Designer Brands Inc (DBI) 2012 Q1 法說會逐字稿

Good morning and welcome to the DSW first-quarter financial results conference call.

All participants will be in listen-only mode.

This event is being recorded.

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 those 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.

Joining us today are Mike MacDonald, President and CEO; Debbie Ferree Vice Chairman and Chief Merchandising Officer; Doug Probst, CFO; and Christina Chang, Director of Investor Relations.

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

Please go ahead, sir.

Thank you and good morning.

I will comment on our results for the first quarter of 2012 and provide our guidance for the fiscal year.

After that, I will turn the call over to Mike for his comments on the results and to share some insights on our strategic growth.

Our reported net income for the first quarter was $39.9 million, which included a net $4.3 million charge for items related to our merger with Retail Ventures.

You can find these items detailed in a reconciliation of adjusted results attached to our press release issued earlier this morning.

On a reported basis our earnings per share is $0.89.

Excluding the RVI related charges of $0.09, adjusted EPS was $0.98 per share.

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

The net $4.3 million in charges for RVI-related items breaks down to the following major components.

First, $325,000 in pre-tax costs included in SG&A, primarily due to legal fees related to RVI.

Second, $5.3 million of non-cash pre-tax cost for the change of the fair value of RVI-related warrants.

Please note that these warrants expire in June 2012.

And finally, the removal of $1.3 million of non-cash after-tax income from the Discontinued Operations resulting from the closure of Filene's Basement.

Now that we have outlined these items, we will now focus our comments on the adjusted results which reflect the performance of our DSW operation.

Net sales for the first quarter were $558.6 million as comparable sales grew 7.6% on top of a 10.8% comp last year.

This represents a two-year comp of over 18%.

By segment, our comps for our DSW business, which includes DSW.com, were up 8%.

Our DSW store counts were driven mainly by an increase in traffic and average unit retail.

Units per transaction and conversion were relatively flat to last year.

We opened 10 new stores, relocated 2 stores, and closed 1 store in the quarter.

Mike will address their performance in his comments.

Comps for the leased business division were up 2.3% after growing by 9.2% last year.

Gross profit increased by 30 basis points to 34.5% due mainly to a 70 basis point decrease in occupancy rates.

Our merchandise margin rate remained relatively flat at 46.9% versus a record 47.0% rate last year, due in part to a higher mix of regular priced sales.

Our distribution and fulfillment center costs increased by 20 basis points due largely to our increasing dot-com business.

As expected, our SG&A rate as a percentage of sales increased 50 basis points to 21.8%, due primarily to incremental new store opening costs and the timing of marketing expenses.

The net result was a 9.7% increase in operating income but a 20 basis point reduction in operating profit rate to 12.7%.

This reduction in operating income rate as a percentage of sales is expected for the first three quarters of 2012 as we ramp up our new store openings and absorb increased product costs.

Our tax rate for the quarter was 38.3% due in part to the favorable resolution of a state tax audit.

As you know, one of the benefits of the transaction with RVI was the ability to use the NOLs and tax credits assumed in the merger, totaling $140 million in cash tax savings, which we are currently utilizing and will continue to utilize into 2013.

Despite the increased spend in marketing and new stores, our record sales and record margin resulted in a 12% increase in net income to $44.1 million or $0.98 per share.

Our operating results and cash tax savings increased our cash and investments to $448 million.

At the end of Q1, total inventories increased by 11.6% to $373 million.

However, on a cost per square foot basis, inventories in DSW stores increased by 5%.

We are very pleased with the level and content of inventory entering the second quarter.

Please note going forward, we anticipate that inventory growth will outpace sales growth as we begin to build inventories ahead of the 25 to 30 stores we are opening later this year.

Capital expenditures for the first quarter were $24 million, of which $18 million was for new and remodeled stores and $6 million was for information technology and business infrastructure.

Now turning to our full-year guidance.

As we announced this morning, we are raising our full-year adjusted EPS guidance to $3.25 to $3.40, up from our previous guidance of $3.20 to $3.35.

The mid point of this new range represents an 11% increase to our 2011 EPS of $3 per share.

We are also raising our annual comp expectations to 3% to 5% growth up from 2% to 4%.

Once again, as explained in our fourth-quarter call in March, we expect a majority of our earnings increase to be achieved in the fourth quarter for the following reasons.

First, a $10 million increase in new store opening costs during Q1 through Q3.

Second, the impact of higher product costs that we began to see in the latter part of 2011.

And, third, the impact of the 53rd week in the fiscal calendar.

Our capital expenditures are still expected to be approximately $120 million for the full year.

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

Okay, thanks, Doug.

We were pleased with our strong results this quarter.

We had better-than-expected comps due in part to the unseasonable warm weather in March and early April, which in turn led to a significant leverage of our occupancy expenses.

The strong sales combined with very good margin rates and good execution allowed DSW to achieve record profits in the quarter.

Revenues of $558.6 million grew by 11%, with comp sales increasing by 7.6%.

Across all product categories, comp sales grew consistently in the high single-digit range for the DSW segment.

Women's footwear increased by 8%, led by sandals.

With the early arrival of warm weather, we chased the strong demand for this category, ending the quarter with sandal comps up by double digits.

Our men's business posted healthy 7% comps on top of an 18% increase last year.

Athletic sales comped up 6% due to the addition of stronger technical brands and the infusion of color across the entire assortment.

Accessory sales grew by 8%, led by casual hosiery and small leather goods.

Finally, our private brand business increased by over 30% and now represents nearly 11% of our sales versus 9% in the first quarter of last year.

The continued growth of private brands helps to differentiate our product assortment and importantly, helps us to offset cost pressure.

As Doug said, we opened 10 new stores in the quarter and closed 1, bringing our store count to 335 as of quarter end.

Collectively, these new stores are exceeding their sales plans by a wide margin.

During the quarter we also relocated two stores, and the customer has transitioned to the new locations quite well.

This is significant because our new store openings and relocations include some high-profile, high-volume stores.

So let me give you some specifics on that.

On March 8, we opened a 37,000 square foot store in New York City on 34th Street.

That is our second Manhattan location.

On March 29, we relocated our downtown San Francisco store from a couple of blocks off of Union Square to directly on the Square across from Sax Fifth Avenue.

The new space is larger, easier to shop, and brand right.

On May 10, which, as you know, is in the second quarter, we opened a 26,000 square foot store in downtown Chicago on State Street.

We already enjoy a strong market share in Chicago, even before this opening, but this new store fills a void within that very important market.

And in July we plan to open our third Manhattan store on the corner of 79th and Broadway.

We're excited about each of these new store opportunities and pleased with early results from those that have already opened.

DSW.com also had strong sales results in the quarter.

As you know, we don't separately disclose sales results for this channel, simply because of the interconnectedness between our brick-and-mortar business and our e-commerce business.

However, as I say every quarter, DSW.com continues to be the fastest-growing part of the DSW business.

During the quarter, we made a couple of technological enhancements to DSW.com.

The first facility, that we call Quick View, gives shoppers the ability to learn more about the features and availability of a given SKU without leaving that shopping page.

We think this new capability will increase conversion rates.

The second change we made allows us to use data to determine related product recommendations.

And by giving more relevant recommendations, we believe we can increase UPTs.

Another major project that we have underway in support of DSW.com is the expansion of our fulfillment center.

This isn't a particularly sexy project but it is necessary to facilitate the continued growth of this part of the business.

As Doug said, our leased business grew comparable sales by 2.3% in the first quarter.

And that's the tenth consecutive quarter of positive comps for the leased business.

As we look forward to the balance of the year and beyond, we are optimistic for several reasons.

You may have noticed our new wedding shoe assortment in the stores.

This White Box collection responds to requests by our customers to offer styles that can be ordered by an entire wedding party.

We offer an assortment of styles in each store and the color multipliers are available for ordering from our Shoephoria!

stock locator system.

We expect this collection to become even more important as we move into the height of the wedding season.

The Shoephoria!

system grew quite strongly in the quarter as our associates became more comfortable using the system and as more of our customers became aware of the systems' capabilities.

During the quarter we also completed almost all of our work on the size optimization system.

We now have selling profiles by store that reflect natural demand by size by store.

Later this quarter we'll begin to place orders utilizing this information to supply our stores with sizes that better reflect our customers' needs.

We grew our rewards database to over 19 million members.

These loyal customers account for 89% of DSW sales.

Their purchases also provide us with a rich database of purchase information that we are using for precision marketing purposes in support of both our stores and DSW.com.

And our multi-channel customer base grew by 50% in the quarter.

This is an area of emphasis because our multi-channel customers purchase about 70% more than our single-channel customers over an annual period.

And we continue to plan for a total of 35 to 40 new stores to open in this fiscal year.

That means we'll open 25 to 30 stores over the remaining three quarters of 2012.

Despite that aggressive new store opening schedule, we have not abandoned our base business.

During 2012, we plan to relocate 6 stores, remodel 6 stores and remove the clearance walls from another 29 stores.

And lastly we raised our quarterly dividend by 20% to $0.18 per share.

As you'll recall last August, we initiated a dividend of $0.15 a share and, at the same time, declared a special dividend of $2 per share.

So we've got a lot going on that supports our belief that we can continue the momentum that has now stretched to 11 consecutive quarters.

During this time we've grown our DSW store base by 10%.

We've grown our sales productivity by over 28%, and we've grown our EPS by over five times.

I don't believe this record of growth and profitability is reflective of an economic phase or a shoe cycle or a boot trend or a sandal trend or any other short-term phenomenon.

Rather, I believe it reflects the increasing relevance of the DSW business model to an increasing number of consumers.

These consumers appreciate our compelling assortment, our everyday discount pricing model, and our in-store and online shopping environments that are comfortable and let the customer control his or her own shopping experience.

In simple terms, consumers who like shoes love DSW.

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

Thank you.

(Operator Instructions) Mark Montagna Avondale Partners.

Trying to look forward with my question.

When you look out to the fourth quarter, I think that's when you're going to start to see some benefits on size optimization.

I'm wondering how many vendors will be on the program for the fourth quarter.

And is that going to be their entire assortments?

And then when you look at the percentage of total inventory can you talk about what percent of total inventory would be on size optimization by this year, and what you might expect for the following year-end?

Okay.

Here's how it's going to roll out, Mark.

We will, in the month of June, towards the end of the month of June, we will begin to place orders for product to arrive, some in the fourth quarter but mostly beyond, that will use the size profiles that we've now developed.

Also at the end of June, we will modify all of our replenishment models to reflect the revised size profile knowledge that we've gained from this effort.

As you'll recall, about one-third of our sales are represented by replenishment styles and the other two-thirds are fashion.

So I think as to one-third of our styles that are on replenishment, we should begin to see some benefits from the revised models, replenishment models, in the second half.

I think as to the other two-thirds of our inventory, you should probably count on that not happening in a meaningful way until first quarter of next year.

Okay.

Then just looking at vendor drop ships, I know you're working on that for e-commerce.

Are you expecting that to begin in the fourth quarter?

And if so, how many vendors?

Or is that more of an issue for the following year?

It really is more of an issue for the following year.

Our stated objective is to have one vendor up on drop ship by February 1, 2013 and then to gradually add vendors thereafter.

So it's really going to be a 2013 event.

I don't think I answered fully your previous question about the number of vendors who appear to have the ability to accommodate our revised size profiles.

I don't have specific information for you but our planning and allocation people have been very pleased with the seeming flexibility of our vendors to accommodate this.

And I would guess that probably 75% of our vendors have indicated they can accommodate our revised size profiles.

Okay, that's great.

And then just the last question.

When you were talking about product input costs up, I think it was about 5% in the first half, how much of that is due to just the mix shift toward higher price merchandise?

I'm not sure I have that specific information.

Debbie?

Yes, let me see if I can take that question for you.

If you look at it by categories -- so women's, men's, and athletic -- women's had the smallest increase in cost increase.

It was about 2%.

So that really is just pure product increases, materials and things like that.

The athletic and the men's department were consistent at about plus 5% to 6%.

That's where you really start talking more about the blend of it being cost increase in product and materials and mix.

So mix had more of an impact in the men's and the athletic than it did women's.

So it really is a balance.

Women's, I would say, is purely material increases.

Men's and athletic have more to do with mix.

Lastly, in the handbag and accessory area, that actually had the highest increase.

And that was at the high end of the 6%, the low end of the 7% range.

That was most all due to a mix and a shift in strategy in some of the vendors that we're going to be bringing in for the future.

Okay, thank you.

Chris Svezia of Susquehanna.

Congratulations.

Debbie, just to go back to product margins.

You did a nice job in Q1.

Between weather and the right product, more full-price merchandise, you mitigated most of the impact.

Just talk about what you're seeing going forward, your ability to continue to manage that process to maybe end up with minimal impact to product margin.

Just also what you're also seeing coming out of China, as well.

Okay.

There was a lot in there, Chris, so let me see if I can break that down for you.

Just talk about cost increases right now.

Cost increases continue to go up but are mitigating a little bit.

So the levels that they're going up are less for the future.

We've been able to manage those cost increases through an increase in private brand but also some good partnership negotiations with our vendors.

I don't see that as a big event going forward.

I think we'll still be able to manage those cost increases.

In terms of AURs, and as it relates to product margin, our AURs, we have seen some nice increase in AURs.

Specifically it's been some in the women's area.

Most all the AURs in the other areas, men's and athletic, are pretty flat to last year.

So I think if we continue, which I'm confident we can continue to get our increases in comps in regular price, that we'll be able to continue to manage those margins going forward.

So being able to control the cost and manage how we sell-through our regular price, I'm pretty confident about the margins going forward into Q2 and going forward.

Thank you.

And just on your women's dress business, how did you perform there during the quarter?

We actually had a very nice performance in the dress area.

Dress was up in the low single digits.

And all of the things we talked to you about on the last call are actually, the big bets we placed are doing very well.

So plain pumps doing very well.

The sales were mid double-digit comps and the inventory was high single-digit comps.

So stock to sales really performed well there.

All the detailed shoes, including wedges and things like that, all the things we talked about as driving that business for first quarter, are playing out.

Once again that part of the business, mid double-digit sales comps on high single-digit inventory comps.

The balance between fashion and classic hasn't changed much.

We're still delivering between 35% and 40% on true fashion in our business in the dress shoe area.

And the balance in more classic investment kinds of shoes.

So I'm very pleased with that balance, as well.

I think the big Aha in this that really helped drive it was color.

We talked about color on the last call.

And color is a little bit higher than 25% of total.

So the bets that we made in color have also paid off.

So we're actually really pleased with our dress shoe business in Q1.

Okay, that's good to hear because I know there are other retailers who said it was a bit of a challenge.

So that's why I was asking how you performed.

Last question I have for you, Debbie, your thoughts on boots, just any change?

I think you seem pretty excited about what's in the pipeline, what's going to be out there in the marketplace.

Any thoughts around that category as you look to fall?

Yes, Chris.

As you know, we tend to plan very conservatively across-the-board.

And based on what happened last year around the cold weather, I still believe that we will be able to deliver low to mid single-digit comps in boots.

I'm excited about the content of the inventory we'll have this year.

Once again, the market did a remarkable job on offering some freshness.

You're going to continue to see that trend in casual.

You're going to see a lot of ornamentation and detailing.

And where the increases have to go up at retail on the boots, I think the perceived value will be obvious to the customer and you won't see resistance in some of the increases that we will have to take on part of the boot assortment.

So to summarize it, there's a lot of freshness.

The price value, I think, is there and we're pretty excited about the season going forward.

Okay, great to hear.

I'll let somebody else get back in the queue.

All the best, thanks.

Steve Marotta of C.L. King & Associates.

Let me offer my congratulations as well.

Doug, you mentioned pre-opening expenses being $10 million more in the first three quarters of this year versus last year.

Can you talk specifically to the first quarter?

And again, is it still continuing to be spread evenly?

Again, if you could speak to the first quarter that would be great.

Sure.

Incremental pre-opening costs in the first quarter were approximately $3 million.

And we expect about a $3 million and $4 million increase in the next couple quarters after that.

So still what we originally planned.

Obviously a pain in the short term for the next two quarters but certainly a big benefit as we get those stores open.

Sure.

Also, in the preamble you also spoke about marketing expense in the first quarter?

Right, and that was incremental spend, as well, to last year.

But we don't really use our last year spending as the plan for marketing.

We look at it as a plan of how we want to spend our dollars.

This particular year our first quarter spend was a few million dollars higher than last year.

But as a percent of sales for the year, we look for marketing expenses, excluding pre-opening marketing expenses, to be roughly the same percentage of sales as last year.

So were they roughly the same percent of sales as last year?

For the year is what we think it is.

It's a higher percentage of sales in the first quarter, but again we manage it on an annual basis.

Okay.

And lastly, you spoke about this during the preamble, as well, as it relates to inventory can you talk about clearance as a percent of total inventory at the end of the first quarter versus last year?

Obviously, with more regular price selling, there's some expectation that inventory levels would change.

But we are happy with the mix.

I think if you walk into our stores you'll see the balance of clearance inventory, as well as regular price inventory, is a pretty good situation where we would want to be at this stage.

So I don't want you to get misled on the fact that we had higher regular price selling, that our inventories are in balance right now.

We're able to manage the inventory and chase the inventories appropriately to keep those levels at the right place.

I think statistically our clearance percent to total at the end of the quarter was identical to the prior year.

Great.

That's very helpful.

My very last question is, and I know you've not spoken about 2013, but would you expect to capture 100% of that pre-opening differential that you're experiencing this year, capture it next year?

In other words, or do you think that that's going to be reinvested in the business somehow?

Obviously, it also depends on how many stores we open next year which we originally plan about 15 to 20.

So if we do open fewer stores, we will recapture some of that.

And the other benefit is that if the mix of stores, of the stores that Mike spoke about -- San Francisco, Chicago, New York -- if there's fewer of those big-volume stores that pre-opening cost might come down, as well.

But it's a little early to predict because it's mostly driven on how many new stores we're going to open in 2013.

Great.

Excellent, thank you much.

David Mann, Johnson Rice.

Thank you, good morning, nice job.

A question on the inventories, as well.

The 5% increase in inventory per square foot, how should we think about that in terms of the build out of inventory towards some of the new stores?

Or are you a little more bullish about your comps for the second quarter because I think you came into the first quarter with a lower inventory per foot.

There's some minor impact from the build-up of inventories for stores that will open down the road.

But the 5% should not imply that we've got an expectation of 5% comps in Q2.

I think our guidance for 3% to 5 for the year makes sense.

And I think if you do the math on that, actually David, what it would imply is 2% to 4% comps for the balance of the year, combined with 7.5% comps in Q1.

So our inventories are consistent with our plans and consistent with bad sales expectations.

Great.

And in terms of the monthly progression in comps, obviously with the Easter shift there was some change.

But was there a deceleration in April and into May as you came out of some of the strength of the pull forward, given the weather?

As you know, we don't comment on that.

But obviously we see up and down related to weather and where it starts to break in areas of the country.

So it was maybe a little choppy but we look at March and April combined and always have.

In terms of some of the new store performance, can you comment on how some of the stores are doing in the smaller market openings?

Yes, we opened two small market stores in Q1.

One was in Peoria, Illinois, and the other was in Fargo, North Dakota.

And those two individual stores are beating their sales plans by more than any of the other stores we've opened.

Let me just say it that way.

The small market test continues to be very encouraging.

Given that, and given some of your excitement about new store performance, whether in the big markets as well, and it sounds like across-the-board new store performance.

At what point will you reassess the opportunity for the total store potential in the US that I think you've talked about it being about 450 now?

I think that the 450 could grow to 500 based on small markets.

I don't think we've declared that but that's the magnitude of the next tier of markets that we would enter.

Great.

Thank you very much.

Scott Krasik of BB&T Capital Markets.

Congratulations, great job.

Debbie, anything different with the way you're flowing merchandise for early fall?

You had a great early boot season last year.

Is that a tough comp for you?

Do you expect price year-over-year to maybe give you some pressure?

And what trends do you expect to drive early fall sales this year?

Last year, we did have a nice Q3.

But to be very honest with you, I'm very critical of some of the business that we actually missed in Q3.

I think the benefit this year is to pull up some of the younger fashion business that we actually receipted in September last year.

I want to receipt that end of July, beginning of August this year.

We think there's an opportunity to pick up some of the young fashion business for the back-to-school time period even though we aren't a true back-to-school driven business, but I think there's opportunity there.

That would really be the only change, the only shift that I would make.

Everything else would be pretty consistent with last year.

Okay, that's helpful.

Mike or Doug, you continue to get dinged by these distribution costs related to DSW.com.

Are those going to continue until you really have drop shipping up-and-running, or are there things you can do before that?

There's really two things happening in those lines.

One is the higher cost associated with the fulfillment center.

It won't change materially as a percent of sales until we do get to drop ship.

The other piece is higher costs related to our now fully penetrated replenishment business.

And the labor content associated with the distribution of that product is quite a bit higher than just product that flows through the DC.

I didn't mention it in the call but we are also underway with a pretty major capital investment in our Columbus distribution center.

And what's going to happen as a result of that is we're putting in a whole sortation system.

That will significantly improve the productivity and throughput capability of replenishment goods as they go in the pipeline.

So we should get some efficiency on that.

When does that go live?

That will go live, I think it will be in stalled by the end of the third quarter.

It might be the end of the fourth quarter.

I'll have to get back to you on that, Scott.

Okay.

And then in terms of collecting data for style optimization, where are you with that in your thinking for going live with style optimization?

And then also, have you really started to consider mark down optimization at all?

Okay.

What we talked about in the call, Scott, is size optimization.

We don't have a project called style optimization.

I thought that was a goal though to eventually allocate by color.

Oh, Sure.

We call that assortment planning.

And so the work on that will begin in the second half.

It's a two-year project so it's not going to help us immediately.

And as to the comment about mark down optimization, we continue to talk about it but we see it as a follow on priority, a secondary priority to the assortment planning project.

Sure, okay.

Congratulations.

Patrick McKeever MKM Partners.

Just a couple questions.

First on the urban market stores.

Wondering if you could give us some even some broad color on unit economics, sales per square foot versus non-urban stores.

Maybe not first-year return on investment but just the returns for those stores.

What do you think is the ultimate growth opportunity in urban markets?

How big can urban market stores be as a percent of your total store base?

Then secondly, any quick thoughts on just the growing cash balance on the balance sheet?

I know you've increased the dividend, or planning to increase the dividend.

And you've got the accelerated store growth and some of the infrastructure investments.

But how should we think about the big amount of cash on the balance sheet?

Thanks.

Okay.

On the, as you call them, urban stores, we were really pleased with the reception we got in both Manhattan on 34th Street and in Chicago on State Street.

We held pre-opening private parties for our premier customers a couple of days before the official store opening.

And I think we had 1,200 people show up on 34th street, and we had 1,500 people show up on State Street in downtown Chicago.

So clearly there is an appetite for what we do in both of those markets.

The Union Square San Francisco situation was slightly different in that we were moving off of a very high traffic portion of Powell Street, because it's close to the transportation hub, and moving up the street literally and figuratively on to Union Square where the traffic is slightly less robust.

The good news in that situation is that, while we have experienced a diminution in traffic, it's been pretty much offset by the increase in conversion.

The way we interpret that is that we've eliminated a lot of non-productive traffic.

As I mentioned in my comments, that store gives us much more space and much higher quality space.

And it's definitely more reflective of the DSW brand.

In terms of the unit economics, we require the same internal rate of return for a large store as we do for small stores.

So we don't change our hurdle rates.

And it looks like, based on pretty limited early information, that we're not going to be disappointed by any of these large stores.

Obviously what comes with them is higher rent per square foot and generally higher build out costs per square foot, as well.

So we've got to do more sales productivity.

Our Union Square store in Manhattan, which has been around for several years, is firing away.

Our highest productivity store in the chain.

It's our highest-volume store in the chain and one of our highest profit-producing stores in the chain.

So we are excited about the opportunity that comes with some of these higher-profile urban stores.

We don't specifically target urban markets as a part of our expansion thinking.

Rather, we identify specific voids, wherever they might be, regardless of whether they're urban or suburban or, in the case of small markets, even in rural locations.

So I don't really have a response for you on an urban strategy because it's not a strategy.

We look at things on an individual market-by-market basis.

In terms of the cash, we're pleased with our ability to accumulate cash.

Obviously, the utilization of the NOLs and tax credits that came with the RVI merger is accelerating our pace of cash accumulation.

We do believe we were somewhat responsive with the 20% increase in our dividend.

And obviously, with $120 million CapEx projection for this year, we're putting money back into our existing operations as a first priority.

Beyond that, I would just remind you what I generally say, which is we're always looking for ways to grow both organically and externally.

And we continue to do that but we've got a pretty tight filter as we look at those opportunities.

We need to have opportunities to invest in operations that we're familiar with, that are not broken, that have room to grow, and that can be accretive.

When you put those four requirements together, it's a pretty tight filter.

Which we think it should be at this time because we believe our top priority is to maximize the opportunity from our base business.

So hopefully that is responsive to the question.

Yes, very much so.

Thank you very much.

(Operator Instructions) Chris Svezia Susquehanna.

Doug, you've been way too quiet so I have a question for you.

What's your Company line comment regarding gross margin and SG&A for the year, assuming you do a 3% to 5% comp?

Just maybe talk about the puts and takes on those as you see it in your guidance.

Fair enough.

And this isn't a Company line.

This is our most open commentary.

But let's break gross profit down into a couple things.

First, merchandise margin.

At that comp range, it will be difficult to get back to that 45.2% we achieved in 2011, for a number of reasons we've been mentioning.

But we can get close.

A lot depends on how we manage the inventories and if we get closer to the top side of that comp range.

But we don't expect to beat last year's merchandise margin rate.

However, because of the occupancy leverage we would get at that sales level, you could see a little bit of expansion in gross profit percentage.

Last year's 32.3% was a record high but if we get at the high end of that range perhaps we could get some improvement on that record rate of last year.

As far as SG&A, going into the year, we said that is SG&A leverage would be very difficult to achieve given the incremental investments that we've been talking about.

But I don't expect leverage.

If we do, it wouldn't be significant for 2012 given all these incremental spend.

Okay.

And then I know you don't give quarterly guidance but there's nothing in your plan or thought process that could potentially lead to a down quarterly result due to the pressure from pre-opening costs, et cetera?

Is that a fair general statement?

Again, we never would like that.

But the toughest quarters for us on a comparative basis to last year are going to be the second and third quarters, for the reasons we've been talking about.

The lower comps certainly that we achieved in the first quarter, merchandise margin pressure, lack of occupancy leverage, incremental spend for pre-opening.

All those things against very good performance last year would make the second and third quarters the most challenging to last year flattish.

But that's why we keep on emphasizing the fourth quarter.

All those factors tend to alleviate themselves as you get into the fourth quarter.

And second quarter being the toughest because we're starting to put some pre-opening costs in that quarter and getting practically zero sales in that quarter because the openings don't happen until the third quarter.

So that would be the most challenging one.

But second and third will be tough as compared to last year.

Okay.

And last one I have is, Debbie, for you.

Athletic comps, nice to see the sequential improvements we've been seeing here.

Just your thoughts about what's working, what's not.

I know you're moving up price points, more technical products.

You're getting through the toning issue, I guess is somewhat abating here.

Any thoughts as you come into the summer season here about the athletic business?

Yes, Chris.

We've been really pleased with the athletic performance.

We're lapping the toning craze, if you will, from last year.

It really is a non-event for us right now.

In toning last year, the toning percent to total penetration to athletic was 6%, Q2 was 3%, Q3 3%, and Q4 2%.

So those are the kind of toning penetrations we're up against from last year.

This year toning was only 1% of our business, yet we delivered a 6% comp in athletic.

So what the real drivers are, are some of the big ideas we've been talking about -- technical and lightweight.

Those are huge growth businesses for us.

They are both high penetrations to our total.

Trail is also doing very well.

Basic running is doing well.

And of course the increase in that number one famous brand of Nike that we continue to do.

The customers really love the product that we're delivering from Nike.

So I like the way the mix looks.

I like how we have really evolved it from being just a fashion athletic business to a combination of fashion and technicals.

I think the balanced assortment is resonating well with the customer.

And we'll continue to grow the technical and lightweight piece because the customer loves that product.

So, it's not really seeing any risk in that business going forward for us at all.

Okay, thank you very much and all the best.

Mark Montagna, Avondale Partners.

I just wanted to go back to your store openings.

You'd mentioned that they are quite strong, beating your plans.

Are you seeing the best ever sales out of your new stores in comparison to what your expectations were?

Is it better than the past two years?

Mark, I don't have the numbers right in front of me but my sense is that it's probably comparable to what we experienced last year in terms of overage versus the sales plan.

Okay.

And then just lastly, looking out to the fourth quarter, for pre-opening expenses, should those be lower this year in the fourth quarter than they were just this past fourth quarter since perhaps you aren't going to be opening as many large stores in the first quarter of the following year?

I would say they're flat to last year in the fourth quarter.

Okay, thank you.

Patrick McKeever MKM Partners.

Yes, just a quick one.

On the technical running and the growth you're seeing there, do you feel like you're bringing a new customer into the store with that product?

And are they buying other merchandise within the store?

I definitely feel, because we had never really been in the technical business before, I definitely feel that we're bringing a brand new customer in.

I think we're doing two things.

I think number one, the customer that we already have coming in our store to find all the rest of the men's and women's products that couldn't buy this, that this is a real service to them.

So they don't have to go somewhere else to buy their technical product.

I think we had these customers in our store and we weren't able to service them because we didn't really have anything outside of just fashion athletic.

So I think that really is the biggest driver here.

Do I think that we will continue to bring new customers in the store?

I believe that as customers realize that DSW is an option to buy technical and lightweight product, that will continue to attract more of these customers.

I can't quantify for you exactly what else they're buying in the store.

I know there's crossover business and there's new business that's just coming in our store that is looking for this kind of product that couldn't find it before.

Great, thank you.

This concludes our question-and-answer session.

I would like to turn the conference back over to Mike MacDonald, President and CEO, for any closing remarks.

Thanks very much and thanks to all of you for your interest in DSW.

It's a fun place to be right now.

And you can be assured that we're going to do our best to keep the party going.

And we look forward to speaking with you again on our next earnings call, if not before.

Thanks very much.

The conference has now concluded.

Thank you for attending today's presentation.

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