DSW Inc. (DSW)

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DSW Inc. (DSW)

Q2 2009 Earnings Call

August 26, 2009 8:00 am ET


Leslie Neville - Director of Investor Relations

Mike MacDonald - CEO

Debbie Ferrée - Vice Chairperson and Chief Merchandising Officer

Doug Probst – CFO


Jeff Black – Barclays Capital

Chris Svezia - Susquehanna Financial

David Mann – Johnson Rice

Heather Boksen – Sidoti & Company

John Zolidis – Buckingham Research

Dana Walker – Kalmar Investments



(Operator Instructions) Welcome to the Second Quarter 2009 DSW Inc. Earnings Conference Call. I would now like to turn the presentation over to your host for today, Leslie Neville, Director of Investor Relations.

Leslie Neville

With me today in Columbus are Mike MacDonald, our CEO, Debbie Ferrée our Vice Chairperson and Chief Merchandising Officer and Doug Probst our CFO. Doug will begin the call with a recap of our second quarter financial results, and then Mike will review highlights of the second quarter performance and share some details about our plans for the remainder of the year and the longer term.

Before we proceed please note that earlier this morning we issued a press release detailing the results of operations for the quarter ended August 1, 2009. Various remarks that 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

We will begin with the financial performance for the second quarter and the update our outlook for 2009. Net sales for the second quarter increased 3% to $369.5 million. Same store sales decreased 2.9% for the comparable period versus a decrease of 6.9% last year. By segment our DSW business was down 2.1% while our lease business comps were -9.9%.

As was the case in the previous two quarters the negative comp was driven primarily by a drop in units per transaction. Despite the negative comps total sales increased over $12 million because of an increase of 32 more stores over last year, including three new stores in the second quarter, and the addition of the DSW.com channel that was not publicly launched until June of last year.

As expected, and as we stated in the first quarter earnings call, the merchandise margin rate for the second quarter decreased 130 basis points from last year to 43.1%. As you will recall, the rate for the first quarter this year increased 120 basis points and consequently the merchandise margin rate for the combined six month spring season was virtually flat to last year at 43.4%. The shift between quarters was due to the timing of clearance markdowns taken to support a sandal sale last year.

The gross profit rate decreased 180 basis points to 26.5% due to the increase in occupancy expenses related to the negative comp. The SG&A rate was flat for the quarter at 23.4% as our planned increases in marketing, IT and depreciation were offset by a decrease in store expenses and overhead. The net result was a 180 basis point decrease in the operating income rate to 3.1% of sales.

Net income for the quarter was $7.6 million compared with net income of $11 million last year and the diluted earnings per share were $0.17 compared with $0.25 a year ago. Throughout this difficult economic period our objective has been to maintain our strong balance sheet and we continued that trend into the second quarter. At the end of the second quarter inventories were down approximately 12% on a cost per square foot basis. We are comfortable with this inventory position as we have been building our inventory throughout August to support our fall selling season.

We invested approximately $5 million of capital in the second quarter into new stores and our IT initiatives. Our cash flow from operations more then covered these investments and we increased our cash and short term investments to $179 million and no debt.

Looking forward to the remainder of 2009 let me start by reminding you of our key assumptions for the year. First, we expect the economic and retail environment to remain difficult in the months ahead. This assumption is built into our annual guidance. Second, based on sales trends for the first six months our comp expectations for the year remain in line with our original annual guidance of negative mid single digits. Third, although we will continue to manage our expenses we expect our SG&A rate to increase over last year as we increase our marketing spend and our investment in IT.

Given these assumptions and the performance through the second quarter reported today, we are raising our estimated annual diluted earnings per share guidance to $0.37 to $0.45 up from our previous range of $0.30 to $0.35.

With that I will turn it over to Mike.

Mike MacDonald

Let me first just add a couple of comments about the second quarter. I was somewhat encouraged by the modest improvement in our comp store sales performance particularly in the DSW segment where as Doug said comps declined by only 2.1%. As Doug also indicated, we continue to see a pretty challenging external environment for the balance of the year. Our operating philosophy is to plan sales, inventories and expenses prudently and then react to plus opportunities if and when they materialize.

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