DSW Earnings Call Insights: Inventory, Product Margins

On Tuesday, DSW Inc (NYSE:DSW) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Inventory

Mark Montagna – Avondale Partners, LLC: I’m trying to look forward with my question, when you look out to the fourth quarter, I think that’s when you are going to start to see some benefits on size optimization, I’m wondering how many vendors will be on the program for the fourth quarter and is that going to be there in assortments, and then, when you look at the percentage of total inventory, can you talk about what percent of total inventory would be on size optimization by this year-end and what you might expect for the following year-end?

A Closer Look: DSW Earnings Cheat Sheet>>

Douglas J. Probst – EVP and CFO: Here’s how it’s going to roll out, Mark. We will, in the month of June, towards the end of the month of June, we will begin to place orders for product to arrive some in the fourth quarter but mostly beyond, that will use the size profiles that we have now developed. Also at the end of June, we will modify all of our replenishment models to reflect the revised size profile knowledge that we have gained from this effort. As you’ll recall, about a third of our sales are represented by replenishment styles and the other two-thirds are fashion. So, I think as to the third of our styles that are on replenishment, we should begin to see some benefit from the revised models, replenishment models in the second half. I think as to the other two thirds of our inventory, you know you should probably count on that not happening in a meaningful way until first quarter of next year.

Mark Montagna – Avondale Partners, LLC: Then, just looking at vendor dropships, I know you’re working on that for e-commerce, are you expecting that to begin in the fourth quarter, and if so, how many vendors, or is that more of an issue for the following year?

Douglas J. Probst – EVP and CFO: It really is more of an issue for the following year. Our stated objective is to have one vendor up on dropship by February 1, 2013, and then to gradually add vendors thereafter. So, it’s really going to be a 2013 event. I don’t think I answered fully your previous question about the number of vendors who appear to have the ability to accommodate a revised size profiles and I don’t have specific information for you but our planning and allocation people have been very pleased with the seeming flexibility of our vendors to accommodate this. And I would guess that probably 75% of our vendors have indicated they can accommodate our revised size profiles.

Mark Montagna – Avondale Partners, LLC: Just the last question. When you were talking about product (in for) costs up I think it was about 5% in the first half. How much of that is due to just the mixed shift towards higher priced merchandise?

Michael R. MacDonald – President and CEO: I’m not sure I have that specific information. Debbie you want to?

Deborah L. Ferree – Vice Chairman and Chief Merchandising Officer: Let me see if I can take that question for you. So if you look at it by kind of categories, so women’s, men’s and athletics. Women’s have the smallest increase in cost increase, it was about 2%. So that really is just pure product increases, materials and things like that. The athletic and the men’s department were consistent at about plus 5% to 6%. That’s where you really start talking more about the blend of seeing cost increase in product and materials and mix. So mix has more of an impact in the men’s and the athletics than it did women’s. So it really is a balance. Women’s I would say is purely material increases, men’s and athletics have more to do with mix. Lastly in the handbag and accessory area that actually had the highest increase and that was at the high end of the 6%, low-end of the 7% range and that was most all due to a mix and a shift in strategy and some of the vendors that we’re going to be bringing into the future.

Product Margins

Christopher Svezia – Susquehanna Financial Group: Debbie just to go back to product margins. You did a nice job in Q1, I guess between weather and the right product, more full priced merchandise you mitigated most of the impact. Just I guess talk about what you’re seeing going forward, your ability to continue to manage that process to maybe end up with minimal impact to product margin? Just what you’re also seeing coming out of China as well?

Deborah L. Ferree – Vice Chairman and Chief Merchandising Officer: There was a lot in there Chris, so let me see if I can break that down for you. Let’s just talk about cost increases right now. Cost increases continue to go up, but are mitigating a little bit, so the levels that they are going up are less for the future. We’ve been able to manage those cost increases through an increase in price brand, but also from good partnership negotiations with our vendors. I don’t see that as a big event going forward. I think we’ll still be able to manage those cost increases. In terms of AURs and as it relates to product margins, our AURs, we have seen some nice increase in AUR specifically it’s been under the women’s area, most of the AURs and the other areas, men’s and athletic are pretty flat to last year. So I think if we continue, which I’m confident we can continue to get our increases in comps in regular price, then we’ll be able to continue to manage those margins going forward. So being able to control the costs and manage how we sell-through our regular price, I’m pretty confident about the margins going forward into Q2 and going forward.

Christopher Svezia – Susquehanna Financial Group: Just on your women’s dress business, how did you perform there during the quarter?

Deborah L. Ferree – Vice Chairman and Chief Merchandising Officer: We actually had a very nice performance in the dress area. Dress was up in the low single-digits and all the things we talked to you about on the last call are actually – the big bets we priced are doing very well. So, plain pumps doing very, very well, where the sales were mid double-digit comps and the inventory was high single-digit comps. So, stock to sales really performed well there. All the detailed shoes, including wedges and things like that, all the things we talked about as driving that business for first quarter are playing out once again that part of the business, mid double-digit sales comp on high single-digit inventory comps. The balance between fashion and classic hasn’t changed much. We’re still delivering between 35% and 40% on shoe fashion in our business, in the dress shoe area, and the balance in more classic investment kind of shoes. So I’m very pleased with that balance as well. I think the big aha that really helped drive it was color. We talked about color on the last call and color is a little bit higher than 25% of total. So, the bets that we made in color have also paid off. So, we’re actually really pleased with our dress shoe business in Q1.

Christopher Svezia – Susquehanna Financial Group: That’s good to hear because in other areas, it seemed like it was – or other retailers comp, it was a bit of a challenge. So I was asking how you guys performed. Last question I have for you Debbie, just on your thoughts on boots, just any change? I think you seem pretty excited about what’s in the pipeline, what’s going to be out there in the marketplace, any thoughts in and around that category as we look to fall?

Deborah L. Ferree – Vice Chairman and Chief Merchandising Officer: Chris, as you know, we tend to plan very conservatively across the board and based on what happened last year, around the cold weather, I still believe that we will be able to deliver low to mid single-digit comps in boot. I’m excited about the content of the inventory we’ll have this year. Once again, the market did a remarkable job on offering some fresh in. So, you’re going to continue to see that trend in casual, you’re going to see a lot of ornamentation and detailing, and where the increases have to go up at retail on the boots, I think the perceived value will be obvious to the customer and you won’t see resistance in some of the increases that we will have to take on part of this assortment. So, to summarize it, there’s a lot of freshness. The price value I think is there and we’re pretty excited about the season going forward.