% of cost per square foot basis.

We remain very pleased with the composition and level of our inventory as we begin 2012.

Capital expenditures for the fourth quarter were $21.7 million, reflecting the opening of one new store, the completion of 13 remodeled stores and IT projects.

For the year, capital expenditures totaled $76.9 million as we opened a total of 17 stores, relocated 3 stores, and completed the remodel of 59 stores.

Now turning to our guidance.

As we did in 2011, we will continue to present our guidance on an adjusted basis.

The impact of the mark-to-market adjustment on the warrants and one-time items will continue to be excluded from adjusted earnings; however the minimal ongoing RVI operating expenses are included in the 2012 guidance.

It is also important to note that our fiscal-year 2012 retail calendar includes the 53rd week in January compared to a 52-week fiscal year for 2011.

Including this extra week for fiscal 2012, we expect annual adjusted diluted earnings per share of between $3.20 to $3.35.

The mid point of this range represents a 9% increase over our 2011 earnings of $3.

We expect comparable sales to increase between 2% and 4% for the fiscal year.

As we previously reported, we plan to open 35 to 40 stores in 2012.

Mike will discuss our accelerated new store opening plan shortly.

While our practice has been to focus on annual guidance, we have given input on significant changes to our operating model.

To that end the following items need to be considered as you begin to model your 2012 expectations by quarter.

First, we expect our comparable sales increase to be fairly consistent on a quarterly basis throughout the year.

Second, we expect to incur approximately $16 million in pre-opening expenses in SG&A related to our accelerated store opening program.

This represents an incremental investment of $10 million from 2011.

Due to the anticipated timing of these openings, the increase will be incurred in the first three quarters.

Third, we expect gross profits to remain very strong yet modestly lower than last year, reflecting the continuation of cost pressures that we started to experience towards the end of 2011.

As a result of these three factors and the impact of the 53rd week, we expect a majority of our earnings increase relative to 2011 to be generated in the fourth quarter.

We expect capital expenditures to be approximately $120 million in 2012 related primarily to new store openings during the year.

As you would expect, the acceleration in our store base this year will make a solid contribution to sales and profitability in 2013.

And with that, I'll turn the call over to Mike.

Thanks, Doug.

Good morning everyone.

We posted another strong quarter at DSW, concluding an equally strong year of growth and accomplishments towards our long-term goals.

Looking at the fourth quarter in particular, we increased overall sales by 10% and achieved 5.6% comp sales increase.

This was a very solid comp gain but it looks even better when you consider that it came on top of a 15% comp increase in Q4 of 2010 and a 13% increase in Q4 of 2009.

Our comparable sales increase was driven by growth in both traffic count and units per transaction.

Of course the real key of our statistical performance is the DSW formula that provides customers with a huge assortment of brands and styles, compelling values on an every day basis, and the convenience of an assisted self-select shopping environment.

With respect to category performance in the DSW segment, our comp sales performance was positive for all major categories with strongest growth in accessories and men's footwear.

Our largest category, women's footwear, grew by 5.1%, lead by contemporary, evening, and plain pumps.

Despite unseasonably warm weather throughout much of the country, overall, boot sales actually increased by 6%.

Men's, which is a strategic growth area, recorded a comp increase of 7.5%.

Sales of men's dress shoes and boots were strong.

For the year, our men's penetration grew by 70 basis points.

Athletic footwear had a 1.8% increase in the quarter lead by technical and lightweight running.

We were pleased with this performance considering that the toning category declined by $20 million year-over-year or nearly 75%.

And accessories which is includes handbags, small leather goods, casual hosiery, and fashion accessories grew by 16.6%.

The big driver of that increase continues to be casual hosiery which includes tights, leggings, boot liners, and other fashionable legwear.

Accessories now represents 7% of our total business.

In terms of geographic performance, we continue to see relatively balanced sales growth across all regions with comps ranging from plus 4% to plus 6% in the fourth quarter.

17 new stores we opened in 2011 are all performing quite well and most are exceeding their initial sales forecasts by a wide margin, and we are pleased with the performance of the two small market stores we opened in 2011.

As announced in January, in 2012, we plan to accelerate our new store opening plan to open between 35 and 40 new stores, which compares to our long-term goal of 15 to 20 new stores per year.

As we mentioned previously, this decision was really driven by opportunity, 16 of the incremental stores are former Borders locations which represent high-quality real estate in markets previously targeted for growth.

We will also be opening or relocating stores in several high-profile locations including two in Manhattan, one in downtown Chicago, and one in San Francisco at Union Square.

We are also excited to announce that we will open our first store in Puerto Rico this Fall.

About a quarter of our new stores will open in the first half of the year and three quarters will open in the back half.

Let me touch briefly on the progress we continue to make on our key initiatives.

First, I want to talk about sales productivity, the key driver of store profitability.

For the full year, our sales per square foot totaled $243 which compares to just $196 per foot in fiscal 2008, representing a 24% increase.

Many of the enhancements we're making to our assortments, our precision marketing, and our supply chain are designed to further improve our sales per square foot and we continue to believe there's room for improvement here.

Second, we continue to drive store and online traffic with high-impact marketing.

We kicked off the holiday season with special offers, featured items, and GWPs in both our stores and dot com channels on Black Friday going through Cyber Monday.

Simultaneously we launched our annual gift card promotion on Black Friday and that ran through Christmas Eve.

In addition, we continued our precision direct mail and e-mail marketing to our 18 million loyalty member base.

Collectively these efforts lead to increased sales at higher margins.

We also increased awareness of the DSW brand and increased customer satisfaction scores.

Third, we advanced our systems initiatives in 2011.

In February 2011, we implemented our Shoeforia stock locator system that allows in-store customers to shop and buy products from www.DSW.com when it's not available in their store.

In June we introduced our mobile website which makes it easier for customers to shop, check rewards balances, and find nearby stores from their smartphones or tablets.

Mobile devices now account for 7% of www.DSW.com's demand.

And at the beginning of the fall season we introduced kids shoes on www.DSW.com.

Fourth, we significantly expanded our private brand penetration.

In 2011, private brands represented 10% of total sales, up from 7% in 2010.

And fifth, we continued to upgrade the physical appearance of our stores through remodels, refreshes, and clearance wall removals.

In 2011, we touched a total of 59 existing stores and we relocated another 3 stores.

Turning to our eCommerce business, we achieved solid results in the fourth quarter.

Our Cyber weekend promotion served to spread sales over multiple days and improve profitability at the same time.

I was pleased with the performance of our systems and our service to the customer over that important weekend.

Our lease business division recorded a 1.4% comp increase in the fourth quarter.

I should mention that none of the Filene's Basement liquidation sales were included in these comp results.

This represents the ninth consecutive quarter of positive comps for the lease division.

And finally on February 29 our Board approved the Company's third quarterly dividend of $0.15 a share.

We're pleased to be able to continue to return value to our shareholders.

This concludes a very strong year for our Company in which we grew our sales by 11%.

Our adjusted operating income rate grew to 11% of sales and our adjusted EPS grew by 25%.

We also enhanced shareholder value through the completion of our merger with RVI.

Our business generated strong cash flow and we returned cash to our shareholders in the form of both a special dividend and regular quarterly dividends.

As we begin 2012, we've identified a number of important objectives we've set for ourselves that we expect will enhance our performance in 2012 and beyond.

Here is a few of those objectives.

First, successfully opening 35 to 40 new stores including 8 small market stores.

Second, implementing our size optimization system in Q2 which will help us to allocate footwear by size, by store more effectively, thus helping us to increase conversion and drive incremental sales.

Third, increasing the capacity of our distribution and fulfillment centers and improving efficiency.

Fourth, implementing a drop-ship capability for www.DSW.com channel to allow us to extend our assortment without increasing our inventory investment.

Fifth, automating our CRM processes for customer selection based on behaviors which we expect will further enhance customer loyalty and store and online visits.

And as you can imagine, we have a number of additional objectives.

We have accomplished a lot but much more lies ahead.

We look forward to another year of profitable growth in 2012.

And with that, I'll turn the call back over to the operator to open the lines for questions.

(Operator Instructions)

Steve Marotta, CL King & Associates.

Congratulations on a great quarter.

A couple of quick questions.

As it relates specifically to the Borders stores, is there economic benefit that's above and beyond normal?

In other words, are the rents per square foot a little bit lower?

Are the buildout costs a little bit lower?

Can you talk a little bit about any economic benefit above and beyond?

Sure.

It kind of varies on a by-location basis.

What I'd say is some rents are high but we think they are justified on the basis of the projected sales productivity such that the real estate cost as a percentage of sales is probably in line with our average today.

What I can also tell you is we subjected these stores to the same financial return requirements as any other location, so I would not characterize them as being on the basis of real estate being either exceptionally good or exceptionally weak.

They're in line with our store return requirements.

Terrific, and Doug, on the COGS line as it relates to the distribution center, when will that act as a tailwind?

Is there an inflection point this year where again leverage from a basis point becomes a tailwind as opposed to a headwind?

Yes, I think we're reaching the top of that plateau.

Again, a lot depends on the growth rate of the dot com business, but certainly the investments that we're making in that fulfillment center in 2011 into 2012, that will start to bring it down in future years, but I think we wouldn't see it getting back too much farther but I would say it would be a contributor to our operating income rate moving forward into 2013.

Terrific.

And the last question, I know you guys are normally reticent to speak about quarter to date, but in the totality of your product mix, I have to imagine that the unseasonably warm weather is more helpful to first quarter than less.

Well, you kind of teed up our answer for us in the beginning with your question.

But your point of warm weather, we've said before and we've always said we look at the whole March/April period combined.

But certainly warmer weather early gives us good check outs in all areas of the country and that helps us make inventory adjustments as necessary, but again, we have to get through the whole March/April period before we extrapolate anything.

Excellent.

Thank you again.

David Mann, Johnson Rice.

Congratulations on a great year.

Can you talk a little bit more about the cost pressures that you saw in the fourth quarter, what you're seeing in the first quarter and what perhaps you're seeing on product that you're buying now as it pertains to later in the year?

In the fourth quarter, we experienced cost inflation overall of about 5% and if you look at our on-order position for spring right now, it's pretty much in line with that 5%.

We really have not placed significant orders beyond first half of the year and I'd be hesitant to quote anything in the way of inflation on cost in the back half.

Like you, we've heard that cost pressures will begin to soften, as we move through the fall season but we don't really have any empirical data to confirm that right now, so right now we're looking at about 5%.

And I think on the last call you talked about both private label and perhaps taking some price where you could as options to mitigating some of these pressures.

Can you just give us your post-mortem on how that worked for you?

Well, private brand was a big help.

We obviously almost increased our penetration by 50% from 7% to 10% in 2011, so that was a big deal because, of course, it carries several hundred basis points of margin advantage with it, private brand that is.

We continue to work very closely with our branded partners and also with our direct factory partners to make certain that they have as much knowledge about our buying and our production needs as they have because when they have that forward knowledge, they can schedule production at times that are opportunistic for them and, therefore, can pass along better savings to us.

So all of the things, and I guess I should say that all of our systems initiatives in one way or another serve to offset cost pressures because the systems are about getting the right product in the right location at the right time, which helps us avoid missed sales but also avoid inventory imbalances which can lead to markdowns, so that is always an underlying mitigator to cost pressures.

So all of the same things that we have been relying on to help us offset cost pressures will continue to be at play as we move out of 2011 into 2012.

Great, thank you.

Scott Krasik, BB&T Capital.

Thanks and congratulations as well.

Doug, just can you break down that merch margin a little bit more?

I think last quarter 130 basis point gross margin you actually quantified the benefit from private label and some of the other moving parts.

I don't believe we necessarily broke that out.

I think Mike did a nice job summarizing the offsetting benefits to those cost increases, but I don't know whether breaking it down, we have that capability of knowing exactly how much was contributed by size replenishment, or effective marketing, precision marketing or things like that, so I think the biggest contributor perhaps to mitigating that downside from the cost pressures was the private brand penetration.

It was 3 percentage points for the year and that will certainly be seen in the fourth quarter as well, and the mix of that private brand being more of our in-house brands also helped us as well, but as far as a specific basis point break down, I don't have that available.

Well I guess then if you looked at the third quarter, I think you had low-single digit cost pressure but you were still able to grow merch margins 130 bps, so with slightly greater cost pressure what was the biggest, was it promotions?

Did you have to clear more boots because of the warm weather?

What was the big driver of down 15 versus up 130 when the cost pressures were similar?

Well, the cost pressures, I like to characterize them really started affecting us in the last four months of the year, so I think the cost pressures were a lot different between the third quarter and the fourth quarter.

And then you really have to go back another year to the comparisons of what we did in the third quarter of 2010 to really get a perspective of that performance, so we are not disappointed with our fourth quarter merchandise margin rate.

In fact we're pleased with it, particularly with the timing of those cost increases, so we think it was a good performance.

Okay, and then just as you think about your comment that expect gross margins to be down slightly in 2012.

Maybe just help us understand the components of that a little.

You said distribution costs start to flatten out.

Yes, I think it's helpful to remember that in 2010, we had a 31% gross profit rate.

In 2011, that jumped 130 basis points to 32.3%.

That's beyond even our expectations for 2015 in our long-range model, so it was a very high gross profit rate in 2011 and have a little bit of contraction on that, probably it's going to stay closer to that 32%.

That's a pretty good gross profit rate for this business and the components in 2012 will have leverage in occupancy.

We can leverage occupancy at those comp expectations, but we have to be realistic about our merchandise margin rate because those cost pressures will be with us for a full year versus just four months in 2011.

Okay, that's fair, and then just lastly, you're opening some expensive stores in 2012 between the New York stores and Chicago and Union Square in San Francisco.

In 2013, have you contemplated any big-city stores or will the stores more look like the average store base?

They're going to look more like the average store base in 2013.

Okay.

Great.

Thanks, congratulations.

Mark Montagna, Avondale Partners.

A couple questions just looking out further to the fall.

For spring, there's obviously a huge emphasis on color.

I'm wondering if you're expecting a similar emphasis for the fall on color but, obviously, not quite as bright.

I'm not sure I can comment on color for fall.

What I can comment on is the boot classification appears to have a lot of newness to it, based on preliminary looks from our merchants, and there's also some silhouettes within the boot category that appear to becoming more important than the one that comes to mind is western.

So boots is a big driver of our total women's category in fall and it's always a function of newness as to how robust that category can grow, and I'm encouraged by the merchants who come back from market and say there does appear to be a lot of newness which gives our customers a reason to buy.

Okay, and then what about private brand penetration for this year?

Do you have a targeted range like 12% or can you just talk about that?

Sure.

I think our long-range target for private brand is 15%.

We're currently at 10% and that's probably going to take us three or four years to get there which says about a point a year, so if you were modeling I'd model it at 11%.

Okay, and then talking about the new stores, you gave us some good direction on somewhat of the flow of the new stores, but can you be more specific and guide us as to how many new stores each of the first three quarters or even the fourth quarter if you happen to open one in the fourth quarter?

Well, it's like I said, it's almost exactly 25% in the first half and 75% in the second half, and they fall into the March/April time period and almost exclusively and then into the August/September time period in the fall.

We don't expect a couple stores could slide into the fourth quarter but as of now we're not expecting any in the fourth quarter this year.

We like to see openings in the first and third quarters when we can.

That's the window we've created but a couple times we make exceptions, but there's none planned for Q4.

Okay.

So with that, when we look at the pre-opening expenses hitting SG&A, would the majority of the third-quarter store openings, would those pre-opening expenses, would the majority fall into the second quarter or into the third quarter?

I think some into the second and some into the third and I would say that increase is pretty evenly split between the first three quarters.

That's incremental $10 million is probably evenly split into the first three quarters.

Okay, that sounds great.

Thank you.

Chris Svezia, Susquehanna Financial.

A question for you, Mike, on size optimization.

I think previously you were talking about that opening up towards the end of the first quarter now looks like second quarter.

Any thoughts as to how you're thinking about that and the impact for 2012 to either comp margin or is that really more of a 2013 potential benefit to comp and margin for DSW?

It's a good question, Chris.

The system is actually up and working right now.

What it's doing, though, is it's essentially accumulating data on size demand by locations.

We won't begin to actually place orders utilizing that knowledge until Q2 and really most of those orders won't start to hit until Q4.

So the benefit is really going to be Q4 only in 2012 and as you say most of it happening in the following year.

But we're beginning to accumulate the knowledge right now and I won't say there's no benefit before Q4 because goods that are in the distribution center awaiting allocation in Q2 and Q3, some of those we can be more precise about how we allocate that product by size, by store.

But for modeling purposes, I'd assume most of the benefit begins in Q4.

Okay, helpful, thank you, and then on the athletic business, when do you guys, I know you're making a big push on the technical athletic piece of the business, higher price points.

When do you start to lap the headwind in toning?

Is it fair to say in Q1 for the most part, toning doesn't have that much of an impact if at all from a comparison perspective?

Just maybe talk about that.

Yes.

I think in 2010, toning represented about 13% or 14% of our total athletic business.

In 2011, it still represented a little over 3% of our business, so there is a continuing ongoing toning business and I don't know what it is whether it's call it 1% or 2% of our total athletic right now.

I think that's probably fair so you might, over the course of the year, be dropping 1% or 2% in terms of penetration to total year-over-year.

Okay, but as the athletic business -- as you start to move in more technical higher price point product, that should help drive comp because the toning is lower price points and becoming a smaller piece of the business.

So the comp sequentially improved Q3/Q4 in that category.

I'm just trying to get a sense of you seem to be rounding the quarter in that category, if that logically makes sense.

It does.

You remember when we were in 2010, the toning AURs were higher than average and then gradually as we went through 2011 the AURs came down and as we converted it to clearance they became lower than average.

So that's the historical AUR story.

In terms of technical, it's been almost the exact opposite and that's why it's been nice to see the comps come back.

I mean, I think technical which we define as being $75 or more compare at price, I think it went from 18% of athletic in 2010 to 25% in 2011, and we fully expect it to be 30% in 2012.

So as that ramps up and the negative impact of toning declines, I think it's fair that the comps should accelerate.

Okay.

And Doug, a question for you.

When you talk about the majority of your earnings growth is I guess towards the second half and particularly towards that fourth quarter, is there any particular quarter where you would expect earnings to decline?

I know you don't want to give specific guidance on a quarter but any thoughts to that if you can answer it?

We're very uncomfortable with having any quarter be less than last year, but fair question.

I think the highest pressure would be in the second quarter given that it's a lower volume period, we have pre-opening expenses, those kind of things.

That would be the one quarter that we would have the most pressure to that challenge, but, again, that wouldn't be acceptable for us.

Okay, and the last question I have is just on the kids business.

Any update, how you like it, what's been going on, what you've learned, any thoughts about that on dot com?

Sure.

Well, we were pleased with the first season's performance of kids on dot com.

It represented about 1.4% of our sales on dot com in the fall season with some ramp up period.

We're planning it to increase to 2% of dot com in 2012, and one of the things that I think will accelerate that business is just understanding who's buying it and developing a customer base to whom we can market, and we really haven't had that kind of database yet just because it takes time to learn who is buying your kid's shoes.

So as we move closer to Easter, we'll be contacting those customers more directly and I think our history proves that the sales respond pretty directly.

Okay, well thank you very much and all the best.

Congratulations.

Jeff Van Sinderen, B Riley.

I'll add my congratulations.

Any regional differences to note in terms of your spring business so far?

We don't comment intraquarter on business at all, so I'm sorry but, as I mentioned, the business in Q4 and really for the year was pretty even across the country.

I think the low was 4% comps and the high was 6% and change so it's a pretty tight range and I would expect that going forward, but I can't comment specifically on how it's moving right now.

Okay, and then I know it's really early but relevant to the boot business and looking out to second half, could colder weather be an opportunity in boots in the second half for you this year, let's just say it is more normal seasonable weather in second half, do you see that as an opportunity or do you feel like you're just more in fashion boots and that's not so much of an opportunity?

Well, let me just comment on what happened in the fourth quarter because it was really interesting.

I think our women's business in total was up about 5% in Q4 and our total women's boot business was up about 6% in the fourth quarter, so we actually, in warm weather, some of the warmest weather we've ever seen, we actually had an increase in our penetration of the boot business to total women's.

Having said that, the mix within the boot category changed very dramatically.

In Q4, we were down something like 27% or 28% in the cold weather category and it was really offset by more fashion boot business.

And the other thing you need to remember, Jeff, is that our cold weather business, our cold weather boots only represent about 15% of our total boot business in Q4.

So I guess what I'd say is that we've proven an ability to withstand pretty dramatic weather changes and to offset large declines in weather-sensitive categories with more robust gains in fashion related items, and so, even if we were to have a return to normal cold weather in the back half of 2012, my sense is we would have softer comps in fashion boots and have stronger comps in cold weather boots, kind of the converse of what we experienced in Q4 of 2011.

Got it, okay.

And then just a question on how you're looking at cost increases.

It seems like your guidance doesn't really include any major cost pressure relief for second half and I'm just wondering, I know it's still early, but given what we know today or what we're all hearing today, as you look at it on a year-over-year comparison basis, just wondering why we might not see some cost pressure relief in the second half?

Well, I guess what I'd say is in fourth quarter, we had inflation on our costs, not all of which we passed along to the consumer because we're looking at it on a style-by-style basis and where we think we pass it along and not injure the business.

We'll do that, or where there's leadership exhibited by others or direction from the resources, we'll do that.

But in those situations where we think that there is some elasticity, some price elasticity on the items, then we want to make certain that we maintain our value proposition since it's such a critical element of who we are as a Company, it's part of our DNA.

And in those cases, we'll give up some margin in order to protect the volume or perhaps even increase market share if others maintain their markup and go ahead and increase the prices.

So we're going to continue to utilize that same philosophy, that same pricing philosophy in 2012, and as I mentioned before we're going to continue to pursue all of the other initiatives whether it's systems or it's private brand or it's resource relationships or it's just the mix of product we're selling in order to offset those modest declines in IMU that otherwise might fall to the gross margin line, and hopefully we can come out with a flattish margin performance as Doug said, but that's how we're approaching it and that's as clear as I can be.

Okay, fair enough.

Thanks very much and good luck this quarter.

Jeff Black, Citigroup.

Thanks and congrats on a transformative year, guys.

Looking out I guess either Doug or Mike, a few years, what's the model really look like here?

On the revenue line, it sounds like store growth goes back to a high-single digit penetration but what about eCommerce?

Does that start getting more meaningful in your thinking and what about an acquisition?

I know you've talked about that in the past.

Does that play out in the next couple of years?

And then on the op margin, given all of the stuff you've put in place and continue to put in place, we're at 11%, I guess we're looking at flattish this year given your guidance but what do you think is possible as we look 2013, 2014 for the business in general?

Thanks.

Jeff, I'll take the first part of that and let Doug comment on the operating margin.

You're right.

Store square footage growth is spiked this year and it will return to a more normal level next year, and I think you're seeing our comp sales moderate from the two consecutive years of strong double-digit growth to a more mid-single digit comp growth, so I think our last couple quarters performance is probably predictive of future comps.

Dot com continues to be the fastest growing part of our business.

We are investing in it from an inventory perspective, from a technology perspective.

We are investing in it from an infrastructure perspective.

We're undergoing a physical expansion of our fulfillment center right now to accommodate the growth.

The one big thing that could stimulate our growth beyond that is the drop-ship capability which is a big darn deal but it's going to take us most of 2012, probably all of 2012 to develop that systemic capability and get our first partner up, but if we're successful in doing that and we think we will, that could stimulate growth as I say at an accelerated pace and the return on investment would be phenomenal because we really wouldn't be investing in inventory to support that sales and profit growth.

So I don't see why dot com shouldn't continue to be a driver of our comps going forward.

We continue to market to our customers on a cross-channel basis and, as we've said before, those cross-channel customers are worth about 2X what a single-channel shopper is worth and we know that's the way we want to build this business.

So I am very optimistic about our ability to continue to drive comps and to have the dot com channel, even though we don't break it out separately, to be a driver of that overall comp.

And I'll let Doug talk about the margin prospects.

Yes, in 2010, as you recall, we had a 9.5% operating income rate and we blew by the 10% because we finished 2011 with 11% so the next horizon is obviously 12%.

I think as you see the components of that 12% in the next few years, it's probably going to be mostly SG&A driven.

Reaching 32.3% this year was a pretty good number to hit.

Our long-range model didn't anticipate to maintain that kind of margin, in fact it was closer to 32%, so getting leverage in SG&A as we continue to grow sales, get some of these investments into our business behind us.

We could see further expansion into our operating income rate but again most of it will come through SG&A leverage, and some of the cost pressures start to alleviate and start going the other way we could get some down the road expansion as well on the gross profit maybe through occupancy or the distribution center, those kinds of things.

But it's nice to know that our model doesn't rely on gross margin or gross profit expansion at this stage of the game, so very confident and optimistic about our ability to expand our operating income rate go forward.

Got it.

Mike you've mentioned acquisitions in the past as a potential use of cash.

What's your thinking on that in the next year out?

We continue to look.

We're discriminating buyers, Jeff, we want companies that aren't broken.

We want companies that have runway ahead of them, they're not out of growth.

We want companies that aren't going to distract us from our primary mission, which is driving this business.

And we want companies that can be immediately accretive.

And you put all those things together and it's a pretty tight sieve we're putting all of these acquisitions through, I'll admit that.

But that's what we think is appropriate for DSW, right now, and I would say we continue to look.

Fair enough.

Good luck, thanks, guys.

Claire Gallacher, Auriga.

You mentioned traffic and UPT being up in the quarter.

Could you give us the AUR for the fourth quarter and talk about conversion and how that trended during the fourth quarter?

Conversion was about flat in the quarter and our AUR was down about 2%.

And what I would say about the AUR decline is that it was really more a function of two things, which is the big toning numbers that we were up against in Q4 of 2010, which had high AURs, and then the double-digit growth of our accessories business that has an AUR that's about a third the size of our footwear AUR, so it's really more mix than anything else.

Okay.

And then as the toning comparison eases as we head into 2012, would it be fair to think that the AUR could potentially go back to about flat?

Well it probably ought to go up a little bit in athletic, I would suspect, and beyond that, I think we continue to think accessories can grow faster than footwear, which those tend to offset.

Okay.

But yes, I think given cost pressures and higher retails on some of those items that the footwear AUR, unless we have slowdown in demand, our AUR should go up.

Okay, great.

And then touching on your inventory levels, they seem pretty clean here coming out of the quarter, but could you talk about the clearance inventory levels just this year versus last year how that fell out at the end of the quarter?

Yes, our clearance inventories, we measure it on a units per average store basis and clearance levels overall were down slightly to the prior year at year-end.

Okay.

And then just my last question has to do with Shoeforia and the penetration there.

I don't know how you measure it, I'm sure you do in some way, but how did it measure in the fourth quarter maybe versus the third quarter?

Are you noticing more and more use of the system?

Yes, I'll tell you, I don't know that I have the penetration in Q4 specifically.

I can tell you that it represents about 10% of our total dot com business and it does appear, based on recent anecdotal information, it does appear to be building somewhat.

We are gaining a better understanding of the kinds of items that are being looked up at store level through the Shoeforia system and to the extent we build that knowledge, we're going to go deeper in terms of our on-hand quantities in support of those items.

So as we build our inventories in support of items most likely to be interrogated from the Shoeforia system, it will increase our hit rate and, at some point, hopefully in the not too distant future our success rate on Shoeforia inquiries is going to be at a level where we can proclaim this system capability to our customers.

Today, if you go into our stores, you'll notice, no signing of the Shoeforia system.

The only way the customer knows that we can look it up is through our associates who are interacting with those customers and responding to their questions, but we don't actually market it to the customer yet.

And the reason is because our hit rate isn't at a level where we want to do that just yet.

But I think in the not too distant future we'll be at that level and then we can implement some appropriate signing and I think, at that point, it can become an even more significant contributor.

It's definitely helping us serve the customer better, that's for sure.

And do you think that it's possible to have that, the signage and whatnot in 2012, do you think it will happen in this next year?

Yes, I do.

Okay, great.

Well thanks and best of luck.

Patrick McKeever, MKM Partners.

Any update on adding another leased business partner to replace Filene's Basement?

Was just wondering where that ranks in the priority list, and how many logical partners are out there in that area?

Where does the leased business model work best?

And do you have that same immediately accretive hurdle that you were talking about with any potential acquisition in adding another leased business partner?

Sure.

Good questions and first of all, the closing of Filene's Basement didn't accelerate or increase our efforts to try to land a new lease partner.

Fortunately that was one of the smaller businesses and, from a profitability standpoint, it was even smaller because of the terms of that arrangement, so that didn't accelerate our effort.

We have been talking to many people.

The range of interest is from people that currently have shoe departments and others that don't, so we're looking at a lot of different places.

Certainly we want to make partnership with people that are genuinely healthy and have an idea that shoes could be a driver of their total business overall.

So we have a lot of services now, as we get bigger, people recognize that we could help them on a number of fronts and so we're broadening our tool set for offering two new businesses and, again, we're hopeful.

But again, our business model doesn't expect us to have one, certainly in 2012 so we'll keep on with that effort throughout the year.

And in terms of hurdles, it's pretty simple because the biggest investment you have with the new lease partner is just the inventory.

Right, okay.

And then on www.DSW.com, you said that's the fastest growing area of the business right now.

How big can that be, do you think, at some point, maybe five years down the road in terms of total dollar sales?

And what are the, just generally speaking, what are the economics of eCommerce versus the store-level economics?

I mean, are they ultimately better?

Are they comparable or are they not quite as good?

Thanks.

In terms of penetration, again, we're so paranoid about splitting out dot com just because of the way we approach it is from a multi-channel perspective.

That's how we communicate to our customer and we actually encourage them to buy online and return in the stores and so there's a blurring of the lines that separate store business from dot com business.

But I think look, I think other brick and mortar retailers, 10% penetration is sort of a bright line and -- but you know the customer is changing the way they shop and who knows how big it can be.

The fact that we just fired up mobile last year and already mobile devices are representing 7% of our demand on dot com is kind of indicative of just how fast customers are changing their shopping behaviors, so 10% may be a low number five years from now.

Not really sure.

In terms of the operating characteristics, Doug, do you want to talk about that?

Yes, we have that discussion quite frequently here.

The incremental sale of an additional pair of shoes would be more profitable coming out of the store because there's no variable expense.

An incremental sale on dot com comes with it shipping expenses, et cetera.

Overall, though, it's a very large contributor to our operating profit and will continue to be as we get more sales to cover some of the fixed expenses and we get more efficient in our fulfillment center.

So to Mike's point, the customer looks at it as one channel and that's DSW and you can get that in store and online, so we really don't even break it out on a P&L basis but we certainly know the margin contribution that each channel brings and from an expense basis we manage that from a total DSW segment and we're pretty confident both are contributing to our bottom line profitability.

Great.

Thanks, Doug.

Thank you, Mike.

Ladies and gentlemen, that will conclude our question and answer session.

I would like to turn the conference back over to Management for any closing comments.

Sure, thanks very much, operator and thanks to all of you who tuned in this morning.

We genuinely appreciate your interest, your support, and I believe Doug and Jenny will be available for calls later today.

So thanks again, have a great day.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.