Welcome to the first quarter 2008 DSW earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Leslie Neville, Director of Investor Relations. Please proceed.

Good morning. With me today in Columbus are Debbie Ferree, our Vice Chairman and Chief Merchandising Officer and Doug Probst, our CFO. Earlier today we issued a press release detailing the results of operations for the quarter ended May 3, 2008. Before we proceed, please note that various remarks we make about the future expectations, plans and prospects of the company constitute forward-looking statements. The 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. With that, I will turn it over to Doug.

Thanks, Leslie and good morning, everyone. My comments today will start with some detail around the quarter and then move into our outlook for the balance of 2008. As previously released, net sales for the first quarter increased 3% to $366.3 million. Same-store sales decreased 5.4% on a decrease of 3.6% last year. Geographically, our comp performance was strongest in the Northeast while weaker performance was in the Midwest. Gross profit for the quarter decreased 410 basis points to 26.5%, due mainly to an increase in markdowns as we strategically took inventory rotations earlier in the season than last year. Also as anticipated, occupancy expense deleveraged to last year due to the negative comp sales. As anticipated, SG&A rate increased 190 basis points in the quarter to 22.1%, due mainly to the decrease in same-store sales and investments in our IT and ecommerce initiatives. For the quarter, the net result was a 600 basis point reduction in the operating income rate to 4.4% of sales. Net income for the quarter was $10.3 million compared to net income of $23.7 million for last year, and diluted earnings per share were $0.23 compared to $0.54 a year ago. Excluding the incremental inventory investment for our ecommerce business, inventories at the end of the quarter decreased 10% on a cost per square foot basis. Furthermore, units of inventory in clearance were down over 40% to last year. As we move into the second quarter, inventories are clearly positioned to eliminate the type of aggressive liquidation we saw last year. We opened 10 DSW stores and seven [leased] stores in the quarter. At the end of the quarter the square footage for DSW stores was approximately 6.3 million square feet. Now we would like to provide our outlook for the balance of 2008. Considering…

Thank you, Doug, I would like to detail our merchandise performance for you and then I will move on to other aspects of the business. First, merchandising. We were disappointed with the comp sales decline in the quarter and continue to feel the effects of an uncertain consumer environment. That being said however, we were pleased with our performance and dress-better brands and comfort. The dress category was the best performer in the company with a flat comp for quarter. This is the core of our business and some of the trends that we mentioned in Q4 such as color prints and natural materials exceeded our expectations here. DSW has always been known as a destination for dress shoes and we are leveraging our expertise and distorting our assortments to continue to capitalize on this trend. We are also seeing positive customer response to better brands in all areas, including dress, casuals and sandals. We believe we are experiencing some tradeoffs from the upper end department store shoppers who know and love these brands and appreciate the value at DSW. Lastly, we took a strong inventory position in the comfort area of the business that proved successful. This area, which includes comfort casuals both in men’s and women's and women’s comfort sandals had a nice comp increase for Q1. The customer is demanding fashionable yet comfortable footwear and we have positioned our inventories appropriately here to continue to meet the consumer demand. As I mentioned in Q4, there is a lack of significant must-haves in footwear right now. However, there are clearly some items that she is responding well to and we are making sure our inventories are reflective of those items. We are closely monitoring trends and responding quickly to edit the assortments and provide her with the best…

Ladies and gentlemen, your conference will resume shortly. Thank you for standing by. (Technical Difficulties)

We are back. If anyone did not hear the latter part of our presentation, please let us know. We're going to go ahead and take questions now.

(Operator Instructions) Your first question comes from Jeff Black - Lehman Brothers.

Good morning, guys. Doug, how do we think about SG&A growth going forward? I know we saw growth slightly ahead of square footage growth in the quarter, but how do we look at that in terms of just year-over-year growth for the year? Any color on that would be helpful.

By the way, Jeff, can I ask you to confirm that you heard the balance of Debbie's presentation after I give you my answers? Actually, the SG&A deleverage that we will have is similar, if not a little bit higher, for the balance of the next three quarters for the reasons we described. It will be 200 basis points pretty much by quarter as we move forward through the balance of the year.

Thanks. And no, I didn't hear the balance of Debbie's comments. She cut off halfway.

Okay.

Why don't we go ahead and start with Debbie’s portion? Is that okay if we just read it over again?

All right. Let's start with where I started with “in Q2 dress and casual sandals continue to be important”. In Q2, dress and casual sandals will continue to be important. The trend in dress is moving toward more casual looks with stacked heels, platform straps and various shades of the brown family moving to the forefront. This supports the safari influences we are seeing in ready-to-wear. In summary, for the balance of 2008 our priorities will remain: to ensure our assortments reflect the right product in trend and style that match consumer demand; to continue to aggressively control inventory, keeping in line with comp expectations; to take advantage of opportunistic buys; and to constantly test new items to determine the next big drivers. Now I would like to reiterate the fundamentals of our business and why we believe DSW is poised for continued long-term growth. First, DSW is a unique retail experience. DSW offers customers a powerful combination of assortment brands, convenience and value that we believe give us a competitive edge in the marketplace. Our year-over-year growth indicates we are gaining market share and we believe we are well-positioned to satisfy our current customer base and attract new customers Second, DSW has a robust loyalty program. With over 9 million active members, the DSW Rewards Program continues to grow and improve, even in these economic times. So far in 2008, enrollments are in excess of 65,000 new members per week, the highest sign-up rates we have ever had in the program. We continue to have significant success in driving sales through timely and relevant communication with this population. Our interests lies in earning a long-term relationship with these valuable customers. Third and most recently we developed DSW.com. We are excited about the prospect of combining our successful and growing…

First of all, thank you Debbie for going through that for us. I apologize for the technical difficulties. Again, if anyone has any issues please contact us. I would be happy to reiterate information for you. First we will take Jeff Black's question again. Jeff, are you still there?

One moment while I open Jeff's line.

You answered our SG&A question. Thanks.

Your next question will come from the line of Chris Svezia - Susquehanna.

Good morning, everyone. I was wondering if you could remind us during the second quarter of last year the break up between how much of the gross margin pressure was related to merchandise margins, how much was related to layering in the additional Stein Mart stores, and how much was deleveraging in terms of store occupancy during the second quarter of last year?

If you recall we had about a 500 basis point reduction last year in gross profit to the previous year 2006. The majority of that came from the merchandise margins. There was some negative pressure with the addition of Stein Mart because we had more stores, but the story there was the decreased merchandise margin, by and large.

As you go into the second quarter, I mean at this point you feel comfortable with your inventory levels. Do you see anything on the horizon, whether it is from a competitive environment, only because it seems like in the past you guys have entered the quarter in pretty good shape from an inventory perspective, though as you have gone through the quarter the markdown cadence has increased and you have had margin pressure. I am curious in terms of where you are right now in terms of what you are seeing and potentially how that might unfold as you go through the quarter from a markdown or margin perspective.

Clearly as we look into the second quarter the picture is going to look a lot different than it did in 2007. Obviously going up against that plus 6% comp that we had last year, that is going to be a tougher challenge from a comp number, clearly. But with the inventory down 10% at cost per square foot, with the clearance inventory down 40%, there is just not the inventory there to make those kinds of aggressive liquidations now. So we are positioned for the comp expectation that we have go forward. Also in our merchandising and marketing plans we don't expect to have the multiple sales that we had to employ last year. We will still have a summer sale as we have always planned to see whatever clearance goods might need to be cleared out, but again with that inventory position entering the quarter and being a few weeks into it already, we don't see the strategy having to change from what we have originally planned and that will look a lot better from the merchandise margin rates to last year.

Thanks for the color there, Doug. Debbie for you, as you went through the first quarter you referenced the dress and comfort sandal businesses that seemed to be incrementally working for you here. Could you talk about what is not working and what changes you are making, whether it is on the low profile side or the athletics side or on the men’s side? I was just wondering if you could add a little more color in terms of what is not working, what changes you are making as you move through the second into the third quarter?

Let's answer the question relative to the first quarter right now. First of all the things that were slower for us this year than they were last year -- not that they weren't working, they were just slower, and I think it points to how customers were shopping, were basically core, basic commodity businesses. The positive response we got was around those fashion callouts that we talked about on the fourth quarter earnings call which is around most of the fashion components; the naturals, the color, white, all of those callouts. That trend seems to be continuing. Our core basic business is still very strong but customers are just moving towards that fashion element. As I look Q2 into Q3 -- actually Q1 into Q2 and continuing to Q3 -- there are some trends that obviously have elevated that are very strong and those were the callouts we talked about being platforms, more the city sandals, more casual, I call it the casualization of dress. So we're starting to see some very strong indicators right now in Q1 around those trends. The reason why I get excited about that is because it's fresh and those looks haven't been in the marketplace for a long time. I see those trends continuing through Q2 and into Q3 and playing very well into the warm door strategy as we talked about last year Q2 into Q3 which is around how many sandals can you sell, both in dress and in casual. So I'm actually encouraged by some of the new things that we saw pop up in Q1 that we got very good results in. We are a very strong dress shoe business; as you know, that really is the core of our business, that is where we had the best performance this quarter. It's where we will continue to distort the appropriate amounts of inventory in the right looks that we have tested and we have found are working for us, so I am actually encouraged there. The things that are softer in the casual area, last year as you'll remember, we were coming off of a trend of about 12 to 18 months of the flat “revolution” I will call it, where the increases there were just exponential. That business did soften up this first quarter. There is still a very strong relevant flat casual business to be done, but it doesn't have the comp increases behind it or the energy behind it that it did last year. So that was the softer part of the Q1 business in casuals. As I mentioned on today's call, the comfort piece of the business has strong high single-digit comp increases and that is a very positive trend for us and that continues through second into third quarter so I'm actually encouraged there.

Thanks, Debbie that is definitely helpful. Doug, when you look at the SG&A increase for the balance of the year, so roughly 200 basis points for each quarter, I guess that includes investments you were making obviously in the shared services platform. Could you potentially break that out in terms of what that is?

Well the shared service agreement is not finalized. When it is there will be an 8-K that is put out and that should be very soon. At this stage we are still in the final negotiations, if you will, with both RVI and Value City so we don't want to give too much specific color around shared services. It is going to be at least 200 basis points for the next three quarters of deleverage, but that covers shared service impact, the dot-com, the increased investment of IT which is about $8 million incremental to last year. Obviously we have more stores and that applies to more deleveraging when we're talking about negative mid single-digit comps so that pretty much shores it up. But the shared service piece is incorporated into our guidance and that SG&A deleverage.

When you are looking to replace Peter, what is the board looking for in terms of the type of person? Obviously Peter was the President of the company; Jay seems to be relinquishing some of the CEO role here in terms of who you are looking for. Can you add some color in terms of the type of person and maybe why Peter might not have wanted to take this position, given the fact it was potentially the CEO role?

Obviously that's going to be a decision that the board and Jay decide on. I can tell you that we're going to be able, we think, to be able to pick from a pretty big audience. If you think about what is going to be attracting people to DSW, we have a pretty unique concept with less than 300 stores; we have a huge loyalty program, a new ecommerce business that is just starting, a much stronger infrastructure. We have invested nearly $200 million over the last couple of years, $100 million in cash, and a pretty good team to work with, we think. So I think we're going to have a pretty good list of people to pick from and attract, and I'm sure there will be a definite leader that can help us grow the business.

Your next question comes from Roxanne Meyer - Oppenheimer.

I wanted to continue on the line of some prior questions. Of the SG&A increase of 200 basis points, can you just break out the dot-com piece?

The dot-com piece, there are two pieces of it, actually. Obviously a piece of it is variable and a piece of it is fixed. Just to the fixed piece alone, as we were building up last year, the capacity to open the site as we did in April, you would expect about $12 million of expenses that are baked into a fixed expense and the rest will start to be variable. We won't get a good view as to what those expenses are; obviously we have an idea of what our expectations are as the dot-com business is launched, but at this stage the fixed expenses would be about $12 million and the rest would be variable depending on how the site does once we fully launch, which we expect to do in the early part of June. At that stage we'll be able to give a better perspective of what that expense rate will be on the variable side.

As it relates to fashion, and you mentioned some of the safari themes that are out there, is there anything big on the horizon in terms of transition out of that, that you see going on for the back half of the year that could drive footwear trends?

It's really hard to make that call right now; as you know, fashion is unpredictable at best. The one thing that we are seeing though and that really plays in to where one of our other category strengths is -- the boot trend. Actually the boot styles for this year are pretty exciting with all of the shearing and the buckles. What we are doing that could be of interest to you here is at the beginning of Q1, what we're starting to do is we're starting to test out some of the new trends that some of the manufacturers, the more fashion-forward facing manufacturers think are going to be good for that year. So we tested out some of those things in Q1 this year, we got some early reads, so early indicators which is very helpful information in deciding how your inventory should be positioned and we took advantage of that learning and applied that to our on-order for third and fourth quarter. Right now we have our boot inventories positioned very positively with some pretty exciting new fashion things that didn't exist in the wardrobes last year. That's the only thing I can really tell you outside of this evolution of these safari kind of city sandal, safari influences that move from second into third quarter that we're really seeing right now. Next week there is a shoe show so I'm hoping by the end of the week we'll see some additional new trends but right now, I think those are the two big callouts.

That's helpful. In terms of timing of when you are going to bring in boots, is it standard year over year as you enter the fall, or knowing what happened last year with the warmer September, are you keeping it a little bit more fluid as to when you bring in, or can you even keep it more fluid as to when you bring in the boots?

What we try to do is we learn from that Q1 testing and we bring in some of the new fashion trends in certain doors in that July/August delivery period. The real boot selling does start when there's a wardrobe change, when customers start to change their ready-to-wear. So the real boot selling doesn’t really start until the middle to the end of September and move on into October and November. But we will make sure that we support the boot sales with the right receipts to match the sales that we think we're going to do in the Q2 to Q3 transitional period, but we usually bring in early fashion in the core. The replacement, the real functional boots start rolling in September/October, so pretty consistent with last year.

Can you give us an indication, obviously inventories are being planned very conservatively and ended the quarter really lean; how are you looking for them to shape up at the end of Q2 and as you move throughout the year?

Well again, as we mentioned in the script that we wanted to keep those in line with our expectations for sales so as we're saying on an annual basis we are negative mid single-digits, but we expect coming out of the second and third quarters we would be down about negative mid single-digit.

Your next question comes from John Zolidis – Buckingham Research. Analyst for John Zolidis – Buckingham Research : This is Jody Yen on behalf of John Zolidis. A question on depreciation and then another question on the inventory. What was your depreciation for the first quarter?

Depreciation for the first quarter, we'll get that for you; what was the other question? Analyst for John Zolidis – Buckingham Research : When was the last time you cut inventory per square foot by this magnitude and what happened as a result of such a steep inventory cut?

Well we have not been down 10% at cost per square foot, but then again we haven't been expecting a quarter to be down relative to last year in that amount either. I would say that it certainly hasn't been down this much before going into a quarter, but we believe it's appropriately positioned given the expectation of the comp as we're going against a plus 6 in the previous year that was driven primarily by the liquidation of excess inventory. The depreciation for the first quarter, by the way, was $7.5 million. Analyst for John Zolidis – Buckingham Research : What are you seeing for May trends so far?

We generally don't talk about the quarter at this level, but clearly there's not a lot changed in the first few weeks of May as the first quarter trends would show overall. I guess I would take this opportunity to explain our sales cadence for the first quarter, like a lot of retailers who report monthly comps, the negative comps in March were large and we had positive comps in April. But in our business, we have always looked at our business from a March and April timeframe combined and that period was down about negative 5%. Some people read into that that was a favorable trend coming off of March, and certainly it was from a numerical perspective on comps, but looking at the two periods together, we saw that the March/April timeframe was a similar trend that we had been experiencing over the previous months. So we're not seeing any huge trend change right now; obviously the weather moves it up and down sometimes, but generally the trend has been the same for the past several months.

Your next question comes from Susan Sansbury – Miller Tabak. Susan Sansbury – Miller Tabak : Going back to the ecommerce initiative, Doug, you have to spend a little bit here in terms of trying to measure the extent of the losses that might occur this year. When do you expect this business to breakeven and on what level of volume? Can you share that with us?

Sure, and nice talking to you Susan, it has been a while. Last year we spent about $8 million or about $0.11 a share in developing this concept. It just on a soft launch opened at the end of April, and we expect a harder, more public launch here in the beginning of June. What we expect this business to, loosely say, breakeven because in the first 12 months of operation – and when I say loosely breakeven we're not going to try to allocate expenses to this channel. It is just a channel, but for the investments that we put into it and the sales that we expect and margin that we expect, we believe it's first 12 months of full operations that this can be a breakeven channel in its first 12 months, but beyond that as we get further into the business. So it's also accretive to other customers in the store, because it's not just the channel per se, but it's the full 360 experience of the customer being able to shop and return online and in the stores that provides us some, we expect, increased traffic into the store as well. So we will measure it on a channel basis, but we're really looking at DSW in total as we examine the importance of this channel and how successful it is going to help us grow. Susan Sansbury – Miller Tabak : Well, let's see if I can rephrase the question. Why don't you refresh my memory in terms of what you think the primary benefit of having the ecommerce site up and running is to you guys?

Well, let's start back with first the volume opportunity to it. If you look at a Zappos.com which has had a lot of press lately, but they are nearly $1 billion in demand. So clearly there's a demand out there for shoes from a direct channel. What we believe we also offer is a differentiation in that we have our brick-and-mortar stores as well. There's a long list of benefits from it. The benefits can range from the customer going in and not finding a size and being able to get that shoe ordered online, and it's really to leverage the customer loyalty program as well. With over 9 million customers to contact, there's a way to get them to either browse online or shop online, so it really becomes another channel for us for those customers as it is more convenient to our assortment, brands, convenience and value concept that we’ve always talked about; more convenience, more assortment, more brands, more sizes, and we believe there's several of those in play and favorable to DSW.com.

(Operator Instructions) Your next question comes from Sam Poser - Sterne Agee.

Good morning. I have a question about the loyalty program. You have been getting fairly significant growth there and my question is, what are you doing to make the customer come in more? I mean, the comps are still extremely difficult and I realize there are macro factors. You are getting a lot of names but how are you converting those names into sales more frequently?

Well actually, the percentage of penetration of our rewards customers continues to grow quarter to quarter to quarter. In fact in the first quarter of this year, over 70% of our sales came from our reward customers. Clearly we have the ability to talk to them, whether it's a GWP or offering them a special points promotion. There are win-back mailers, there are retention mailers, special offers, there are a lot of different things that we can do to attract them in the stores. We are at the very early stages of this but we're certainly building the ability to contact them. Not with an online site but the points, education in the stores and online, so there's a lot of different ways to increase that relationship with her and hopefully get her to virally tell other people about us. But clearly she's attracted to the program, because we are seeing a record number of signups and obviously an increased number of percentage of penetration of these the customers. So the program is working and again, programs like EWP that we do throughout the year are just one of the different ways that we can contact them and make their relationship a little bit more special.

Where do you stand on some of your systems to be able to do more quicker fill-ins, more accurate store-by-store markdowns and so on?

We're kind of in the first wave of a three-wave process of improving our systems. The first wave is laying that foundation, so everything from not just the merchandise planning systems but also the foundation of the store POS systems. Again, we’ve told the story before that the POS systems might look fine to a particular customer, but as you look at the total company they are on six different platforms. So we have to fix those infrastructure pieces as well even in the stores. But that first wave is underway through 2008 and into 2009, then we'll start to be able to add some of those operational efficiencies in the second wave, which will start again in 2009 and into 2010 where we'll be able to do some of the things that we talked about before, Sam, about merchandise planning and price optimizations and things like that.

There are no further questions at this time. I would like to turn the call back over to Ms. Neville for closing remarks.

Thank you very much again for joining us this morning and thank you for sticking with us through our technical difficulties. As always, we will be taking follow-up calls all day today at our home office home number. Have a great day.