DSW Inc. (DSW)

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Q3 2012 Earnings Call

November 20, 2012 8:30 am ET


Christina S. Cheng - Director of Investor Relations

Douglas J. Probst - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Michael R. MacDonald - Chief Executive Officer, President and Director

Deborah L. Ferrée - Vice Chairman and Chief Merchandising Officer


Steven Louis Marotta - CL King & Associates, Inc., Research Division

Mark K. Montagna - Avondale Partners, LLC, Research Division

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Seth Sigman - Crédit Suisse AG, Research Division

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Camilo R. Lyon - Canaccord Genuity, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Danielle McCoy - Brean Murray, Carret & Co., LLC, Research Division



Good morning, and welcome to the DSW Inc. Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Christina Cheng, Director of IR. Please go ahead, ma'am.

Christina S. Cheng

Thank you. Good morning, and welcome to DSW's third quarter conference call. 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.

Joining us today are Mike MacDonald, President and CEO; Debbie Ferrée, our Vice Chairman and Chief Merchandising Officer; and Doug Probst, our Chief Financial Officer. Doug will start with our prepared remarks, with a short discussion of our reported results and then highlight the details of DSW's adjusted results for the third quarter. He will also provide some color on our outlook for the balance of the year. Mike will then elaborate on our ongoing strategic initiatives. After our prepared remarks, we will open the call for Q&A.

But before we begin, we want to take a moment to express our sympathy and support to all those affected by Hurricane Sandy. Our hearts go out to the millions who have lost family, friends and property during the past few weeks. We are grateful for associates in the Northeast and mid-Atlantic regions who have shown remarkable teamwork in securing our stores and facilities during the storm and in raising funds to support the Red Cross.

With that, I turn the call over to Doug.

Douglas J. Probst

Thanks, Christina, and good morning, everyone. Our reported net income for the third quarter ended October 27 was $50.1 million, which includes a net benefit of $3.5 million due to the -- due from a favorable resolution of litigation stemming from the credit card data breach in 2005. Including this net benefit, our reported earnings were $1.10 per share compared to last year's $0.75 per share. Excluding the onetime benefit and charges from the merger of RVI, our adjusted EPS was $1.02 per share compared to last year's $0.88 per share, an increase of 15.9%. You can find these items detailed in the Consolidated Statements of Operations and Reconciliation of Adjusted Results attached to our press release.

The balance of our comments will focus on adjusted results for the third quarter, which reflect the performance of our DSW operations. Sales for the third quarter increased by 11.7% to $593 million, and comparable sales grew 6.3% on top of a 5.2% comp growth last year. Comps for our DSW segment, which includes DSW.com, were up 6.6%. All 4 of our store comp drivers: traffic, conversion, average unit retail and units per transaction, had increases for the quarter.

We recently renamed our former lease business division to the Affiliated Business Group. We believe this better reflects the broad range of capabilities and formats we can offer to our potential partners. Comps for our Affiliated Business Group increased by 1.8% after growing by 4.9% last year, representing the 12th straight quarter of positive comp growth.

Total segment sales declined by 14%, however, due to the discontinuation of the Filene's Basement operations last year. We added net 2 locations in our Affiliated Business Group, bringing our total to 345 departments at the end of the third quarter. For the company, gross profit was 33.8% for the quarter, a decrease of 20 basis points from the record lever -- levels a year ago. This decline was due mainly to a 40-basis-point decrease in merchandise margin, driven in part to incremental certificate redemptions from our rewards members.

Our distribution and fulfillment rate also increased by 20 basis points as a result of the greater mix of online sales and additional costs from the expansion of our fulfillment center. These reductions to the gross profit rate were partially offset by occupancy leverage generated by our 6.3% comps for the quarter.

Our adjusted SG&A rate as a percentage of sales decreased by 50 basis points to 21.2% despite a $4.4 million increase in preopening cost associated with adding 26 new stores in the quarter. Reductions in the adjusted SG&A rate were driven by leverage of fixed cost, marketing expenses and lower incentive compensation. As a net result, our operating profits increased by 15% to a record third quarter operating profit rate of 12.6% compared to 12.3% last year.

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