DSW Earnings Call Insights: Productivity Details and New Stores

DSW Inc (NYSE:DSW) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Productivity Details

Mark Montagna – Avondale Partners, LLC: Just a question in terms of your – with the productivity gains that I’m assuming you’re getting at the DC, I think in January you’ve really kicked off all the reorganized DC. I am hoping you can give us some metrics in terms of productivity per hour, how much cost per unit may have declined, because I’ve got to think that you’re getting a lot of EPS benefit out of that DC.

Douglas J. Probst – EVP and CFO: Well, from a rate perspective, the DC has improved its expense rate to last year as it relates to the DSW store sales. Obviously, the mix change going to the fulfillment center because of a growing dotcom business, you’re not going to see an overall leverage on that DC/FC expense based on that shift in sales. So, we’re certainly seeing productivity gains, but from a benefit to the bottom line and the operating profit rate, you’re not seeing a material impact there. Mike?

Michael R. MacDonald – President and CEO: Yeah. I would say the big change in the DC is the implementation of the high-speed sortation system. And what this really did is dramatically increased our capacity to allocate by size, by store, and to replenish at size level by store. Previously, I think we put up our unit replenishment system – I don’t know, two years plus ago, and as we ramped that up, it was largely a manual process in the DC, and as a consequence, there was limited number of items that we could put on our unit replenishment system. And so, what the sortation system has effectively done is taken the lid off of that capacity constraint, and as a consequence, we are putting a lot more product through that that sortation system. So, I defer to Doug on the numbers, but I think what we’re doing is we are processing a lot more precisely because of our automation…

Mark Montagna – Avondale Partners, LLC: Then just as follow-up, in the past you’ve spoken about gross margin being at its peak and it would seem as though with all the systems that you’ve got rolling out now and in the future that there is got to be more to go in terms of gross margin rate perhaps a couple hundred basis points, over the next four, five, six years. And I just was hoping you could comment on that whether you really have hit peak of just seems like that’s not quite possible that you’d have hit peak yet?

Michael R. MacDonald – President and CEO: Yeah, I am not sure we said that we were at the peak; maybe we did. I think we’re pleased with our margin progress and our margin performance. I think I mentioned in the prepared remarks that size optimization is helping us. We think it’s helping us on sales line and we think it’s helping us on the gross margin line. I think we’re a couple of years out from assortment planning and that will provide further margin help. We’re not fully mature in terms of growing our private brand to its ultimate penetration target. So that represents an additional opportunity. Then, when we get really smart about managing the charge-send project, we will be able to select product from other stores to fulfill orders, either from dotcom or from a given store where a customer is shopping and do it intelligently such that we would select product that’s most likely to turn into a markdown as opposed to a full-price sale. So, I do agree there is more margin rate potential ahead of us. The question becomes how does that get utilized? Does it get utilized by going to the bottom line for the shareholders, or does it allow us to become even sharper in our pricing which is a constant challenge that we’re very mindful of or some combination; and I think that that’s the issue. But I agree, Mark, there is probably further margin rate potential ahead of us.

New Stores

Kelly Chen – Telsey Advisory Group: One of the questions that I had was in regards to just new store productivity. I know that you guys have a couple of different things affecting it, with, like the high volume stores and the mix of small format stores. Could you just give us a sense of how the new stores are performing this year relative to your expectations and talk about when that spread or that new store productivity goes back to normal?

Michael R. MacDonald – President and CEO: I’ll let Doug talk about returning to normal. But so far, the 13 new stores we’ve opened this year are performing slightly above the aggregate sales projection that we established when we approved each of them. So, they’re not all performing equal to their pro forma and they typically don’t. But the ones that are outperforming are more than offsetting the couple that are underperforming, and as an aggregate, they’re doing slightly in excess of our expectations.

Douglas J. Probst – EVP and CFO: I’ll have to admit, as far as returning to normalcy and their productivity, I’m not certain I know exactly what you mean, other than there is a initial lift when we have the pre-op or the grand opening, if you will. There is a little bit of pullback after that but they quickly get back to the normal operating levels halfway into their first year. So it’s not – we do see some growth in maturity in those stores depending on where they’re open, but I can’t say they are materially off there for normal levels very dramatically.

Kelly Chen – Telsey Advisory Group: So, it sounds like in 2014 we should see that spread between the comp and the total sales kind of get back to a more normal spread versus this year it was…?

Douglas J. Probst – EVP and CFO: Yeah, I see what you mean. I guess the point is we have to remember how we calculate our comps here, is that it has to be open 13 months at the beginning of the fiscal year. So, in many cases stores are open already 18 months and that tends to dilute that impact to our comp number. So, also another difficult thing to model out for you guys is the fact that we opened a lot of stores in the second half last year and they were all open for that fourth quarter. So, 39 new stores were opened in the fourth quarter last year and we also had a 53rd week, so I think there is some difficulty in modeling that and you’ll see a big distortion of sales increase versus comp increase.

Kelly Chen – Telsey Advisory Group: Then just a really quick question on the outlook for – it sounded like – could you talk a little bit about what you’re thinking in terms of which systems – it sounds like you’re feeling a little bit better about that. Do you still think that it’s enough to offset what you’re expecting for cost increases going forward, and just an update on what you’re looking for in terms of cost increases for the back half and early thoughts for 2014?

Michael R. MacDonald – President and CEO: Yeah, I wouldn’t want to project out cost increases beyond what we can see, because that is volatile and it’s obviously a function of what happens internationally. What we’re seeing right now and what we project for the back half is low single-digit cost increases, call that 3%-ish, something like that. Does that answer your question?

Kelly Chen – Telsey Advisory Group: Yes, thank you.

A Closer Look: DSW Earnings Cheat Sheet>>