DSW Inc. (DSW)
Q2 2012 Earnings Call
August 21, 2012 8:30 am ET
Michael MacDonald – President, Chief Executive Officer
Douglas Probst – Chief Financial Officer
Christina Cheng – Director, Investor Relations
Steve Marotta – CL King & Associates
Mark Montagna – Avondale Partners
Chris Svezia – Susquehanna Financial Group
Camilo Lyon – Canaccord Genuity
Scott Krasik – BB&T Capital Markets
Jane Thorn Leeson – Keybanc
Jeff VanSinderen – B. Riley & Co.
David Mann – Johnson Rice
Patrick McKeever – MKM Partners
Danielle McCoy – Brean Murray
Good day and welcome to the DSW Incorporated Second Quarter Fiscal 2012 Earnings conference call. All participants will be in a 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 this event is being recorded.
I would now like to turn the conference over to Ms. Christina Cheng, Director of Investor Relations. Ms. Cheng, the floor is yours, ma’am.
Thank you. Good morning and welcome to DSW’s second quarter conference call. Please note that the 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 those 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.
Joining us today are Mike McDonald, President and CEO, and Doug Probst, Chief Financial Officer. Debbie Ferrée, our Vice Chairman and Chief Merchandising Officer is attending the MAGIC trade show in Las Vegas today and won’t be here with us. Doug will start our prepared remarks with a short discussion of our reported results and then highlight the details of DSW’s adjusted results for the second quarter. He will also provide some color on our outlook for the back half of the year. Mike will then elaborate on our ongoing strategic initiatives. After our prepared remarks, we will open the call for Q&A.
With that, I turn the floor over to Doug.
Thanks Christina and good morning everyone. Our reported net income for the second quarter was $29.3 million, which included a net $700,000 charge for items related to our merger with RVI in 2011. This net charge was primarily due to a non-cash expense related to our fair value of RVI-related warrants. Please note these warrants were fully exercised in the second quarter and as a result they will no longer be the source of mark-to-market adjustments going forward. Including this charge, our earnings per share was $0.65 compared to last year’s $3.96. As you recall, last year’s Q2 reported EPS included a $106 million net benefit due mainly to the reversal of evaluation allowance and other merger-related items. Excluding these RVI-related items for both years, adjusted EPS was $0.66 per share compared to last year’s $0.74 per share. You can find these items detailed in the condensed consolidated statements of operations and reconciliation of adjusted results attached to our press release.
Now that we have reviewed the reported results, we will focus our comments on the adjusted results for the second quarter which reflect the performance of our DSW operation. Sales for the second quarter increased by 7.5% to $512.2 million as comparable sales grew 4.2% on top of a 12.3% growth last year. This represents a two-year comp of 16.5%. By segment, comps for our DSW business, which includes DSW.com, were up 4.3% on top of 13% growth last year. Our DSW comps were driven by an increase in traffic and conversion while average unit retail and units per transaction were relatively flat to last year.
Although we typically open our new stores in the higher volume periods of the first and third quarters, we opened two larger than average downtown stores in the second quarter. We also relocated two stores, bringing our total new store activity to 12 new stores and four relocations for the first six months of the year.
Comps for the lease business division were up 3.5% after growing by 3.7% last year. This is the 11th straight quarter of positive comps for the lease business. We also opened two new locations for our lease business for a total of 343 departments at the end of the period.
Gross profit was 31.3% for the quarter. While this is a good rate by historical standards, it compares unfavorably to the recent high rates of the first quarter this year and the second quarter last year. Our merchandise margin rate declined 120 basis points to 44.5% versus 45.7% last year as we normalized our clearance mix to historical levels and took additional clearance action in early June. These additional markdowns were partially offset by favorable shrink results recorded as part of our annual physical inventory process. Total occupancy leveraged 10 basis points to last year and our distribution and fulfillment rate increased by 20 basis points as a result of the increasing mix of the DSW.com sales.
As expected and previously communicated, our SG&A rate as a percentage of sales increased by 80 basis points to 21.9% due to costs related to new stores and a shift in marketing expenses. As a result of the changes of margin and expense rates, our operating income for the quarter was 9.4% compared to 11.6% last year. Please note that our effective tax rate for the quarter dropped to 38.1% and we expect our tax rate to be slightly below 39% on an annual basis. The end result was an adjusted net income of $30.1 million or, as we mentioned earlier, $0.66 per share for the second quarter. This compares to the adjusted net income for the same period last year of $33.7 million or $0.74 per share and was slightly above our second quarter guidance of $0.60 to $0.64.
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