Q3 2011 Earnings Call Transcript

Transcript Call Date 11/22/2011

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's DSW Inc.'s Third Quarter Fiscal 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a questions-and-answer session instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded.

Now I would like to turn the conference over to Mr. Doug Probst, Chief Financial Officer. Please go ahead.

Douglas J. Probst - EVP and CFO: Thank you, and good morning. Welcome to DSW's third quarter earnings conference call. With me today in Columbus are Mike MacDonald, CEO; and Debbie Ferree, Vice Chairperson and Chief Merchandising Officer. Please note that various remarks we make 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 our public filings with the SEC.

Similar to the format of our presentation in our second quarter call, I will be commenting on our reported results for the third quarter, and then Mike will provide his comments on our operating performance.

Earlier this morning we issued a press release, detailing the results of operations for the quarter ended October 29, 2011. Our reported net income was $53.7 million and included $13.9 million in items related to our merger with Retail Ventures Inc., which was completed on May 26, 2011, the settlement of the Premium Income Exchangeable Securities or PIES on September 15, 2011 and related items. You can find these items detailed in the condensed consolidated statements of operations, and reconciliation of adjusted results attached to our press release issued this morning. Again, similar to our discussion in the second quarter, we thought it would be beneficial to walk you through the details of the costs 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 $13.9 million in RVI merger and related items in the third quarter, breaks down into the following five components. First, $300,000 in costs included in SG&A, primarily related to RVI operating expenses. Second, $20.9 million in a non-cash benefit related to the change in fair value of derivatives instruments. This reflects the change in fair value of the PIES from the beginning of the quarter to the settlement date and the change in the fair value of the warrants for the entire quarter. Although this is a benefit for reported net income, in accordance with GAAP, this item is excluded from net income for the reported diluted EPS calculation.

Third, net interest expense of $1.5 million related to the interest on the PIES. Fourth, $300,000 in non-cash income tax expense due to the merger-related tax items; and finally, a $5 million impairment charge related to a leased office facility that DSW inherited in the merger with RVI. The tables in our press release outline these adjustments in more detail.

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