DSW Inc. (DSW)

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DSW Inc. (DSW)

F3Q08 Earnings Call

November 25, 2008 8:00 am ET

Executives

Leslie Neville - Director of Investor Relations

Debbie Ferrée - Vice Chairman and Chief Merchandising Officer

Doug Probst – CFO

Analysts

John Zolidis – Buckingham Research

Chris Svezia - Susquehanna Financial

David Mann – Johnson Rice

Jeff Black – Barclays Capital

Jeff Mintz – Wedbush

Patrick McKeever – MKM Partners

Presentation

Operator

(Operator Instructions) Welcome to the Third Quarter 2008 DSW Inc. Earnings Conference Call. I would now like to turn the presentation over to your host for today’s call Ms. Leslie Neville, Director of Investor Relations.

Leslie Neville

With me today in Columbus are Debbie Ferrée our Vice Chairman and Chief Merchandising Officer and Doug Probst our CFO. Earlier today we issued a press release detailing the results of operations for the quarter ended November 1, 2008.

Before we proceed please note that various remarks we make about the future expectations, plans and prospects of the company constitute forward looking statements. The actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those listed in today's press release and in our public filings with the SEC.

With that, I will turn it over to Doug.

Doug Probst

My comments today will start with detail around the third quarter and then move into our outlook for the balance of 2008. As previously released net sales for the third quarter increased 6.5% to $391.4 million. Same store sales decreased 4.1% for the comparable period versus a decrease of 3% last year. Like most retailers traffic was down in the quarter, however, we are pleased to report that our conversion rate on the mall traffic was up, resulting in a net increase in comp store transactions.

Inventory levels entering the third quarter were positioned appropriately relative to the anticipated comp store sales decline resulting in a 44.1% merchandise margin rate, a 10 basis point increase to last year. The gross profit rate dropped to 27.9% due mainly to a 100 basis point increase in occupancy expenses related to the negative comp.

As expected the SG&A rate increased 290 basis points in the quarter to 22.5% due mainly to the decrease in same store sales, the increase in IT and e-commerce spend and the reversal of the year to date accrual for bonus in 2007. For the quarter the net result was a 270 basis point decrease in the operating income rate to 3.4% of sales.

Net income for the quarter was $13.2 million compared with net income of $22.4 million for last year and diluted earnings per share were $0.30 compared with $0.51 a year ago. We are pleased with how we managed the business in the third quarter and we are especially pleased with the customer’s response in what continues to be a difficult economic environment.

Excluding the incremental inventory investment for DSW.com inventories we essentially flat to last year on a cost per square foot basis entering the fourth quarter. While this is inconsistent with our previous trend of being down entering the quarter inventory levels were mainly attributed to accelerated receipt to support two merchandise strategies, a large opportunistic athletic buy and an incremental boot inventory designed to increase boot penetration for the fourth quarter and first quarter next year. Debbie will provide more details on these strategies in her merchandise commentary.

Despite the current inventory position we expect end of year store inventory levels to be less than last year. We added a record 21 DSW stores in the quarter ending with 295 DSW stores and 380 leased departments. At the end of the quarter the square footage for DSW stores was approximately 6.7 million square feet. Today we expect to open our 41st and final new store in 2008 an increase to our previous estimate of at least 35 stores.

Based on the environment we anticipated that a few of these stores may have been delayed until 2009. Consequently because of the incremental openings in 2008 we are now expecting only 10 to 15 stores in 2009.

Now I’d like to provide our outlook for the remainder of 2008, based on sales trends for the first three quarter of 2008 our comp expectations for the year remain in line with our original annual guidance of negative mid single digits. Our sales expectations also include our e-commerce channel that is expected to contribute approximately 2% of DSW stores sales for fiscal 2008. For the year, if we achieve our sales targets and manage inventory we would expect an improvement in merchandise margin that can mostly offset the expected de-leverage in occupancy.

As we have mentioned before our expense rate for the year was planned to increase significantly as we de-leverage expenses on negative comp store sales while continuing to invest in growth initiative such as IT and e-commerce. At the beginning of the year we expected to receive approximately $12 million for IT, finance, HR and distribution services provided to Value City Department Stores. As of the end of the third quarter DSW has only recorded $3 million of these fees.

Due to the recent bankruptcy of Value City Department Stores, DSW expects to absorb nearly all of the remaining $9 million of expenses in 2008. We will seek payment for the full amount of past services in bankruptcy court. Since the petition for bankruptcy, DSW has an agreement to provide service which Value City Department Stores pay for in full on a weekly basis.

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