DSW Inc. (DSW)

DSW 
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DSW Inc. (DSW)

Q3 2009 Earnings Call

November 24, 2009 8:00 am ET

Executives

Leslie Neville – Director IR

Michael MacDonald – President & CEO

Deborah Ferree – Chief Merchandising Officer

Douglas Probst – EVP & CFO

Analysts

Jeff Black - Barclays Capital

Christopher Svezia - Susquehanna Financial Group

David Mann - Johnson Rice & Company

[Mike Shritka] – Longacre Fund Management

John Zolidis - Buckingham Research

Dana Walker – Komar Investments


Presentation

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2009 DSW Inc. earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today’s call, Leslie Neville, Director of Investor Relations.

Leslie Neville

Good morning. Welcome to DSW’s third quarter 2009 earnings conference call. With me today in Columbus are Michael MacDonald, our CEO, Debbie Ferree, Vice Chairperson and Chief Merchandising Officer and Douglas Probst our CFO.

Before we proceed please note that earlier this morning we issued a press release detailing the results of operations for the quarter ended October 31, 2009. 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 Douglas Probst

Douglas Probst

Thanks Leslie, good morning everyone. We will begin with the financial performance for the third quarter and then update our outlook for 2009. Net sales for the third quarter increased 14% to $444.6 million. Same store sales increased 8.7% for the comparable period versus a decrease of 4.1% last year.

By segment our comps for our DSW business were up 9.8% while our lease business comps were down 1.5%. The merchandise margin rate for the third quarter increased 220 basis points to 46.3% compared to last year’s 44.1% as we experienced significant regular price sell throughs throughout the quarter.

Occupancy expense rate decreased due to the positive comps and an increased focus on negotiating rent concessions from landlords. The improvement in merchandise margin and occupancy expense combined with leveraging in our distribution and fulfillment centers resulted in a gross profit rate increase of 520 basis points to a record high of 33.1%.

The SG&A rate increased to 23.0% in the quarter however excluding the increase in the year to date bonus accrual, the SG&A rate decreased 160 basis points to last year due to the increased sales, excellent execution in our stores, and marketing department, and an overall concerted effort to control expenses.

The net result was a 470 basis point increase in the operating income rate to 10.1% of sales. Net income for the quarter more then doubled to $26.6 million compared with net income of $13.2 million last year and the diluted earnings per share were$0.60 compared with $0.30 a year ago.

At the end of the third quarter inventories were down approximately 10% on a cost per square foot basis with over half of the decrease coming out of the distribution center. While inventories are a little lower then we anticipated due to the increase in sales, we are comfortable with our in store inventory position and will continue to plan inventories conservatively throughout the fourth quarter and into 2010.

We invented approximately $4 million of capital into the third quarter into new stores and our IT initiatives, and we increased our cash and short-term investments by $87 million in the quarter to $266 million and no debt.

Looking forward to the remainder of 2009 we have built the following assumptions into our annual guidance based on our performance through the first three quarters. Our comp expectation for the year is approximately 1%. Based on improving merchandise margins and occupancy rates, we now expect an annual gross profit rate of approximately 28%.

And despite the increased sales and improved focus on controlling expenses, we still expect our annual SG&A rate to increase over last year to account for our investments in marketing and IT as well as payouts on our incentive compensation plans.

Given these assumptions we are raising our estimate for 2009 annual earnings to a range of $0.90 to $1.00 per diluted share. With that I will turn it over to Michael.

Michael MacDonald

Thanks Douglas, good morning everyone. I’ll start by adding some color on our performance in the third quarter and then touch on the progress we’re making on some of our strategic initiatives.

The big turnaround that we experienced in the third quarter was driven by increased footsteps coming through our doors. For the quarter our traffic in comp stores increased quite dramatically. This factor was the key driver to the significant reversal in sales trend from a comp store stores decline in the second quarter, to an almost 9% comp increase in the third quarter.

I think there were three things that led to this improvement in traffic. Briefly those three things were an improved external environment, the fit of the DSW formula with the consumer psyche right now, and the strength of our execution in the quarter.

With respect to the environment we were fortunate to have a friendly weather pattern in the quarter. It was generally cool and that helped us drive early selling in the boot category. As to the economic environment, while the economic fundamentals remained weak, the financial markets have rebounded.

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