DSW's CEO Discusses Q4 2011 Results - Earnings Call Transcript

DSW Inc. ( DSW)

Q4 2011 Earnings Call

March 20, 2012 8:30 am ET


Michael MacDonald – President, Chief Executive Officer

Douglas Probst – Executive Vice President, Chief Financial Officer


Steve Marotta – CL King & Associates

David Mann – Johnson Rice

Scott Krasik – BB&T Capital

Mark Montagna – Avondale Partners

Chris Svezia – Susquehanna Financial

Jeff VanSinderen – B. Riley & Co.

Jeff Black - Citigroup

Claire Gallacher – Auriga

Patrick McKeever – MKM Partners



Good morning and welcome to the DSW Fourth Quarter and Fiscal Year 2011 Financial Results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two.

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. This event is being recorded.

I would now like to turn the conference over to Mr. Doug Probst, CFO of DSW. Please go ahead, sir.

Douglas Probst

Thank you and good morning. Welcome to DSW’s fourth quarter earnings conference call. With me today in Columbus is Mike MacDonald, our CEO. Debbie Ferreé, our Vice Chairperson and Chief Merchandising Officer, is not with us today as she is travelling overseas with members of our supply chain team.

Today I will comment on our results for the fourth quarter and the full year of 2011 and provide our guidance for fiscal 2012; then Mike will provide more detailed comments on our operating performance. As a reminder, earlier this morning we issued a press release detailing the results of operations for the quarter and the year ended January 28, 2012.

Our reported net income for the fourth quarter was $19.4 million, which included a net $3.7 million charge in items related to our merger with Retail Ventures, which was completed earlier in 2011. You can find these items detailed in the condensed consolidated statements of operations and reconciliation of adjusted results attached to our press release. As we’ve done in prior quarters, we’ll first walk you through the details of the cost and benefits associated with the merger and related items and the specifics of where they are reflected on our P&L so that you have a clear comparison of our operating performance to last year.

The $3.7 million in RVI, merger and related items in the fourth quarter breaks down to the following major components: first, $700,000 in costs included in SG&A primarily related to RVI operating expenses such as pension and legal costs; second, $3 million in non-cash benefits related to the change in fair value of the warrant; third, $900,000 in non-cash income tax expense due to merger-related tax items; and fourth, a $5 million after-tax charge related to the guarantees of two leases that DSW inherited in the merger with RVI.

For the fiscal year, our reported net income was $174.8 million, which included $38.6 million in net benefits related to the RVI merger. For the full year, the impact of the merger is due to the following items: first, $17.3 million in net costs included in SG&A related to the merger transaction and other RVI operating expenses; second, $53.9 million in non-cash expense related to the change in fair value of the PIEs and warrants; third, $10.5 million in interest expense related to interest on the PIEs and deferred financing fees on other RVI debt; fourth, $145.9 million in non-cash income tax benefit due to the reversal of the valuation allowance on NOLs and other merger-related tax items; fifth, a net $4.9 million charge related to two lease guarantees previously mentioned, and finally a net $20.7 million charge related to RVI’s non-controlling interest in DSW prior to the merger date.

Now that we have reviewed these items, the remainder of our discussion will refer to our adjusted results which reflect the performance of our DSW operations. We achieved very good results in the fourth quarter, capping off a strong year overall. Sales for the quarter were $513.7 million and comparable sales grew 5.6% on top of a 14.9% comp increase last year. This represents a two-year comp of 20.5%. By segment, our comps for our DSW business, which includes DSW.com, were up 5.9% and our comps for the lease business division were up 1.4%.

Our total company merchandise margin rate was 41.7% for the quarter. Given the cost pressures in the market, we were pleased to limit the reduction to 15 basis points. We also ended the fourth quarter in good shape with respect to inventory levels and merchandise mix.

On a total company basis, we achieved occupancy leverage of 50 basis points for an 11% occupancy rate for the quarter, primarily due to the increased sales. This was slightly offset by 30 basis points of deleverage in our distribution and fulfillment centers to support continued investments in our size replenishment initiatives and DSW.com business. Combined with the change in merchandise margin, gross profit was virtually flat to last year.

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