DSW Inc. (DSW)

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DSW Inc. (DSW)

F2Q08 Earnings Call

August 28, 2008 8:00 amĀ ET

Executives

Leslie Neville - Director of Investor Relations

Doug Probst - Chief Financial Officer

Debbie Ferree - Vice Chairman, Chief Merchandising Officer

Analysts

Jeff Black - Lehman Brothers

Christopher Svezia - Susquehanna Financial Group

David Mann - Johnson Rice & Company

Jodie Young - Buckingham Research

Jeff Mintz - Wedbush Morgan Securities Inc.

Sam Poser - Sterne, Agee & Leach

Susan Sansbury - Miller Tabak + Co., LLC

Presentation

Operator

Welcome to the second quarter 2008 DSW Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to your host, Leslie Neville, Director of Investor Relations.

Leslie Neville

With me today in Columbus are Debbie Ferree, Vice Chairman and Chief Merchandising Office, and Doug Probst, our CFO. Earlier today we issued a press release detailing the results of operations for the quarter ended AugustĀ 2, 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 and the result of various important factors, including those listed in today's press release and in our public filings with the SEC.

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

Doug Probst

My comments today will start with detail around the second quarter and then move into our outlook for the balance of 2008.

As previously released, net sales for the second quarter increased 2.4% to $357.2 million. Same-store sales decreased 6.9%. Last year's second [break in audio] same-store sales increase of nearly 6% was driven by significant promotional activity aimed at clearing seasonal merchandise.

This year, inventory levels entering the second quarter were positioned appropriately relative to anticipated comp sales declines, resulting in a 44.4% merchandise margin rate, over a 600 basis point improvement to last year.

Occupancy expenses deleveraged 110 basis points to last year as a result of the negative comp in the quarter. The net result was a 500 basis point increase in the gross profit rate to 28.3%.

As expected, the SG&A rate increased 250 basis points in the quarter to 23.4%, due mainly to the decrease in same-store sales and investments in our IT and ecommerce initiatives. For the quarter, the net result was a 250 basis point increase in the operating income rate to 4.9% of sales.

Net income for the quarter was $11 million compared with net income of $6.5 million for last year and diluted earnings per share were $0.25 compared with $0.15 a year ago.

We are pleased with our financial performance in the second quarter, and we are especially pleased with the DSW team's ability to execute in what continues to be a difficult economic environment.

We ended the quarter with inventories down approximately 4% on a cost-per-square-foot basis, excluding the incremental inventory investment for our ecommerce channel. As a reminder, we entered the second quarter with inventory down 10% on a cost-per-square-foot basis. Our intention is to keep inventory levels consistent with anticipated comp stores sales declines.

We added five DSW stores in the quarter, ending with 274 DSW stores and 384 lease departments. At the end of the quarter the square footage for DSW stores was approximately 6.4 million square feet. We will open at least 35 stores this year. New stores, like the overall industry, felt the impact of the economic downturn, however these new DSW stores have produced a first-year profit with an improved sales per square foot compared to history. As we move forward, given the financial difficulties facing developers and our own internal hurdle rates, we will likely open fewer stores in 2009.

As you know, we remodeled five stores earlier this year and have experienced a sales lift in these locations. We are in the process of remodeling another eight stores, most at significant lower cost so we can evaluate the return on investment [break in audio] design element. This will help optimize go forward investments for remodeling stores.

Now I would like to provide our outlook for the back half of 2008.

Based on sales trends for the first half of 2008, our current expectations for the year remain in line with our original annual guidance of negative mid single digits. Our sales expectations also include our newly launched ecommerce channel that is expected to contribute approximately 2% of DSW store sales for fiscal 2008. For the year, if we achieve our sales targets and manage inventories, we would expect improvement in merchandise margins that can mostly offset the expected deleverage in occupancy.

As a reminder, last year's third quarter merchandise margins and gross profit were strong, providing a tougher comparison as we enter the back half.

Our expense rates for the year plan to increase significantly as we deleverage store expenses on negative same-store sales while continuing to invest in growth initiatives such as IT infrastructure and ecommerce.

Based on these expectations we are reiterating our previous annual EPS guidance of $0.75 to $0.85 for fiscal 2008.

Finally, regarding the balance sheet, we expect capital expenditures to be approximately $85 million this year as we open at least 35 stores and continue to invest into our system's infrastructure. After these investments we expect to end the year with approximately $100 million in cash and short-term investments with no debt.

On a separate note, we recently finalized the shared services agreement with Retail Ventures. The financial impact of the transfer of shared services from RVI is factored into our earnings guidance for the year.

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